Item 1. Business
General
PVF Capital Corp. is the holding company for Park View Federal Savings Bank (“Park View Federal” or the “Bank”). PVF Capital owns and operates Park View Federal, PVF Service Corporation, a real estate subsidiary, and Mid Pines Land Company, a real estate subsidiary. In addition, PVF Capital owns PVF Holdings, Inc., a financial services subsidiary which is currently inactive, and two other subsidiaries, PVF Mortgage Corp. and PVF Community Development Corp., both of which are chartered for future operation, but are also currently inactive. Park View Federal has operated continuously for 92 years, having been founded as an Ohio chartered savings and loan association in 1920. PVF Capital’s main office is located at 30000 Aurora Road, Solon, Ohio 44139 and its telephone number is (440) 248-7171.
On February 19, 2013, PVF Capital and F.N.B. Corporation (“FNB”) the parent company of First National Bank of Pennsylvania (“FNB Bank”), entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which PVF Capital will merge with and into FNB and cease to exist as a separate legal entity and its business will be combined with that of FNB. Promptly following consummation of the merger, it is expected that Park View Federal will merge with and into FNB Bank. PVF Capital’s common stockholders approved the Merger Agreement at the special meeting of stockholders held September 25, 2013. Additionally, the planned merger has received the necessary regulatory approvals to consummate the merger. Consummation of the merger is subject to certain conditions, including, governmental filings and expiration of applicable waiting periods, accuracy of specified representations and warranties of the other party, absence of a material adverse effect, recipient of tax opinions and the absence of any injunctions or other legal restraints. The consummation of the merger agreement is expected to occur in October of 2013. The information presented in this Annual Report on Form 10-K does not give effect to the planned merger.
Park View Federal’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, as well as other commercial and consumer loans located in its market area, which consists of Portage, Lake, Geauga, Cuyahoga, Summit, Medina and Lorain Counties in Ohio. Historically, Park View Federal has emphasized 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, Park View Federal has also originated loans secured by second mortgages, including home equity lines of credit and loans secured by savings deposits. Over the past few years, portfolio real estate lending has been minimal as Park View Federal has continued to focus on problem asset resolution. Recently, Park View Federal has increased its lending activity in the commercial and industrial loan segment, including Small Business Administration (“SBA”) lending, which it initiated in late fiscal 2011.
Park View Federal 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 interest earned on investments. Park View Federal’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, Federal Home Loan Bank of Cincinnati (“FHLB of Cincinnati”) advances and other borrowings, repayments of outstanding loans, sales of loans and operating revenues. The business of PVF Capital consists primarily of the business of Park View Federal.
For the current fiscal year as well as the fiscal year ended June 30, 2012, PVF Capital and Park View Federal, as a federally chartered savings and loan holding company and federal savings association, respectively, have been subject to examination and comprehensive federal regulation and oversight by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) and the Office of the Comptroller of the Currency respectively. As of July 21, 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) imposed new restrictions and an expanded framework of regulatory oversight for financial institutions and has altered the jurisdictions of existing bank regulatory agencies. In particular, the Dodd-Frank Act has transferred the regulatory responsibilities and authority over federal savings associations and savings and loan holding companies from the Office of Thrift Supervision to the Office of the Comptroller of the Currency and the Federal Reserve Board, respectively. Park View Federal has also been and continues to be subject to regulation and examination by the Federal Deposit Insurance Corporation (the “FDIC”), which insures Park View Federal’s
savings deposits up to applicable limits through the Deposit Insurance Fund. Park View Federal is a member of, and owns capital stock in, the FHLB of Cincinnati, which is one of 12 regional banks in the Federal Home Loan Bank System (the “FHLB”). For additional information on the regulation of PVF and Park View Federal, see the section captioned “Regulation.”
From October 19, 2009 until termination, each of PVF Capital and Park View Federal was subject to an Order to Cease and Desist. The order governing Park View Federal was terminated on August 27, 2012, and the order governing PVF Capital was terminated on December 15, 2012. For further discussion see Note 15 of Notes to Consolidated Financial Statements. PVF Capital’s Internet site, parkviewfederal.com, provides PVF Capital’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 free of charge as soon as reasonably practicable after PVF Capital has filed the report with the SEC.
Market Area
Park View Federal conducts its business through sixteen offices located in its geographic market area, which consists of Cuyahoga, Summit, Medina, Lorain, Lake, Portage and Geauga Counties in Ohio. At June 30, 2013, over 85% of Park View Federal’s net loan portfolio and generally all of its deposits were from its market area.
The economy in Park View Federal’s market area has historically been based on the manufacture of durable goods. Though manufacturing continues to remain an important sector of the economy, diversification has occurred with the growth of healthcare, education, service, financial and wholesale and retail trade industries. In recent years, the healthcare industry has grown significantly in Park View Federal’s market area and has overtaken manufacturing as Cleveland’s largest sector employer.
Park View Federal’s market area continued to experience stabilizing declines in the housing market, with falling home prices and increased foreclosures and higher rates of unemployment, which have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially in the area of mortgage-backed securities but spread to credit default swaps and other derivative securities, caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Concerns continue about the stability of the financial markets, as well as the strength of counterparties, lenders, and financial institutions.
Lending Activities
General
Park View Federal’s lending activities include the origination of commercial real estate and business loans, consumer loans, and conventional fixed-rate and adjustable-rate mortgage loans for acquisition or refinancing of single-family residential homes located in Park View Federal’s primary market area. Permanent mortgage loans on condominiums, multi-family (over four units) and nonresidential properties are also offered by Park View Federal. Historically, construction financing of single-family residential properties was a primary component of Park View Federal’s lending activity; however, depressed market conditions in the last several years have forced a curtailment of lending activity within this segment and lead Park View Federal to focus its new substantive lending activity in the commercial and industrial loan segment, including a specialized focus in SBA lending, subject to market conditions and applicable lending restrictions imposed under the Home Owners’ Loan Act. PVF Capital’s SBA lending activities are focused on general small businesses within its market area and on an industry-specific basis throughout the Midwestern United States.
Loan Portfolio Composition
PVF Capital’s loans receivable and loans receivable held for sale totaled $564.7 million and $566.7 million at June 30, 2013 and June 30, 2012, respectively, and representing 72.6 % and 71.6% of total assets at such dates, respectively. It is Park View Federal’s policy to concentrate its lending in its market area, with the exception of its SBA lending activities which target a broader geographic area, but limited industry segments.
Set forth below is certain data relating to the composition of Park View Federal’s loan portfolio by type of loan on the dates indicated. As lending activity to commercial and industrial customers has increased, the composition of the loan portfolio will continue to change.
Loan Maturity
The following table presents at June 30, 2013 the amount of loan principal repayments scheduled to be received by Park View Federal 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, no stated maturity date and overdrafts are reported as due in one year or less. The table below does not include any estimate of prepayments that may cause Park View Federal’s actual repayment experience to differ from that shown below.
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans may be substantially less than their contractual terms because of prepayments.
Origination, Purchase and Sale of Loans
Residential Lending
Park View Federal 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, Park View Federal concentrates its lending activities in its market area.
Generally, Park View Federal originates fixed-rate, single-family mortgage loans in conformity with Freddie Mac guidelines, so as to permit their being swapped with Freddie Mac or Fannie Mae in exchange for mortgage-backed securities secured by such loans or their sale in the secondary market. Most such loans are sold with servicing rights retained, and are sold in furtherance of Park View Federal’s goal of better matching the maturities and interest rate sensitivity of its assets and liabilities. Park View Federal 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.
PVF Capital does not originate sub-prime loans and only originates Alt A loans for sale, without recourse, in the secondary market. PVF Capital considers subprime borrowers typically to have weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. PVF Capital also does not originate any hybrid loans, low-doc/no-doc loans or payment option ARMs. Substantially all one-to-four family loans are underwritten according to agency underwriting standards. Exceptions, if any, are submitted to PVF Capital’s board loan committee for approval. Any exposure PVF Capital may have to these types of loans is immaterial
Commercial Lending
Park View Federal also originates loans to commercial borrowers for their operating companies, including traditional lines of credit, revolving lines of credit and term loans and for the purpose of purchasing commercial owner-occupied, investment, and/or multi-family properties. During the last year, Park View Federal has augmented its commercial lending activities when qualified with SBA guaranties, which enables the guaranteed portion of these loans to either be held in the portfolio or to be sold in the secondary market.
Loan Underwriting Policies
Residential Lending
Park View Federal historically has been and continues to be an originator of single-family residential real estate loans in its market area. Park View Federal currently originates fixed-rate residential mortgage loans in accordance with underwriting guidelines promulgated by Freddie Mac and adjustable-rate mortgage loans for terms of up to 30 years. Park View Federal offers adjustable-rate residential mortgage loans with interest rates which adjust based upon changes in an index based on the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board (the “Treasury Rate Index”), plus a margin of 2.50% to 3.50%. The amount of any increase or decrease in the interest rate is usually limited to 2% per year, with a limit of 6% over the life of the loan. The date of the first rate adjustment may range from one to ten years from the original date of the loan.
Park View Federal’s lending activities are subject to its written, nondiscriminatory underwriting guidelines and to loan origination procedures prescribed by its 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 performed by independent outside appraisers approved by Park View Federal’s board of directors. As prescribed by Park View Federal’s Credit Policy and supporting approved lending authorities, Park View Federal’s residential underwriter has authority to approve all fixed-rate single-family residential mortgage loans which meet Freddie Mac underwriting guidelines and those adjustable-rate single-family residential mortgage loans which meet Park View Federal’s underwriting standards and are in amounts of less than $700,000. All loans in excess of the above amounts or any exceptions to guidelines must be approved by Park View Federal’s Loan Committee. All loans secured by savings deposits can be approved by lending officers based in Park View Federal’s branch offices.
It is Park View Federal’s policy to have a mortgage creating a valid lien on real estate and to obtain a title insurance policy which insures that the property is free of prior encumbrances. When a title insurance policy is not obtained, a lien verification 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 Federal Emergency Management Agency, 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 Park View Federal makes disbursements for items such as real estate taxes and homeowners insurance.
Park View Federal’s lending policies permit it to lend up to 95% of the appraised value of the real property securing a mortgage loan. Private Mortgage insurance is required on those loans whose loan-to-value ratios exceed 80%.
Interest rates charged by Park View Federal 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 Freddie Mac. 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.
Commercial and Multi-Family Residential Real Estate Lending
The commercial real estate loans originated by Park View Federal are secured primarily by office buildings, shopping centers, warehouses and other income-producing commercial property. Park View Federal’s multi-family residential loans are primarily secured by apartment buildings. These loans are generally for a term of up to 5 years, amortization periods from 10 to 25 years and with interest rates that adjust either annually or every three to five years based upon changes in the Treasury Rate Index or FHLB advance rate, plus a negotiated margin.
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 depends 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 fluctuation based upon current economic conditions. 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 it. Park View Federal obtains financial statements and, in most cases, the personal guarantees from all principals obtaining commercial real estate loans.
The Home Owners’ Loan Act includes a provision that limits Park View Federal’s non-residential real estate lending to no more than four times its total capital. This maximum limitation, which at June 30, 2013 and June 30, 2012 was $318.4 million and $281.5 million, respectively, and has not materially limited its lending practices.
Under the Home Owners’ Loan Act, the maximum amount which Park View Federal may lend to any one borrower is 15% of its unimpaired capital and surplus, or $13.8 million at June 30, 2013. Loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to the same borrower if such loans are fully secured by readily marketable collateral. Park View Federal may request a waiver from the Office of the Comptroller of the Currency to exceed the 15% loans-to-one borrower limitation on a case-by-case basis. See “-Loans-to-One Borrower” for more information and a discussion of the loans-to-one borrower regulations.
Construction Loans
While Park View Federal continues to offer residential and commercial construction loans, market conditions have decreased the volume of activity within this loan segment. When originated, loans for the construction of owner-occupied, single-family residential properties are underwritten in connection with the permanent loan on the property and have a construction term of six to 18 months. Interest rates on residential construction loans made to the eventual occupant are set at competitive rates, and are usually fixed for the construction term. Interest rates on commercial construction loans are set at a variable rate based on the prime rate or the London Interbank Offer Rate (“LIBOR”) index, and adjust quarterly or monthly, respectively. Generally, the construction period for commercial properties is less than 24 months.
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 depends largely on 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, Park View Federal may be required to advance funds beyond the amount originally committed to ensure completion of the development. If the estimate of value proves to be inaccurate, Park View Federal may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment.
Land Loans
As with the construction loan segment, market conditions have slowed the origination of loans to builders and developers for the acquisition and/or development of vacant land. Park View Federal will continue to allow attrition in the construction and the land loan segments, as it shifts its balance sheet composition from real estate and land-focused to commercial and industrial lending (in purpose and in collateral).
Historically, the proceeds of the land loan were used to acquire the land itself and/or to make site improvements necessary to develop the land into saleable lots. As in the past, Park View Federal will not originate land loans to borrowers wishing to speculate in the value of land, and limits land loans to borrowers who expect to begin development of the property within two years of the date of the loan.
Land development and acquisition loans involve significant additional risks when compared with loans on existing residential properties. All of these loans originated are within Park View Federal’s market area.
Home Equity Line of Credit Loans
Park View Federal originates loans secured by mortgages on residential real estate. Such loans are for an initial ten-year draw period followed by a ten-year repayment period.
Commercial Non-Real Estate Business Loans
Park View Federal originates commercial business loans secured by non-real estate assets such as accounts receivable, inventory, furniture and fixtures, equipment and certain intangible assets. Such loans are part of a new lending strategy for Park View Federal. Generally, these loans are made for up to $5.0 million to any one borrowing relationship (person or company). This new activity follows Park View Federal credit policy and supporting underwriting guidelines in establishing collateral values, advance rates and required levels of due diligence. Generally, Park View Federal requires the personal guarantee of all borrowers for such loans.
Loan Participation Interests
From time to time, Park View Federal sells participation interests in mortgage loans and commercial loans originated by it and purchases whole loans or participation interests in loans originated by other lenders. Park View Federal held whole loans and participations in loans originated by other lenders of approximately $13.6 million at June 30, 2013. Loans which Park View Federal purchases must meet or exceed the underwriting standards for loans originated by Park View Federal.
Mortgage Banking Activity
PVF Capital originates conventional loans secured by first lien mortgages on one-to-four family residential properties located within its market area for either portfolio or sale into the secondary market. During the years ended June 30, 2013 and 2012, Park View Federal recorded gains of $13.7 and $9.0 million on the sale of $422.6 and $350.8 million, respectively, in loans receivable originated for sale. Cyclically low market rates resulted in increased refinancing activity for the year. The sold loans were sold on a servicing retained basis to Freddie Mac.
In addition to interest earned on loans and income recognized on the sale of loans, Park View Federal receives fees for servicing loans that it has sold. During the years ended June 30, 2013 and 2012, Park View Federal reported a net loan servicing loss of $1.2 and $1.8 million, respectively, the result of the accelerated repayment of loans serviced along with impairment charges against the value of its mortgage loan servicing asset. At June 30, 2013 and June 30, 2012, Park View Federal was servicing approximately $1.1 billion of loans for others, respectively. The income from loan servicing during these periods was attributable to the generation of mortgage loan servicing fees of $2.7 and $2.3 million during the years ended June 30, 2013 and 2012, which was reduced by amortization expense of $3.8 and $3.6 million of the mortgage servicing assets, respectively, resulting from heavy refinance activity and impairment charges of $.2 million and $.5 million for the respective periods, resulting from low interest rates and accelerated prepayment speeds during the year. Park View Federal has been able to keep delinquencies on residential loans serviced for others to a relatively low level of the aggregate outstanding balance of loans serviced, as a result of its policy of limiting servicing to loans it originates and subsequently sells to Freddie Mac. Because of the success Park View Federal 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, Park View Federal 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 Freddie Mac in exchange for mortgage-backed securities or sell such loans for cash, while retaining servicing.
In addition to loan servicing fees, Park View Federal 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. Park View Federal typically receives fees in connection with the origination of fixed-rate and adjustable-rate residential mortgage loans. All loan origination fees are deferred and accreted into income over the contractual life of the loan according to the interest method of recognizing income. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to the 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 Park View Federal’s market area.
Non-performing Loans and Other Problem Assets
It is Park View Federal’s policy to monitor its loan portfolio and to anticipate and address payment delinquencies, loans with attributes of potential future delinquency and those with delinquencies due to loan maturities. When a borrower fails to make a payment on a loan, Park View Federal takes immediate steps to have the delinquency cured and the loan restored to current status. Within its Credit Policy, Park View Federal delineates its approaches to consumer and commercial loan delinquencies. Remedies to all delinquencies begin with contact to the borrower, once a loan is past its due date. For serious commercial loan delinquencies, a separate work out plan may be developed and followed until the delinquency is cured and the loan is returned to accrual status. For consumer delinquencies exceeding 90 days, Park View Federal will institute additional measures to enforce its remedies resulting from the loan’s default, including commencing foreclosure action. It is Park View Federal’s desire to work with the borrower towards an acceptable loan modification, loan restructuring or forbearance agreement.
The following table sets forth information with respect to Park View Federal’s non-performing loans and other problem assets at the dates indicated. Amounts are net of deferred loan fees.
(1) Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet the nonaccrual criteria established by regulatory authorities. Nonaccrual loans include all loans classified as doubtful or loss, and all loans greater than 90 days past due with a loan-to-value ratio greater than 60%.
(2) Other non-performing assets represent property acquired by Park View Federal through or in lieu of foreclosure or repossession.
(3) Includes all nonaccrual loans disclosed as troubled debt restructurings in note 5 in notes to the financial statements.
All nonperforming loans are specifically evaluated and an updated valuation obtained at least annually to determine the amount of impairment. Additionally, in determining the adequacy of the allowance for loan losses, a factor is applied to the amount of impaired loans to estimate possible declining values of the underlying collateral as well as possible valuation adjustments above the specific factor applied against collateral whose valuation is greater than twelve months old. As such, the length of time that a loan has been nonperforming is not additionally factored in determining the adequacy of the allowance for loan losses. The following is a schedule as of June 30, 2013 and June 30, 2012 detailing the length of time our nonaccrual loans and accruing loans that were contractually past due 90 days have been contractually past due, along with detail as to the composition of these loans:
The level in nonaccrual loans and accruing loans which are contractually past due more than 90 days at June 30, 2013 and June 30, 2012 although lower than recent past, continues to remain elevated on a historical basis and is attributable to continued poor current local and national economic conditions. Residential markets locally and nationally have been impacted by a significant increase in foreclosures and value declines as a result of the problems faced by sub-prime borrowers and the resulting contraction of residential credit available to all but the most credit worthy borrowers. Land development projects nationally and locally have seen slow sales and price decreases. As a savings institution, Park View Federal has significant exposure to the residential market in the greater Cleveland, Ohio area. As a result, Park View Federal has seen a continued high level of non-performing loans. Due to an increase in foreclosure activity in the area, the foreclosure process in Cuyahoga County, one of Park View Federal’s primary markets, has become elongated. As such, loans have remained past due for considerable periods prior to being collected, transferred to real estate owned (“OREO”), or charged off.
Of the $13.2 million in nonaccrual loans at June 30, 2013, $5.6 million were individually identified as impaired. All of these loans are collateralized by various forms of non-residential real estate or residential construction loans. These loans were reviewed for the likelihood of full collection based primarily on the value of the underlying collateral. To the extent Park View Federal believes the collection of loan principal is in doubt, it charges off all or a portion of the loan balance or establishes specific loss reserves. Management’s evaluations of the underlying collateral include a consideration of the potential impact of erosion in real estate values due to poor local economic conditions and a potentially long foreclosure process. This evaluation involves discounting the original appraised values of the real estate and estimated disposition costs along with unpaid real estate taxes to arrive at an estimate of the net realizable value of the collateral. A new appraisal or evaluation is obtained within 90 days from the time a loan becomes criticized. Additionally, a new appraisal is obtained annually as long as the loan remains criticized, regardless of loan type. For criticized loans where the appraisal or evaluation is more than twelve months old, an additional adjustment is made to the existing appraised value until such time that an updated appraisal has been obtained. Based on actual experience for updating valuations, this additional adjustment approximates 10%. The estimated disposition costs are deemed to be 9% based on actual experience. In determining the adequacy of the allowance for loan losses, a factor is applied to the amount of impaired loans to estimate possible declining values of the underlying collateral as well as possible valuation adjustments above the specific factor applied against collateral whose valuation is greater than twelve months old.
The remaining nonaccrual loans are homogeneous one-to-four family loans. The loss allocations applied to adversely classified loans are based on current appraisals on the underlying collateral, the potential impact of continuing erosion in real estate values and the estimated cost of disposal. Additionally, the loss allocations consider the potential that the value of this collateral may erode during the foreclosure process. Through this analysis, management established specific reserves for these loans to the extent such losses are identifiable.
Impaired loans represent nonaccrual loans in the nonresidential real estate, non real estate and residential construction loan categories. Foreclosure proceedings for these loans are subject to external factors, such as bankruptcy and other legal proceedings that may delay the disposition of the loan, but generally occur within a period of time ranging from 12 to 60 months from the time they are initiated until the loan is ultimately collected, transferred to OREO, or charged off. Management is not aware of any loans where information known about a possible credit would cause serious doubts of the borrower to comply with payments terms related to the credit causing the credit to be deemed nonaccrual.
It is Park View Federal’s policy not to record as income partial interest payments on nonaccrual loans. At June 30, 2013, gross interest income of $2.9 million would have been recorded on loans accounted for on a nonaccrual basis if such loans had been current and accruing.
Management has reviewed its non-accruing loans and believes that the allowance for loan losses is adequate to absorb probable losses on these loans.
Park View Federal has adversely classified $24.1 million and $33.9 million of loans at June 30, 2013 and June 30, 2012 respectively, including $13.2 and $20.1 million in non-performing loans. Real estate acquired by Park View Federal as a result of or in lieu of foreclosure is classified as OREO until such time as it is sold. At June 30, 2013 and June 30, 2012, Park View Federal had 37 and 43 OREO properties totaling $6.9 million and $7.7 million, respectively. These properties include raw land, partially developed land and, in some cases, developed and partially developed commercial and residential properties. Park View Federal faces the possibility of declines in value of these properties below their carrying amount. During the years ended June 30, 2013 and 2012, Park View Federal recognized a write-down on OREO of $4.2 and $1.7 million respectively. Occasionally, Park View Federal will finish development or construction of these projects or homes. In these cases, Park View Federal also faces the risk that costs to complete construction will exceed original estimates or other execution risks.
The following table presents the activity in other real estate owned for the years ended June 30, 2013 and 2012:
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. If an asset or portion thereof is classified as a loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified as a 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.” As part of its Credit Policy, Park View Federal outlines its risk rating methodology to ensure appropriate grading of non-homogenous loans. The Asset Classification Committee reviews the recommendations of Park View Federal’s Special Assets team for potential downgrades and allocation of specific reserve allowance to loans. Currently, general loss allowances (up to 1.25% of risk-based assets) established to cover losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific allocation for loan losses do not qualify as regulatory capital. For additional information regarding regulatory capital requirements, see the section captioned “-Regulatory Capital Requirements”. Examiners at the Office of the Comptroller of the Currency 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. At June 30, 2013 and June 30, 2012, total nonaccrual and 90 days past due loans and other non-performing assets were $13.2 million and $20.1 million, all of which were classified as substandard. For additional information, see the section captioned “-Non-performing Loans and Other Problem Assets” Note 5 of Notes to Consolidated Financial Statements for the year ended June 30, 2013, 2012, and 2011.
In originating loans, Park View Federal 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, Park View Federal’s and the industry’s historical loan loss experience, evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Park View Federal increases its allowance for loan losses by charging provisions for loan losses against its income.
General allowances are made pursuant to management’s assessment of risk in Park View Federal’s loan portfolio as a whole. Specific allocations 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 monitor Park View Federal’s asset quality and to charge off loans against the allowance for loan losses when appropriate or to provide specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations.
As of December 31, 2011, PVF Capital implemented an enhanced loan accounting system, which provides for the systematic recording of charged-off loans for financial recognition without losing its ability to track the legal contractual amounts. As such, during the fiscal year ended June 30, 2012, PVF Capital charged off those loan amounts which had previously been specifically impaired through the use of the Specific Valuation Allowance approximately $13.0 million. Remaining specific impairments known in prior periods as specific valuation allowances are now tracked as specific allocations to the allowance. In addition to reducing loan balances, including nonperforming loans, this new enhanced loan accounting system had the impact of elevating reported charge-offs for the period and reducing the allowance for loan losses associated with specific reserves.
The following table shows how Park View Federal’s allowance for loan losses is allocated at each of the dates indicated:
Management’s approach includes establishing a specific allocations by evaluating individual non-performing loans for probable losses based on a systematic approach involving estimating the realizable value of the underlying collateral. Additionally, management establishes a general valuation allowance for pools of performing loans segregated by collateral type. For the general valuation allowance, management is applying a prudent loss factor based on Park View Federal’s historical loss experience, trends based on changes to non-performing loans and foreclosure activity, effectiveness of its credit administration processes and management’s subjective evaluation of the local population and economic environment. The loan portfolio is segregated into categories based on collateral type and a loss factor is applied to each category. The initial basis for each loss factor is Park View Federal’s loss experience for each category. Historical loss percentages are calculated and adjusted by taking charge-offs in each risk category during the past 36 months and dividing the total by the average balance of each category. Management during the current year increased the historical loss period to 36 months from 18 months to capture the loss experience over a broader period and better reflect the losses in the portfolio.
A provision for loan losses is recorded when necessary to bring the allowance to a level consistent with this analysis. Management believes it uses the best information available to make a determination as to the adequacy of the allowance for loan losses. The current period provision for loan losses reflects the impact on the loss factors applied to pools of performing loans due to the recent increase in Park View Federal’s historical loss experience.
Management’s ongoing analysis of the allowance for loan losses considers changes in nonaccrual loans and changes in probable loan losses as economic conditions deteriorate and the underlying collateral is subjected to an elongated foreclosure process.
Investment Activities
Park View Federal’s investment policy currently allows for investment in various types of liquid assets, including U.S. government and U.S. government-sponsored enterprise securities, time deposits at the FHLB of Cincinnati, certificates of deposit or bankers’ acceptances at other federally insured depository institutions, and Trust Preferred, corporate 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. Park View Federal reports its investments, other than marketable equity securities and securities available for sale, at cost as adjusted for discounts and unamortized premiums. Park View Federal has the intent and ability and generally holds all securities until maturity.
During the fiscal years ended June 2013 and 2012, Park View Federal did not sell mortgage-backed securities available for sale. At present, management is not aware of any conditions or circumstances which could impair its ability to hold its remaining securities to maturity. In accordance with its general investment policy, Park View Federal held U.S. government sponsored enterprise, Trust Preferred, corporate and mortgage-backed securities, and FHLB of Cincinnati stock at June 30, 2013 and at June 30, 2012. For additional information regarding Park View Federal’s investment activities, see Note 4 of Notes to Consolidated Financial Statements for the Years Ended June, 2013, 2012 and 2011.
Deposit Activity and Other Sources of Funds
General
Deposits are the primary source of Park View Federal’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
Park View Federal 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 generally range in maturity from seven days to five 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 Park View Federal 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 costs and liquidity requirements, growth goals and federal regulations. Under the terms of the Stipulation and Consent to the Issuance of Order to Cease and Desist that Park View Federal entered into with the Office of Thrift Supervision on October 19, 2009, in which Park View Federal consented to the issuance of an Order to Cease and Desist without admitting or denying that grounds exist for an administrative proceeding against the bank, Park View Federal was prohibited from accepting brokered deposits or offering rates more than 75 basis points above the national average rate. On August 27, 2012, the Office of the Comptroller of the Currency, which had replaced the Office of Thrift Supervision as Park View Federal’s primary regulator, terminated the Order to Cease and Desist. See Note 15 of Notes to Consolidated Financial Statements for Years Ended June 30, 2013, 2012 and 2011 for additional information with respect to the Order to Cease and Desist and its termination.
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 the nationwide MoneyPass® ATM/debit card Automated Teller Machine network, through which customers can gain access to their accounts at any time.
The following table sets forth the deposits in Park View Federal as of June 30, 2013 were:
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:
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. Park View Federal 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, Park View Federal’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 Park View Federal’s operations. To the extent such deposits do not roll over, Park View Federal may, if necessary, use other sources of funds, including borrowings from the FHLB of Cincinnati, to replace such deposits. For additional information, see the section captioned “-Borrowings.”
The following table indicates the amount of Park View Federal’s certificates of deposit of $100,000 or more by time remaining until maturity as of June 30, 2013:
Borrowings
Savings deposits historically have been the primary source of funds for Park View Federal’s lending, investments and general operating activities. Park View Federal 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, Park View Federal is required to own stock in the FHLB of Cincinnati and is authorized to apply for advances. Advances are made 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 Park View Federal may borrow up to 50% of its assets subject to normal collateral and underwriting requirements. Park View Federal currently has two commitments with the FHLB of Cincinnati for flexible lines of credit, referred to as a cash management advance (“CMA”) and a Repo advance (“REPO”), in the amounts of $30 million and $200 million, respectively, which can be drawn on to the extent of collateral pledged. At June 30, 2013 and June 30, 2012, Park View Federal had borrowing capacity of $230.0 million on these lines of credit, subject to available collateral. The CMA and the REPO were not drawn down at June 30, 2013. Advances from the FHLB of Cincinnati are secured by Park View Federal’s stock in the FHLB of Cincinnati and other eligible assets. In addition, PVF Service Corporation had a loan with an outstanding balance of $0.9 million as of June 30, 2013 collateralized by real estate. For additional information, refer to Note 9 of Notes to Consolidated Financial Statements for Years Ended June 30, 2013, 2012 and 2011.
The following table sets forth certain information regarding Park View Federal’s advances from the FHLB of Cincinnati for the periods indicated:
Subsidiary Activities
Park View Federal is required to give the FDIC and the Office of the Comptroller of the Currency 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 Office of the Comptroller of the Currency have the authority to prohibit the initiation of, and 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, 2013, Park View Federal was authorized to invest up to approximately $23 million in the shares of, or as 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 Capital has three active subsidiaries, Park View Federal, PVF Service Corporation and Mid Pines Land Company. PVF Service Corporation is engaged in the activities of land acquisition and real estate investment and Mid Pines Land Company holds an investment in land adjacent to PVF Capital’s Corporate Center. PVF Capital has three nonactive subsidiaries, PVF Community Development Corp., PVF Mortgage Corp. and PVF Holdings, Inc., which have been chartered for future activity. Park View Federal has also created various limited liability companies that have taken title to property acquired through or in lieu of foreclosure.
PVF Service Corporation
At June 30, 2013, PVF Service Corporation had the following investments: (1) a $.1 million investment in a joint venture that owns real estate leased to Park View Federal for use as a branch office in Avon, Ohio; (2) a $0.1 million investment in a joint venture for a branch office location in Mayfield Heights, Ohio; (3) an interest in Park View Plaza, a joint venture, which is a strip center in Cleveland, Ohio that includes Park View Federal’s Cleveland branch office; (4) an interest in a joint venture containing a title company, PVF Title Services, LLC; and (5) a $4.2 million investment in office properties used by PVF Capital and Park View Federal that includes the Corporate Center in Solon, Ohio, and branch offices in Bainbridge, Ohio and Chardon, Ohio. In November 2008, PVF Service Corporation refinanced a line of credit loan for $1.6 million. The balance at June 30, 2013 and at June 30, 2012 was $0.9 million and $1.0 million, and the loan is secured by the Corporate Center in Solon, Ohio.
Mid Pines Land Company
At June 30, 2013, MPLC had an investment of $0.6 million in land adjacent to PVF’s Corporate Center in Solon, Ohio.
Competition
Park View Federal faces strong competition both in originating real estate and other loans and in attracting deposits. Park View Federal 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 that are located in Park View Federal’s market area.
Park View Federal generally attracts all its deposits through its branch offices primarily from the communities in which these 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, Park View Federal 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, 2013, PVF and its subsidiaries had 165 full-time employees and 33 part-time employees, none of whom was represented by a collective bargaining agreement. PVF believes it enjoys a good relationship with its personnel.
Regulation
General
For the fiscal year ended June 30, 2013 and continuing to date, PVF Capital and Park View Federal, as a federally chartered savings and loan holding company and federal savings association, respectively, have been subject to examination and comprehensive federal regulation and oversight by the Office of the Comptroller of the Currency. Park View Federal has also been and continues to be subject to regulation and examination by the FDIC, which insures the deposits of Park View Federal to the maximum extent permitted by law, and certain other requirements established by the Federal Reserve Board.
The investment and lending authority of savings institutions is prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws or regulations. Such regulations and supervision primarily are intended for the protection of depositors and not for the purpose of protecting shareholders.
Federal law provides federal banking regulators, including the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC, with substantial enforcement powers. The enforcement authority of the Office of the Comptroller of the Currency and the Federal Reserve Board over savings institutions and their holding companies includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe and unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the Office of the Comptroller of the Currency and the Federal Reserve Board.
Recently Enacted Regulatory Reform
Federal regulators continue to implement many provisions of the Dodd-Frank Act, which was signed into law by President Obama on July 21, 2010. The following discussion summarizes significant aspects of the new law that affect or are already affecting PVF Capital and Park View Federal:
•
Effective July 21, 2011, the Office of the Comptroller of the Currency assumed responsibility from the Office of Thrift Supervision for the examination, supervision and regulation of federal savings associations and rulemaking for federal and state savings associations, and the authority of the other remaining bank regulatory agencies has been restructured;
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The Consumer Financial Protection Bureau has been established and empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws;
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New capital regulations for thrift holding companies have been adopted and any new trust preferred securities no longer count toward Tier 1 capital;
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The prohibition on the payment of interest on demand deposits has been repealed, effective July 21, 2011;
•
The deposit insurance assessment base calculation has been expanded to equal a depository institution’s total assets minus the sum of its average tangible equity during the assessment period; and
•
New corporate governance requirements, which are generally applicable to most larger public companies, now require new compensation practices, including, but not limited to, providing shareholders the opportunity to cast a non-binding vote on executive compensation, to consider the independence of compensation advisors and requiring new executive compensation disclosure.
Many provisions of the Dodd-Frank Act have not yet been implemented and will require interpretation and rule making by federal regulators. PVF Capital is closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with the applicable portions of the law and its rules and regulations. While the ultimate effect of the Dodd-Frank Act on us cannot currently be determined, the law and its implementing rules and regulations are increasing compliance costs and may restrict our operations, all of which may have a material adverse effect on our operating results and financial condition.
Regulation of Park View Federal
General
As a savings institution, Park View Federal is subject to extensive regulation by federal banking regulators, and its deposits are insured by the Deposit Insurance Fund, which is administered by the FDIC. The lending activities and other investments of Park View Federal must comply with various federal regulatory requirements. The Office of the Comptroller of the Currency periodically examines Park View Federal for compliance with various regulatory requirements. The FDIC also has the authority to conduct special examinations of FDIC-insured savings institutions. Park View Federal must regularly file reports describing its activities and financial condition. Park View Federal 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. The discussion is not intended to be a complete explanation of all applicable laws and regulations and is qualified in its entirety by reference to the actual statutes and regulations involved.
Regulatory Capital Requirements
Under current regulations of the Office of the Comptroller of the Currency, savings institutions must maintain “tangible” capital equal to at least 1.5% of adjusted total assets, Tier 1 capital (core) equal to at least 4.0% (or 3.0% if the institution is the highest rated under the Office of the Comptroller of the Currency’s examination rating system) of adjusted total assets and “total capital,” a combination of Tier 1 and “supplementary” capital, equal to at least 8.0% of “risk-weighted” assets. The Office of the Comptroller of the Currency continues to enforce 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 the highest rated). For purposes of these regulations, Tier 1 capital generally consists of common shareholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. For additional information regarding regulatory capital requirements, see the section captioned “-Prompt Corrective Regulatory Action”. Investments in subsidiaries that are engaged as principal in activities not permissible for national banks must also be deducted from Tier 1 capital. Park View Federal was in compliance with all applicable regulatory capital requirements at both June 30, 2013 and June 30, 2012.
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 does not exceed the savings institution’s core capital. Supplementary capital is defined to include certain preferred stock issues, certain approved subordinated debt, certain other capital instruments, a portion of the savings institution’s allowances for loan and lease losses allowances, and up to 45% of unrealized net gains on equity
securities. Total core and supplementary capital are reduced by the amount of capital instruments held by other depository institutions pursuant to reciprocal arrangements and equity investments other than those deducted from core and tangible capital. At both June 30, 2013 and June 30, 2012, Park View Federal had no equity investments for which federal regulations require a deduction from total capital.
The risk-based capital requirements are 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 Office of the Comptroller of the Currency’s risk-weighting system, one- to four-family first mortgages not more than 90 days past due with loan-to-value ratios under 80% and multi-family mortgages (or residential property consisting of five or more dwelling units) with loan-to-value ratios under 80% are assigned a risk weight of 50%. Consumer, home equity and land loans, residential and nonresidential 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 Fannie Mae or Freddie Mac 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. At June 30, 2013 and June 30, 2012, Park View Federal’s risk-weighted assets were $608.9 million and $595.1 million, and its total risk-based capital was $87.3 million and $77.3 million, or 14.34% and 13.00%, of risk-weighted assets, respectively.
The table below presents Park View’s capital position at June 30, 2013, relative to its various minimum regulatory capital requirements:
(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.
In addition to requiring generally applicable capital standards for savings institutions, the Office of the Comptroller of the Currency has the authority to establish the minimum level of capital for a savings institution at such amount or at such ratio of capital-to-assets as is determined to be necessary or appropriate for such institution in light of the particular circumstances of the institution. The failure of any savings institution to maintain capital at or above such level is an unsafe or unsound practice and such a savings institution may be issued a directive requiring such savings institution to submit and adhere to a plan for increasing capital. On October 19, 2009, Park View Federal was directed by the Office of Thrift Supervision to raise its Tier 1 core capital and total risk-based capital ratios to 8.0% and 12.0%, respectively. As discussed in Note 15 of Notes to Consolidated Financial Statements for the years ended June 30, 2013 and 2012, the Office of the Comptroller of the Currency, which had replaced the Office of Thrift Supervision as Park View Federal’s primary regulator, has terminated the Order to Cease and Desist.
In July 2013, PVF Capital’s primary federal regulator, the Federal Reserve, and Park View Federal Savings Bank’s primary federal regulator, the OCC, and other regulatory agencies published final rules (the Basel III Capital Rules) that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain available-for-sale securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital risk-based weighted assets in addition to the amount necessary to meeting its minimum risk-based capital requirements.
The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also implements consolidated capital requirements, effective January 1, 2015.
Regulatory Agreements
On October 19, 2009, PVF Capital and Park View Federal each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the Office of Thrift Supervision, in which they each consented to the issuance of an Order to Cease and Desist without admitting or denying that grounds existed for the Office of Thrift Supervision to initiate an administrative proceeding against them. Effective July 21, 2011, the Office of the Comptroller of the Currency and the Federal Reserve Board succeeded to all powers, authorities, rights and duties of the Office of Thrift Supervision relating to the cease and desist orders as a result of the Dodd-Frank Act.
The cease and desist order against Park View Federal required Park View Federal to take several actions, including but not limited to: (i) by December 31, 2009, meet and maintain (1) a Tier 1 (core) capital ratio of at least 8.0% and (2) a total risk-based capital ratio of at least 12.0% after the funding of an adequate allowance for loan and lease losses and submit a detailed plan to accomplish this; (ii) if Park View Federal fails to meet these capital requirements at any time after December 31, 2009, within 15 days thereafter prepare a written contingency plan detailing actions to be taken, with specific time frames, providing for (a) a merger with another federally insured depository institution or holding company thereof, or (b) voluntary liquidation; (iii) adopt revisions to Park View Federal’s liquidity policy to, among other things, increase its minimum liquidity ratio; (iv) reduce the level of adversely classified assets to no more than 50% of core capital plus allowance for loan and lease losses by December 31, 2010 and reduce the level of adversely classified assets and assets designated as special mention to no more than 65% of core capital plus allowance for loan and lease losses by December 31, 2010; (v) submit a new business plan to the Office of Thrift Supervision for approval that will include the requirements contained in the cease and desist order and that also will include well-supported and realistic strategies to achieve consistent profitability by September 30, 2010; (vi) restrict quarterly asset growth to an amount not to exceed net interest credited on deposit liabilities until the Office of Thrift Supervision approves of the new business plan; (vii) cease to accept, renew or roll over any brokered deposit or act as a deposit broker, without the prior written waiver of the FDIC; and (viii) not declare or pay dividends or make any other capital distributions from Park View Federal without receiving prior approval of the Office of Thrift Supervision.
The cease and desist order against PVF Capital required PVF Capital to take several actions, including, but not limited to: (i) submit a capital plan that includes, among other things, (1) the establishment of a minimum tangible capital ratio of tangible equity capital to total tangible assets commensurate with PVF Capital’s consolidated risk profile, and (2) specific plans to reduce the risks to PVF Capital from its current debt levels and debt servicing requirements; (ii) not declare, make or pay any cash dividends or other capital distributions or purchase, repurchase or redeem or commit to purchase, repurchase or redeem PVF Capital equity stock without the prior non-objection of the Office of Thrift Supervision, except that this provision does not apply to immaterial
capital stock redemptions that arise in the normal course of PVF Capital’s business in connection with its share-based compensation plans; and (iii) not incur, issue, renew, roll over or increase any debt or commit to do so without the prior non-objection of the Office of Thrift Supervision (debt includes loans, bonds, cumulative preferred stock, hybrid capital instruments such as subordinated debt or trust preferred securities, and guarantees of debt).
The cease and desist orders against PVF Capital and Park View Federal also imposed certain on-going reporting obligations and additional restrictions on severance and indemnification payments, changes in directors and management, employment agreements and compensation arrangements, third party service contracts and transactions with affiliates.
On August 27, 2012, the cease and desist order against Park View Federal was terminated by Office of the Comptroller of the Currency, which had replaced the Office of Thrift Supervision as Park View Federal’s primary regulator. On December 15, 2012, the cease and desist order against PVF Capital was terminated by the Federal Reserve Board, which had replaced the Office of Thrift Supervision as PVF Capital’s primary regulator.
Prompt Corrective Regulatory Action
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, 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 any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an “undercapitalized institution”) is: (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 capital restoration plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution’s total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A “significantly undercapitalized” institution, as well as any undercapitalized institution that did not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution could also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution’s ratio of tangible capital to total assets falls below a “critical capital level,” the institution will be subject to conservatorship or receivership within specified time periods.
Under regulations jointly adopted by the federal banking regulators, a savings institution’s capital adequacy for purposes of the prompt corrective action rules under the FDIC Improvement Act is determined on the basis of the institution’s total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its Tier 1 or core capital to adjusted total assets). The following table shows the capital ratio requirements for each prompt corrective action category:
* 3.0% if the institution has the highest examination rating.
A “critically undercapitalized” savings institution is defined as a savings institution that has a ratio of “tangible equity” to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative preferred stock less all intangibles other than qualifying supervisory goodwill and certain servicing rights. The Office of the Comptroller of the Currency may reclassify a well-capitalized savings association as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the Office of the Comptroller of the Currency determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any examination rating category. At June 30, 2013, Park View Federal met the capital requirements to be deemed a well-capitalized institution for purposes of the prompt corrective action regulations. For more information regarding the position of Park View Federal with respect to the prompt corrective action rules under the FDIC Improvement Act, see Note 15 of Notes to Consolidated Financial Statements for the Years Ended June 30, 2013, 2012 and 2011.
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 peer institutions. If the Office of the Comptroller of the Currency 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. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Additionally, a savings institution should maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves.
Federal Home Loan Bank System
Park View Federal is a member of the FHLB, which consists of 12 regional FHLBs subject to supervision and regulation by the Federal Housing Finance Agency. The FHLB provides a central credit facility primarily for member institutions. As a member of the FHLB, Park View Federal is required to acquire and hold specified amounts of capital stock in the FHLB of Cincinnati. Park View Federal was in compliance with this requirement with an investment in FHLB of Cincinnati stock at June 30, 2013 of $12.8 million. The FHLB of Cincinnati’s ability to pay dividends to its shareholders is subject to a variety of factors such as legal requirements, Park View Federal’s financial condition and income and economic conditions.
Long-term advances may be made only for the purpose of providing funds for residential housing finance, small business loans, small farm loans and small agri-business loans. At June 30, 2013, Park View Federal had $35 million in advances outstanding from the FHLB of Cincinnati. For more information regarding Park View Federal’s sources of funds, see the section captioned “- Borrowings.”
Loan and Investment Powers
Federal savings associations, such as Park View Federal, are subject to certain lending and investment restrictions imposed by the Home Owners’ Loan Act and the Office of the Comptroller of the Currency’s implementing regulations thereunder. Under these laws and regulations, federal savings associations may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. Federal savings associations may also establish service corporations that may engage in activities not otherwise permissible, including certain real estate equity investments and securities and insurance brokerage activities. These investment powers are subject to various limitations. At June 30, 2013, Park View Federal met all lending restrictions imposed under the Home Owners’ Loan Act.
Qualified Thrift Lender Test
Pursuant to the provisions of the Home Owners’ Loan Act, a savings association must meet the standard of a qualified thrift lender. Under the qualified thrift lender test, Park View Federal is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” on a monthly basis in at least nine months of the most recent twelve-month period. “Portfolio assets” means, in general, an association’s total assets less the sum of: (1) specified liquid assets up to 20% of total assets; (2) goodwill and other intangible assets; and (3) the value of property used to conduct Park View Federal’s business. “Qualified thrift investments” include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities and consumer loans. If a savings association fails the qualified thrift lender test, it must operate under certain restrictions on its activities. The Dodd-Frank Act made non-compliance potentially subject to agency enforcement action for violation of law. At June 30, 2013, Park View Federal qualified as a qualified thrift lender. Additionally, Park View Federal had also met the qualified thrift lender test in each of the prior 12 months.
Uniform Lending Standards
Under current federal banking 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. Park View Federal believes that its current lending policies conform to these guidelines.
Insurance of Deposit Accounts
The deposits of Park View Federal are insured to the maximum extent permitted by the Deposit Insurance Fund and are backed by the full faith and credit of the U.S. government. Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels, and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned.
In order to cover losses to the Deposit Insurance Fund, the FDIC imposed on all insured institutions a special emergency assessment of five basis points of total assets minus Tier 1 capital, as of June 30, 2009 (capped at ten basis points of an institution’s deposit assessment base). The amount of Park View Federal’s special assessment, which was paid on September 30, 2009, was $430,387. The FDIC provided for similar assessments during the final two quarters of 2009, if deemed necessary. However, in lieu of further special assessments, the FDIC required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. Nevertheless, pursuant to discretionary authority granted to the FDIC, the FDIC determined to exempt Park View Federal from having to prepay its quarterly risk-based assessment for the fourth quarter of 2009, and all of 2010, 2011 and 2012.
The Emergency Economic Stabilization Act of 2008 (“EESA”) instituted two temporary programs effective through December 31, 2009 to further insure customer deposits at FDIC-member banks: deposit accounts were insured up to $250,000 per customer (up from $100,000) and noninterest-bearing transactional accounts were fully insured (unlimited coverage). The Dodd-Frank Act made permanent the $250,000 per customer insurance limit for deposit accounts, and in November 2010, the FDIC issued a final rule under the Dodd-Frank Act that continued temporary unlimited coverage for noninterest-bearing transaction accounts. The separate coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and terminated on December 31, 2012.
All FDIC-insured depository institutions must pay an additional quarterly assessment, based on deposit levels, to provide funds for the payment of interest on bonds issued by the Financing Corporation (“FICO”), a federal corporation chartered under the authority of the Federal Housing Finance Board. The FICO bonds were issued to capitalize the Federal Savings and Loan Insurance Corporation. The FICO assessments are adjusted quarterly to reflect changes in the assessment bases of the FDIC’s insurance funds and do not vary regardless of a depository institution’s capitalization or supervisory evaluations.
The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of PVF Capital. Management cannot predict what insurance assessment rates will be in the future. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. In addition, the FDIC has the authority to initiate enforcement actions against savings institutions, after giving the Office of the Comptroller of the Currency an opportunity to take such action.
Dividend Limitations
Under applicable federal regulations, Park View Federal 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 Park View Federal at the time of its conversion from mutual to stock form.
Federal regulations require that savings institutions submit notice to the Office of the Comptroller of the Currency prior to making a capital distribution (which includes dividends, share repurchases and amounts paid to shareholders of another institution in a cash merger) if the institution is a subsidiary of a holding company. A savings institution must make application to the Office of the Comptroller of the Currency to pay a capital distribution if: (1) the institution would not be adequately capitalized following the distribution; (2) the institution’s total distributions for the calendar year exceed the institution’s net income for the calendar year to date plus its net income (less distributions) for the preceding two years; or (3) the distribution would otherwise violate applicable law or regulation or an agreement with or conditions imposed by the Office of the Comptroller of the Currency. As a subsidiary of a savings and loan holding company, Park View Federal must, at a minimum, provide prior notice to the Office of the Comptroller of the Currency of capital distributions. The Office of the Comptroller of the Currency may disapprove or deny a capital distribution if in the view of the Office of the Comptroller of the Currency, the capital distribution would constitute an unsafe or unsound practice.
In addition to the foregoing, earnings of Park View Federal 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 Park View Federal on the amount of earnings removed from the reserves for such distributions. For additional information regarding federal income taxes, see the section titled “-Taxation”. Park View Federal intends to make full use of this favorable tax treatment and does not contemplate using any of its earnings in a manner which would limit its bad debt deduction or create Federal tax liabilities.
Federal Reserve System
Federal Reserve Board regulations require federally chartered savings associations to maintain non-interest-earning cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). At June 30, 2013, Park View Federal met its reserve requirements. Since required reserves must be maintained in the form of either vault cash, an account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce Park View Federal’s interest income.
Interstate Branching
Federal law permits federal savings institutions to branch in any state or states of the U.S. and its territories, subject to certain exceptions. Except in supervisory cases or when interstate branching is otherwise permitted by state law or other statutory provision, an institution may not establish an out-of-state branch unless: (i) the institution qualifies as a “domestic building and loan association” under §7701(a)(19) of the Internal Revenue Code or meets the qualified thrift lender test and the total assets attributable to all branches of the association in the state would qualify such branches taken as a whole for treatment as a domestic building and loan association or as a qualified thrift lender; and (ii) such branch would not result in (1) formation of a prohibited multi-state multiple savings and loan holding company, or (2) a violation of certain statutory restrictions on branching by savings institution subsidiaries of bank holding companies. Federal savings institutions generally may not establish new branches unless the institution meets or exceeds minimum regulatory capital requirements. The Office of the Comptroller of the Currency will also consider the institution’s record of compliance with the Community Reinvestment Act in connection with any branch application.
Loans to One Borrower Limitations
Under federal law, loans and extensions of credit, to anyone may generally not exceed 15% of the unimpaired capital and surplus of the savings institution. Loans and extensions of credit fully secured by certain readily marketable collateral may represent an additional 10% of unimpaired capital and surplus. At March 31, 2013, Park View Federal’s lending limit under this restriction is $13.6 million.
Enforcement
Effective July 21, 2011, the Office of the Comptroller of the Currency assumed primary enforcement responsibility over federal savings institutions. In this regard, the Office of the Comptroller of the Currency has the authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants, who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Office of the Comptroller of the Currency that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Office of the Comptroller of the Currency, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Transactions with Affiliates
Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as PVF Capital) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B: (i) limit the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus; (ii) specify certain collateral requirements for particular transactions with affiliates; and (iii) 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 an unaffiliated customer. The term
“covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may: (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies; or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. Park View Federal is also prohibited from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on condition that the customer obtain some additional services from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions.
Savings institutions are also subject to the restrictions contained in Section 22(h) and Section 22(g) of the Federal Reserve Act on loans to executive officers, directors and principal shareholders. Under Section 22(h), loans to a director, executive officer or to a greater than 10% shareholder of a savings institution, and certain affiliated entities of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loan to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus and an additional 10% of such capital and surplus for loans fully secured by certain readily marketable collateral). Section 22(h) also prohibits loans above specified amounts to directors, executive officers and greater than 10% shareholders of a savings institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution, with any “interested” director not participating in the voting. The specified amounts are the greater of $25,000 or 5% of capital and surplus (and any loan or loans aggregating to $500,000 or more). Further, loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions to other persons. There is an exception to that requirement where such loans are made pursuant to a benefit or compensation program that is widely available to employees of the institution and the program does not give preference to directors or executive officers over other employees.
Section 22(g) of the Federal Reserve Act and Regulation O promulgated by the Federal Reserve Board 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. Extensions of credit to executive officers, directors, and greater than 10% shareholders of a depository institution by any other institution which has a correspondent banking relationship with the institution are prohibited, 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 PVF
General
PVF Capital is a savings and loan holding company as defined by the Home Owners’ Loan Act. Effective July 21, 2011, the Dodd-Frank Act regulatory restructuring transferred to the Federal Reserve Board the responsibility for regulating and supervising savings and loan holding companies, such as PVF Capital. As a subsidiary of a savings and loan holding company, Park View Federal is subject to certain restrictions in its dealings with PVF Capital and affiliates thereof.
Capital
Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to the institutions themselves. There is a five-year transition period from the July 21, 2010 (the date of enactment of the Dodd-Frank Act) before the capital requirements will apply to savings and loan holding companies.
Source of Strength
The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy that holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.
Activities Restrictions
The board of directors of PVF Capital presently intends to operate PVF Capital as a unitary savings and loan holding company. Since PVF Capital became a unitary savings and loan holding company before May 4, 1999, there are generally no restrictions on the activities of PVF Capital; however, this broad latitude to engage in activities can be restricted if the Federal Reserve Board determines an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings association or if the association fails to qualify as a qualified thrift lender. The Federal Reserve Board may impose restrictions it deems necessary to address such risk, including limiting (i) payment of dividends by the savings association; (ii) transactions between the savings association and its affiliates; and (iii) any activities of the savings association that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings association.
If PVF Capital were to acquire control of another savings institution to be held as a separate subsidiary, PVF Capital would become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and each subsidiary savings institution meets the qualified thrift lender test, the activities of PVF Capital and any of its subsidiaries (other than Park View Federal or other subsidiary savings institutions) would thereafter be subject to further restrictions.
Restrictions on Acquisitions
According to federal law, savings and loan holding companies are generally prohibited from acquiring, without prior approval: (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. Except with the prior approval of the Federal Reserve Board, 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.
Acquisition of PVF Capital
Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire control of a savings and loan holding company or savings institution. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the outstanding voting stock of the company or institution, unless the Federal Reserve Board has found that the acquisition will not result in a change of control of PVF Capital. Under the Federal Change in Bank Control Act, the Federal Reserve Board has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.
Taxation
General
PVF Capital 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
PVF Capital and Park View Federal are both subject to the federal tax laws and regulations which apply to corporations generally. In addition to the regular income tax, PVF Capital and Park View Federal may be subject to an alternative minimum tax. The alternative minimum tax is imposed to the extent it exceeds the corporation’s regular income tax. Payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.
Savings institutions are subject to the provisions of the Internal Revenue Code in the same general manner as other corporations. Prior to legislation in 1996, institutions such as Park View Federal, which met certain definitional tests and other conditions prescribed by the Internal Revenue Code, benefitted from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. Legislation that is effective for tax years beginning after December 31, 1995 repealed the reserve method available to thrifts and required institutions to recapture into taxable income over a six taxable year period the portion of the tax loan loss reserve that exceeds the pre-1988 tax loan loss reserve. Park View Federal had no such excess reserve. Park View Federal is no longer allowed to use the percentage of taxable income method for tax loan loss provisions, but is allowed to use the experience method of accounting for bad debts as long as it is not considered a large thrift. Beginning with its June 30, 1997 taxable year, Park View Federal was treated the same as a small commercial bank. Institutions with less than $500 million in assets were still permitted to make deductible bad debt additions to reserves, using the experience method. Beginning with the June 30, 2000 taxable year, Park View Federal began being taxed as a large thrift and is only able to take a tax deduction when a loan is actually charged off.
Earnings appropriated to Park View Federal’s bad debt reserve and claimed as a tax deduction are not available for the payment of cash dividends or for distribution to shareholders (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.
Park View Federal’s federal income tax returns through June 30, 2010 were audited by the Internal Revenue Service. Subsequent fiscal years remain open to audit.
For further information regarding federal income taxes, see Note 12 of Notes to Consolidated Financial Statements for the Years Ended June 30, 2013, 2012 and 2011.
State Income Taxation
Park View Federal is subject to 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 is taxed at a rate of 1.3%. PVF Capital generally elects to be taxed as a qualifying holding company and pay Ohio tax based on its net income only. The other subsidiaries of PVF Capital are taxed on the greater of a tax based on net income or net worth.
Legal Proceedings
From time to time, PVF Capital and/or Park View Federal is a party to various legal proceedings incident to its business. There are no material legal proceedings to which PVF Capital or Park View Federal is a party or to which any of their property is subject.
Executive Officers of the Registrant
The following sets forth information with respect to the executive officers of PVF.
Robert J. King, Jr.
Mr. King was appointed President and Chief Executive Officer of PVF and Park View Federal in July, 2009 and began service on September 10, 2009. Mr. King succeeded Marty E. Adams, who served as interim chief executive of PVF and Park View Federal from March 4, 2009 to September 9, 2009. Prior to joining PVF, Mr. King was senior managing director of FSI Group, LLC, a private equity operation focused on investing in the financial sector. Prior to that, Mr. King held numerous positions with Fifth Third Bank, which he joined in 1975. During his tenure with the Cincinnati-based company, he served in various positions, including vice president of Institutional Asset Administration, director of marketing, commercial lending officer, customer service manager and marketing research specialist. In 1989, he joined Fifth Third Bank (Northeastern Ohio) as an executive vice president and was promoted to president and chief executive officer the following year. In 1997, Fifth Third’s Board of Directors appointed King Chairman of Fifth Third Bank (Northeastern Ohio), a position he held until his retirement in 2004. He also was an executive vice president of Fifth Third Bancorp and regional president of Fifth Third affiliates in Toledo, Dayton, Columbus and southern Ohio. Mr. King currently serves on the boards of directors of United Way Services, the Cleveland Orchestra, the Diversity Center, Ursuline College, Cleveland Development Partners, Musical Arts Association and Cleveland Area Boy Scouts. Mr. King is a director of The Andersons, Inc. and Shiloh Industries, Inc., companies with a class of securities registered under Section 12(b) of the Exchange Act.
James H. Nicholson
In November 2009, James H. Nicholson was appointed Chief Financial Officer of PVF and Park View Federal. From 2006 to 2009, Mr. Nicholson served Huntington Bank in several capacities, including regional chief operating officer (Akron/Canton Region) and regional president and chief operating officer (Eastern Ohio Region). Mr. Nicholson previously served as Executive Vice President and Chief Operating Officer of Unizan Financial Corp. and President and Chief Executive Officer and director of Unizan Bank, National Association from 2002 until Huntington Bancshares, Inc.’s acquisition of Unizan Financial in 2006. Previously, Mr. Nicholson’s served BancFirst Ohio Corp. and The First National Bank of Zanesville as Controller from 1990 to 1994, Chief Financial Officer until 1996, Executive Vice President and Chief Operating Officer until 1997, and President and Chief
Executive Officer and a director of the bank until the merger with Unizan Financial (formerly UNB Corp.) in 2002. Mr. Nicholson became a director of BancFirst Ohio Corp. in 2000, and was also serving as its Executive Vice President and Corporate Secretary at the time of the 2002 merger.
Jeffrey N. Male
Mr. Male has been with Park View Federal since 1973. He has served in various capacities, including supervisor of the construction loan department, personnel director and manager of the collection, foreclosure and REO departments. Mr. Male was named Executive Vice President of Park View Federal in 2000. In 1986 Mr. Male was named Senior Vice President in charge of residential lending operations. He was named Vice President and Secretary of PVF upon its organization in 1994 and continues to serve in that position.
Robert K. Healey, Jr.
In June 2012, Mr. Healey was appointed as Senior Vice President, Information Technology Director/ Information Security Officer. In October 2012, Mr. Healey assumed responsibility for retail and bank and loan operations upon the resignation of Jane Grebenc. Prior to joining Park View Federal Mr. Healey was with KeyBank from 2010 to 2012 serving in a newly created position as Program Manager - Key Community Banking where he developed and executed an integrated implementation program for major Community Bank wide initiatives. Previously Mr. Healey was with PNC and its predecessor organization National City Bank from 1980 to 2010. Most recently from 2008 to 2010 Mr. Healey served as the co-leader representing National City on the Integration Oversight Committee for the Asset Management Group to facilitate the integration of National City’s Private Client Group and Institutional Asset Management into PNC’ Wealth Management business line.
Mary Ann Stropkay
In August 2010, Ms. Stropkay was appointed Senior Vice President and Chief Credit Officer. Previously, Ms. Stropkay served as President and Chief Executive Officer of Shore Bank Enterprise Cleveland, a 501(c)3 Community Development Finance Institution from 2007 to 2010. Ms. Stropkay served as a Senior Vice President in wealth management at FirstMerit Bank from 2005 to 2007. Prior to that, Ms. Stropkay served in a variety of capacities at National City Corporation from 1993 to 2005.
Item 1A.
Item 1A. Risk Factors
Our business could be impacted by any of the risks noted below, although such risks are not the only risks that we face. Additional risks that are not presently known or that we presently deem to be immaterial could also have a material, adverse impact on our business, financial condition or results of operations.
Risks Relating to Economic and Market Conditions
Difficult market conditions and economic trends have adversely affected our industry and our business.
Beginning in the latter half of 2007, the U.S. and global financial markets experienced severe disruption and volatility, with business activity across a wide range of industries and regions greatly reduced. Although economic conditions have begun to show improvement in recent months, certain sectors of the U.S. economy, such as real estate, remain weak and unemployment rates, specifically in Ohio, remain high. Local governments and many businesses still face serious difficulties due to lower consumer spending and the lack of liquidity in the credit markets.
Market conditions encountered under the current economic cycle have also led to the failure and merger of a number of financial institutions. These failures, as well as projected future failures, have had a significant negative impact on the capitalization levels and of the DIF, which has led to a significant increase in deposit insurance premiums paid by financial institutions and pervasive regulatory modifications.
Our success depends, to a certain extent, upon economic and political conditions, local and national, as well as governmental monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money supply and other factors beyond our control may adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings and our capital. Because we have a significant amount of real estate loans, additional decreases in the value of real estate collateral securing the payment of such loans may result in significant credit losses, which could result in increased delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on our operating results. Adverse changes in the economy may also have a negative effect on the ability of our borrowers, including those involving commercial real estate, to make timely repayments of their loans, which would have an adverse impact on our earnings and cash flows. Overall, while economic and market conditions have improved in the U.S. and in our primary geographic market, there can be no assurance that this improvement will continue.
Certain interest rate movements may hurt earnings and asset value.
Our results of operations depend substantially on our net interest income, which is the difference between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits and other borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions, inflation, recession, unemployment, the money supply, and the policies of various governmental and regulatory authorities. While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk.
Increases in interest rates can affect the value of loans and other assets, including our ability to realize gains on the sale of assets. We originate loans for sale and for our portfolio. Increasing interest rates may reduce the origination of loans for sale and consequently the fee income we earn on such sales. Further, increasing interest rates may adversely affect the ability of borrowers to pay the principal or interest on loans and leases, resulting in an increase in nonperforming assets and a reduction of income recognized.
In contrast, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of assets related to the servicing rights on loans sold to be lower than originally anticipated. If this happens, we may need to write down our servicing assets faster, which would accelerate our expense and lower our earnings.
Changes in interest rates also affect the value of Park View Federal’s interest-earning assets and, in particular, the Bank’s securities portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on shareholders’ equity.
Our financial condition and results of operations are dependent on the economy in our market area.
Our market area consists of Portage, Lake, Geauga, Cuyahoga, Summit, Medina and Lorain Counties in Ohio. As of June 30, 2013, management estimates that more than 90% of our deposits and the majority of loans came from our market area. Because of our concentration of business activities in our market area, our financial condition and results of operations depend upon economic conditions in our market area. Adverse economic conditions in our market area could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorders, terrorism and other factors beyond our control may adversely affect our profitability. We are less able than larger institutions to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in our market area could adversely affect the value of our assets, revenues, results of operations and financial condition. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas when and if they do occur.
Risks Related to Our Business
We have an elevated level of non-performing loans and classified assets relative to our total assets. If our allowance for loan losses is not sufficient to cover our actual loan losses, our ability to remain profitable will be adversely affected.
At June 30, 2013, our non-performing loans totaled $13.2 million, representing 2.41% of total loans and 1.70% of total assets. In addition, loans which management has classified as either substandard, doubtful or loss totaled $24.1 million, which includes the non-performing loans previously mentioned, representing 4.38% of total loans and 3.10% of total assets. At June 30, 2013, our allowance for loan losses was $13.9 million, representing 105.30% of non-performing loans. In the event our loan customers do not repay their loans according to their terms and the collateral securing the payment of these loans is insufficient to pay any remaining loan balance, we may experience significant loan losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable losses in our loan portfolio, resulting in additions to our allowance. The additions to our allowance for loan losses would be made through increased provision for loan losses, which would reduce our income.
In addition, the OCC periodically reviews our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any significant increase in our allowance for loan losses or loan charge-offs as required by the OCC would have a material adverse effect on our results of operations and financial condition.
Strong competition within Park View Federal’s market area could hurt profits and slow growth.
Park View Federal faces intense competition both in making loans and attracting deposits. This competition has made it more difficult for Park View Federal to make new loans and at times has forced the Bank to offer higher deposit rates. Price competition for loans and deposits might result in Park View Federal earning less on loans and paying more on deposits, which would reduce net interest income. Competition also makes it more difficult to increase loans and deposits. Competition also makes it more difficult to hire and retain experienced employees. Some of the institutions with which Park View Federal competes have substantially greater resources and lending limits than the Bank has and may offer services that Park View Federal does not provide. Management expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Park View Federal’s profitability depends upon its continued ability to compete successfully in its market area.
Our past emphasis on construction and commercial real estate lending and land loans may expose us to increased lending risks.
At June 30, 2013, we had $205.7 million in loans secured by commercial real estate, $16.0 million in real estate construction loans, which included $2.9 million in residential construction loans, $2.0 million in loans for the construction of multi-family properties and $11.1 million for the construction of commercial properties and $21.4 million in loans secured by land. Commercial real estate loans, construction loans and land loans represented 38.4%, 3.0% and 4.0%, respectively, of our loan portfolio. While commercial real estate, construction and land loans are generally more interest rate sensitive and carry higher yields than do residential mortgage loans, these types of loans generally expose a lender to greater risk of non-payment and loss than single-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers and, for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to single-family residential mortgage loans.
Our allowance for loan losses may not be adequate to cover actual future losses.
We maintain an allowance for loan losses to cover current, incurred loan losses. Every loan we make carries a certain risk of non-repayment, and we make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which will require additions to the allowance. Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact on our financial condition and results of operations.
We may not be able to access capital when needed.
We are required by regulatory authorities to maintain specified levels of capital. The financial institutions regulatory agencies are contemplating increased capital requirements. Should we experience significant loan losses, we may need additional capital. In addition, we may elect to raise additional capital to support our business, to finance acquisitions, if any, or for other purposes. Our ability to raise additional capital, if needed, will depend on our financial performance, conditions in the capital markets, economic conditions and a number of other factors, many of which are outside of our control. There can be no assurance, therefore, that we can raise additional capital at all or on terms acceptable to us. If we cannot raise additional capital when needed or desired, it may have a material adverse effect on our financial condition, results of operations and prospects.
Material breaches in security of our systems may have a significant effect on our business.
We collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both us and third party service providers. We have security and backup and recovery systems in place, as well as a business continuity plan, to ensure the computer systems will not be inoperable, to the extent possible. We also have implemented security controls to prevent unauthorized access to the computer systems and requires its third party service providers to maintain similar controls. However, management cannot be certain that these measures will be successful. Security breach of the computer systems and loss of confidential information, such as customer account numbers and related information, could result in a loss of customers’ confidence and, thus, loss of business.
Provisions in our First Amended and Restated Articles of Incorporation, Amended and Restated Code of Regulations, and statutory provisions could discourage a hostile acquisition of control.
Provisions in our First Amended and Restated Articles of Incorporation (the “Articles”) and Amended and Restated Code of Regulations (the “Regulations”) contain certain provisions that could discourage non-negotiated takeover attempts that certain shareholders might deem to be in their interests or through which shareholders might otherwise receive a premium for their shares over the then current market price and that may tend to perpetuate existing management. These provisions include: (i) the classification of the terms of the members of the Board of Directors; (ii) supermajority provisions for the approval of certain business combinations; (iii) elimination of cumulative voting by shareholders in the election of directors; (iv) certain provisions relating to meetings of shareholders; and (v) provisions allowing the Board of Directors to consider nonmonetary factors in evaluating a business combination or a tender or exchange offer. The provisions in the Articles requiring a supermajority vote for the approval of certain business combinations and containing restrictions on acquisitions of our equity securities provide that the supermajority voting requirements or acquisition restrictions do not apply to business combinations or acquisitions meeting specified Board of Directors approval requirements. The Articles also authorizes the issuance of 1,000,000 shares of preferred stock as well as additional common shares up to a total of 65,000,000 outstanding shares. These shares could be issued without shareholder approval on terms or in circumstances that could deter a future takeover attempt.
In addition, Ohio law provides for certain restrictions on acquisition of PVF, and federal banking laws contain various restrictions on acquisitions of control of savings associations and their holding companies.
The Articles, Regulations, Bylaws and statutory provisions, as well as certain other provisions of state and federal law and certain provisions in our employee benefit plans are employment agreements and change in control severance agreements, may have the effect of discouraging or preventing a future takeover attempt in which shareholders otherwise might receive a substantial premium for their shares over then current market prices.
Trading in our common shares is limited, which may adversely affect the time and the price at which you can sell your PVF common shares.
Although the common shares of PVF are quoted on The NASDAQ Capital Market, trading in PVF’s common shares is not active, and the spread between the bid and the asked price may be significant. As a result, you may not be able to sell your shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. The price at which you may be able to sell your common shares may be significantly lower than the price at which you could buy PVF common shares at that time.
Risks Relating to the Proposed Merger with F.N.B. Corporation
The pendency of our agreement to be acquired by F.N.B. Corporation could have a negative impact on our business.
On February 19, 2013, we entered into the Merger Agreement with F.N.B. Corporation pursuant to which, subject to the satisfaction or waiver of the conditions contained in the Merger Agreement, PVF Capital will merge with and into FNB Corporation, and FNB Corporation will be the surviving corporation of the Merger. Under the terms of the Merger Agreement, the Company’s shareholders will receive 0.3405 shares (the “Exchange Ratio”) of FNB common stock for each share of the Company’s common stock they own. In addition, all unexercised warrants remaining at the time of closing will be settled in cash based on the average closing price of FNB’s common shares for a specific 20 day trading period. The Merger Agreement also provides that all options to purchase the Company’s stock which are outstanding and unexercised immediately prior to the closing shall be converted into fully vested and exercisable options to purchase shares of FNB common stock, based upon the Exchange Ratio. The announcement and pendency of the Merger may have a negative impact on our business, financial results and operations or disrupt our business by:
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intensifying existing litigation or increasing new legal claims from purported shareholders challenging the Merger Agreement;
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intensifying competition as our competitors may seek opportunities related to our pending Merger;
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affecting our relationships with our customers, vendors and employees;
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limiting certain of our business operations prior to completion of the Merger which may prevent us from pursuing certain opportunities without F.N.B. Corporation’s approval;
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causing us to forego certain opportunities we might otherwise pursue absent the Merger Agreement;
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impairing our ability to attract, recruit, retain, and motivate current and prospective employees who may be uncertain about their future roles and relationships with F.N.B. Corporation following the completion of the Merger; and
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creating distractions from our strategy and day-to-day operations for our employees and management and a strain on resources.
The failure to complete the Merger with FNB Corporation could negatively impact our business.
There is no assurance that the Merger with FNB Corporation or any other transaction will occur or that the conditions to the Merger will be satisfied in a timely manner or at all. Further, there is no assurance that any event, change or other circumstances that could give rise to the termination of the Merger Agreement will not occur. If the proposed Merger or a similar transaction is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of
up to approximately $4.0 million. Certain costs associated with the Merger are already incurred or may be payable even if the Merger is not completed. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Finally, any disruptions to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers, vendors and employees or recruiting and retention efforts, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these relationships or our financial condition will not be negatively impacted, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated.
Risks Related to the Legal and Regulatory Environment
Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.
The policies of the Federal Reserve Board impact us significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Such policies determine to a significant extent our cost of funds for lending and investing. Changes in Federal Reserve Board policies are beyond our control and are difficult to predict. Federal Reserve Board policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve Board could reduce the demand for a borrower’s products and services. This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
PVF and Park View Federal are subject to extensive regulation, supervision and examination by federal banking authorities. Effective July 21, 2011, the Dodd-Frank Act transferred the regulatory responsibilities and authority over federal savings associations and savings and loan holding companies from the OTS to the OCC and the Federal Reserve Board, respectively. Park View Federal has also been and continues to be subject to regulation and examination by the FDIC, which insures the Bank’s savings deposits up to applicable limits. The regulation and supervision by the Federal Reserve Board, the OCC and the FDIC are not intended to protect the interests of investors in our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Proposals to change the laws governing financial institutions are frequently raised in Congress and before bank regulatory authorities, as evidenced by the enactment of the Dodd-Frank Act in 2010. Substantial regulatory and legislation initiatives, including a comprehensive overhaul of the financial regulatory system in the United States, could materially affect our business, and the nature and scope of future major changes and their effects are impossible to determine. Moreover, it is impossible to predict the ultimate form newly proposed legislation might take or how it might affect us.
The Dodd-Frank Act may adversely impact our results of operations, financial condition or liquidity.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the U.S. There are a number of reform provisions that are likely to significantly impact the ways in which savings institutions and their holding companies, including us and Park View Federal, do business. For example, the Dodd-Frank Act significantly altered the regulation of federal savings associations and savings and loan holding companies by transferring the authority and responsibilities of the OTS with respect to savings associations to the OCC. Additionally, the Dodd-Frank Act changed the assessment base for federal deposit insurance premiums by modifying the deposit insurance assessment base calculation to equal a depository institution’s consolidated assets less tangible capital and permanently increases the standard maximum amount of deposit insurance per customer to $250,000 and non-interest bearing transaction accounts will have unlimited deposit insurance through December 31, 2012. The unlimited deposit insurance on non-interest bearing transaction accounts expired December 31, 2012 and now is limited to deposit insurance of $250,000 per customer. The Dodd-Frank Act also created the Consumer Financial Protection Bureau as a new agency, which is empowered to promulgate new and revise existing consumer protection regulations which may limit certain consumer fees or
otherwise significantly change fee practices. The Dodd-Frank Act also repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. Other significant changes from provisions of the Dodd-Frank Act include, but are not limited to: (i) changes to rules relating to debit card interchange fees; (ii) new comprehensive regulation of the over-the counter derivatives market; (iii) reform related to the regulation of credit rating agencies; (iv) restrictions on the ability of banks to sponsor or invest in private equity or hedge funds; and (v) the implementation of a number of new corporate governance provisions, including, but not limited to, requiring companies to “claw back” incentive compensation under certain circumstances, providing shareholders the opportunity to cast a non-binding vote on executive compensation, new executive compensation disclosure requirements and considerations regarding the independence of compensation advisors.
Many provisions of the Dodd-Frank Act have not yet been implemented and will require interpretation and additional rule making by federal regulators. We are closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with laws and regulations. While the ultimate effect of the Dodd-Frank Act on us cannot currently be determined, the law and its implementing rules and regulations are likely to result in increased compliance costs and fees paid to regulators, along with possible restrictions on our operations, all of which may have a material adverse effect on our operating results and financial condition.
Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain industry deficiencies in foreclosure practices, including delays in the foreclosure process, as well as potentially impacted by losses in connection with actual or projected repurchases and indemnification payments related to mortgages sold into the secondary market.
Park View Federal primarily conducts loan sale and securitization activity with Freddie Mac, and to a lesser degree Fannie Mae, and acts as seller and servicer of these mortgage loans. In connection with these and other securitization transactions, Park View Federal makes certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. Park View Federal may be required to repurchase the loans and/or indemnify these organizations against losses due to material breaches of these representations and warranties.
During fiscal 2012, PVF evaluated its foreclosure documentation procedures, given the recent announcements made by other financial institutions regarding their foreclosure activities. The results of PVF’s review indicate that its procedures for reviewing and validating the information in its documentation are sound and its foreclosure affidavits are accurate. PVF has implemented additional reviews of pending foreclosures to ensure that all appropriate actions are taken to enable foreclosure actions to continue.
Although PVF believes that its mortgage documentation and procedures have been appropriate, it is possible that the Company may receive repurchase requests in the future and PVF may not be able to reach favorable settlements with respect to such requests. In addition, PVF could face delays and challenges in the foreclosure process arising from claims relating to industry practices generally, which could adversely affect recoveries and PVF’s financial results, whether through increased expenses of litigation and property maintenance, deteriorating values of underlying mortgaged properties or unsuccessful litigation results generally.
PVF undertakes no obligation and disclaims any intention to publish revised information or updates to forward-looking statements contained in the above risk factors or in any other statement made at any time by any director, officer, employee or other representative of the Company unless and until any such revisions or updates are required to be disclosed by applicable securities laws or regulations.
Item 1B.
Item 1B. Unresolved Staff Comments
Not Applicable.
Item 2.
Item 2. Properties
The following table sets forth the location and certain additional information regarding PVF’s offices at June 30, 2013:
At June 30, 2013, the net book value of PVF’s premises, furniture, fixtures and equipment was $7.0 million. See Note 7 of Notes to Consolidated Financial Statements for further information.
PVF also owns real estate in Solon, Ohio. See “Item 1. Business-Subsidiary Activities” for further information.
Item 3.
Item 3. Legal Proceedings
From time to time, PVF and/or Park View Federal is a party to various legal proceedings incident to its business. There are no material legal proceedings to which PVF or Park View Federal is a party or to which any of their property is subject.
Item 4.
Item 4. (Mine Safety Disclosures)
Not applicable.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PVF’s common shares trade under the symbol “PVFC” on the Nasdaq Capital Market. PVF had 25,901,009 common shares outstanding and approximately 138 holders of record of common shares at August 31, 2013. Federal regulations applicable to all federal savings institutions, such as Park View Federal, limit the dividends that may be paid by Park View Federal to PVF. Any dividends paid may not reduce Park View Federal’s capital below minimum regulatory requirements. In addition, Park View Federal must have the approval of the OCC if a dividend in any year would cause the total dividends for that year to exceed the sum of Park View Federal’s current year’s net income and the retained net income for the preceding two years.
At June 30, 2013, as adjusted to reflect all stock dividends, PVF had acquired a total of 472,725 shares, or 1.78%, of the Company’s common shares. PVF’s cash dividend policy remains dependent upon the Company’s financial condition, earnings, capital needs, regulatory requirements and economic conditions.
The following table sets forth certain information as to the range of the high and low bid prices for PVF’s common shares for the calendar quarters indicated. Quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.
Item 6.
Item 6. Selected Financial Data
Selected Consolidated Financial and Other Data
Financial Condition Data:
Operating Data:
(1) Includes gains of $17.6 million recorded on the cancellation of subordinated debt.
Other Data:
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
When used in this Annual Report on Form 10-K, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in PVF’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. PVF wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. PVF wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause PVF’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
PVF does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
General
PVF is the holding company for Park View Federal, its principal and wholly-owned subsidiary and a federally chartered savings bank headquartered in Solon, Ohio. Park View Federal has 16 branch offices located in Cleveland, Ohio, and surrounding communities. Park View Federal’s principal business consists of attracting deposits from the general public through its branch offices and investing these funds in loans secured by first mortgages on real estate located in its market area, which consists of Cuyahoga, Lake, Geauga, Portage, Summit, Medina and Lorain Counties in Ohio. Historically, Park View Federal has concentrated its activities on serving the borrowing needs of local homeowners and builders in its market area by originating both fixed-rate and adjustable-rate single-family mortgage loans, as well as construction loans, commercial real estate loans and multi-family residential real estate loans. In addition, Park View Federal has originated loans secured by second mortgages, including equity line of credit loans and non real estate loans. In recent years, Park View Federal has developed and increased its portfolio lending in commercial and industrial loan products, while the Bank remained primarily focused on problem asset resolution. Prospectively, Park View Federal intends to become more focused on commercial and industrial loans and SBA loans. Lending activities are influenced by the demand for, and supply of, housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and cost of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the level of personal income and savings in the market area.
On February 19, 2013, PVF Capital and F.N.B. Corporation (“FNB”) the parent company of First National Bank of Pennsylvania (“FNB Bank”), entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which PVF Capital will merge with and into FNB and cease to exist as a separate legal entity and its business will be combined with that of FNB. Promptly following consummation of the merger, it is expected that Park View Federal will merge with and into FNB Bank. PVF Capital’s common stockholders approved the Merger Agreement at the special meeting of stockholders held September 25, 2013. Additionally, the planned merger has received the necessary regulatory approvals to consummate the merger. Consummation of the merger is subject to certain conditions, including, governmental filings and expiration of applicable waiting periods, accuracy of specified representations and warranties of the other party, absence of a material adverse effect, recipient of tax opinions and the absence of any injunctions or other legal restraints. The information presented in this Annual Report on Form 10-K does not give effect to the planned merger.
As discussed in note 2 of the Notes to Consolidated Financial Statements the Company is applying relevant guidance from the SEC Staff Accounting Bulletin No. 108. Amounts related to fiscal 2012 have been adjusted to reflect the adjustment for Freddie Mac interest using the above referenced guidance.
For the fiscal year ended June 30, 2013, PVF and Park View Federal have been subject to examination and comprehensive federal regulation and oversight by the Federal Reserve Board and the OCC, respectively. As of July 21, 2011, the Dodd-Frank Act transferred the regulatory responsibilities and authority over savings associations and savings and loan holding companies from the OTS to the OCC and the Federal Reserve Board, respectively. Consequently, effective July 21, 2011, the Federal Reserve Board began serving as PVF’s primary federal regulator and the OCC will serve as the primary regulatory agency for Park View Federal. For additional information on the regulation of PVF and Park View Federal, see “Item 1 - Business.”
Overview of Financial Condition at June 30, 2013, 2012 and 2011
Park View Federal had total assets of $777.9 million, $791.4 million, and $787.1 million at June 30, 2013, 2012 and 2011, respectively. The primary source of Park View Federal’s total assets has been its loan portfolio. Net loans receivable, loans receivable held for sale and mortgage-backed securities totaled $593.6 million, $582.1 million, and $561.6 million at June 30, 2013, 2012 and 2011, respectively.
The following table provides a breakdown of the composition of loans receivable, loans receivable held for sale and mortgage-backed securities for these periods.
Investment of Funds
Loans: Total loans were $550.3 million at June 30, 2013, compared to $558.3 million at June 30, 2012 and $578.3 million at June 30, 2011, representing a decline of $8.1 million or 1.4% for fiscal 2013 and $20.0 million or 3.4% for fiscal 2012. The decline in total loans in 2013 and 2012 resulted from management’s efforts to reduce its problem and non-performing loans which declined $6.8 million and $30.2 million, respectively, diversify its balance sheet by emphasizing non-real estate loans and the decision to sell fixed rate mortgages originated in this low interest rate environment in the secondary market instead of retaining the loans in portfolio.
Mortgage-backed securities: The increase in mortgage-backed securities in 2013 resulted from the purchase of $20.2 million in mortgage-backed securities, less payments received of $6.4 million, and a market valuation adjustment of $0.5 million. The decrease of $3.1 million in available for sale securities in 2013 is the result of the purchase of $3.9 million of trust preferred and corporate securities, call or maturities of $7.6 million and an increase the market valuation adjustment of $0.6 million. There were no securities held to maturity. Cash and cash equivalents totaled $100.6 million, $120.1 million and $149.3 million at June 30, 2013, 2012 and 2011, respectively.
The securities portfolio has been and will continue to be used primarily to meet the liquidity requirements of Park View Federal in its deposit taking and lending activities.
Park View Federal’s policy permits investment only in U.S. government, U.S. government-sponsored enterprises securities, Triple-A-rated securities, trust preferred or corporate securities which the Park View performs a separate credit analysis. Park View Federal invests primarily in securities having a maturity of five years or less, federal funds sold and deposits at the FHLB of Cincinnati.
Park View Federal’s deposit liabilities totaled $630.6 million, $656.0 million, and $652.6 million at June 30, 2013, 2012 and 2011, respectively. Management’s decision to continue to pay reduced rates on certificates of deposit and promote the growth of core accounts resulted in a decrease of $57.8 million in certificates of deposit, an increase of $31.7 million in core accounts and a total decrease in savings deposits of $0.7 million for the year ended June 30, 2013. Park View Federal no longer holds any brokered deposits. Brokered deposits represent funds which Park View Federal obtains through a deposit broker that places deposits from third parties with insured depository institutions. Following is a breakdown of deposits by category for these periods:
FHLB advances and other borrowings amounted to $35.9 million, $36.0 million, and $36.2 million at June 30, 2013, 2012 and 2011, respectively.
Liquidity and Capital Resources
PVF’s shareholders’ equity totaled $81.0 million, $70.7 million, and $71.3 million at the years ended June 30, 2013, 2012 and 2011, respectively. The increase in shareholders’ equity in 2013 of $10.9 million is substantially the result of net income for the period of $9.1 million, other comprehensive income of $0.9 million and equity based compensation instruments of $0.9 million. There were no cash dividends paid.
At June 30, 2013, Park View Federal’s Tier 1 (core) capital ratio was 10.16% and its total risk-based capital ratio was 14.34%. Federal banking regulators have implemented a statutory framework for capital requirements which establishes five categories of capital strength ranging from “well capitalized” to “critically undercapitalized.” An institution’s category depends upon its capital level in relation to relevant capital measures, including two risk-based capital measures, a tangible capital measure and a core/leverage capital measure. At June 30, 2013, Park View Federal was in compliance with all of the current applicable regulatory capital measurements to meet the definition of a well-capitalized institution, as demonstrated in the table below.
(1) Tangible and core capital levels are shown as a percentage of total adjusted assets; risk-based capital levels are shown as a percentage of risk-weighted assets.
Park View Federal’s liquidity measures its ability to fund loans and meet withdrawals of deposits and other cash outflows in a cost-effective manner. Park View Federal’s primary sources of funds for operations are deposits from its primary market area, principal and interest payments on loans and mortgage-backed securities, sales of loans, proceeds from maturing securities, and advances from the FHLB of Cincinnati. While loan and mortgage-backed securities payments and maturing securities are relatively stable sources of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by prevailing interest rates, economic conditions and competition. FHLB advances may be used on a short-term basis to compensate for deposit outflows or on a long-term basis to support expanded lending and investment activities. Cash and cash equivalents decreased by $19.5 million to $100.6 million. Cash provided by operating activities was $4.6 million in 2103, $1.8 million in 2012 and
$0.8 million in 2011. Cash used in investing activities was $7.3 million and $27.6 million in 2013 and 2012, respectively, primarily from net deployment into loans and investment securities, while cash provided by investing activities was $77.3 million in 2011, primarily from the decline in the loan and investment securities portfolios. Cash used in financing activities was $16.8 million, $3.4 million and $58.8 million in 2013, 2012, and 2011, respectively, from lower deposits and borrowings.
Park View Federal uses its capital resources principally to meet its ongoing commitment to fund existing and continuing loan commitments, fund maturing certificates of deposit and deposit withdrawals, repay borrowings, maintain its liquidity and meet operating expenses. At June 30, 2013, Park View Federal had commitments to originate loans totaling $36.2 million, of which $34.7 million are intended to be sold, commitments to fund equity lines of credit totaling $53.3 million, and $2.3 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the 12 months following June 30, 2013 totaled $173.7 million. Management believes that a significant portion of the amounts maturing during fiscal 2014 will be reinvested with Park View Federal because they are retail deposits; however, no assurances can be made that this will occur.
PVF’s ability to pay dividends depends, in part, on its receipt of dividends from Park View Federal because the Company has minimal sources of income other than distributions from the Bank. Federal regulations impose limitations upon all capital distributions, including cash dividends, by a savings institution, such as Park View Federal. Under the regulations, an application to and prior approval of federal regulators is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under applicable regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement. If an application is not required, the institution must still provide prior notice to federal regulators of the capital distribution if, like Park View Federal, it is a subsidiary of a holding company.
PVF currently does not pay dividends on its common shares. The Company’s ability to pay dividends is dependent, in large part, on its receipt of dividends from Park View Federal, which is not positioned to do so due to its large losses the prior two years. This may adversely affect the market price for PVF’s common shares. PVF’s ability to pay dividends will depend on a number of factors, including capital requirements, its financial condition and results of operations including its ability to generate sufficient earnings to warrant the payment of dividends, tax considerations, statutory and regulatory limitations and general economic conditions. PVF has cash of approximately $1.0 million at the parent company level available to service its operating expenses and for future investment in Park View Federal, if necessary. It has no debt obligations. PVF also derives its liquidity resources for operating obligations from its non subsidiaries which are sufficient to meet current operating obligations. Management believes its current liquidity levels are adequate to meet its operating obligations over the next twelve months.
Park View Federal maintains liquid assets sufficient to meet operational needs. Park View Federal’s most liquid assets are cash and cash equivalents, which are short-term, highly-liquid investments that are readily convertible to known amounts of cash. The levels of such assets are dependent upon Park View Federal’s operating, financing and investment activities at any given time. Management believes that the liquidity levels maintained are more than adequate to meet potential deposit outflows, repay maturing FHLB advances, fund new loan demand and cover normal operations.
Commitments, Contingencies and Off-Balance Sheet Risk
Park View Federal is a party to financial instruments with off-balance sheet risk including commitments to originate new loans, commitments to extend credit under existing lines of credit and commitments to sell loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.
Off-balance sheet financial instruments are summarized as follows:
Commitments to originate new loans or to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally expire within 30 to 60 days and are adjusted for expected historic fallout. Most home equity line of credit commitments are for a term of ten years and commercial real estate lines of credit are generally renewable every two years. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Park View Federal evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.
Commitments to sell loans intended for sale are agreements to sell loans to a third-party at an agreed-upon price. The fair value of commitments to originate mortgage loans intended for sale at June 30, 2013 was $0.1 million, and commitments to sell loans intended for sale was $0.6 million. Park View Federal’s net mortgage banking derivatives was $0.7 million at June 30, 2013.
The following table presents as of June 30, 2013, PVF’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
Results of Operations
General
PVF’s net income for the year ended June 30, 2013 was $9.1 million or $0.35 basic earnings per share and $0.34 diluted earnings per share compared to a net loss for the year ended June 30, 2012 of $1.9 million and $.08 basic and diluted loss per share, and a net loss for 2011 of $9.7 million, or $.38 basic and diluted loss per share.
PVF’s earnings for 2013 improved by $11.0 million over the prior year. The improvement for 2013 was attributable to $1.3 million improvement in net interest income, a $4.9 million decrease in the provision for loan losses, a $4.3 million increase in non-interest income, and a higher federal income tax benefit of $0.9 million, partially offset by a $0.4 million increase in non-interest expense. The increase to net interest income was attributable to an improved mix of assets combined with a decrease in the level of nonperforming loans and a continued a continued reduction in the cost of funds. The provision for loan losses decreased as a result of a decrease in nonperforming loans and lower losses and net charge-offs associated with specifically identified loans. Non-interest income increased primarily the result of higher overall net mortgage banking revenue, SBA income, service and other income and lower REO-related credit costs. The increase in non-interest expense resulted primarily from increases in incentive compensation from higher mortgage banking revenues and improved overall Company financial performance, merger related expenses and professional and legal expenses. These increases were partially offset by decreases in office occupancy and equipment, FDIC insurance expense, and other expense.
The level of non-accruing loans continued to improve, and was attributable to stabilizing-to-modestly improving local and national economic conditions. Residential markets locally and nationally have begun to stabilize as well. This was reflected in the meaningful reduction in the provision for loan losses during 2013.
Net Interest Income
Net interest income amounted to $22.7 million for the year ended June 30, 2013 compared to $21.4 million and $20.8 million for the years ended June 30, 2012 and 2011, respectively. Changes in the level of net interest income reflect changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. Tables 1 and 2 provide information as to changes in PVF’s net interest income.
Table 1 sets forth certain information relating to PVF’s average interest-earning assets (loans and securities) and interest-bearing liabilities (deposits and borrowings) and reflects the average yield on assets and average cost of liabilities for the periods and at the dates indicated. Such yields and costs are derived by dividing interest income or interest expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans are included in the loan category.
Table 1 also presents information for the periods indicated with respect to the difference between the weighted-average yield earned on interest-earning assets and weighted-average rate paid on interest-bearing liabilities, or interest rate spread, which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution’s net interest income is its net interest margin or net yield on interest-earning assets, which is its net interest income divided by the average balance of net interest-earning assets. Net interest income is affected by the interest rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities.
Table 1 Average Balances, Interest, and Average Yields and Costs
(1) For purposes of the computation, nonaccrual loans are included in the average loans outstanding.
Table 2 illustrates the extent to which changes in interest rates and shifts in the volume of interest-related assets and liabilities have affected Park View Federal’s interest income and expense during the years indicated. The table shows the changes by major component, distinguishing between changes relating to volume (changes in average volume multiplied by average old rate) and changes relating to rate (changes in average rate multiplied by average old volume). Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate.
Table 2 Volume/Rate Variance Analysis
As is evidenced by these tables, interest rate changes had a positive effect on Park View Federal’s net interest income for the years ended June 30, 2013, and 2012. Specifically, net interest income increased by $1.3 million, and $2.1 million due to rate changes for the years ended June 30, 2013, and 2012, respectively. The table continues to reflect the repricing characteristics of Park View Federal’s loan portfolio and short-term nature of its deposit portfolio, along with changing interest rates during the years ended June 30, 2013, and 2012. Park View Federal’s interest rate spread was 3.10% for fiscal year 2013, and 2.82% for fiscal year 2012. The increase in Park View Federal’s interest rate spread in fiscal year 2013 and 2012 was attributable to the decline in the cost of interest-bearing liabilities exceeding the decline in the yield on interest-earning assets. This was partially due to a lower level of nonperforming loans and a continued effort to reduce cost of funds. Non-accruing loans decreased to $13.2 million at June 30, 2013 from $20.1 million at June 30, 2012 and $50.2 million at June 30, 2011.
Net interest income was unfavorably affected by volume changes during the year ended June 30, 2013, and 2012. Accordingly, net interest income declined by $23 thousand, and $.9 million due to volume changes for the years ended June 30, 2013, and 2012, respectively. The Company has continued its improvement strategy, resulting in lower levels of portfolio lending as focused efforts have been on improving its risk profile and reducing problem assets. As a result, interest-earning asset levels are lower but at an overall higher interest spread. Net interest income increased by $1.3 million during the year ended June 30, 2013, and by $1.2 million during the year ended June 30, 2012, as a result of changes to interest rates and the volume of rate sensitive assets and liabilities.
The rate/volume analysis set forth above illustrates the effect that volatile interest rate environments can have on a financial institution.
Provision for Loan Losses
Park View Federal monitors its loan portfolio carefully and establishes levels of general and specific reserves for loan losses. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to provide for probable incurred loan losses inherent in the loan portfolio as of each balance sheet date, based on the following criteria: prior loss experience, volume and type of lending conducted by Park View Federal, industry standards and past due loans in the Bank’s loan portfolio.
Park View Federal uses a systematic approach in determining the adequacy of its allowance for loan losses and the necessary provision for loan losses, whereby the loan portfolio is reviewed generally and delinquent loan accounts are analyzed individually on a monthly basis. Consideration is given primarily to the types of loans in the portfolio and the overall risk inherent in the portfolio as well as, with respect to individual loans, account status, payment history, ability to repay and probability of repayment, and loan-to-value percentages. After reviewing current economic conditions, changes in delinquency status and actual loan losses incurred by Park View Federal, management establishes an appropriate reserve percentage applicable to each category of loans, and a provision for loan losses is recorded when necessary to bring the allowance to a level consistent with the results of this analysis. Loans are grouped by property type and original loan to value ratio in determining historical loss rates. One-to-four family property type loans are further categorized by first mortgage, second mortgage, and home equity line of credit in addition to owner occupied and non-owner occupied loans. Historical loss rates reflect the actual prior 36 months losses recorded as a percentage of the average loan balance by property type at June 30, 2013. For the year ended June 30, 2013 management adjusted the loss history period to 36 months, from an 18 month period which was used for 2012 and 2011. As the more recent loss history has improved substantially, management believes that the elongated horizon for losses more appropriately captures existing risk in the portfolio. Management believes it uses the best information available to make a determination with respect to the allowance for loan losses, recognizing that future adjustments may be necessary depending upon a change in economic conditions.
Park View Federal’s policies require the review of assets on a regular basis, and the Bank appropriately classifies loans as well as other assets if warranted. Park View Federal establishes specific provisions for loan losses when a loss of principal is probable. A loan that is classified as either substandard or doubtful is assigned an allowance based upon the specific circumstances on a loan-by-loan basis after consideration of the underlying collateral and other pertinent economic and market conditions. In addition, Park View Federal maintains general allowances based upon the establishment of a risk category for each type of loan in the Bank’s portfolio.
For the year ended June 30, 2013, a provision for loan losses of $2.1 million was recorded, while a provision for loan losses of $7.0 million was recorded in the prior year. The provision for loan losses for the year ended June 30, 2013 reflected management’s judgments about the remaining inherent risk in Park View Federal’s loan portfolio as management continues to reduce problem and nonperforming loans. The decline in the provision for loan losses in the current year can be attributed to an improving historical loss experience from declining levels of charge offs and impairments recognized, stabilizing economic factors, improving portfolio trends and a significant decrease in the migration of performing loans to delinquent and nonperforming loans.
The following table provides statistical measures of nonperforming assets:
(1) Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet the nonaccrual criteria established by regulatory authorities. Nonaccrual loans include all loans classified as doubtful or loss, and loans greater than 90 days past due for which interest accrual has been discontinued. Payments received on a nonaccrual 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. Nonperforming loan balances are net deferred loan origination fees.
(2) Other nonperforming assets represent property acquired by Park View Federal through or in lieu of foreclosure or repossession.
(3) Excludes loans past due more than 90 days still on accrual status.
The reduction in non-accruing loans continues to be related to management’s efforts to resolve and remove problem loans. Of the $13.2 million and $20.1 million of non-accruing loans at June 30, 2013 and June 30, 2012, respectively, $5.6 million and $10.8 million, respectively, were individually identified as impaired. All of these loans are collateralized by various forms of multi-family, commercial and industrial, land, non-residential real estate or residential construction. These loans were reviewed for the likelihood of full collection based primarily on the value of the underlying collateral, and, to the extent management believed collection of loan principal was in doubt, Park View Federal established specific loss reserves. Management’s evaluation of the underlying collateral included a consideration of the potential impact of erosion in real estate values due to poor local economic conditions and a potentially long foreclosure process. This consideration involved obtaining an updated valuation of the underlying real estate collateral and estimating carrying and disposition costs to arrive at an estimate of the net realizable value of the collateral. Through management’s evaluation of the underlying collateral, Park View Federal determined that despite difficult conditions, these loans are generally well secured. Through this process, Park View Federal established no specific loss reserves related to these loans outstanding at June 30, 2013 and $.3 million, as of June 30, 2012.
The remaining balance of nonperforming loans represents homogeneous one-to-four-family loans. These loans are also subject to the rigorous process for evaluating and accruing for specific loan loss situations described above. Through this process, PVF established no specific loan loss reserves as of June 30, 2013 and $.6 million in specific loan loss reserves for these loans as of June 30, 2012, respectively.
While loan balances decreased by $5.8 million or 1.07% in 2013, Park View Federal experienced significant growth in the Commercial and Industrial segment of the portfolio. This segment increased by $14.2 million, or 39.9%, from 2012 to 2013. The decrease in loan balances was the result of the successful reduction in classified assets from $33.9 million in 2012 to $27.5 million in 2013, while the level of non-accruing loans fell from $20.1 million in 2012 to $13.2 million in 2013. Net charge-offs decreased from $20.9 million in 2012 to $5 million in 2013.
During 2012, Park View Federal experienced a decrease in the loan portfolio, net of the allowance for loan losses of $5.7 million, or 1.03%, the result of significantly reducing the level of one to four family, commercial real estate, construction and land loans. These reductions were offset by a $4.7 million increase in commercial and industrial loans. The level of classified assets decreased from $71.9 million in 2011 to $33.9 million in 2012. The level of non-accruing loans decreased from $50.3 million in 2011 to $20.1 million in 2012. Net charge-offs increased from $15.1 million in 2011 to $20.9 million in 2012. This increase can primarily be attributed to the charge off of loans previously treated as specific valuation allowances.
As economic conditions have stabilized since 2011, Park View Federal’s allowance level stands at $13.9 million, or 2.53% of total loans, for fiscal 2013. Management deems this level to be appropriate, as the charge-off levels have decreased from 2012 to 2013, driving a lower level of provision in 2013 of $2 million, compared to $6.9 million in 2012. By contrast, in 2011, the elevated levels of nonperforming loans, the poor local and national economic conditions, and Park View Federal’s concentrations of land development and construction loans, prompted management to increase the general reserve or non-specific portion of the allowance for loan losses. Although nonperforming loans remained elevated in 2012, the general reserve or non specific portion was reduced due to a more stabilized level of nonperforming loans and a reduction of historic losses.
Non-interest Income
Non-interest income totaled $13.4 million, $9.1 million, and $7.9 million for the years ended June 30, 2013, 2012 and 2011, respectively. The $4.3 million increase in 2013 was due in part to a $2.3 million increase in net mortgage banking activities. The historically low interest rate environment fueled a high level of mortgage application activity, the majority of which involved refinance loans. Income attributable to mortgage banking activities consists of net loan servicing income, gains and losses on the sale of loans, and market valuation provisions and recoveries. Income from mortgage banking activities amounted to $11.5 million, $9.1 million, and $6.6 million for the years ended June 30, 2013, 2012 and 2011, respectively. The increase in income from mortgage banking activities was primarily due to gains recorded on loans sold as a result of elevated refinancing activity from historically low interest rates. Also contributing to the improvement in non-interest income in 2013 was a $0.5 million increase in gains on the sale of SBA loans as Park View Federal expanded its capabilities in this line of business and market premiums improved. Additionally, the credit-related costs associated with other real estate owned declined $1.2 million during 2013 and service fee income improved $0.4 million.
Non-interest Expense
Non-interest expense amounted to $26.1 million, $25.7 million, and $24.8 million for the years ended June 30, 2013, 2012 and 2011, respectively. The principal component of non-interest expense is compensation and related benefits which amounted to $12.9 million, $11.5 million, and $10.7 million for the years ended June 30, 2013, 2012 and 2011, respectively. The increase in compensation for the year ended June 30, 2013 was primarily due to the Company’s return to profitability and the reestablishment of related compensation. Office occupancy totaled $2.2 million, $2.4 million and $2.5 million for the years ended June 30, 2013, 2012 and 2011, respectively. Other components of non-interest expense totaled $10.9 million, $11.8 million, and $11.6 million for the years ended June 30, 2013, 2012 and 2011, respectively. Changes in other non-interest expense for the years ended June 30, 2013 and 2012 are also the result of a continued progress toward a improving the risk profile of the Company. The reductions are primarily comprised as reductions in FDIC insurance and real estate owned and collection expense, partially offset by increases in professional and legal expense as well as one time charges related to the merger. These onetime charges totaled $.7 million for the year ended June 30, 2013.
Federal Income Taxes
PVF’s federal income tax expense (benefit) was $(1.1) million, $(.2) million, and $0.1 million for the years ended June 30, 2013, 2012 and 2011, respectively. Due to the availability of tax credits for the years ended June 30, 2010 and 2008, the tax-advantaged treatment of BOLI and other miscellaneous deductions, the Company’s effective federal income tax rate was below the expected tax rate of 35%, with an effective tax rate of negative 14.1% for the year ended June 30, 2013, 14.1% for the year ended June 30, 2012, and negative 1.3% for the year ended June 30, 2011.
Management recorded net deferred tax assets at year end 2013 and 2012 of $2.1 million and $0 respectively. A valuation allowance is established to reduce the deferred tax asset if it is more likely than not that the related tax benefits will not be realized. In management’s opinion, it is more likely than not that the tax benefits will be realized; consequently, the valuation allowance that was established as of June 30, 2011 and increased as of June 30, 2012, was reversed as of June 30, 2013. When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income, and projected future reversals of deferred tax items. Based on these criteria, the Company determined that it was necessary to carry a valuation allowance against deferred tax assets of $4.8 million at June 30, 2012 and $4.4 million at June 30, 2011 to reduce the carrying amount of the Company’s net deferred tax asset to zero for those periods. Based primarily on six consecutive quarters of profitability, management assessed the likelihood that the deferred tax asset would more likely than not be realized from future taxable income, which led to the determination that no valuation allowance was needed at June 30, 2013. The reversal of the valuation allowance during fiscal 2013 had the impact of reducing the Company’s statutory federal income tax rate of 35.0% by recognizing an effective tax benefit rate of 49.3% For fiscal 2012 and 2011, the impact of the changes to the valuation allowance resulted in increases to the statutory federal income tax rate by recognizing an effective tax expense rate of 23.9% and 37.1%, respectively.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. For further information regarding the effect of interest rate fluctuations on the Company, see Item 7A
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Park View Federal’s market risk is composed of interest rate risk.
Asset/Liability Management: Park View Federal’s Asset and Liability Committee (“ALCO”) monitors and considers methods of managing the rate sensitivity and repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in net portfolio value (“NPV”) and net interest income. Park View Federal’s asset and liability management program is designed to minimize the impact of sudden and sustained changes in interest rates on NPV and net interest income.
Park View Federal’s exposure to interest rate risk is reviewed on a quarterly basis by the ALCO and the Bank’s Board of Directors. Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine Park View Federal’s change in NPV in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of Park View Federal’s assets and liabilities. If estimated changes to NPV and net interest income are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, Park View Federal has developed strategies to manage its liquidity and the interest rate sensitivity of its asset base. Management has sought to decrease the average duration of its assets by emphasizing the origination of floating rate and adjustable commercial and industrial loans, adjustable-rate residential mortgage loans and adjustable-rate mortgage loans for the acquisition, development and construction of residential and commercial real estate, which are retained by Park View Federal for its portfolio. In addition, most long-term, fixed-rate mortgages are underwritten according to guidelines of Freddie Mac and Fannie Mae and are then sold directly for cash in the secondary market.
Interest rate sensitivity analysis is used to measure Park View Federal’s interest rate risk by computing estimated changes in NPV of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of an immediate and sustained 1%, 2%, 3% and 4% increase or decrease (if practical) in market interest rates. Park View Federal’s Board of Directors has adopted an interest rate risk policy which establishes maximum percentage change decreases in the NPV ratio (ratio of market value of portfolio equity to the market value of portfolio assets) of 10.0%, 15.0%, 20% and 25% in the event of an immediate and sustained 1%, 2%, 3% and 4% increase or decrease in market interest rates, respectively.
The following table presents Park View Federal’s projected change in NPV for the various rate shock levels at June 30, 2013 and 2012, respectively. All market risk sensitive instruments presented in this table are held to maturity or held for sale. Park View Federal has no trading securities.
The table illustrates that for June 30, 2013, in the event of an immediate and sustained increase in prevailing market interest rates, Park View Federal’s NPV ratio would be expected to decrease. Under the current market environment an immediate and sustained decrease in market interest rates of 1.0% or more is not practical. Park View Federal carefully monitors the maturity and repricing of its interest-earning assets and interest-bearing liabilities to minimize the effect of changing interest rates on its NPV. At June 30, 2013, Park View Federal’s estimated changes in the NPV ratio were within the targets established by the Board of Directors in the event of an immediate and sustained increase and decrease in prevailing market interest rates. Park View Federal’s interest rate risk position is the result of the repricing characteristics of assets and liabilities. The balance sheet is primarily comprised of interest-earning assets having a maturity and repricing period of one month to five years. These assets were funded primarily utilizing interest-bearing liabilities having a final maturity of two years or less and FHLB borrowings. Management carefully monitors its interest rate risk position and will make the necessary adjustments to its asset and liability mix to manage Park View Federal’s NPV ratio to within target levels established by the Board of Directors.
NPV is calculated utilizing a model using Park View Federal’s information based on the net present value of discounted cash flow utilizing prepayment assumption and market rates of interest. Additionally, beginning in fiscal 2012, Park View Federal also began to use its simulation model to measure net interest income sensitivity to movement in interest rates. The model is based on cash flows and repricing characteristics for balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. This model also includes management’s projections for activity levels of various balance sheet instruments necessary to simulate and measure net interest income assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into this simulation model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income and NPV. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions Park View Federal may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets such as adjustable-rate loans, which represent Park View Federal’s primary loan product, have features which restrict changes in interest rates on a short-term basis and over the life of
the asset. In addition, the proportion of adjustable-rate loans in Park View Federal’s portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase.
PVF uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities and is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. Management’s goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings.
The following table summarizes PVF’s interest rate sensitivity gap analysis at June 30, 2013. The table indicates that PVF’s one year and under ratio of cumulative gap to total assets is negative 9%, one-to-three year ratio of cumulative gap to total assets is negative 9%, and three-to-five year ratio of cumulative gap to total assets is negative 2%.
Item 8.
Item 8. Financial Statements and Supplementary Data
Crowe Horwath LLP
Independent Member Crowe Horwath International
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
PVF Capital Corp.
Solon, Ohio
We have audited the accompanying consolidated statements of financial condition of PVF Capital Corp. (“Company”) as of June 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2013, in conformity with U.S. generally accepted accounting principles.
Crowe Horwath LLP
Cleveland, Ohio
September 27, 2013
PVF CAPITAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2013 and 2012
See Notes to the Consolidated Financial Statements
PVF CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 2013, 2012 and 2011
See Notes to the Consolidated Financial Statements
PVF CAPITAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended June 30, 2013, 2012, and 2011
See Notes to the Consolidated Financial Statements
PVF CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended June 30, 2013, 2012, and 2011
See Notes to the Consolidated Financial Statements
PVF CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2013, 2012 and 2011
See Notes to the Consolidated Financial Statements
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
The accounting and reporting policies of PVF Capital Corp. (the “Company”) conform to U.S. generally accepted accounting principles (“GAAP”) and general industry practice. The Company’s principal subsidiary, Park View Federal Savings Bank (the “Bank” or “Park View Federal” is principally engaged in the business of offering deposits through the issuance of savings accounts, money market accounts and certificates of deposit, and lending funds primarily for the purchase, construction, and improvement of real estate in Cuyahoga, Summit, Geauga, Lake, Medina, Lorain and Portage Counties, Ohio. The deposit accounts of the Bank are insured up to applicable limits by the FDIC. The following is a description of the significant policies the Company follows in preparing and presenting its consolidated financial statements.
Principles of Consolidation: The consolidated financial statements include the accounts of PVF and its wholly-owned subsidiaries, the Bank, Park View Federal Service Corp (“PVFSC”), Park View Federal Holdings, Inc. (“PVF Holdings”), and Mid Pines LC (“MPLC”). PVFSC owns some of the Bank’s premises and leases them to the Bank. PVF Holdings, Inc. and MPLC did not have any significant assets or activity as of or for the periods presented. All significant intercompany transactions and balances are eliminated in consolidation.
PVFSC and the Bank have entered into various nonconsolidated joint ventures that own real estate including properties leased to the Bank. See “Note 16-Related Party Transactions” for additional disclosures related to these entities. Park View Federal has created various limited liability companies that have taken title to property acquired through or in lieu of foreclosure.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, valuation of mortgage servicing rights, fair value of mortgage banking derivatives, valuation of loans held for sale, fair value of securities, valuation of other real estate owned, and the realizability of deferred tax assets and are particularly subject to change.
Cash Flows: For purposes of the consolidated statements of cash flows, the Company considers cash and amounts due from depository institutions, interest bearing deposits, and federal funds sold with original maturities of less than three months to be cash equivalents. Net cash flows are reported for customer loan transactions, NOW and passbook savings accounts, time deposits, short-term borrowings, and advances from borrowers.
Interest-bearing Deposits: Interest-bearing deposits in other financial institutions that mature within one year and are carried at cost.
Securities: Debt securities that could be sold in the future because of changes in interest rates or other factors are classified as available for sale. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premium or accretion of purchase discount. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield. Prepayment is assumed for mortgage-backed securities. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of OTTI is recognized through earnings.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The Company sells the loans on either a servicing retained or servicing released basis. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The Company measures servicing assets using the amortization method. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Loan servicing rights are amortized in proportion to and over the period of estimated net future servicing revenue. The expected period of the estimated net servicing income is based in part on the expected prepayment of the underlying mortgages. The unamortized balance of mortgage servicing rights is included in prepaid expenses and other assets on the Consolidated Statement of Financial Condition.
Mortgage servicing rights are periodically evaluated for impairment. Impairment represents the excess of amortized cost over its estimated fair value. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate and original time to maturity. Any impairment is reported as a valuation allowance for an individual tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance will be recorded as an increase to income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material.
The Company is exposed to interest rate risk on loans held for sale and rate-lock loan commitments (“IRLCs”). As market interest rates increase or decrease, the fair value of loans held for sale and rate-lock commitments will decrease or increase. The Company enters into derivative transactions principally to protect against the risk of adverse interest movements affecting the value of the Company’s committed loan sales pipeline. In order to mitigate the risk that a change in interest rates will result in a decrease in value of the Company’s IRLCs in the committed mortgage pipeline or its loans held for sale, the Company enters into mandatory forward loan sales contracts with secondary market participants. Mandatory forward sales contracts and committed loans intended to be held for sale are considered free-standing derivative instruments and changes in fair value are recorded in current period earnings. For committed loans, fair value is measured using current market rates for the associated mortgage loans. For mandatory forward sales contracts, fair value is measured using secondary market pricing.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the time the loan is greater than 90 days delinquent unless the loan is well-secured with a loan to value ratio of 60% or less and in process of collection. Interest income on consumer loans is discontinued at the time the loan is greater than 90 days delinquent. Consumer loans that become 180 days or more past due will be classified as loss and fully reserved. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due greater than 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for either on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is maintained at a level to absorb probable incurred losses in the portfolio as of the balance sheet date. The adequacy of the allowance for loan losses is periodically evaluated by the Company based upon the overall portfolio composition and general market conditions as well as information about specific borrower situations and estimated collateral values. While management uses the best information available to make these evaluations, future adjustments to the allowance may be necessary if economic conditions change substantially from the assumptions used in making the evaluations.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses.
The allowance consists of specific and general components. The specific allocation relates to loans that are individually classified as impaired and not yet charged off. The general component covers non-impaired loans and is based on historical loss experience, adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company. For the year ended June 30, 2013 management adjusted the loss history period to 36 month, from 18 months. As the more recent loss history has improved substantially, management believes that the elongated horizon for losses more appropriately captures existing risk in the portfolio. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.
The loan portfolio segments include one-to-four family, one-to-four family construction, multi-family, commercial real estate, land, commercial and industrial, and consumer loans. One-to-four family, one-to-four family construction, and consumer loans rely on the historic cash flows of individual borrowers and on the real estate securing the loan. Multi-family, commercial real estate, land, SBA, and the commercial and industrial segments are comprised of loans with a reliance on historic cash flows of small business borrowers and of small scale investors, as well as of the underlying real estate projects or of the land. The underwriting criteria across all segments consider the risk attributes associated with weak local economic conditions and a weak real estate market.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Certain loans to borrowers experiencing financial difficulty can be modified as troubled debt restructurings and are classified as impaired. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed under the Company’s internal underwriting policy with respect to the following: whether the borrower is or will be in payment default on any of his or her debt in the foreseeable future without the modification; whether there is a potential for a bankruptcy filing; whether there is a going-concern issue; or whether the borrower is unable to secure financing elsewhere.
Generally, accruing loans which have one or more of their terms modified in response to financial difficulties of the borrower, but remain payment current, are considered troubled debt restructurings on accrual status and performing. Loans that are classified as nonaccrual, which have one or more of their terms modified in response to financial difficulties of the borrower, need to remain payment current for a minimum of 180 days under the terms of the restructuring. Only after satisfactory payment history has been re-established can the loan be moved to accrual status.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the respective loan’s effective rate at inception. The Company records impairments associated with troubled debt restructurings as specific allocations to the allowance. If a troubled debt restructure is paid off, the associated specific allocation is released back into the general allowance. For troubled debt restructurings considered to be collateral dependent, the loan is reported, net, at the fair value of collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment and accordingly, they are not separately identified for impairment disclosure purposes.
The Company’s loan portfolio is primarily secured by real estate. Collection of real estate secured loans in the portfolio is dependent on court proceedings, and as a result, loans may remain past due for an extended period before being collected, transferred to other real estate owned, or charged off. Charge-offs are recorded after the foreclosure process is complete for any deficiency between the Company’s recorded investment in the loan and the fair value of the real estate acquired or sold, to the extent that such a deficiency exists.
Historically, the Company recognized specific impairment on individual loans through the utilization of a specific valuation allowance, but did not charge off the impaired loan amount until the loan was disposed and removed from the loan accounting system. During the quarter ended December 31, 2011, the Company implemented an enhanced loan accounting system, which provides for the systematic recording of charged-off loans for financial recognition without losing the ability to track the legal contractual amounts. As such, during the three months ended March 31, 2012 and
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
December 31, 2011, respectively, the Company charged off those principal loan amounts which had previously been specifically impaired through a specific valuation allowance and continued to be carried in loans outstanding. In addition to reducing loan balances, including nonperforming loans, this new enhanced loan accounting system had the impact of elevating reported charge-offs for the periods and reducing the allowance for loan losses associated with specific reserves. Since these charge-offs associated with the implementation of this loan accounting system were previously specifically reserved and included in the Company’s historical loss factors, the allowance for loan losses did not need to be replenished after recording these charge-offs.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions to constrain it from taking that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Office Properties and Equipment: Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method at rates expected to amortize the cost of the assets over their estimated useful lives or, with respect to leasehold improvements, the term of the lease, if shorter. Estimated lives for buildings are 40 years. Estimated lives for equipment range from 1 to 10 years.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Long-Term Assets: Office properties and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Bank-Owned Life Insurance: The Company has purchased life insurance policies on certain officers. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value, adjusted for other charges or other amounts due that are probable at settlement.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of the tax benefit that is greater than fifty percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company is subject to federal income tax only. Ohio-domiciled Banks and bank holding companies are not subject to income tax in Ohio. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company is no longer subject to examination by taxing authorities for years before 2010.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Stock Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the requisite service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the entire service period for the entire award.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.
Earnings per Share: Basic earnings (loss) per share is calculated by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. The additional potential common shares issuable under stock options and outstanding warrants to purchase common stock are included in the calculation of diluted earnings per share.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe at this time such matters exist that will have a material effect on the financial statements.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank that was required to meet regulatory reserve requirements.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividend paid by the bank to the holding company or by the holding company to shareholders. See “Note 15-Regulatory Matters” for more specific disclosure related to the Bank.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in “Note 19-Fair Value”. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Operating Segments: While the Company’s chief decision-makers monitor the revenue streams of the various Company products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications: Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 2-ADJUSTMENT FOR FREDDIE MAC INTEREST
During the quarter ended December 31, 2012, the Company identified that it was not making appropriate adjustments with respect to interest on residential mortgage loans originated and sold into the secondary market. In these mortgage sales, interest was advanced by Freddie Mac for the period from the first day of the month until the date of settlement with Freddie Mac to ensure a whole payment was subsequently remitted by the Company to Freddie Mac. Such amounts should have been reversed monthly from interest income and included in the liability account of funds due to Freddie Mac. It was determined that the adjustments to reverse interest income were not made beginning in August 2011.
The Company is applying relevant guidance from the SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”) to assess the materiality of the interest income adjustments described above. It was determined, based upon the assessment, that the adjustments were immaterial to the previously reported amounts contained in the Company’s prior periodic filings. Although the interest income adjustments were immaterial to prior periods, recording the cumulative impact of the out-of period correction in the second quarter of 2013 would have been material. Therefore the Company applied the guidance for accounting for changes and error corrections and revised the prior period financial statements presented per SAB 108.
The Company is therefore revising the previously reported financial information for the twelve months ended June 30, 2012. The adjustment for the twelve months ended June 30, 2012 is a decrease to interest income of $0.6 million and an increase in accrued expenses and other liabilities for the same amount. This adjustment does not require previously filed reports with the SEC to be amended. The Company considers these adjustments to be immaterial to prior periods.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The applicable effect on the prior year balance sheet and statement of operations related to the adjustment for interest income on residential loans is as follows:
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 3-AGREEMENT AND PLAN OF MERGER
On February 19, 2013, the Company and F.N.B. Corporation (“FNB”) the parent company of First National Bank of Pennsylvania (“FNB Bank”), entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which the Company will merge with and into FNB. Promptly following consummation of the merger, it is expected that the Bank will merge with and into FNB Bank.
Under the terms of the Merger Agreement, the Company’s shareholders will receive 0.3405 shares (the “Exchange Ratio”) of FNB common stock for each share of the Company’s common stock they own. In addition, all unexercised warrants remaining at the time of closing will be settled in cash based on the average closing price of FNB’s common shares for a specific 20 day trading period. The Merger Agreement also provides that all options to purchase the Company’s stock which are outstanding and unexercised immediately prior to the closing shall be converted into fully vested and exercisable options to purchase shares of FNB common stock, based upon the Exchange Ratio.
The Company’s common stockholders approved the Agreement and Plan of Merger at the special meeting of stockholders held September 25, 2013. Additionally, the planned merger has received the necessary regulatory approvals to consummate the merger. Consummation of the merger is subject to certain conditions, including, governmental filings and expiration of applicable waiting periods, accuracy of specified representations and warranties of the other party, absence of a material adverse effect, recipient of tax opinions and the absence of any injunctions or other legal restraints.
NOTE 4-SECURITIES
As of June 30, 2013 and 2012, the amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
Management performs a quarterly evaluation of investment securities for other-than-temporary impairment. At June 30, 2013 and June 30, 2012, respectively, the gross unrealized losses were in a loss position for less than twelve months on all but the trust preferred securities. The unrealized losses in trust preferred securities relate primarily to the changes in market interest rates and spreads since the securities were purchased. Management does
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
not believe that any of these losses at June 30, 2013 or June 30, 2012 represent an other-than-temporary impairment. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized within net income in the period the other-then-temporary impairment is identified.
The amortized cost and fair value of securities available for sale, by contractual maturity, are shown below:
These mortgage-backed securities are backed by residential mortgage loans and do not mature on a single maturity date. Securities pledged as collateral for contingent funding at the Federal Home Loan Bank of Cincinnati were approximately $10.8 million.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Gross unrealized losses on mortgage backed securities at June 30, 2013 were at a loss position for less than 12 months. There were no gross unrealized losses on mortgage-backed securities at June 30, 2012. All of the Company’s holdings of mortgage-backed securities at year end 2013 and 2012 were issued by U.S. government sponsored enterprises. Unrealized gains and losses on mortgage-backed securities have not been recognized into income, because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other than temporarily impaired at June 30, 2013 and 2012.
In June of 2011, the Company sold a mortgaged-backed security with an amortized cost of $29,871,145. The Company realized a gross gain of $1,232,112.
There were no sales of securities in 2013 and 2012.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 5-LOANS RECEIVABLE
Loans receivable at June 30, 2013 and 2012 consisted of the following:
The following is a summary of the changes in the allowance for loan losses for the year ended June 30, 2011:
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The following table presents activity in the allowance for loan losses by portfolio segment for the years ended June 30, 2013 and 2012:
As of December 31, 2011, the Company implemented an enhanced loan accounting system, which provides for the systematic recording of charged-off loans for financial recognition without losing its ability to track the legal contractual amounts. As such, during the fiscal year ended June 30, 2012, the Company charged off those loan amounts which had previously been specifically impaired through the use of the specific valuation allowance. As of June 30, 2013, any remaining specific impairments known in prior periods as specific valuation allowances were tracked as specific allocations to the allowance. In addition to reducing loan balances, including nonperforming loans, this new enhanced loan accounting system had the impact of elevating reported charge-offs for the period and reducing the allowance for loan losses associated with specific reserves.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013. The recorded investment in loans includes the unpaid principal balance and unamortized loan origination fees, but excludes accrued interest receivable which is not considered to be material.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2012. The recorded investment in loans includes the unpaid principal balance and unamortized loan origination fees, but excludes accrued interest receivable which is not considered to be material.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2013 and the average recorded investment and interest income recognized by class for the twelve months ended June 30, 2013:
(1) There are $17.6 million of loans individually identified for impairment accruing interest.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2012 and the average recorded investment and interest income recognized by class for the twelve months ended June 30, 2012:
(1) There are $13.9 million of loans individually identified for impairment accruing interest.
The average recorded investment in impaired loans for the year ended June 30, 2011 amounted to $61,642,944. Interest recognized on impaired loans while considered impaired in 2011 was not material.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Past Due and Non-Accrual Loans
The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of June 30, 2013 and 2012. Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
(1) Nonaccrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet the nonaccrual criteria established by regulatory authorities. Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the collectability of the principal balance of the loan.
(2) At June 30, 2013 and 2012, the Company had balances of approximately $2.8 million and $6.3 million, respectively, in loans that have matured and continue to make current payments. These loans are not considered past due as a result of their payment status being current.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 by class of loan. Performing loans are accruing loans less than 90 days past due. Nonperforming loans are all loans not accruing or greater than 90 days past due and accruing. At June 30, 2013, the Company had a balance of approximately $2.8 million in loans that were contractually past maturity but were not considered past due as a result of the payment status being current.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The following table presents the aging of the recorded investment in past due loans as of June 30, 2012 by class of loan. Performing loans are accruing loans less than 90 days past due. Nonperforming loans are all loans not accruing or greater than 90 days past due and accruing. At June 30, 2012, the Company had a balance of approximately $6.3 million in loans that were contractually past maturity but were not considered past due as a result of the payment status being current.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Troubled Debt Restructurings:
Included in loans individually impaired are loans with recorded investment of $18,640,130 and $15,590,705 for which the Company has allocated $138,706 and $153,391 of specific reserves to customers whose terms have been modified in troubled debt restructurings as of June 30, 2013 and 2012, respectively. Included in troubled debt restructurings are $1,179,167 and $1,805,855 of restructured loans on nonaccrual at June 30, 2013 and 2012, respectively. Of the restructured loans, 5 loans totaling $1,219,300 are not performing in accordance with their modified terms. There are no commitments to lend additional amounts at June 30, 2013 and 2012.
The following table presents the aggregate balance of loans by loan class whose terms have been modified in troubled debt restructurings as of June 30, 2013 and 2012:
The summary of activity for troubled debt restructuring loans at June 30, 2013 and 2012 was as follows:
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
During 2013 and 2012, the terms of certain loans to borrowers experiencing financial difficulty were modified as troubled debt restructurings. The modification of the terms of such loans may include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
Loans modified as troubled debt restructurings during the year ended June 30, 2013 were for existing classified loans or loans already classified as troubled debt restructurings, and involved an extension of the maturity dates for periods ranging from 12 month to 24 months. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended June 30, 2013:
The troubled debt restructurings resulted in $0.2 million and $1.9 million of charge-offs during the years ended June 30, 2013 and 2012, respectively of which $0.0 million and $1.1 million were specifically reserved prior to the charge off. During the year ended June 30, 2013, there was no increase in the allowance for loan losses associated with troubled debt restructurings, whereas the increase in the allowance for loan losses associated with the troubled debt restructuring was $0.8 million for the year ended June 30, 2012.
The following table presents loans by class that was modified as troubled debt restructurings at June 30, 2012. All modifications during 2012 involved a reduction of the stated interest rate of the loan and were for periods ranging from 12 months to 24 months, additionally three loans involved a permanent reduction in the recorded investment in the loan totaling approximately $932,000. No maturity dates were extended in these modifications.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The troubled debt restructurings resulted in $1.9 million of charge-offs during the period ended June 30, 2012 of which $1.1 million were specifically reserved prior to the charge off. As a result the increase in the allowance for loan losses associated with the troubled debt restructuring was $0.8 million for the period ended June 30, 2012 and included charge off recognized in previous periods.
For the purpose of this disclosure, a loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
The troubled debt restructurings that subsequently defaulted did not result in an increase in the allowance for loan losses or result in charge-offs during the periods ended June 30, 2013 and 2012.
Credit Quality Indicators:
The Company categorizes loans into risk strata based on relevant borrower information about the ability to service debt. This information includes a review of current financial information, historic payment experience, credit documentation, relevant public information and other factors, as determined by credit underwriting guidelines. Through its analysis of individual borrowers, the Company classifies each loan as to credit risk. All loans considered non-homogeneous, specifically those that are deemed commercial and industrial or commercial real estate loans, are subject to review by the Company, regardless of loan size. In practice, these loans are reviewed continually and changes to the risk rating, if necessary, occur on a quarterly basis. Loans that are considered homogeneous, or those which fall into the categories of one-to-four family loans or into consumer loans, are not individually rated annually. The payment performance of the homogeneous loans serves as the clear credit indicator of classification into the categories of pass-rated loans or into substandard, nonaccrual loans. Homogeneous loans that are less than 90 days past due are generally reported as pass-rated loans, unless related to a rated commercial and industrial or commercial real estate loan. Homogeneous loans which are greater than 90 days past due are placed on nonaccrual and rated substandard. Payment performance indicators are based on performance through June 30, 2013. The Company uses the following definitions for adverse risk ratings:
Special Mention Loans classified as special mention have a potential weakness that requires close attention. If left unattended, the potential weaknesses may result in further deterioration in the repayment prospects of the loan or of the institution’s credit position at a future date.
Substandard Loans classified as substandard are protected inadequately by the current financial means of the borrower or through the liquidation of collateral pledged. Loans classified as substandard have a well-defined weakness, and without substantial intervention, there is a distinct possibility that the institution may incur a loss. As a matter of practice, if the Bank feels that a total loss is imminent, it designates nearly all of these loans to charge off. Accordingly, the Bank uses the loan classification of doubtful, as defined below, sparingly.
Doubtful Loans classified as doubtful have all of the inherent weaknesses of those loans classified as substandard with the added structural weakness rendering the collection in full highly unlikely. As such, this category is used sparingly by the Bank.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
As of June 30, 2013, and based on the most recent analysis performed by the Company, the risk category of loans by class of loan was as follows:
(1) There are $1.0 million in non-homogeneous loans which are subject to individual review for risk rating included in the pass risk category based on payment status as they have not yet been individually reviewed.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
As of June 30, 2012, and based on the most recent analysis performed by the Company, the risk category of loans by class of loans is as follows:
(1) There is $2.6 million in non-homogeneous loans which are subject to individual review for risk rating included in the pass risk category based on payment status as they have not yet been individually reviewed.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Note 6-MORTGAGE BANKING ACTIVITIES
Loans held for sale at June 30, 2013 and 2012 were $28,835,018 and $25,062,786, respectively.
The Company accounts for loans held for sale at fair value. The fair value of loans held for sale exceeded the unpaid principal balance of these loans by $719,505 and $738,742 as of June 30, 2013 and 2012, respectively. The gain on loans held for sale as of June 30, 2013 was reported in the mortgage banking activities line of the consolidated statement of operations. Interest on loans held for sale was reported in interest income.
The Company services real estate loans for investors that are not included in the accompanying Consolidated Financial Statements. Mortgage servicing rights are established based on the fair value of servicing rights retained on loans originated by the Company and subsequently sold in the secondary market. Mortgage servicing rights are included in the Consolidated Statements of Financial Condition under the caption “Prepaid Expenses and Other Assets.” At June 30, 2013 and 2012, the mortgage loan servicing portfolio was approximately $1.1 billion.
Originated mortgage servicing rights capitalized and amortized during the years ended June 30, 2013, 2012 and 2011 were as follows:
Activity in the valuation allowance for mortgage servicing rights over the years ended June 30, 2013, 2012 and 2011 was as follows:
The fair value of capitalized mortgage servicing rights was $7,774,125 and $7,928,789 at June 30, 2013 and 2012, respectively. Fair value was determined using discount rates ranging from 10.0% to 12.0% and prepayment speeds ranging from 213.0% to 593.0%, depending on the stratification of the specific rights. The weighted average life was determined to be 4.95 years. At June 30, 2013 there were ten tranches of the Company’s mortgage servicing asset that were considered impaired. The weighted average coupon of the loans serviced represented by these tranches was 3.97%, and the Company recorded a valuation allowance for impairment of $994,568 on these tranches. At June 30, 2012, an impairment of $816,481 was recorded.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Mortgage banking activities, net, as presented in the consolidated statements of operations consisted of the following:
The above amounts do not include non-interest expense related to mortgage banking activities.
At June 30, 2013 and 2012, the Bank had IRLC’s on $34,672,027 and $65,996,365, respectively, of loans intended for sale in the secondary market. These commitments are considered to be free-standing derivatives and the change in fair value is recorded in the Consolidated Financial Statements. The fair value of these commitments as of June 30, 2013 and 2012 was estimated to be $118,090 and $1,773,453, respectively, which is included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. To mitigate the interest rate risk represented by these IRLC’s, the Bank entered into contracts to sell mortgage loans of $50,000,000 and $69,150,472 as of June 30, 2013 and 2012, respectively. These contracts are also considered to be free-standing derivatives, and the change in fair value also is recorded in the financial statements. The fair value of these contracts at June 30, 2013 and 2012 was estimated to be $573,401 and ($117,718), respectively. These amounts are added to (netted against) the fair value of IRLC’s recorded in accrued expenses and other liabilities. Changes in fair value for both types of derivatives are reported in mortgage banking activities in the consolidated statements of operations.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 7-OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at cost, less accumulated depreciation and amortization at June 30, 2013 and 2012, are summarized as follows:
NOTE 8-DEPOSITS
Scheduled maturities of time deposits were as follows:
Time deposits in amounts of $100,000 or more totaled approximately $126,761,299 and $150,740,270 at June 30, 2013 and 2012, respectively.
Deposits of related parties totaled $2,321,971 and $2,391,702 at June 30, 2013 and June 30, 2012.
No brokered deposits were held at June 30, 2013 or 2012.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 9-ADVANCES FROM THE FEDERAL HOME LOAN BANK OF CINCINNATI
Short-Term Advances: The Bank maintains two lines of credit totaling $230,000,000 with the FHLB. The $200,000,000 repurchase line matures on February 8, 2014. No borrowings were outstanding on the repurchase line of credit as of June 30, 2013 and June 30, 2012, respectively. The Bank has chosen to take daily advances from this line, with the interest rate set daily. The $30,000,000 cash management line matures on September 28, 2013. No borrowings were outstanding on the cash management line as of June 30, 2013 and June 30, 2012, respectively. The borrowing capacity on these lines of credit is limited to collateral pledged. At June 30, 2013, Park View Federal had an available borrowing capacity of $14.8 million on these lines.
In order to secure these advances, the Bank has pledged mortgage loans with unpaid principal balances aggregating approximately $49,764,912 and $45,393,890 at June 30, 2013 and 2012, respectively, and FHLB stock.
Long-Term Advances: Long-term advances from the FHLB, with maturities and interest rates thereon at June 30, 2013 and 2012, were as follows:
The advances outstanding at June 30, 2013 and 2012 were putable fixed-rate advances. They can be terminated at the option of the FHLB after a stated lockout period. If the option is exercised, the Bank could repay this advance without a prepayment penalty.
NOTE 10-NOTE PAYABLE
On November 24, 2008, one of PVF’s subsidiaries obtained a $1.4 million dollar loan from another financial institution which has a principal balance of $939,445 as of June 30, 2013. The loan was a refinance of a line of credit loan and is collateralized by PVF’s Solon, Ohio headquarters building. The note carries a variable interest rate that adjusts to The Wall Street Journal published prime lending rate plus 50 basis points. The loan required interest only payments for the first six months and then converted to an amortizing loan for a term of 15 years. At June 30, 2013, the interest rate was 3.75%.
NOTE 11-REPURCHASE AGREEMENT
In March 2006, the Bank entered into a $50 million repurchase agreement with another institution (Citigroup) collateralized by mortgage-backed securities and securities. The repurchase was for a five-year term and matured in March 2011. Interest was adjustable quarterly during the first year based on the three-month LIBOR rate minus 100 basis points. After year one, the rate adjusted to 4.99% and the repurchase agreement became callable quarterly at the option of the issuer.
On March 21, 2011 the repurchase agreement matured and the Bank repurchased the securities for $50 million utilizing cash on deposit at the Federal Reserve Bank of Cleveland. Interest expense associated with this borrowing was approximately $1.8 million during the year ended June 30, 2011.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 12-FEDERAL INCOME TAXES
Income tax expense (benefit) was as follows:
For 2013, $868,105 of the valuation allowance was reversed through other comprehensive income. For 2012, the tax benefit reflected in continuing operations relates to adjustments between other comprehensive income and continuing operations tax expense due to accounting rules related to intraperiod allocation of tax between components of the financial statements.
The provision for federal income taxes differs from the amounts computed by applying the U.S. federal income tax statutory rate to income before federal income taxes. These differences are reconciled as follows:
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The net tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2013 and 2012 were:
Management recorded net deferred tax assets at year end 2013 and 2012 of $2.1 million and $0 respectively. A valuation allowance is established to reduce the deferred tax asset if it is more likely than not that the related tax benefits will not be realized. In management’s opinion, it is more likely than not that the tax benefits will be realized; consequently, the valuation allowance that was established as of June 30, 2011 and increased as of June 30, 2012, was reversed as of June 30, 2013. When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income, and projected future reversals of deferred tax items. Based on these criteria, the Company determined that it was necessary to carry a valuation allowance against deferred tax assets of $4.8 million at June 30, 2012 to reduce the carrying amount of the Company’s net deferred tax asset to zero. Based primarily on six consecutive quarters of profitability, management assessed the likelihood that the deferred tax asset would more likely than not be realized from future taxable income, which led to the determination that no valuation allowance was needed at June 30, 2013.
As of June 30, 2013, the Company has net operating loss carryforwards of approximately $4,286,000 from the year ended June 30, 2012, and $4,417,000 from June 30, 2011. The related net operating loss carry-forward periods expire in 2032 and 2031, respectively.
Accumulated deficits at June 30, 2013 and 2012 include approximately $4,516,000 for which no provision for federal income tax has been made. The related unrecorded deferred tax liability was approximately $1,535,000 at June 30, 2013 and 2012. This amount represents allocations of income during years prior to 1988 to bad debt reserve deductions for tax purposes only. These reserves will be recaptured into taxable income in the event of certain distributions and redemptions. Such recapture would create income for tax purposes only, which would be subject to
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
income taxes at the then current corporate income tax rate, resulting in a charge to income tax expense. Recapture would not occur upon the reorganization, merger, or acquisition of Park View Federal, or if the Bank is merged or liquidated tax-free into a bank or undergoes a charter change. If Park View Federal fails to qualify as a bank or merges into a nonbank entity, these reserves will be recaptured into taxable income, resulting in a charge to income tax expense.
NOTE 13-LEASES
The Company leases certain premises from unrelated and related parties. Future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more consisted of the following at June 30, 2013:
During the years ended June 30, 2013, 2012 and 2011, rental expense was $885,691, $942,416, and $962,863, respectively. Rental expense related to related party leases was $303,820, $296,159, and $233,357 for the years ended June 30, 2013, 2012 and 2011, respectively.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 14-LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
In the normal course of business, the Bank enters into commitments with off-balance-sheet risk to meet the financing needs of its customers. Commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Bank since the time the commitment was made.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of 60 to 120 days or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on management’s credit evaluation of the applicant. Collateral held is generally residential and commercial real estate.
The Bank’s lending is concentrated in Northeastern Ohio, and as a result, the economic conditions and market for real estate in Northeastern Ohio could have a significant impact on the Bank.
At June 30, 2013 and 2012, the Bank had the following commitments to originate loans intended to be held in the portfolio:
At June 30, 2013 and 2012, the Bank had IRLCs on $34,672,027 and $65,996,365 of loans intended for sale in the secondary market. These commitments are considered to be free-standing derivatives, and the change in fair value is recorded in the financial statements. The fair value of these commitments as of June 30, 2013 and 2012 was estimated to be $118,090 and $1,773,453, respectively. To mitigate the interest rate risk represented by these IRLCs the Bank entered into contracts to sell mortgage loans of $50,000,000 and $69,150,472 as of June 30, 2013 and 2012, respectively. These contracts are also considered to be free-standing derivatives and the change in fair value also is recorded in the financial statements. The fair value of these contracts at June 30, 2013 and 2012 was estimated to be $573,401 and ($117,718), respectively.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 15-REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements, which are now administered by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Office of the Comptroller of the Currency (“OCC”). Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by banking regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Prompt corrective action regulations provide five classifications: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.
Federal regulations require savings institutions to maintain certain minimum levels of regulatory capital. An institution that fails to comply with its regulatory capital requirements must obtain approval of a capital plan and can be subject to a capital directive and certain restrictions on its operations. At June 30, 2013, the adjusted total minimum regulatory capital regulations require institutions to have a minimum tangible capital to adjusted total assets ratio of 1.5%; a minimum leverage ratio of core (Tier 1) capital to adjusted total assets of 4.0%; a minimum ratio of core (Tier 1) capital to risk-weighted assets of 4.0%; and a minimum ratio of total capital to risk-weighted assets of 8.0%. At June 30, 2013 and 2012, respectively, the Bank exceeded all of the aforementioned regulatory capital requirements.
On October 19, 2009, the Company and the Bank each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the Office of Thrift Supervision (the “OTS”), whereby the Company and the Bank each consented to the issuance of an Order to Cease and Desist (the “Company Order” and the “Bank Order”) without admitting or denying that grounds existed for the OTS to initiate an administrative proceeding against the Company or the Bank. Effective July 21, 2011, the OCC and the Federal Reserve Board succeeded to all powers, authorities, rights, and duties of the OTS relating to the enforcement of the Bank and Company Orders, respectively, as a result of the regulatory transition under the Dodd-Frank Wall Street Reform and Consumer Protection Act. On August 27, 2012, the Bank was released from the Bank Order. On December 15, 2012, the Company was released from the Company Order.
Regulations limit capital distributions by savings institutions. Generally, capital distributions are limited to undistributed net income for the current and prior two years.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
At June 30, 2013 and 2012, the Bank was in compliance with regulatory capital requirements as set forth below (dollars in thousands):
2012 has been revised to reflect the adjustment described in “Note 2 Adjustment for Freddie Mac Interest.”
NOTE 16-RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2013 were as follows.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The business relationships between the Company and its directors and directors’ affiliated companies that were considered by the Board of Directors were: (i) current director Mr. Calabrese’s position as the managing partner of Calabrese, Racek and Markos, Inc., a firm that performs appraisals on properties securing loans made by the Bank, and CRM Construction Services, Inc., a firm that provides asset positioning services for the Bank relative to Bank-owned real estate and other assets; and (ii) current director Mr. Fedeli’s position as President and Chief Executive Officer of the Fedeli Group, which acts as the Bank’s agent in connection with its purchase of certain insurance coverage. During the years ended June 30, 2013 and 2012 the Bank paid a total of $48,000 and $56,261, respectively in appraisal fees to CRM and $8,261 and $292,841, respectively, to CRMC for asset positioning services.
NOTE 17-STOCK-BASED COMPENSATION
The 2010 Equity Incentive Plan (the “2010 Plan”) replaced the 2008 Equity Incentive Plan and all remaining available shares from the 2008 Equity Incentive Plan will be available for distribution under the 2010 Plan. Generally, the Company can issue incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and other stock-based compensation under the 2010 PlanGenerally, for incentive stock options, a percentage of the options awarded become exercisable on the date of grant and on each anniversary date of grant, and for nonqualified stock options a percentage of the options awarded become exercisable on each anniversary of the date of grant. The option period expires ten years from the date of grant, except for awards to individuals who own more than 10% of the Company’s outstanding stock. Awards to these individuals expire after five years from the date of grant and are exercisable at 110% of the market price at the date of grant.
Previously, nonqualified stock options have been granted to directors, which vest immediately. The option period expires ten years from the date of grant, and the exercise price is the market price at the date of grant.
For the years ended June 30, 2013, 2012, and 2011, compensation expense of $205,597, $138,785, and $117,203, respectively, was recognized in the income statement related to the vesting of option awards.
As of June 30, 2013, there was $363,000 of compensation expense related to unvested awards not yet recognized in the financial statements. The weighted-average period over which this expense is to be recognized is 1.4 years.
The aggregate intrinsic value of all options that were exercisable at June 30, 2013 was $486,000. The aggregate intrinsic value of all options outstanding at June 30, 2013 was $1,315,000. The Company has not issued any stock option awards to directors of the Company since the institution of the regulatory orders detailed in Note 15 - Regulatory Matters.
Options outstanding at June 30, 2013 were as follows:
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
A summary of stock-based compensation activity is as follows:
The weighted-average remaining contractual life of options outstanding as of June 30, 2013 was 7.1 years. The weighted-average remaining contractual life of vested options outstanding as of June 30, 2013 was 5.0 years.
No options were exercised in the twelve-month period ended June 30, 2012.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The fair value for stock options granted to executive officers and certain other employees was determined at the date of grant using a Black-Scholes options-pricing model and the following assumptions:
The weighted-average fair value of the fiscal 2013 grants was $1.17 per option. The expected average risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the life of the option. The expected average life represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. Expected volatility is based on historical volatilities of the Company’s common stock. The expected dividend yield is based on historical information.
There were 420,790 shares of restricted stock issued to directors, executive officers and certain other employees with a weighted average fair value of $1.84 per share at June 30, 2013. The total fair value of restricted shares issued at June 30, 2013 was $773,148. For the years ended June 30, 2013, 2012 and 2011 compensation expense related to the vesting of restricted stock awards of $261,844, $215,813 and $166,124, respectively was recognized. As of June 30, 2013, there was $115,930 of compensation expense related to unvested awards not yet recognized in the financial statements. The weighted-average period of time over which this expense is to be recognized was 1.1 years at June 30, 2013.
A summary of changes in the Company’s restricted stock for the twelve months ended June 30, 2013 is as follows:
There were 1,963,210 shares available for future issuance under the existing stock plan at June 30, 2013.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 18-EARNINGS (LOSS) PER SHARE
The following table discloses earnings (loss) per share for the years ended June 30, 2013, 2012 and 2011, respectively:
There were 967,688 options not considered in the diluted earnings per share calculation for the year ended June 30, 2013, because they were not dilutive as the exercise price is higher than the average stock price for the periods. There was no dilution attributable to stock options for the years ended June 30, 2012 and 2011 since the Company was in a net loss position for the periods.
Also included for consideration in the diluted earnings per share calculation for the year ended June 30, 2013, were warrants to acquire common shares issued as part of two separate exchange offerings. The warrants issued on March 16, 2010 included warrants to purchase 1,246,179 common shares, of which 1,083,009 remain unexercised and are exercisable at any time before March 16, 2015 at a price of $1.75 per share. The warrants issued on March 16, 2010 were considered for potential dilution for the year ended June 30, 2013.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 19-FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the company has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted market prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use to price an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Securities and mortgage-backed securities. The fair value of securities available for sale is determined by obtaining quoted market prices on nationally recognized securities exchanges, if available (Level 1 inputs). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities. The fair value of mortgage-backed securities is determined through matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
Loans held for sale at fair value. The fair value of loans held for sale, which consist of single-family residential loans, is determined using quoted secondary market prices, adjusted for specific attributes of that loan or other observable data, such as outstanding commitments from third party investors (Level 2 inputs).
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Mortgage banking pipeline derivatives. The fair value of loan commitments is measured using current market rates for the associated mortgage loans (Level 2 inputs). The fair value of mandatory forward sales contracts is measured using secondary market pricing for similar product types (Level 2 inputs):
Impaired loans. The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available as well as type and status of the property. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Other real estate owned. Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data approach. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral dependent impaired loans and other real estate owned are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties, whose qualifications and licenses have been reviewed and verified by the Company. When the appraisals are received, Credit Administration reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. The Company currently utilizes a 9% discount for selling costs and it is applied to all properties, regardless of size. This discount is supported by the Company’s most recent analysis. Also, an additional 10% discount is applied to properties with appraisals performed greater than 12 months ago.
Loan Servicing Rights. On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount on an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Assets and liabilities measured at fair value on a recurring basis at June 30, 2013 and 2012 are summarized below:
There were no transfers between Level 1 and Level 2 in the period ended June 30, 2013 or June 30, 2012. The Company’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Assets measured at fair value on a nonrecurring basis at June 30, 2013 and 2012 are summarized below:
Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $11.7 million after the application of impaired charge-offs of $4.4 million, with a specific valuation allowance of $0.1 million at June 30, 2013. Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $26.3 million after the application of impaired charge-offs and impaired recasting of $9.7 million, with a specific valuation allowance of $1.4 million at June 30, 2012. The provision for loan losses related to changes in the fair value of impaired loans was $1.3 million and $.4 million for the years ended June 30, 2013 and 2012, respectively.
Tranches of mortgage servicing rights carried at fair value totaled $7.1 million, which is made up of the outstanding balance of $8.1, net of a valuation allowance of $1.0 million at June 30, 2013. During the year ended June 30, 2013, the Company recognized an impairment charge of $0.2 million. Tranches of mortgage servicing rights carried at fair value totaled $6.5 million, which is made up of the outstanding balance of $7.3 million, net of a valuation allowance of $0.8 million at June 30, 2012. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Other real estate owned, which is maintained at fair value less costs to sell, had a net carrying amount of $6,920,247 and $7,733,578 at June 30, 2013, and June 30, 2012, respectively. The carrying amount of other real estate owned is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying amount exceeds the fair value, less estimated selling costs. For the year ended June 30, 2013, the Company recognized a net loss of $0.2 on the disposal of other real estate owned and recorded a provision for other real estate owned losses of $1.1. These direct write-downs recognized for the period are the result of obtaining updated appraisal valuations and reflect declining property values while holding the asset. The Company values all other real estate owned by obtaining updated appraisal valuations every twelve months. There have been no upward adjustments made in determining fair value.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2013:
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The Company has elected the fair value option for loans held for sale. These loans are intended for sale and are hedged with derivative instruments, and the Company believes the fair value is the best indicator of the valuation of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans are 90 days or more past due or on nonaccrual as of June 30, 2013 and 2012.
As of June 30, 2013 and 2012, the aggregate fair value, contractual balance (including accrued interest), and gain or loss was as follows:
The total amount of gains (losses) from changes in fair value included in earnings for the years ended June 30, 2011, 2012 and 2013 for loans held for sale were ($142,208) $556,778 and ($19,237).
The carrying amounts and estimated fair values of financial instruments at June 30, 2013 were as follows:
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
The carrying amounts and estimated fair values of financial instruments at June 30, 2012 were as follows:
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is involved in interpreting market data so as to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The Company used the following methods and assumptions to estimate fair value for items not described above:
Cash and amounts due from financial institutions, interest-bearing deposits, and federal funds sold. The carrying amount is a reasonable estimate of fair value because of the short maturity of these instruments and therefore are classified as Level 1.
Loans receivable. For performing variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a level 3 classification. For other performing loans receivable, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs resulting in a Level 3 classification.
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
Federal Home Loan Bank stock. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Accrued interest receivable and accrued interest payable. The carrying amount is a reasonable estimate of the fair value. The fair value level classification is consistent with the related financial instrument.
Demand deposits and time deposits. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date resulting in a Level 1 classification. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities resulting in a Level 2 classification.
Note payable. The carrying amount is a reasonable estimate of the fair value resulting in a Level 2 classification.
Federal Home Loan Bank Advance. The fair value of the Company’s FHLB debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities resulting in a Level 2 classification.
NOTE 20-PARENT COMPANY
The following are condensed statements of financial condition as of June 30, 2013 and 2012 and related condensed statements of operations and cash flows for the years ended June 30, 2013, 2012 and 2010 for the parent company.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
CONDENSED STATEMENTS OF OPERATIONS
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
CONDENSED STATEMENTS OF CASH FLOWS
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended June 30, 2013, 2012 and 2011
NOTE 21 - EMPLOYEE BENEFIT PLANS
401(k) Savings Plan: Employees who have reached age 18 and have completed three months of eligibility service are eligible to participate in the Company’s 401(k) Savings Plan. The plan allows eligible employees to contribute up to 50% of their compensation with the Company matching up to 50% of the first 4% contributed by the employee, as determined by the Company for the contribution period. The plan also permits the Company to make a profit sharing contribution at its discretion of up to 4% of the employee’s compensation. Participants vest in the Company’s contributions ratably over six years.
The total of the Company’s matching and profit sharing contribution cost related to the plan for the years ended June 30, 2013, 2012 and 2011 was $0.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
PVF maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to PVF’s management, including the Company’s principal executive officer and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, PVF carried out an evaluation, with the participation of management, including its principal executive officer and principal accounting officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(e). Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that PVF disclosure controls and procedures were effective as of June 30, 2013.
Management’s responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial reporting that are designed to produce reliable financial statements in accordance with U.S. generally accepted accounting principles. As disclosed in the Report on Management’s Assessment of Internal Control Over Financial Reporting, management assessed PVF’s system of internal control over financial reporting as of June 30, 2012, in relation to criteria for effective internal control over financial reporting as described in “1992 Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The management of PVF is responsible for establishing and maintaining adequate internal control over financial reporting. PVF’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.
With the supervision and participation of our Chief Executive Officer and Chief Financial Officer, management assessed the effectiveness of PVF’s internal control over financial reporting as of June 30, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992 Internal Control-Integrated Framework. Based on management’s assessment and those criteria, management believes that PVF Capital Corp. maintained effective internal control over financial reporting as of June 30, 2013.
/s/ James H. Nicholson
/s/ Robert J. King, Jr.
James H. Nicholson
Robert J. King, Jr.
Chief Financial Officer
President and Chief Executive Officer
Changes in Internal Control Over Financial Reporting
Management previously concluded that as of December 31, 2012, the Company’s internal control over financial reporting was not effective because management identified a material weakness. During the quarter ended December 31, 2012, the Company identified that it was not properly adjusting for the interest on residential mortgage loans originated and sold into the secondary market whereby interest was advance to Freddie Mac for the period from the first day of the month until the date of settlement with Freddie Mac to ensure a whole payment is subsequently remitted by the Company to Freddie Mac. Such amounts should have been reversed from interest income and included in the liability account of funds due Freddie Mac. It was determined that the adjustments were not made beginning August 2011.
As a result management determined that we were required to record a charge to interest income totaling $753,229, of this, $599,745 related to the prior fiscal year ended June 30, 2012 and the remaining $153,484 related to the quarter ended September 30, 2012. We adjusted our opening retained earnings for 2013 for the item described above as reflected in the consolidated financial statements contained in this form 10-K and consider these adjustments to be immaterial in prior periods.
Management determined that the control deficiency that lead to the adjustment to retained earnings, constituted a material weakness in the Company’s internal control over financial reporting. Promptly following the identification of the material weakness, management began taking the following steps to remediate this material weakness.
•
Management reviewed this material weakness with our audit committee, senior management and independent accounting firm
•
Management has modified the procedures around the monthly Freddie Mac interest posting
•
Management has further educated the appropriate parties involved in the process
•
Management has strengthened the review of the accounts related to the Freddie Mac interest posting
Management believes these changes contributed to the remediation of the material weakness in internal control over financial reporting that was in existence at December 31, 2012. Other than discussed above there were no significant changes in the Company’s internal controls during the period covered by this report or, to our knowledge, in other factors that has materially affected or is reasonable likely to affect the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors, Executive Officers and Persons Nominated or Chosen to Become Directors or Executive Officers
The following table sets forth certain information with respect to the directors and executive officers of the PVF Capital and the Bank. The directors are currently divided into two classes, with each director to be elected for two year terms and until the director’s successor is duly elected and qualified. Executive officers are elected by the Board of Directors to hold office until their successors are elected and qualified.
Robert J. King, Jr. has served as a director, President and Chief Executive Officer of PVF Capital and the Bank since September 2009. Prior to joining PVF Capital, Mr. King was senior managing director of FSI Group, LLC, a private equity operation focused on investing in the financial sector. Prior to that, Mr. King held numerous positions with Fifth Third Bank, which he joined in 1975. During his tenure with the Cincinnati-based financial institution, Mr. King served in various positions, including vice president of Institutional Asset Administration, director of marketing, commercial lending officer, customer service manager and marketing research specialist. In 1989, Mr. King joined Fifth Third Bank (Northeastern Ohio) as an executive vice president and was promoted to president and CEO the following year. In 1997, Fifth Third Bank’s board of directors appointed Mr. King chairman of the board of Fifth Third Bank (Northeastern Ohio), a position he held until his retirement in 2004. Mr. King was also an executive vice president of Fifth Third Bancorp and regional president of Fifth Third affiliate banks in Toledo, Dayton, Columbus and southern Ohio. Mr. King currently serves on the boards of directors of United Way Services, The Diversity Center, Ursuline College, Cleveland Development Partners, Musical Arts Association and Cleveland Area Boy Scouts. Mr. King is a director of The Andersons, Inc., Shiloh Industries, Inc., MTD, Inc., and Medical Mutual. The Board of Directors believes that the attributes, skills and qualifications Mr. King has developed through his education and experiences in the banking and financial services industries, as well as his significant leadership position with PVF Capital, allow him to provide continued business and leadership insight to the Board of Directors.
Jeffery N. Male has been with Park View Federal since 1973. He has served in various capacities, including supervisor of the construction loan department, personnel director and manager of the collection, foreclosure and REO departments. Mr. Male was named Executive Vice President of Park View Federal in 2000. In 1986 Mr. Male was named Senior Vice President in charge of residential lending operations. He was named Vice President and Secretary of PVF upon its organization in 1994 and continues to serve in that position.
James H. Nicholson has served as Chief Financial Officer of PVF and Park View Federal since November 2009. From 2006 to 2009, Mr. Nicholson served Huntington Bank in several capacities, including regional chief operating officer (Akron/Canton Region) and regional president and chief operating officer (Eastern Ohio Region). Mr. Nicholson previously served as Executive Vice President and Chief Operating Officer of Unizan Financial Corp. and President and Chief Executive Officer and director of Unizan Bank, National Association from 2002 until Huntington Bancshares, Inc.’s acquisition of Unizan Financial in 2006. Previously, Mr. Nicholson’s served BancFirst Ohio Corp.
and The First National Bank of Zanesville as Controller from 1990 to 1994, Chief Financial Officer until 1996, Executive Vice President and Chief Operating Officer until 1997, and President and Chief Executive Officer and a director of the bank until the merger with Unizan Financial (formerly UNB Corp.) in 2002. Mr. Nicholson became a director of BancFirst Ohio Corp. in 2000, and was also serving as its Executive Vice President and Corporate Secretary at the time of the 2002 merger.
Mary Ann Stropkay was appointed Senior Vice President and Chief Credit Officer in August 2010. Previously, Ms. Stropkay served as President and Chief Executive Officer of Shore Bank Enterprise Cleveland, a 501(c)3 Community Development Finance Institution from 2007 to 2010. Ms. Stropkay served as a Senior Vice President in wealth management at FirstMerit Bank from 2005 to 2007. Prior to that, Ms. Stropkay served in a variety of capacities at National City Corporation from 1993 to 2005.
Mark D. Grossi was named Chairman of the Board of PVF Capital and the Bank in January 2009. Since 2004, Mr. Grossi has been providing consulting services to financial services companies. From 1992 to 2004, Mr. Grossi served as Executive Vice President, Chief Retail Banking Officer and member of the Board of Directors of Charter One Bank, N.A. Prior to joining Charter One, Mr. Grossi was President and Chief Executive Officer and member of the Board of Directors of First American Savings Bank from 1987 to 1992. Mr. Grossi serves as a trustee for Walsh University, the Greater Cleveland Boy Scouts of America and Lake Ridge Academy. Mr. Grossi earned his Bachelor of Science in Business from Miami University and holds a Masters of Business Administration from Cleveland State University. During the past five years, Mr. Grossi served as a director of Energy, Inc. and the John D. Oil and Gas Company. The Nominating and Governance Committee believes that the attributes, skills and qualifications Mr. Grossi has developed through his educational background and his professional experiences in retail and commercial banking, as well as his knowledge of the northeast Ohio business community and markets, allow him to provide continued financial and regional business expertise to the Board of Directors.
Steven A. Calabrese has served as a director of PVF Capital and the Bank since October 2008. Mr. Calabrese is the managing partner of Calabrese, Racek and Markos, Inc., which operates a number of commercial real estate companies in Cleveland, Ohio and Tampa, Florida. The firm specializes in evaluation, market research and reporting, management, construction and development services for commercial and industrial real estate. During his 30+ years of real estate and investment experience, Mr. Calabrese has provided leadership on multiple public, private and philanthropic boards. These include real estate investment trusts, financial institutions, utility companies, major healthcare facilities and academic boards. During the past five years, Mr. Calabrese served as a director of Energy, Inc. and the John D. Oil and Gas Company. The Board of Directors believes that the attributes, skills and qualifications Mr. Calabrese has developed through his extensive experience in the real estate field, as well as his knowledge of the northeast Ohio business community and markets, and his experience as a director of PVF Capital, allow him to provide continued local business and real estate expertise to the Board of Directors and has nominated him for re-election.
Umberto P. Fedeli has served as a director of PVF Capital and the Bank since November 2008. Mr. Fedeli has served since 1988 as President and Chief Executive Officer of The Fedeli Group, a privately held insurance brokerage firm in Independence, Ohio. Mr. Fedeli is a member of the Board of Directors of the Cleveland Clinic Foundation and is currently serving as their Chairman of Government Relations. Mr. Fedeli also serves on the Board of Trustees of John Carroll University, is a trustee of the Cleveland Catholic Diocese Foundation, and trustee of the Northern Ohio Italian American Foundation, a charitable organization that he helped establish in 1995. Mr. Fedeli is a graduate of John Carroll University. The Board of Directors believes that the attributes, skills and qualifications Mr. Fedeli has developed through his extensive experience in the insurance industry, as well as his knowledge of the northeast Ohio business community and markets, and his experience as a director of PVF Capital, allow him to provide continued business and leadership insight to the Board of Directors and has nominated him for re-election.
Richard R. Hollington, III has served as a director of PVF Capital and the Bank since May 2010. Mr. Hollington is the current President of CapitalWorks, LLC, an alternative asset manager with two private investment funds. Mr. Hollington’s responsibilities include day-to-day management for CapitalWorks and all of its products, developing and maintaining relationships with investors and financial intermediaries, sourcing and executing acquisition opportunities and stewarding portfolio company investments. Prior to joining CapitalWorks, Mr. Hollington founded RRH Management LLC to acquire and grow high quality manufacturing or distribution businesses in Northeastern Ohio. Before forming RRH Management, Mr. Hollington spent 11 years in banking as a member of the executive management team of Sky Financial Group and its predecessors, where he led wealth management, insurance and banking business units and was responsible for the integration of several bank acquisitions. Mr. Hollington has also worked for McKinsey & Company, in its Cleveland, San Francisco and London offices, providing strategy
development and performance improvement initiatives with energy, heavy industry, steel, food, and research and development companies. Earlier still, Mr. Hollington was in corporate finance with Cleveland-based McDonald Investments, working on public offerings, mergers and acquisitions and venture capital transactions. Mr. Hollington is currently a director of Advanced Hydro Solutions, a developer of hydroelectric facilities, Premium Plastic Solutions, a plastics custom blow molder, and KKSP Precision Machining, and a trustee of University School. The Board of Directors believes that the attributes, skills and qualifications Mr. Hollington has developed through his extensive experiences in the financial services and investment banking industries, as well as his knowledge of the northeast Ohio business community and markets, allow him to provide continued business and leadership insight to the Board of Directors and has nominated him for re-election
Frederick D. DiSanto has served as a director of PVF Capital and the Bank since July 2010. Since January 2006, Mr. DiSanto has served as the Chief Executive Officer of Ancora Advisors, LLC, a registered investment advisor since January 2006. Mr. DiSanto served as Executive Vice President and Manager of Fifth Third Bank’s Investment Advisors Division from 2000 to 2006, overseeing investment management, private banking, trust and banking services. From 1998 until 2000, Mr. DiSanto served as President and Chief Operating Officer of Maxus Investment Group and was responsible for the marketing, sales, financial and general operations. Prior to that, Mr. DiSanto served as managing partner of Gelfand Partners Asset Management from 1991 until its merger with Maxus Investment Group in 1997. Mr. DiSanto began his investment career in 1985 with McDonald Investments. Mr. DiSanto currently is a director of Parts Associates Inc., an MRO distributor, W.F. Hann & Sons, an HVAC Company, and Netnowledge, Inc. dba Thin Solutions, an IT services company. In addition, Mr. DiSanto serves as Chairman of the Greater Cleveland Sports Commission and on the Board of Directors of Boys Hope Girls Hope of Northeast Ohio and John Carroll University. Mr. DiSanto earned his Bachelor degree in Management Science and his Masters of Business Administration from Case Western Reserve University. The Nominating and Governance Committee believes that the attributes, skills and qualifications Mr. DiSanto has developed through his educational background and professional experiences in the financial services and investment banking industries, as well as his knowledge of the northeast Ohio business community and markets, allow him to provide continued financial and regional business expertise to the Board of Directors.
Stuart D. Neidus has served as a director of PVF Capital and the Bank since 1996. Mr. Neidus is the current Chairman and Chief Executive Officer of Anthony & Sylvan Pools Corporation, a company that operates in the leisure industry and is one of the nation’s largest in-ground residential concrete swimming pool installers. Previously, Mr. Neidus served as President and a director of Parkwood Corporation, a private financial services company that is based in Cleveland, Ohio, from October 2009 to August 2010, during which time he continued in his roles of Chairman and Chief Executive Officer of Anthony & Sylvan Pools Corporation in a part-time capacity. Prior to serving with Anthony & Sylvan Pools Corporation, Mr. Neidus served as Executive Vice President and Chief Financial Officer of Essef Corporation from September 1996 until Anthony & Sylvan’s split-off from Essef in August 1999. Prior to joining Essef Corporation, Mr. Neidus held various positions at Premier Industrial Corporation from 1992 until 1996, including serving as Executive Vice President. Prior to that, Mr. Neidus spent 19 years with the international accounting firm of KPMG LLP, serving as an audit partner from 1984 until 1992. Mr. Neidus has served as a board member and on advisory committees of many nonprofit and civic organizations over the years. In addition, Mr. Neidus currently serves as a director of Parkwood Corporation. The Board of Directors believes that the attributes, skills and qualifications Mr. Neidus has developed through his educational background in business and accounting, his business and leadership experiences, as well as his knowledge and experience as a director of PVF Capital, allow him to provide continued accounting, business and corporate governance expertise to the Board of Directors.
Family Relationships
There are no family relationships among the directors and executive officers of our Company.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years, been involved in any legal proceedings described in subparagraph (f) of Item 401 of Regulation S-K.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires PVF Capital’s officers and directors, and persons who own more than ten percent of its common shares, to file reports of ownership and changes in ownership with the Commission. To PVF Capital’s knowledge, based solely on its review of the copies of such forms received by the Company during the fiscal year ended June 30, 2013, the Company believes that no person(s) who, at any time during such fiscal year, was a director, officer or beneficial owner of more than 10% of the Company’s common shares failed to comply with all Section 16(a) filing requirements during such fiscal year.
Code of Ethics
PVF has adopted a Code of Business Conduct and Ethics that applies to the Company’s directors, officers and employees. The Code is posted on PVF’s website at www.parkviewfederal.com/investor/governance. Amendments to the Code and waivers of the provisions of the Code will also be posted on PVF’s website.
Procedures for Recommending Director Nominees
There were no material changes to the procedures by which shareholders may recommend nominees to the Company’s Board of Directors during the period covered by this Annual Report on Form 10-K.
Audit Committee
PVF Capital has a separately designated Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the fiscal year ended June 30, 2013, the Audit Committee met periodically to examine and approve the audit report prepared by PVF Capital’s independent registered public accounting firm, to review and appoint the independent registered public accounting firm to be engaged by the Company, to review the internal audit function and internal accounting controls and to review and approve various policies. The Board of Directors has determined that one member of the Audit Committee, Stuart D. Neidus, qualifies as an “audit committee financial expert” as defined in Section 407(d) of Regulation S-K promulgated by the Commission. Mr. Neidus acquired these attributes through education and experience in the areas of business and accounting. Mr. Neidus is “independent,” as independence for audit committee members is defined under applicable Nasdaq listing standards. The Board of Directors has adopted a written charter for the Audit Committee, a copy of which is available on PVF Capital’s website www.parkviewfederal.com/investor/governance. The Audit Committee and the Board of Directors review the charter periodically to ensure the scope of the charter is consistent with the Audit Committee’s expected role.
Item 11.
Item 11. Executive Compensation
Summary Compensation
The following information is furnished for the individuals who served as the principal executive officer of the Company for the 2013 fiscal year and for the three other most highly compensated executive officers of the Company who were serving as executive officers on June 30, 2013 and whose total compensation exceeded $100,000.
Summary Compensation Table
(1) Amounts shown for 2013 represent bonus payments made on October 8, 2012.
(2) Amounts shown reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 for awards granted during such fiscal year. Assumptions used in the calculation of these amounts are included in Note 17 “Stock-Based Compensation” to the Consolidated Financial Statements included in PVF Capital’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013. The stock option stock appreciation rights vest ratably on the first three anniversaries of the grant date.
(3) Amount represents reimbursement payments for medical insurance premiums.
(4) Amount represents payments made on Mr. Male’s behalf for country club dues.
(5) Mr. Shiffert resigned from his position as Executive Vice President of Corporate Banking at Park View Federal Savings Bank, the Company’s wholly owned subsidiary, effective July 12, 2013.
2013 Incentive Plan
On November 30, 2011 the Company received non-objection from the OCC for the adoption of an annual incentive plan (the “Incentive Plan”) for the Company’s executive officers, including its Named Executive Officers (“NEOs”), and the officers and other key employees of its wholly-owned subsidiary, Park View Federal Savings Bank (the “Bank”).
The Incentive Plan sets forth target bonus amounts for each participating executive officer, expressed as a percentage of base salary, and provides for awards ranging from 50% (threshold) to 200% (maximum) of target. The target bonus awards under the Incentive Plan for each of the Company’s NEOs are as follows:
For each of the NEOs, 100% of each executive’s 2013 bonus opportunity was dependent upon the achievement of pre-established corporate performance metrics and, with the exception of Mr. King, subject to upward or downward adjustment based upon individual performance. Pursuant to the Incentive Plan, corporate performance was evaluated based upon the following metrics, each of which with a one-half weighting: (i) level of adversely classified assets (ii) net income). In addition, the Incentive Plan includes a circuit breaker component that required the Company to maintain certain regulatory capital levels in order for any award to be paid. For NEOs other than Mr. King, 50% of each executive’s annual bonus award is subject to adjustment from 0 to 125% based upon individual performance. Awards earned under the Incentive Plan were settled in cash.
Outstanding Equity Awards at Fiscal Year End 2013
The following table provides certain information with respect to the number of shares of PVF Capital represented by outstanding restricted stock awards and stock options held by the named executive officers as of June 30, 2013.
(1) Market value computed using $4.00, the closing price of PVF Capital’s common shares on June 30, 2013.
(2) Award of stock options, which vest on December 29, 2013.
(3) Award of restricted shares, one- half of which vest on each of September 10, 2013 and 2014.
(4) Award of restricted shares, one-half of which vest on each of November 30, 2013 and 2014.
(6) Award of restricted shares, which vest on December 29, 2013.
(7) Award of stock option, stock appreciation rights, one third of which vest on each of December 10, 2013, 2014 and 2015.
DIRECTOR COMPENSATION
As approved by the OCC and the Fed in November and December 2011, non-employee directors of the Company were eligible to receive the following compensation for fiscal 2013:
•
an annual cash retainer of $12,000 for each director; and
•
a supplemental equity grant of 3,750 shares for each director.
In addition, directors received the following cash retainers for Board committee service:
•
$2,500 retainer for Audit Committee and Director Loan Committee members;
•
$1,500 retainer for Compensation Committee members; and
•
$1,000 retainer for Nominating and Governance Committee members.
Finally, directors with significant additional duties received the following additional retainers:
•
$12,000 retainer for the Chairman of the Board;
•
$5,000 retainer for the Audit Committee and Director Loan Committee chairpersons;
•
$3,000 retainer for the Compensation Committee chairperson; and
•
$2,000 retainer for the Nominating and Governance Committee chairperson.
Directors were entitled to elect to receive the annual retainer and committee fees in the form of restricted shares, determined and granted at the beginning of the service period and vested at the end of the service period. Only a single election which applies to both the annual retainer and committee fees could be made. The same compensation arrangements have been continued for fiscal year 2014.
Directors who are also employees of the Company are not compensated separately for service as directors.
The following table sets forth the compensation paid to our non-employee directors for fiscal year 2013.
Director Compensation
(1) Each award was granted on July 2, 2012 as compensation for service for the fiscal year ended June 30, 2013. Each award fully vested on July 2, 2013.
(2) Mr. Adams resigned as director effective February 26, 2013.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Persons and groups beneficially owning in excess of 5% of PVF Capital’s common shares are required to file certain reports with respect to such ownership pursuant to the Exchange Act. The following table sets forth, as of September 26, 2013, certain information as to the common shares beneficially owned by the only persons known to PVF Capital to beneficially own more than 5% of the common shares, by each of the Company’s directors and nominees, by the non-director executive officers of PVF Capital named in the Summary Compensation Table set forth under the caption “Executive Compensation” and by all executive officers and directors of the Company as a group.
Beneficial Ownership Table
* Denotes ownership of less than 1%.
(1) Unless otherwise noted, all directors and executive officers of PVF Capital have the Company’s address: 30000 Aurora Road, Solon, Ohio 44139.
(2) In accordance with Rule 13d-3 under the Securities Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any common shares if he has or shares voting or investment power with respect to such common shares or has a right to acquire beneficial ownership at any time within 60 days from [•], 2013. As used herein, “voting power” is the power to vote or direct the voting of shares and “investment power” is the power to dispose or direct the disposition of shares. Unless otherwise indicated, the beneficial owner has sole voting and investment power with respect to the listed shares. The amount also includes the following number of restricted shares, which may be voted, but not disposed, by the applicable executive officer or director: (i) 96,000 by Mr. King; (ii) 3,334 by Mr. Nicholson; (iii) 3,334 by Mr. Shiffert; (iv) 10,927 by Mr. Calabrese, (v) 11,669 by Mr. DiSanto, (vi) 16,867 by Mr. Grossi, (vii) 12,907 by Mr. Hollington, (viii) 12,165 by Mr. Neidus; and (v) 167,203 by all directors and executive officers as a group.
(3) For all directors and executive officers, the percentage of class is based upon the sum of 26,081,460 common shares outstanding on [September 26], 2013 and the number of common shares, if any, as to which the named individual or group has the right to acquire beneficial ownership upon the exercise of options or warrants within 60 days of [September 26], 2013. As a group, all executive officers and directors have the right to acquire 776,776 common shares upon exercise of options or warrants.
(4) The amount includes 213,697 shares owned by the Steven A. Calabrese Profit Sharing Trust, 1,091,148 shares owned by CCAG Limited Partnership; 83,362 shares held by trusts for the benefit of Mr. Calabrese’s children, over which he has sole voting and investment power; and 8,460 shares held by Mr. Calabrese’s children in IRAs. The amount also includes 5,000 shares underlying vested options, 280,060 shares underlying warrants and 61,522 shares owned by his wife, over which Mr. Calabrese has shared voting and investment power. Mr. Calabrese disclaims beneficial ownership of the shares owned by his wife.
(5) The amount includes 70,154 shares held by Mr. DiSanto in an IRA, 30,447 shares owned by JPD Management LLC, 20,339 shares owned by Anden, Inc., 36,695 shares owned by Mr. DiSanto’s wife, 28,815 shares owned by his son and 3,480 shares owned by his son’s IRA.
(6) The amount includes 28,431 shares owned by the Fedeli Family Charitable Foundation, of which Mr. Fedeli is the president, 2,543 shares owned by his wife’s IRA and shares underlying vested warrants. Mr. Fedeli disclaims beneficial ownership of the shares owned by his wife’s IRA. On June 23, 2010, Mr. Fedeli entered into a letter agreement with PVF Capital, pursuant to which he agreed he would keep his ownership level, including shares he acquires upon the exercise of warrants, at or below 9.9% of the outstanding common shares of the Company unless he has received the prior approval or non-objection of the Office of the Comptroller of the Currency. As a result of the execution of the letter agreement, based upon the number of common shares outstanding as of June 27, 2013, the number of shares Mr. Fedeli may be deemed to own upon the exercise of warrants is limited to 181,100 of the 248,942 total PVF Capital common shares subject to warrants held by Mr. Fedeli.
(7) The amount includes 118,208 shares owned by Westwood Douglas LLC, over which Mr. Grossi has sole voting and investment power.
(8) According to the Schedule 13D filed with the Commission on April 1, 2010, filed jointly by Mr. Hollington and Short Vincent Partners II, L.P., the amount includes 2,436,610 shares over which Mr. Hollington has shared voting and investment power with Short Vincent Partners II, L.P. and 7,006 shares over which Mr. Hollington has sole voting and investment power. Short Vincent Partners II, L.P.’s general partner is CapitalWorks SVP II LLC, a subsidiary of CapitalWorks LLC. Mr. Hollington is the president of CapitalWorks SVP II LLC. The amount includes 31,117 shares underlying vested warrants.
(9) The amount includes 434,382 shares held by a trust of which Mr. King is trustee, 124,471 shares underlying vested warrants and 61,666 shares underlying vested options.
(10) The amount includes 6,903 shares owned by Mr. Neidus’ wife, 18,842 shares owned by his daughters’ IRAs, 8,006 shares owned directly by Mr. Neidus’ daughter over which he has a general power of attorney and 14,060 shares underlying options.
(11) The amount includes 5,000 shares underlying vested options.
(12) The amount includes 58,220 shares held by the 401(k) Plan, as to which Mr. Male has sole voting and shared investment power, 389,763 shares held by revocable trusts of which Mr. Male is co-trustee and shares voting and investment power, 30,076 shares owned by Mr. Male’s wife’s IRA and 21,799 shares underlying vested options.
The following table sets forth certain information with respect PVF’s equity compensation plans as of June 30, 2013:
(1) Adjusted for a 10% share dividend paid on the common shares on September 1, 1997, a 50% dividend paid on the common shares on August 17, 1998, a 10% share dividend paid on the common shares on September 7, 1999, a 10% share dividend paid on the common shares on September 1, 2000, a 10% share dividend paid on the common shares on August 31, 2001, a 10% share dividend paid on the common shares on August 30, 2002, a 10% dividend paid on the common shares on August 29, 2003, a 10% dividend paid on the common shares on August 31, 2004 and a 10% dividend paid on the common shares on August 31, 2005.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Indebtedness of Management
During fiscal 2013, certain current directors and executive officers of PVF Capital, and their associates, were customers of, and had banking transactions with, subsidiaries of PVF Capital, including the Bank. Extensions of credit by PVF Capital and the Bank to their directors and executive officers are regulated by Regulation O adopted under the Federal Reserve Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. Pursuant to Regulation O, loans by the Bank to directors and executive officers must be made on substantially the same terms, including interest rates, as those prevailing for comparable transactions with non-affiliated persons, and must not involve more than the normal risk of repayment or present other unfavorable features. Furthermore, Regulation O requires that loans above the greater of $25,000, or 5% of the Bank’s unimpaired capital and surplus (i.e., up to $4.6 million at June 30, 2013), to such persons must be approved in advance by a disinterested majority of the Bank’s Board of Directors. Finally, Regulation O sets additional limitations on loans to executive officers, unless the loan is for certain stipulated purposes or is secured in a stipulated manner. Specifically, loans to executive officers may not exceed 2.5% of the Bank’s unimpaired capital and surplus or $25,000, whichever is larger, and in no event may the total exceed $100,000.
At June 30, 2013, the aggregate amount of loans by the Bank to executive officers and directors was $4.2 million, representing 4.5% of shareholders’ equity. These loans were made in compliance with the provisions of Regulation O and were performing according to their original terms at June 30, 2012. All loans made by the Bank to its directors and executive officers and members of their immediate families were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Bank, and did not involve more than the normal risk of collectability or present other unfavorable features.
Transactions with Related Persons
Pursuant to its charter, the Audit Committee of the Board of Directors has the responsibility to review all related party transactions for potential conflict of interest situations on an ongoing basis and to determine whether to approve such transactions. The Audit Committee has adopted a comprehensive written policy for the review of certain transactions with related persons that are required to be reported under applicable federal securities laws. The policy requires Audit Committee review of certain transactions with a director, nominee for director or executive officer, or any immediate
family member or entity controlled by any such person (collectively, a “Related Person”). The transactions that require review are financial transactions or relationships (including charitable contributions and indebtedness) where the aggregate amount involved will, or may be expected to, exceed $120,000 in any calendar year, the Company is, will be, or may be, expected to be a participant and any Related Person has or will have a direct or indirect material interest. In considering whether to recommend approval of a transaction, the Audit Committee will consider: (i) whether the terms of the transaction are at least as favorable to PVF Capital as those that might be achieved with an unaffiliated third party; (ii) the size of the transaction and the amount of consideration payable to the Related Person; (iii) the nature of the interest of the Related Person; (iv) whether the transaction may involve a conflict of interest as defined in the Company’s Code of Ethics; and (v) whether the transaction involves the provision of goods or services to PVF Capital that are available from unaffiliated third parties. The Audit Committee’s recommendations with respect to Related Person transactions are then submitted for consideration by the full Board of Directors, which decides whether to approve any covered transaction. Additionally, PVF Capital’s Code of Ethics provides that all executive officers and directors must disclose any private interest that presents the possibility of a conflict of interest with the Company, the Bank and/or their respective affiliates.
Since July 1, 2011, the Board of Directors evaluated and approved the following relationships:
•
Director Steven A. Calabrese is the managing partner of CRM, a firm that performs appraisals on properties securing loans made by the Bank, and CRMC, a firm that provides asset positioning services for the Bank relative to Bank-owned real estate and other assets. During fiscal years 2012 and 2013, the Bank paid a total of $56,261 and $48,000, respectively, in appraisal fees to CRM and $292,841 and $8,261, respectively, to CRMC for asset positioning services.
Corporate Governance-Director Independence
The Board of Directors of PVF Capital is currently comprised of seven members. The only current director of PVF Capital who has not been deemed independent by the Board of Directors is Robert J. King, Jr, the Company’s President and Chief Executive Officer. In assessing the independence of directors, the Board of Directors considered the business relationships between PVF Capital and its directors or their affiliated businesses, other than ordinary banking relationships. Where business relationships other than ordinary banking relationships existed, the Board determined that none of the relationships between PVF Capital and their affiliated businesses impaired the directors’ independence because the amounts involved were immaterial to the directors or to those businesses when compared to their annual income or gross revenues. The business relationships between PVF Capital and its directors or the directors’ affiliated companies that were considered by the Board of Directors were: (i) Mr. Calabrese’s position as the managing partner of Calabrese, Racek and Markos, Inc. (“CRM”), a firm that performs appraisals on properties securing loans made by PVF Capital’s subsidiary bank, Park View Federal Savings Bank (the “Bank”), and CRM Construction Services, Inc. (“CRMC”), a firm that provides asset positioning services for the Bank relative to Bank-owned real estate and other assets; and (ii) Mr. Fedeli’s position as President, Chief Executive Officer and owner of the Fedeli Group, which acts as the Bank’s agent in connection with its purchase of insurance. In reviewing the independence of Mr. Calabrese, the Board of Directors determined that all fees paid to CRM and CRMC during fiscal 2013 or any of the past three fiscal years did not exceed 5% of either entity’s annual consolidated gross revenues. In reviewing the independence of Mr. Fedeli, the Board of Directors considered the relationship between PVF Capital and the Fedeli Group and determined such firm received fees of less than $200,000 for the performance of insurance related services in fiscal 2013 or any of the past three fiscal years.
Item 14.
Item 14. Principal Accountant Fees and Services
Crowe Horwath LLP served as PVF Capital’s independent registered public accounting firm for the 2013 and 2012 fiscal years. For the years ended June 30, 2013 and 2012, the fees billed to PVF Capital by Crowe Horwath LLP totaled $205,390 and $188,220, respectively. Such fees were comprised of the following:
Audit Fees
During the fiscal years ended June 30, 2013 and 2012, the aggregate fees billed for professional services rendered for the audit of PVF Capital’s annual financial statements and the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q filed during the fiscal years ended June 30, 2013 and 2012 were $187,000 and $185,000, respectively.
Audit-Related Fees
The aggregate fees billed for audit-related services for the fiscal years ended June 30, 2013 and 2012 were $16,940 and $3,220, respectively. The fees for the year ended June 30, 2013 were for the review of the application of guidance of SAB 108 related to the FHLMC interest adustments. The fees for the year ended June 30, 2012, were related to comments from the SEC on PVF Capital’s filings with the SEC.
Tax Fees
No fees were billed to PVF Capital by the independent registered public accounting firm for tax services for the fiscal years ended June 30, 2013 and 2012.
All Other Fees
The aggregate fees billed by PVF Capital’s independent registered public accounting firm for services not included above were $1,450 and $0, respectively, for the fiscal years ended June 30, 2013 and 2012. The fees for the year ended June 30, 2013 represent consultation regarding the merger agreement with FNB.
Pre-Approval of Services by the Independent Registered Public Accounting Firm
Pursuant to its charter, the Audit Committee is required to approve, in advance, all permissible non-audit services to be performed by PVF Capital’s independent registered public accounting firm. Any such services are considered on a case-by-case basis, and the Audit Committee does not have any set pre-approval policies or procedures. All non-audit services provided by the independent registered public accounting firm in fiscal years 2013 and 2012 were pre-approved by the Audit Committee.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The following financial statements appear in Part II of this Annual Report:
(a) Consolidated Statements of Financial Condition, at June 30, 2013 and 2012;
(b) Consolidated Statements of Operations for the Years Ended June 30, 2013, 2012 and 2011;
(c) Consolidated Statements of Shareholders’ Equity for the Years Ended June 30, 2013, 2012 and 2011;
(d) Consolidated Statements of Cash Flows for the Years Ended June 30, 2013, 2012 and 2011;
(e) Notes to Consolidated Financial Statements;
(f) Report of Independent Registered Public Accounting Firm.
(a)(2) Financial Statement Schedules
All schedules have been omitted as the required information is either inapplicable or included in the Notes to Consolidated Financial Statements.
(a)(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.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto.
** To be filed by amendment.
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.
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.