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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1996
Commission file no 0-17411
PARKVALE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1556590
------------------------ -----------------
(State of incorporation) (I.R.S. Employer
Identification Number)
4220 William Penn Highway
MONROEVILLE, PA 15146
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code:(412)-373-7200
Securities registered pursuant to Section 12(b) of the Act - None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($1.00 PAR VALUE)
------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[ ]
As of September 16, 1996, the aggregate market value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the reported
closing sale price of $28.50 per share on such date was $74,077,856. Excluded
from this computation are 355,232 shares held by all directors and executive
officers as a group and 279,023 shares held by the Employee Stock Ownership
Plan.
Number of shares of Common Stock outstanding as of September 16,
1996: 3,233,478.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Annual Report to Shareholders for Fiscal Year ended June 30, 1996. With the
exception of those portions which are incorporated by reference in this Form
10-K Annual Report, the 1996 Annual Report to Shareholders is not deemed to be
filed as part of this report. Part II
Proxy Statement for Annual Meeting of Shareholders dated September 16, 1996.
The definitive proxy statement was filed with the Commission on
September 16, 1996. Part III
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PART I.
ITEM 1. BUSINESS
INTRODUCTION
Parkvale Financial Corporation ("PFC") is a unitary savings and loan holding
company incorporated under the laws of the Commonwealth of Pennsylvania. Its
subsidiary, Parkvale Savings Bank ("Parkvale" or "the Bank"), is a Pennsylvania
chartered permanent reserve fund stock savings bank headquartered in
Monroeville, Pennsylvania. Parkvale is also involved in lending in the greater
Washington, D.C. and Columbus, Ohio area through its wholly-owned subsidiary,
Parkvale Mortgage Corporation ("PMC"), located in Fairfax, Virginia and
Columbus, Ohio. The primary assets of PFC consist of the stock of Parkvale,
equity securities and cash. See Note N of Notes to the Consolidated Financial
Statements in the 1996 Annual Report to Shareholders filed as Exhibit 13 hereto
("1996 Annual Report") for additional details regarding PFC.
THE BANK
GENERAL
The Bank conducts business in the greater Pittsburgh metropolitan area through
28 full-service offices in Allegheny, Beaver, Butler and Westmoreland Counties.
With total assets of $919.2 million at June 30, 1996, Parkvale was the fifth
largest financial institution headquartered in the Pittsburgh metropolitan area
and tenth largest financial institution with a significant presence in Western
Pennsylvania. Parkvale was originally chartered in 1943 as Park Savings and
Loan Association and was renamed as a result of its merger with Millvale
Savings and Loan Association in 1968. Parkvale intends to open its 29th branch
office in the fall of 1996, located in the Raceway Plaza in Scott Township, PA.
This office will be a full-service facility with the convenience of night
deposit and ATM service.
Parkvale converted to a state chartered savings bank in 1993. Such charter
conversion resulted in the replacement of the Office of Thrift Supervision
("OTS") by the Federal Deposit Insurance Corporation ("FDIC") and the
Pennsylvania Department of Banking ("Department") as the Bank's primary
regulators. As a Pennsylvania-chartered savings bank, deposits continue to be
insured by the FDIC and Parkvale retains its membership in the Federal Home
Loan Bank ("FHLB") of Pittsburgh. The savings bank continues to conduct
business in a manner substantially identical to the conduct of its business as
a savings association. The OTS retains jurisdiction over Parkvale Financial
Corporation due to its status as a unitary savings and loan holding company.
Parkvale is further subject to regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") governing reserves to be
maintained against deposits and certain other matters.
The primary business of Parkvale consists of attracting deposits from the
general public in the communities that it serves and investing such deposits,
together with other funds, in residential real estate loans, mortgage-backed
securities, consumer loans, commercial loans, and investment securities.
Parkvale focuses on providing a wide range of consumer and commercial services
to individuals, partnerships and corporations in the greater Pittsburgh
metropolitan area, which comprises its primary market area. In addition to the
loans described above, these services include various types of deposit and
checking accounts, including commercial checking accounts and automated teller
machines ("ATMs") as part of the Money Access Center ("MAC") System.
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Parkvale derives its income primarily from interest charged on loans and
interest on investments, and, to a lesser extent, service charges and fees.
Parkvale's principal expenses are interest on deposits and borrowings and
operating expenses. Funds for lending activities are provided principally by
deposits, loan repayments, FHLB advances and other borrowings, and earnings
provided by operations.
To supplement the demand for loans in its primary market area and to achieve
geographic asset diversification, Parkvale purchases adjustable rate
residential mortgage loans subject to its normal underwriting standards.
Parkvale purchased loans aggregating $104.9 million in fiscal 1996. These
represent 55.4% of total mortgage loan originations and purchases for the
fiscal year. In addition, Parkvale operates loan production offices through its
subsidiary, PMC with offices in Fairfax, Virginia and Columbus, Ohio. During
fiscal 1996, PMC originated a total of $39.7 million or 21.0% of total mortgage
loan originations and purchases for inclusion in Parkvale's loan portfolio. See
"Lending Activities" and "Sources of Funds."
Parkvale continues to emphasize the resolution and disposition of problem
assets. The total non-performing assets, comprised of non-accrual loans and
foreclosed real estate, decreased from $2.1 million at June 30, 1995 to $1.2
million at June 30, 1996. The $879,000 decrease in fiscal 1996 related to the
disposition of a $1.1 million apartment complex. See "Lending Activities-
Nonperforming Loans and Foreclosed Real Estate".
The exposure from interest rate risk (IRR) is the impact on Parkvale's current
and future earnings and capital from movements in interest rates. To properly
manage its historically liability sensitive position and mitigate the financial
impact of IRR, Parkvale's management has implemented an asset and liability
management plan to increase the interest rate sensitivity of its assets and
extend the average maturity of its liabilities. As part of this program,
Parkvale has, among other things (1) promoted the origination and purchase of
adjustable rate mortgage ("ARM") loans, (2) maintained a high level of
liquidity, (3) deployed excess liquidity, (4) emphasized the origination of
short-term and/or variable rate consumer loans, and (5) attempted to extend the
average maturity of its deposits through the promotion of certificate accounts
with terms of one year or more. For additional discussion of asset and
liability management, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset and Liability Management" in the
1996 Annual Report.
Interest rate sensitivity gap analysis provides one indicator of potential IRR
by comparing interest-earning assets and interest-bearing liabilities maturing
or repricing at similar intervals. More recently from a gap perspective, the
excess of interest-bearing assets over interest-earning liabilities which
reprice or mature in one year or less has been reduced to 0.24% of total assets
at June 30, 1996 from 6.03% of total assets at June 30, 1995. Similarly, the
cumulative five year gap ratio has been reduced from 12.25% at June 30, 1995 to
2.20% at June 30, 1996. Key components of the asset and liability management
program are as follows: Deployment of excess accumulated federal funds sold
from 13.0% of total assets at June 30, 1995 to 7.2% of total assets at June 30,
1996. ARM loans represented approximately 56.9% of the Bank's real estate loan
portfolio at June 30, 1996 compared to 50.9% and 46.4% at June 30, 1995 and
1994, respectively. Deposits with terms in excess of one year or more increased
$23.1 million from $433.6 million at June 30, 1995 to $456.7 million at June
30, 1996.
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Parkvale's main office is located at 4220 William Penn Highway, Monroeville, PA
15146, and its telephone number is (412) 373-7200.
THE SAVINGS INDUSTRY
The earnings of Parkvale are affected by the competitive, economic and
regulatory environment in which the savings industry operates. A fundamental
trend in the financial services industry-consolidation--confronts the banking
industry with the challenge to survive and prosper in an evolving market.
Continued alliances are likely as banks move to trim costs, expand
geographically and consolidate market strengths by diversifying the financial
products offered.
The industry is in the midst of a consolidation phase with an operating focus
on improving profitability, reallocation of capital and expense management. The
traditional banks' share of the overall loan market has been reduced
significantly. Corporate lending has abated since public companies found
raising funds on Wall Street is faster and cheaper via commercial paper and
medium-term notes. At the same time, retail customers are increasingly
abandoning traditional commercial and local banks in favor of nonbank financial
institutions. Instead of buying a CD or opening a passbook savings account,
consumers increasingly direct their IRA money and savings into mutual fund
companies. Mutual funds total assets have increased substantially in the 1990's
to exceed total FDIC insured deposits. Banks in today's market are faced with
growing competition from an array of outside financial-service providers,
including brokerage firms, insurance companies and mutual funds. These
non-banking entities continue to take a portion of market share of lending and
deposits away from the banking industry without the regulatory burdens, FDIC
insurance premiums and other associated costs imposed upon banks and savings
industry.
The challenge is the delivery of financial products at competitive prices. This
translates to spreading of costs of services over a greater number of customers
and has spurred banks to adopt technological skills so that customers will
ultimately do all their banking without ever having to walk into a branch,
consequently, reducing operating costs.
Parkvale does not foresee the dissolution of the community banking sector.
Parkvale expects a tiering of institutions with several large national and
regional firms on the one hand and a sizeable number of community institutions
and niche players on the other.
The economic outlook will be characterized by continuing moderate economic
growth and inflation. During fiscal 1996, the Federal Reserve lowered the
federal funds rate 75 basis points after raising rates 300 basis points between
February 1994 and February 1995. This generally resulted in increased mortgage,
consumer and commercial loan interest rates, with a somewhat smaller movement
in deposit interest rates due to excess liquidity remaining in the banking
system. Throughout fiscal 1995, the level of national and
Pittsburgh-area housing starts as well as sales of existing homes were low
compared to prior years.
Parkvale will continue to be affected by these and other market and economic
conditions, such as inflation and factors affecting the markets for debt and
equity securities, as well as legislative, regulatory, accounting and tax
changes which are beyond its control. Parkvale has positioned its liquidity
level to remain flexible to the high volatility of the financial market. For
additional
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discussion of asset/liability management, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset and Liability
Management" in the 1996 Annual Report.
Congress has removed most of the regulatory discretion of the Federal banking
regulatory agencies. As such, these agencies have shifted their collective
focus away from chartering and supervising financial institutions and are now
more focused on protecting the deposit insurance funds. Regulators today use
capital-based, differential regulation; i.e., the more highly capitalized, the
more freedom an institution has to operate.
FDIC INSURANCE
Parkvale's savings deposits are insured by the FDIC up to a maximum of $100,000
for each insured depositor. The Bank currently pays deposit insurance premiums
to the FDIC based on a risk-based assessment system established by the FDIC for
all Savings Association Insurance Fund ("SAIF") member institutions. Under
applicable regulations, institutions are assigned to one of three capital
groups, which is based solely on the level of an institution's capital - "well
capitalized," "adequately capitalized," and "undercapitalized". Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and
is not subject to any written capital order or directive; (ii) "adequately
capitalize" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," and (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances). These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates ranging from 0.23%
for well capitalized, healthy institutions to 0.31% for undercapitalized
institutions with substantial supervisory concerns. The Bank is a
"well-capitalized" institution and therefore its insurance premium is 0.23% of
insured deposits. The total deposit insurance assessments amounted to $1.8
million yearly for the Bank in fiscal 1996, 1995 and 1994.
The deposit insurance premium rates may not be reduced by either the SAIF or
the insurer of commercial banks and certain savings banks, the Bank Insurance
Fund ("BIF"), until each fund has been recapitalized to a level of 1.25% of
insured deposits. In 1995, the BIF reached this required capitalization level.
Consequently, the well-capitalized BIF-insured financial institutions pay
effectively nothing for deposit insurance premium rates. This puts SAIF-insured
institutions at a competitive disadvantage since the average SAIF premium
currently remains at 24 basis points. To resolve this premium disparity,
regulators proposed legislation requiring thrifts to pay a one-time charge of
85-90 basis points in order to ultimately integrate both the thrift and bank
deposit insurance funds and charter. In August 1996, this proposed one-time
assessment was reduced to 68 basis points. If enacted, this one time assessment
could result in a pre-tax charge to Parkvale's earnings of approximately $5.3
million to $6.8 million. Upon recapitalization of the SAIF, both the SAIF and
the BIF would be merged into the DIF (Deposit Insurance Fund) in 1998 or 1999,
requiring both state and federally-chartered thrifts to convert to commercial
banks.
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A precondition to the charter realignment is the elimination of the "tax bad
debt deduction" granted solely to thrifts. The "tax bad debt deduction" allowed
thrifts to deduct various percentages of taxable income rather than actual bad
debt losses since 1953 in calculating taxable income. Currently, the deduction
consists of 8% of taxable income. On August 20, 1996, the Small Business Reform
Act was signed which eliminates such bad debt tax deduction, consequently
requiring the recapture of past taxes for permanent deductions arising from
"applicable excess reserve." The "applicable excess reserve" is the total
amount of the thrift's reserve over the base year reserve as of December 31,
1987 (the base year). At January 1, 1996, there was approximately $4.1 million
of applicable excess reserves. Subject to prevailing corporate tax rates,
Parkvale owes $1.4 million in federal taxes. The law exempts pre-1988 reserves
from recapture on acquisition by a commercial bank, asset diversification or
charter change. Such charges will not impact Parkvale's status as a
well-capitalized institution qualifying for the lowest SAIF insurance premium.
BUSINESS
LENDING ACTIVITIES
LOAN ACTIVITY AND PORTFOLIO COMPOSITION
The following table shows Parkvale's loan origination, purchase and sale
activity on a consolidated basis during the years ended June 30.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
TOTAL LOANS RECEIVABLE AT BEGINNING OF YEAR................. $544,956 $517,417 $520,834
-------- -------- --------
Real estate loan originations:
Residential:
Single family (1)....................................... 72,349 43,237 83,998
Multi-family............................................ 1,560 2,300 4,800
Construction -Single family............................... 4,411 8,258 10,518
Commercial................................................ 6,019 1,287 1,769
-------- -------- --------
TOTAL REAL ESTATE LOAN ORIGINATIONS......................... 84,339 55,082 101,085
Consumer loan originations.................................. 53,061 45,364 47,471
Commercial loan originations................................ 10,227 2,764 5,450
-------- -------- --------
TOTAL LOAN ORIGINATIONS..................................... 147,627 103,210 154,006
Purchase of loans........................................... 104,940 27,808 15,209
-------- -------- --------
TOTAL LOAN ORIGINATIONS AND PURCHASES....................... 252,567 131,018 169,215
-------- ------- -------
Principal loan repayments................................... 69,511 60,990 61,620
Mortgage loan payoffs....................................... 80,739 39,911 109,001
Sales of whole loans........................................ 2,479 2,578 2,010
-------- -------- --------
Net increase (decrease)in loans.......................... 99,838 27,539 (3,417)
-------- -------- -------
TOTAL LOANS RECEIVABLE AT END OF YEAR....................... 644,794 544,956 517,417
Less:
Loans in process.......................................... 4,386 4,816 7,506
Allowance for loan losses................................. 13,990 13,136 12,056
Unamortized discounts & loan fees......................... 966 2,459 2,861
-------- -------- --------
NET LOANS RECEIVABLE AT END OF YEAR......................... $625,452 $524,545 $494,994
======== ======== ========
</TABLE>
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- - --------------------------
(1) Includes $39.7 million, $20.2 million and $18.7 million of loans
originated by PMC during fiscal 1996, 1995 and 1994, respectively.
At June 30, 1996, Parkvale's net loan portfolio amounted to $625.5 million,
representing approximately 68% of Parkvale's total assets at that date.
Parkvale, like most other savings institutions, has traditionally concentrated
its lending activities on conventional first mortgage loans secured by
residential property. Conventional loans are not insured by the Federal Housing
Administration ("FHA") or guaranteed by the Department of Veteran's Affairs
("VA"). Conventional loans secured by single family and multi-family
residential properties amounted to $524.9 million or 84.0% of the net loan
portfolio at June 30, 1996, and conventional loans secured by commercial
properties represented $19.5 million or 3.1% of the net loan portfolio. FHA/VA
loans accounted for an additional $9.5 million or 1.5% of the net loan
portfolio at June 30, 1996. The Bank is a traditional mortgage lender and if it
were subject to the "Qualified Thrift Lender" ("QTL") requirements, 94.8% of
its assets are considered to be "qualifying" at June 30, 1996.
Total consumer loans were $79.5 million or 12.7% of the net loan portfolio at
June 30, 1996. Commercial loans represented 1.4% of the net loan portfolio at
that date.
The following table sets forth the composition of the Bank's loan portfolio by
type of loan as of June 30.
<TABLE>
<CAPTION>
1996 1995 1994
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential: (Dollars in Thousands)
Single family (1) $507,566 81.2 412,145 78.6 390,916 79.0
Multi-family (2) 17,375 2.8 22,894 4.4 22,735 4.6
FHA/VA 9,516 1.5 11,294 2.1 12,576 2.5
Commercial 19,516 3.1 18,435 3.5 18,113 3.6
Other (3) 2,387 0.4 3,196 0.6 1,931 0.4
-------- ------ -------- ------ -------- ------
Total real estate loans 556,360 89.0 467,964 89.2 446,271 90.1
Consumer loans (4) 76,224 12.2 69,197 13.2 61,805 12.5
Deposit loans 3,285 0.5 3,253 0.6 3,206 0.7
Commercial loans 8,925 1.4 4,542 0.9 6,135 1.2
-------- ------ -------- ------ -------- -----
Total loans receivable 644,794 103.1 544,956 103.9 517,417 104.5
Less:
Loans in process 4,386 0.7 4,816 0.9 7,506 1.5
Allowance for losses 13,990 2.2 13,136 2.5 12,056 2.4
Unamortized premiums
and discounts 966 0.2 2,459 0.5 2,861 0.6
-------- ------ -------- ------ -------- ------
Net loans receivable $625,452 100.0% $524,545 100.0% $494,994 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
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(1) Includes first mortgages secured by one to four unit residences.
(2) Includes short-term construction loans to developers.
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(3) Loans for purchase and development of land.
(4) Primarily includes home equity loans, home equity and personal lines of
credit, student loans, personal loans, deposit loans, charge cards, home
improvement loans and automobile loans.
The following table sets forth the percentage of loans in each category to
total loans at June 30.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate loans 86.3% 85.9% 86.2% 87.0% 88.2%
Consumer loans 12.3 13.3 12.6 11.3 9.9
Commercial loans 1.4 0.8 1.2 1.7 1.9
----- ----- ----- ----- -----
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
CONTRACTUAL MATURITIES OF LOANS
The following table presents information regarding loan contractual maturities
by loan categories during the periods indicated. Mortgage loans with adjustable
interest rates are shown in the year in which they are contractually due rather
than in the year in which they reprice. The amounts shown for each period do
not take into account loan prepayments and normal amortization of the Bank's
loan portfolio.
<TABLE>
<CAPTION>
AMOUNTS DUE IN Real Estate Consumer Commercial
YEARS ENDING JUNE 30, loans (1) loans (2) loans
- - --------------------- ----------------- ------------- ------------
( Dollars in Thousands )
<S> <C> <C> <C>
1997 $5,126 $58,042 $3,222
1998 - 1999 8,715 4,395 1,476
2000 - 2001 15,011 6,526 1,447
2002 - 2006 49,735 8,942 2,500
2007 - 2016 121,745 1,604 280
After 2016 356,028 -- --
-------- ------- ------
Gross loans receivable (3) $556,360 $79,509 $8,925
======== ======= ======
</TABLE>
- - ----------------------
(1) Includes all residential and commercial real estate loans, and loans
for the purchase and development of land.
(2) Includes home equity, personal, deposit, student, charge card,
automobile, mobile home loans and overdraft lines of credit.
(3) Variable rate consumer and commercial loans and ARM loans represent
approximately 58% of gross loans receivable at June 30, 1996. Of the
$578.4 million principal amount of loans maturing after June 30, 1997,
loans with an aggregate principal amount of $241.7 million have fixed
interest rates and loans with an aggregate principal amount of $336.7
million have variable or adjustable interest rates.
The average life of mortgage loans has been substantially less than the average
contractual terms of such loans because of loan prepayments and, to a lesser
extent, because of enforcement of due-on-sale clauses, which enable Parkvale to
declare a loan immediately due and payable in the event that the borrower sells
or otherwise disposes of the real property. The average life of mortgage loans
tends to increase, however, when market rates on new mortgages substantially
exceed rates on existing mortgages and, conversely, decrease when rates on new
mortgages are substantially below
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rates on existing mortgages. Such was the case in the early 1990's as many
borrowers refinanced their mortgage loans in order to take advantage of the
lower market rates.
ORIGINATION, PURCHASE AND SALE OF LOANS
As a Pennsylvania-chartered, federally-insured savings bank, Parkvale has the
ability to originate or purchase real estate loans secured by properties
located throughout the United States. At June 30, 1996, the majority of loans
in Parkvale's portfolio have been secured by real estate located in its primary
market area, which consists of the greater Pittsburgh metropolitan area.
However, 28.7% and 16.9% of Parkvale's total mortgage loan portfolio at June
30, 1996 and 1995, respectively, represent loans serviced by others, the
majority of which are secured by properties located outside of Pennsylvania,
including, in order of loan concentration: Ohio, Missouri, California,
Washington, Illinois, Texas, and Florida. The increase in loans secured by
out-of-state properties is due to the loan purchases of $104.9 million which
measures 55.4% of Parkvale's total origination and purchases for fiscal 1996.
See further discussion below.
Currently, new loans are originated by Parkvale primarily within its primary
market area or through the PMC offices in Fairfax, VA and Columbus, OH. In
addition, Parkvale purchases loan participations and whole loans from other
institutions.
All of Parkvale's mortgage lending is subject to its written underwriting
standards and to loan origination procedures approved by the Board of
Directors. Decisions on loan applications are made on a number of factors
including, but not limited to, property valuations by independent appraisers,
credit history and cash flow available to service debt. The Loan Committee of
Parkvale consists of executive officers and is authorized to approve all loans
up to $300,000. At least three executive officers must be present to hold a
meeting of the Loan Committee. Loans exceeding $300,000 must be approved by the
Board of Directors.
Under policies adopted by Parkvale's Board of Directors, Parkvale limits the
loan-to-value ratio to 80% on newly originated residential mortgage loans, or
up to 95% with private mortgage insurance. Depending upon the amount of private
mortgage insurance obtained by the borrower, Parkvale's loan exposure may be
reduced to as low as 65% of the value of the property. Commercial real estate
loans generally do not exceed 80% of the value of the secured property. In
addition, it is Parkvale's policy to obtain title insurance policies insuring
that Parkvale has a valid first lien on mortgaged real estate.
ORIGINATIONS BY PARKVALE. Historically, mortgage loans have been originated by
Parkvale primarily through referrals from real estate brokers, builders and
direct customers, as well as through refinancings for existing customers. All
consumer and commercial loan originations are made by Parkvale within its
primary market area. Total loan originations for the fiscal years ending June
30, 1996, 1995 and 1994 were $147.6 million, $103.2 million and $154.0 million,
respectively. In fiscal 1996, increased origination were experience in
mortgage, commercial and consumer loans. Originations in fiscal 1995 were lower
than 1996 and 1994 due to lower housing and refinancing demand, primarily
related to higher rates prevailing during fiscal 1995.
LOAN PURCHASES. The asset/liability strategy of owning ARM loans to remain
flexible in a volatile interest rate environment was evident in fiscal 1996 as
Parkvale significantly increased loan
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purchases to $104.9 million, compared to $27.8 million and $15.2 million in
fiscal 1995 and 1994, respectively. In 1996, $104.7 million or 99.8% of the
total purchased loans were ARM loans. Typically, Parkvale purchases loans to
supplement the portfolio during periods of loan origination shortfalls or when
yields on whole loans are greater than similarly securitized loans. These loan
purchases are subject to Parkvale's underwriting standards and are purchased
from reputable mortgage banking institutions.
RESIDENTIAL REAL ESTATE LOANS
Parkvale offers ARMs with amortization periods of up to 30 years. The monthly
payment amounts on all Parkvale residential mortgage ARMs are reset at each
interest rate adjustment period without affecting the maturity of the ARM.
Interest rate adjustments generally occur on either a one, three or five year
basis and allow a maximum change of 2% or 3% per adjustment period, with a 6%
or 7% maximum rate increase over the life of the loan. ARMs comprised
approximately 77.4%, 82.6% and 56.3% of total mortgage loan originations and
purchases in fiscal 1996, 1995 and 1994, respectively. At June 30, 1996,
approximately 56.9% of Parkvale's total residential loan portfolio was
represented by ARMs. Adjustable-rate loans generally do not adjust as rapidly
as Parkvale's cost of funds. Parkvale has been emphasizing the origination of
adjustable-rate versus long-term fixed rate residential mortgages for its
portfolio as part of the asset and liability plan to increase the rate
sensitivity of its assets.
COMMERCIAL REAL ESTATE LOANS
The balance of commercial real estate mortgages increased slightly from $18.4
million at June 30, 1995 to $19.5 million at June 30, 1996.
CONSUMER LOANS
Parkvale offers a full complement of consumer loans, including home equity
loans, home equity and personal lines of credit, student loans, personal loans,
deposit loans, home improvement loans, charge card and automobile loans. Total
consumer loan outstandings at June 30, 1996 increased by 10.2% to $76.2 million
from $69.2 million at June 30, 1995. Parkvale has been granting home equity
lines of credit at up to 120% of collateral value at competitive introductory
rates. These loans have shorter maturities and greater interest rate
sensitivity and margins than residential real estate loans.
Home equity lines are revolving and range from $5,000 to $150,000. The amount
of the available line of credit is determined by the borrower's ability to pay,
their credit history and the amount of collateral equity. Personal and
overdraft lines of credit are generally unsecured and are extended for $500 to
$50,000. Line of credit interest rates are variable and are priced at a margin
above Parkvale's prime rate.
Parkvale offers student loans through its community banking network. Parkvale
receives a guaranteed rate on such loans indexed to the 91-day United States
Treasury bill rate and generally sells the loans to the Student Loan Marketing
Association when the student graduates or leaves school in order to avoid
costly servicing expenses.
10
<PAGE> 11
Parkvale's deposit loans are made on a demand basis for up to 90% of the
balance of the account securing the loan. The interest rate on deposit loans
equals the rate on the underlying account plus a minimum of 200 basis points.
In fiscal 1994, Parkvale began offering Visa and Visa Gold cards through the
Independent Bankers Association of America. Annual fees have been waived
through June 30, 1997. Credit cards outstanding totalled $4.5 million, $3.4
million and $1.8 million at June 30, 1996, 1995 and 1994, respectively.
COMMERCIAL LOANS
Parkvale's commercial loans are primarily of a short-term nature and are
extended to small businesses and professionals located within the communities
served by Parkvale. Generally, the purpose of the loan dictates the basis for
its repayment. Both secured and unsecured commercial loans are offered by
Parkvale. In originating commercial loans, the borrower's historical and
projected ability to service the proposed debt is of primary importance.
Interest rates are generally variable and indexed to Parkvale's prime rate.
Fixed-rate commercial loans are extended based upon Parkvale's ability to match
available funding sources to loan maturities. Parkvale generally requires
personal guarantees on its commercial loans. Commercial loans were $8.9 million
and $4.5 million at June 30, 1996 and 1995, respectively.
LOAN SERVICING AND LOAN FEES
Interest rates and fees charged by Parkvale on mortgage loans are primarily
determined by funding costs and competitive rates offered in its market area.
Mortgage loan rates reflect factors such as general interest rate levels, the
availability of money and loan demand.
After originating fixed rate mortgage loans, Parkvale has the ability to sell
its loans in the secondary mortgage market, primarily to the Federal Home Loan
Mortgage Corporation ("FHLMC"). Parkvale generally retains the right to service
loans sold or securitized in order to generate additional servicing fee income.
The amount of loans serviced by Parkvale for others decreased from $15.6
million at June 30, 1995 to $13.0 million at June 30, 1996. There have been no
mortgage loan securitization or sale transactions since fiscal 1991, with the
exception of certain loans made in conjunction with various state and local
bond programs designed to assist first time and/or low income home buyers.
Parkvale may or may not be the servicer of these loans depending on the terms
of the specific program.
In addition to interest earned on loans and income from servicing of loans,
Parkvale generally receives fees in connection with loan commitments and
originations, loan modifications, late payments, changes of property ownership
and for miscellaneous services related to its loans. Income from these
activities varies with the volume and type of loans originated. The fees
received by Parkvale in connection with the origination of conventional
mortgage loans on single family properties vary depending on the loan terms
selected by the borrower.
Parkvale accounts for loan fees and costs in accordance with Statement of
Financial Accounting Standards No. 91 ("FAS 91"). FAS 91 requires deferral of
all loan origination and commitment fees over the contractual life of a loan as
an adjustment of yield. In addition, certain direct loan
11
<PAGE> 12
origination costs are required to be deferred and recognized over the
contractual life of the loan as a reduction of yield. Indirect loan origination
costs are charged to expense as incurred.
Net deferred loan origination fees were $1.1 million, $1.2 million and $1.2
million at June 30, 1996, 1995 and 1994, respectively. The decreasing balance
reflects the offering of various mortgage products with minimal points being
charged to the customer.
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE
A loan is considered delinquent when a borrower fails to make contractual
payments on the loan. If the delinquency exceeds 90 days, Parkvale generally
institutes legal action to remedy the default. In the case of real estate
loans, this includes foreclosure action. If a foreclosure action is instituted
and the loan is not reinstated, paid in full or refinanced, the property is
sold at a judicial sale at which, in most instances, Parkvale is the buyer. The
acquired property then becomes "foreclosed real estate" until it is sold. In
the case of consumer and commercial business loans, the measures to remedy
defaults include the repossession of the collateral, if any, and initiation of
proceedings to collect and/or liquidate the collateral and/or act against
guarantees related to the loans.
Loans are placed on non-accrual status when, in management's judgment, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. As a result, no
uncollected interest income is included in earnings for loans which are on
non-accrual status. Parkvale provides an allowance for the loss of accrued but
uncollected interest on mortgage, consumer and commercial business loans which
are more than 90 days contractually past due.
Parkvale's policy is to establish specific reserves for potential losses on
delinquent loans, foreclosed real estate, and other assets where perceived
values have been impaired on the underlying assets. Loan loss reserves,
including general valuation allowances, were 2.17%, 2.41% and 2.33% of gross
loans at June 30, 1996, 1995 and 1994, respectively. The adequacy of these
reserves in relation to current or anticipated trends in the loan portfolio
will continue to be monitored by management.
The following table sets forth information regarding Parkvale's non-accrual
loans and foreclosed real estate at June 30.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual Loans:
Mortgage $1,008 $2,031 $1,016 $ 989 $2,663
Consumer -- -- -- -- --
------ ------ ------ ------ ------
Total non-accrual Loans $1,008 $2,031 $1,016 $ 989 $2,663
====== ====== ====== ====== ======
Total non-accrual loans
as a percent of total loans 0.16% 0.37% 0.20% 0.20% 0.51%
Total foreclosed real estate, net $240 $96 $147 $4,683 $1,772
Total amount of non-accrual
loans and foreclosed real estate $1,248 $2,127 $1,163 $5,672 $4,435
Total non-accrual loans and
foreclosed real estate as a
percent of total assets 0.14% 0.24% 0.13% 0.64% 0.49%
</TABLE>
12
<PAGE> 13
The amount of additional interest income that would have been included in
interest income for the years ended June 30, 1996 and 1995 if the non-accrual
loans had been current in accordance with their original terms was $137,000 and
$127,000, respectively.
Each asset classified as substandard/non-accrual or foreclosed real estate in
excess of $250,000, net of reserves, at June 30, 1996 is described below.
Parkvale has an aggregate $476,000 of first mortgage loans on rental properties
located in the Mount Washington area of Pittsburgh which are classified as
non-accrual substandard at June 30, 1996. These include 12 loans that originated
between 1974 through 1989 with various maturities. These credits are classified
as non-accrual substandard due to inadequate debt service coverage. Management
does not anticipate any loss on the resolution of this credit relationship.
Management does not believe that any asset not herein disclosed which is
classified for regulatory purposes as loss, doubtful, substandard, or special
mention will materially impact future operating results, liquidity, or capital
resources.
As of June 30, 1996, $227,000 or 22.5% of the non-accrual mortgage loans
totaling $1.0 million were purchased from others and $194,000 or 75.1% of
foreclosed real estate represented properties located outside of Pennsylvania
with loans originally purchased from others.
During fiscal 1994, Parkvale made a $4.8 million first mortgage loan to
facilitate the sale of a multi-family apartment complex located in the
Pittsburgh suburb of Penn Hills. This loan was classified as special mention
for regulatory purposes due to the loan to value ratio being higher than the
Bank's normal underwriting standards for multi-family loans. The gain resulting
from the sale of this property was deferred and accreted into income over the
term of the loan in accordance with FAS 66. As the loan was paid off in the
third quarter of fiscal 1996, the remaining deferred gain of $969,000 was
recognized into income as gain on sale of assets.
INVESTMENT ACTIVITIES
Investment decisions are made by authorized officers including the Chief
Executive Officer or the Chief Financial Officer of Parkvale in accordance with
policies established by Parkvale's Board of Directors.
Under federal regulations, Parkvale is permitted to invest in commercial paper
having one of the two highest investment ratings of two nationally recognized
investment rating agencies and certain types of rated corporate debt
securities, provided, among other limitations, that the average maturity of
Parkvale's portfolio of such corporate debt securities does not exceed six
years. In addition, Parkvale may invest up to 1% of its total assets in
commercial paper and corporate debt securities that do not meet these rating
and maturity requirements, but which Parkvale has reasonable grounds to believe
will be repaid.
13
<PAGE> 14
Parkvale's investment portfolio consisted of the following securities at June
30 for the years indicated.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
(In Thousands)
<S> <C> <C> <C>
Federal funds sold $ 66,557 $116,581 $ 84,900
US Government and agency obligations 62,936 86,860 73,002
Corporate debt 32,086 36,957 79,224
Mortgage backed securities 99,371 100,881 115,043
Equity securities (1) 10,493 8,738 5,597
-------- -------- --------
Total investment portfolio $271,443 $350,017 $357,766
======== ======== ========
</TABLE>
- - ------------------
(1) Equity securities available for sale are stated at market value at June
30, 1996 and 1995.
As part of its investment strategy, Parkvale invests in mortgage-backed
securities, the majority of which are guaranteed by the Federal Home Loan
Mortgage Corporations ("FHLMC"), the Federal National Mortgage Association
("FNMA") or the Government National Mortgage Association ("GNMA"). GNMA
securities are guaranteed as to principal and interest by the full faith and
credit of the United States, while FHLMC and FNMA securities are guaranteed by
their respective agencies. At June 30, 1996, Parkvale had $99.4 million, or
10.8% of total assets invested in mortgage-backed securities, as compared to
11.3% and 13.2% at June 30, 1995 and 1994, respectively. At June 30, 1996, the
mortgage-backed securities consisted of FHLMC ($61.7 million); GNMA ($1.3
million); FNMA ($7.8 million); collateralized mortgage obligations, including
REMIC's ($27.0 million) and private participation certificates ($1.6 million).
The following table shows Parkvale's mortgage-backed security activity during
the years ended June 30.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of year $100,881 $115,043 $ 98,771
Purchases 25,211 -- 60,450
Principal repayments (26,721) (14,162) (44,178)
Sales -- -- --
--------- -------- --------
Mortgage-backed securities at end of year $ 99,371 $100,881 $115,043
========= ======== ========
</TABLE>
HEDGING ACTIVITIES
The objective of Parkvale's financial futures policy is to reduce interest rate
risk by authorizing an asset and liability hedging program. The futures policy
permits Parkvale's President to hedge up to $10 million of assets and
liabilities. Hedges over $10 million and up to $25 million require the approval
of the Audit-Finance Committee of the Board of Directors, and hedges over $25
million require the approval of the Board of Directors. Parkvale has not
engaged in any financial futures activity since the beginning of fiscal 1986.
The objective of Parkvale's financial options policy is to reduce interest rate
risk in the investment portfolio through the use of financial options. The
options policy permits the use of options on United States Treasury bills,
notes, bonds and bond futures and on mortgage-backed securities. The options
policy generally limits the use of puts and calls to $5.0 million per type of
option. Parkvale's President and Senior Vice President - Treasurer
14
<PAGE> 15
are authorized to conduct options activities, which are monitored by the
Audit-Finance Committee of the Board of Directors. Parkvale has not engaged in
any financial options activity in the last four fiscal year.
Derivative instruments are various instruments used to construct a transaction
that is derived from and reflects the underlying value of assets, other
instruments or various indices. The primary purpose of derivatives, which
included such items as forward contracts, interest rate swap contracts, options
and futures, is to transfer price risk associated with the fluctuations of
financial instrument value. During the year ended June 30, 1996, Parkvale has
not entered into any forward contracts, interest rate swap contracts, options
or futures.
SOURCES OF FUNDS
GENERAL
Savings accounts and other types of deposits have traditionally been the
principal source of Parkvale's funds for use in lending and for other general
business purposes. In addition to deposits, Parkvale derives funds from loan
repayments, FHLB advances, and whole loan and mortgage-backed security sales.
Borrowings may be used on a short-term basis to compensate for seasonal or
other reductions in deposits or for inflows at less than projected levels, as
well as on a longer term basis to support expanded lending and investment
activities. Parkvale's ability to maintain high liquidity levels has allowed
investment decisions to be evaluated with the funding source a secondary issue.
DEPOSITS
Parkvale has established a complete program of deposit products designed to
attract both short-term and long-term savings by providing an assortment of
accounts and rates. The deposit products currently offered by Parkvale include
passbook and statement savings accounts, non-insured sweep accounts, checking
accounts, money market accounts, certificates of deposit ranging in terms from
31 days to ten years, IRA certificates and jumbo certificates of deposit. In
addition, Parkvale is a member of the MAC system with sixteen ATMs currently
operated by Parkvale.
Parkvale is generally competitive in the types of accounts and in the interest
rates it offers on its deposit products, although it generally does not lead
the market with respect to the level of interest rates offered. Parkvale
intends to continue its efforts to attract deposits as a principal source of
funds for supporting its lending activities because the cost of these funds
generally is less than other borrowings. Although market demand generally
dictates which deposit maturities and rates will be accepted by the public,
Parkvale intends to continue to promote longer term deposits to the extent
possible in a manner consistent with its asset and liability management goals.
15
<PAGE> 16
The following table shows the distribution of Parkvale's deposits by type of
deposit as of June 30.
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ----------------- ---------------
BALANCE % BALANCE % BALANCE %
------- ----- ------- ------ ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $140,908 17.5% $141,791 17.9% $167,513 21.5%
Checking accounts 70,446 8.7 62,578 7.9 65,271 8.4
Money market accounts 47,657 5.9 51,148 6.4 72,506 9.3
Certificate accounts 509,694 63.1 501,597 63.1 443,945 57.0
Jumbo certificates 32,218 4.0 32,234 4.1 25,218 3.3
Accrued interest 6,164 0.8 5,097 0.6 4,102 0.5
-------- ---- -------- ----- -------- -----
Total Savings Deposits $807,087 100.0% $794,445 100.0% $778,555 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth information regarding average balances and
average rates paid by type of deposit for the years ending June 30.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
Average Average Average
BALANCE % BALANCE % BALANCE %
------- --- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $138,647 2.62% $151,029 2.63% $165,726 2.68%
Checking accounts 65,152 1.08 64,879 1.14 61,066 1.66
Money market accounts 49,159 2.95 60,807 2.66 77,874 2.62
Certificate accounts 542,390 5.95 487,426 5.65 477,846 5.44
Accrued interest 5,699 -- 4,543 -- 4,144 --
-------- ---- -------- ---- -------- ----
$801,047 4.75% $768,684 4.41% $786,656 4.26%
======== ===== ======== ==== ======== =====
</TABLE>
The wide range of deposit accounts offered has increased Parkvale's ability to
retain funds and allowed it to be more competitive in obtaining new funds, but
does not eliminate the threat of disintermediation. During periods of high
interest rates, certificate and money market accounts have been more costly
than traditional accounts. In addition, Parkvale has become much more subject
to short-term fluctuations in deposit flows as customers have become more rate
conscious and willing to move funds into higher yielding accounts. The ability
of Parkvale to attract and maintain deposits and Parkvale's cost of funds has
been, and will continue to be, significantly affected by market conditions.
The principal methods used by Parkvale to attract deposits include the offering
of a wide range of services and accounts, competitive interest rates, and
convenient office hours and locations. Parkvale utilizes traditional marketing
methods to attract new customers and deposits, including mass media advertising
and direct mail.
Parkvale's deposits are obtained primarily from persons who are residents of
Pennsylvania. Parkvale neither advertises for deposits outside of Pennsylvania
nor utilizes the services of deposit brokers. An insignificant amount of
Parkvale's deposits were held by non-residents of Pennsylvania at June 30,
1996.
16
<PAGE> 17
The following table sets forth the net deposit flows of Parkvale during the
years ended June 30.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before interest credited ($15,624) ($9,187) ($37,334)
Interest credited 28,266 25,077 23,916
------- ------- --------
Net deposit increase (decrease) $12,642 $15,890 ($13,418)
======= ======= ========
</TABLE>
Management carefully monitors the interest rates and terms of its deposit
products in order to maximize Parkvale's interest rate spread and to better
match its interest rate sensitivity. The following table reflects the makeup of
Parkvale's deposit accounts at June 30, 1996, including the scheduled quarterly
maturity of CD accounts.
<TABLE>
<CAPTION>
Amount % of Total Average
In 000's Deposits Rates
------- -------- -----
<S> <C> <C> <C>
Passbook and club accounts $140,908 17.46% 2.62%
Checking accounts 70,446 8.73 1.08
Money market accounts 47,657 5.90 2.95
-------- ------ -----
Total non-certificate accounts $259,011 32.09 2.29
-------- ------ ----
Certificate accounts maturing in quarter ending:
September 30, 1996 90,237 11.18 4.95
December 31, 1996 72,308 8.96 5.22
March 31, 1997 49,102 6.08 5.39
June 30, 1997 56,529 7.00 5.60
September 30, 1997 27,512 3.41 6.02
December 31, 1997 20,862 2.58 6.18
March 31, 1998 18,151 2.25 6.24
June 30, 1998 21,642 2.68 6.34
September 30, 1998 10,215 1.27 5.95
December 31, 1998 12,370 1.53 6.00
March 31, 1999 10,302 1.28 5.86
June 30, 1999 14,293 1.77 6.54
Thereafter 138,389 17.15 6.46
------- -----
Total certificate accounts 541,912 67.14 5.78
------- -----
Accrued interest 6,164 0.77 0.00
-------- ------
Total deposits $807,087 100.00% 4.75%
======== ====== ====
</TABLE>
The following table presents, by various interest rate categories, the
outstanding amount of certificates of deposit at June 30, 1996 which mature
during the years ending June 30.
<TABLE>
<CAPTION>
1997 1998 1999 Thereafter Total
---------- ---------- ---------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit:
Under 6.00% $225,135 $32,751 $26,276 $26,636 $310,798
6.00% to 7.99% 40,845 52,093 18,489 111,735 223,162
8.00% to 9.99% 2,197 3,322 2,415 18 7,952
-------- ------- ------- -------- --------
Total certificates of deposits $268,177 $88,166 $47,180 $138,389 $541,912
======== ======= ======= ======== ========
</TABLE>
17
<PAGE> 18
Maturities of certificates of deposit of $100,000 or more that were outstanding
as of June 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
3 months or less $4,700
Over 3 months through 6 months 3,101
Over 6 months through 12 months 4,729
Over 12 months 19,688
------
Total $32,218
=======
</TABLE>
BORROWINGS
Parkvale's borrowings from the FHLB of Pittsburgh are collateralized with FHLB
capital stock, deposits with the FHLB of Pittsburgh and certain mortgage-backed
securities. See "Regulation Federal Home Loan Bank System". Borrowings are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. FHLB advances are generally available to
meet seasonal and other withdrawals of savings accounts and to expand lending
and investment activities, as well as to aid the efforts of members to
establish better asset/liability management by extending the maturities of
liabilities. At June 30, 1996, Parkvale had $20.7 million of FHLB advances
outstanding.
The following table sets forth information concerning Parkvale's advances from
the FHLB of Pittsburgh for the years ended June 30.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Average balance outstanding $20,658 $20,648 $24,317
Maximum amount outstanding at any month-end
during the period $20,699 $20,703 $25,622
Average interest rate 7.25% 7.26% 7.36%
</TABLE>
The decrease in the outstanding average balance from $24.3 million in 1994 to
$20.6 million in 1995 is due to the maturity of a $5.0 million advance in April
1994.
YIELDS EARNED AND RATES PAID
The results of operations of Parkvale depend substantially on its net interest
income, which is the largest component of Parkvale's net income. Net interest
income is affected by the difference or spread between yields earned by
Parkvale on its loan, mortgage-backed security and investment portfolios and
the rates of interest paid by Parkvale for its deposits and borrowings, as well
as the relative amounts of its interest-earning assets and interest-bearing
liabilities. Parkvale's operating results are also affected by levels of
non-interest income and expenses.
The following table sets forth the average yields earned on Parkvale's
interest-earning assets and the average rates paid on its interest-bearing
liabilities, the resulting average interest rate spreads, the net yield on
interest-earning assets and the weighted average yields and rates at June 30,
1996.
18
<PAGE> 19
<TABLE>
<CAPTION>
Year Ended June 30, At
----------------------- June 30,
1996 1995 1994 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Average yields on (1):
Loans 8.23% 8.14% 8.15% 8.12%
Mortgage-backed securities 6.61 6.51 6.33 6.52
Investments (2) 5.96 5.30 5.25 5.76
Federal funds sold and
repurchase agreements 5.67 5.51 3.53 5.27
---- ---- ---- ----
All interest-earning assets 7.45 7.17 6.89 7.45
---- ---- ---- ----
Average rates paid on (1):
Savings deposits 4.75 4.41 4.26 4.56
Borrowings 6.19 6.31 6.77 6.02
---- ---- ---- ----
All interest-bearing liabilities 4.79 4.46 4.34 4.61
---- ---- ---- ----
Average interest rate spread 2.66% 2.71% 2.55% 2.84%
==== ==== ==== ====
Net yield on interest-earning assets(3) 2.98% 3.01% 2.78% N/A
==== ==== ==== ====
</TABLE>
- - -----------------
(1) Average yields and rates are calculated by dividing the interest income or
expense for the period by the average balance for the year. The weighted
averages at June 30, 1996 are based on the weighted average contractual
interest rates. Non-accrual loans are excluded in the average yield and
balance calculations.
(2) Includes held-to-maturity and available-for-sale investments and
interest-bearing deposits.
(3) Net interest income divided by average interest-earning assets.
The following table presents for the periods indicated the average balances of
each category of interest-earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Interest-earning assets: (In Thousands)
Loans $566,134 $510,919 $495,596
Mortgage-backed securities 102,470 106,073 120,696
Investments 119,573 158,267 156,833
Federal funds sold and repurchase agreements 99,382 75,503 88,880
-------- -------- --------
Total interest-earning assets 887,559 850,762 862,005
-------- -------- --------
Non-interest-earning assets 18,856 16,364 21,696
-------- -------- --------
Total assets $906,415 $867,126 $883,701
======== ======== ========
Interest-bearing liabilities:
Savings deposits 801,367 768,684 786,656
FHLB advances and other borrowings 25,634 24,727 27,894
-------- -------- --------
Total interest-bearing liabilities 827,001 793,411 814,550
-------- -------- --------
Non-interest-bearing liabilities 15,843 15,600 16,340
-------- -------- --------
Total liabilities 842,844 809,011 830,890
Shareholders' equity 63,571 58,115 52,811
-------- -------- --------
Total liabilities and equity $906,415 $867,126 $883,701
======== ======== ========
Net interest-earning assets $ 60,558 $ 57,351 $ 47,455
======== ======== ========
Interest-earning assets as a % of interest-
bearing liabilities 107.3% 107.2% 105.8%
</TABLE>
19
<PAGE> 20
An excess of interest-earning assets over interest-bearing liabilities will
enhance a positive interest rate spread and result in greater net interest
income. In fiscal 1996, increasing net interest income was favorably impacted
by higher loan volumes. In fiscal 1995, increasing net interest income was
favorably impacted by higher yielding investments and loans. This follows a
slight decline in fiscal 1994 which was attributable to high liquidity and low
yields available on short-term investments. Parkvale's net yield on average
interest-earning assets was 2.98% in fiscal 1996, 3.01% in fiscal 1995, and
2.78% in fiscal 1994.
The following table sets forth certain information regarding changes in
interest income and interest expense for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in rates (change in rate
multiplied by old volume), (2) changes in volume (changes in volume multiplied
by old rate), and (3) changes in rate-volume (change in rate multiplied by the
change in volume).
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1996 vs. 1995 1995 vs. 1994
----------------------- ------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
------ ------ ------ ----- ---- ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 460 $4,495 $ 63 $5,018 ($50) $1,249 ($36) $1,163
Mortgage-backed securities 106 (235) (3) (132) 217 (926) (21) (730)
Federal funds sold 121 1,316 35 1,472 1,760 (472) (266) 1,022
Investments 1,045 (2,051) (261) (1,267) 78 75 14 167
------ ------ ---- ------ ----- ------ ---- ------
Total 1,732 3,525 (166) 5,091 2,005 (74) (309) 1,622
------ ------ ----- ------ ----- ------ ---- ------
Interest-bearing liabilities:
Deposits 2,614 1,441 118 4,173 1,180 (766) (54) 360
FHLB advances and
other borrowings (30) 57 -- 27 (128) (214) 14 (328)
------ ----- ---- ---- ----- ----- --- -----
Total 2,584 1,498 118 4,200 1,052 (980) (40) 32
------ ------ ---- ----- ----- ----- --- -----
Net change in net interest
income (expense) ($852) $2,027 ($284) $891 $953 $906 ($269) $1,590
====== ====== ===== ==== ==== ==== ===== ======
</TABLE>
SUBSIDIARIES
Pennsylvania law permits a Pennsylvania-chartered, federally-insured savings
institution to invest up to 2% of its assets in the capital stock, paid-in
surplus and unsecured obligations of subsidiary corporations or service
corporations and an additional 1% of its assets when the additional funds are
utilized for community or inner-city development or investment. Parkvale is
also authorized to invest up to 30% of its assets in finance subsidiaries whose
sole purpose is to issue debt or equity securities that Parkvale is authorized
to issue directly, subject to certain limitations.
20
<PAGE> 21
At June 30, 1996, Parkvale was authorized to have an investment in excess of
$25.0 million in the capital stock and other securities of its service
corporation subsidiaries. At June 30, 1996, Parkvale had equity investments of
$7,000, net of cash balances, in its service corporation subsidiaries.
Parkvale's wholly-owned service corporation, P.V. Financial Service Inc.
("PVFS"), was incorporated in 1972 and owns PMC as a wholly-owned subsidiary.
At June 30, 1996, PVFS and its subsidiary had net assets of $268,000. Gains of
$109,000 and $54,000 were recorded in fiscal 1995 and 1994, respectively, from
an investment in Interstate Service Corporation as certain contingencies were
resolved. PMC was acquired in 1986 and currently operates two offices
originating residential mortgage loans for the Bank. For additional information
regarding PMC, see "Lending Activities". In conjunction with a merger
conversion, Parkvale acquired Renaissance Corporation ("Renaissance"), a
wholly-owned subsidiary that performs collateral evaluations on consumer loans.
The sole asset of Renaissance at June 30, 1996 is $22,000 in cash.
COMPETITION
Parkvale faces substantial competition both in the attraction of deposits and
in the making of mortgage and other loans in its primary market area.
Competition for the origination of mortgage and other loans principally comes
from other savings institutions, commercial banks, mortgage banking companies,
credit unions and other financial service corporations located in the
Pittsburgh metropolitan area. Because of the wide diversity and large number of
competitors, the exact number of competitors is fluid. Parkvale's most direct
competition for deposits has historically come from other savings institutions,
commercial banks and credit unions located in the Pittsburgh area. In times of
high interest rates, Parkvale also encounters significant competition for
investors' funds from short-term money market securities and other corporate
and government securities. During the low interest rate environment, Parkvale
and other depository institutions have also experienced increased competition
from stocks, mutual funds, and other direct investments offering the potential
for higher yields.
Parkvale competes for loans principally through the interest rates and loan
fees it charges on its loan programs. In addition, Parkvale believes it offers
a high degree of professionalism and quality in the services it provides
borrowers and their real estate brokers. It competes for deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours,
and convenient branch locations with interbranch deposit and withdrawal
privileges at each branch. Parkvale believes that its office locations in
various neighborhoods of Pittsburgh and the surrounding suburbs outside of
downtown Pittsburgh provide Parkvale with both an opportunity to become an
integral part of these smaller communities and the means of competing with
larger financial institutions doing business within the Pittsburgh metropolitan
area. In addition, Parkvale has two offices located in Downtown Pittsburgh to
provide services to the business community and to its suburban customers
working and shopping in the city.
MARKET AREA
The greater Pittsburgh metropolitan area, which is a heavily populated and
predominately industrialized region, ranks 19th in population of the
metropolitan areas in the country according to the 1990 census. The region's
economy is primarily dependent on a combination of the manufacturing trade,
services, government and transportation industries. The economy has
21
<PAGE> 22
experienced a transition away from the steel and steel-related industries to
the service industries, such as transportation, health care, education and
finance. In addition to containing the corporate headquarters of major
industrial and financial corporations, Pittsburgh is also a major regional
health and education center, and a large number of high technology firms have
located in Pittsburgh due to the wide range of support services available.
EMPLOYEES
As of June 30, 1996, Parkvale and its subsidiaries had 234 full-time equivalent
employees. These employees are not represented by a collective bargaining agent
or union, and Parkvale believes it has satisfactory relations with its
personnel.
REGULATION
GENERAL
Following conversion to a Pennsylvania chartered savings bank charter in fiscal
1993, the Bank is subject to extensive regulation by the FDIC and the
Department, and is no longer directly subject to regulation by the OTS.
Nonetheless, several requirements which were applicable to the Bank as a
Pennsylvania chartered savings association regulated by the OTS remain
applicable to the Bank as a Pennsylvania chartered savings bank. The FDIC has
adopted a regulation which provides that the same restrictions on activities,
investments in subsidiaries, loans to one borrower, and affiliate transactions
apply to the Bank as if the Bank had not converted to a savings bank charter.
However, the capital requirements applicable to the Bank as a savings bank are
the FDIC's capital maintenance regulations rather than the comparable OTS
regulations.
The Bank must file reports with the Pennsylvania Department of Banking and the
FDIC describing its activities and financial condition and is periodically
examined to test compliance with various regulatory requirements. This
supervision and regulation is intended primarily for the protection of
depositors. Certain of these regulatory requirements are referred to below or
elsewhere in this document.
FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989 ("FIRREA")
On August 9, 1989, major reform and financing legislation was enacted into law
in order to restructure the savings industry and to address the financial
condition of the FSLIC. The legislation has adversely affected the savings
industry in several ways, including more stringent capital requirements,
investment limitations and restrictions and holding company regulation. In
addition, the legislation enhances federal regulatory enforcement power and
draws upon the earnings of the Federal Home Loan Bank System in order to
partially address the large number of troubled savings institutions. Bank
holding companies are now permitted to acquire savings institutions.
INSURANCE AND REGULATORY STRUCTURE. Pursuant to the provisions of FIRREA, an
insurance fund administered by the FDIC and named the SAIF insures the deposits
of savings associations and certain savings banks. The FDIC fund existing
prior to the enactment of FIRREA is now known as the BIF and continues to
insure the deposits of commercial banks and certain savings banks. Although
the FDIC administers both funds, the assets and liabilities are not commingled.
In
22
<PAGE> 23
addition, FIRREA established the OTS, which is a bureau of the Department of
Treasury. The OTS is headed by a single Director who is appointed by the
President.
CAPITAL STANDARDS. The Bank is required to maintain Tier I (Core) capital equal
to at least 4% of the institution's adjusted total assets, and Tier II
(Supplementary) risk-based capital equal to at least 8.0% of risk-weighted
assets. At June 30, 1996, Parkvale was in compliance with all applicable
regulatory requirements, with Tier I and Tier II ratios of 7.1% and 14.9%,
respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
required, among other things, each federal banking agency to revise its
risk-based capital standards for insured institutions to ensure that those
standards take adequate account of interest-rate risk ("IRR"), concentration of
credit risk, and the risks of nontraditional activities, as well as to reflect
the actual performance and expected risk of loss on multi-family residential
loans. On June 26, 1996, the FDIC, the FRB and the Office of the Comptroller of
the Currency ("OCC"), collectively, "the agencies", have jointly issued a
policy statement providing bankers guidance on sound interest rate risk
management practices. This policy statement augments the action taken by the
agencies in August 1995 to implement the portion FDICIA addressing risk-based
capital standards for interest rate risk. It also replaces the proposed policy
statement that the agencies issued for comment in August 1995 regarding a
supervisory framework for measuring and assessing banks' interest rate
exposures. The agencies have elected not to pursue a standardized measure and
explicit capital charge for interest rate risk at this time. This decision
reflects concerns about the burden, accuracy, and complexity of a standardized
measure and recognition that industry techniques for measuring interest rate
risk are continuing to evolve. Rather than dampening incentives to improve risk
measures by adopting a standardized measure at this time, the agencies hope to
encourage these industry efforts. Nonetheless, the agencies will continue to
place significant emphasis on the level of a bank's interest rate risk exposure
and the quality of its risk management process when evaluating a bank's capital
adequacy.
Parkvale's management does not anticipate difficulty in meeting the capital
requirements in the future, however there can be no assurance that this will be
the case. Failure to maintain minimum levels of required capital will result in
the submission to the applicable FDIC regional director for review and approval
of a reasonable plan describing the means and timing by which the bank shall
achieve its minimum Tier I ratio and may result in the imposition by the
Pennsylvania Department of Banking or the FDIC of various operational
restrictions, including limitations as to the rate of interest that may be paid
on deposit accounts, the taking of deposits, the issuance of new accounts, the
ability to originate a particular type of loan, and the purchase of loans or
the taking of specified other investments. Alternatively, the institution may
be placed into receivership or conservatorship under the FDIC, which would be
charged with managing the institution until it could be sold or liquidated.
INVESTMENT IN SUBSIDIARIES. Under FIRREA, investments in and extensions of
credit to subsidiaries not engaged in activities permissible for national banks
must generally be deducted from capital. However, certain exemptions generally
apply where: (i) a subsidiary is engaged in activities impermissible for
national banks solely as an agent for its customers and (ii) the subsidiary is
engaged solely in mortgage-banking activities. These provisions have not
reduced or limited Parkvale's business activity.
23
<PAGE> 24
INVESTMENT RULES. FIRREA also materially affects the permissible investments of
savings banks. Under FIRREA, the permissible amount of loans to one borrower
now follows the national bank standards for all loans made by savings banks, as
compared to the pre-FIRREA rule that applied that standard only to commercial
loans made by federal associations. The national bank standard generally does
not permit loans to one borrower to exceed 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital
and surplus also may be made to a borrower if the loans are fully secured by
readily marketable securities. While Parkvale has historically made loans with
lesser dollar balances than was permitted by federal regulations, the
loans-to-one borrower limitation may limit its ability to do business with
certain customers.
Savings banks and subsidiaries may not acquire or retain investments in
corporate debt securities that at the time of acquisition were not rated in one
of the four highest rating categories by at least one nationally recognized
rating organization.
ACQUISITIONS BY BANK HOLDING COMPANIES. FIRREA permits bank holding companies
to acquire any savings institution, including healthy as well as troubled
institutions, and prohibits the Board of Governors of the Federal Reserve
System from imposing any tandem restrictions on transactions between the
savings institution and its holding company affiliates (other than those
required by Sections 23A and 23B of the Federal Reserve Act or by other
applicable laws). FIRREA does not impose any geographic restrictions on such
acquisitions, and as a result, a number of savings institutions have been
acquired by bank holding companies.
SAVINGS AND LOAN HOLDING COMPANY JURISDICTION. The Director of OTS administers
and regulates the activities of registered savings and loan holding companies
and the acquisition of savings banks by any company. Savings and loan holding
companies, such as Parkvale Financial Corporation, are no longer required to
receive regulatory approval prior to incurring debt. Savings banks which are
subsidiaries of a holding company, as well as other savings banks, are now
deemed to be member banks for purposes of Sections 23A and 23B of the Federal
Reserve Act and, as a result, are subject to the transaction with affiliate
rules contained in those sections. Savings and loan holding companies now may
also purchase up to 5% of the stock of unaffiliated savings bank or savings and
loan holding companies without prior regulatory approval. Cross-marketing
restrictions that prohibited an insured institution subsidiary of a diversified
savings and loan holding company from offering or marketing products or
services of an affiliate that are not permissible for bank holding companies
were also removed by FIRREA.
ENFORCEMENT. Other provisions of FIRREA include substantial changes to
enforcement powers available to regulators. FIRREA also expands jurisdiction of
the FDIC's enforcement powers to all "institution-affiliated" parties,
including shareholders, attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action having or likely to have an adverse
effect on an insured institution. Under FIRREA, civil penalties are classified
into three levels, with amounts increasing with the severity of the violation.
The first tier provides for civil penalties up to $5,000 per day for violation
of law or regulation. A civil penalty of up to $25,000 per day may be assessed
if more than a minimal loss to an institution or action that results in a
substantial pecuniary gain or other benefit. Criminal penalties are increased
to $1 million per violation, up to $5 million for continuing violations or for
the actual amount of gain or loss. These monetary penalties may be combined
with prison sentences of up to five years.
24
<PAGE> 25
FIRREA also provides regulators with far greater flexibility to impose
enforcement action on an institution that fails to comply with its regulatory
requirements, particularly with respect to the capital requirements. Possible
enforcement actions include the imposition of a capital plan and termination of
deposit insurance. The FDIC also may recommend that the Department of Banking
take enforcement action. If action is not taken by the Department, the FDIC
would have authority to compel such action under certain circumstances.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional FHLBs,
each subject to supervision and regulation by the Federal Housing Finance
Board. The FHLBs provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of Pittsburgh, is required to
acquire and hold shares of capital stock in that FHLB in an amount equal to at
least 1% of the aggregate principal amount of its unpaid residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances (borrowings) from the FHLB of Pittsburgh, whichever
is greater. Parkvale had a $5.9 million investment in stock of the FHLB of
Pittsburgh at June 30, 1996, which complied with this requirement.
Advances from the FHLB of Pittsburgh are secured by a member's shares of stock
in the FHLB of Pittsburgh, certain types of mortgages and other assets. The
maximum amount of credit which the FHLB of Pittsburgh will advance for purposes
other than meeting deposit withdrawals fluctuates from time to time in
accordance with changes in policies of the FHLB of Pittsburgh. Interest rates
charged for advances vary depending upon maturity, the cost of funds to the
FHLB of Pittsburgh and the purpose of the borrowing. At June 30, 1996, the Bank
had $20.7 million of outstanding advances from the FHLB of Pittsburgh.
INTERSTATE ACQUISITIONS
The Commonwealth of Pennsylvania has enacted legislation which permits
interstate acquisitions and branching, subject to specific restrictions, for
savings banks located in Delaware, Kentucky, the District of Columbia,
Maryland, New Jersey, Ohio, Virginia, and West Virginia ("the Region") if the
state offers reciprocal rights to savings institutions located in Pennsylvania.
Of the states in the Region, Delaware, Kentucky, Maryland, New Jersey, Ohio and
West Virginia currently have laws that permit savings banks located in
Pennsylvania to branch into such states and/or acquire savings banks located in
such states. However, Maryland and Ohio have not permitted Pennsylvania savings
banks to operate branches in their states.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings banks to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
accounts and regular checking accounts) and certain non-personal time deposits.
Money market deposit accounts are subject to the reserve requirement applicable
to non-personal time deposits when held by a person other than a natural
person. Because required reserves must be maintained in the form of vault cash
or a non-interest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the
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<PAGE> 26
Bank's interest-earning assets. Parkvale satisfies the majority of its reserve
requirement with vault cash.
PENNSYLVANIA SAVINGS BANK LAW
The Bank is incorporated under the Pennsylvania Banking Code of 1965, as
amended ("Banking Code"), which contains detailed provisions governing the
organization, location of offices, rights and responsibilities of directors,
officers, employees and members, as well as corporate powers, savings and
investment operations and other aspects of the Bank and its affairs. The
Banking Code delegates extensive rulemaking power and administrative discretion
to the Department so that the supervision and regulation of state-chartered
banks may be flexible and readily responsive to changes in economic conditions
and in savings and lending practices.
One of the declared purposes of the Banking Code is to provide banks with the
opportunity to be competitive with each other and with other financial
institutions existing under other state, federal and foreign laws. To this end,
the Banking Code provides Pennsylvania-chartered savings banks with all the
powers permitted federally chartered savings and loan associations and savings
banks, subject to regulation by the Department.
A Pennsylvania savings bank may locate or change the location of its principal
place of business and establish an office anywhere in the Commonwealth, with
the prior approval of the Department.
The Department generally examines each savings bank at least once every two
years. The Banking Code permits the Department to accept the examinations and
reports of the FDIC in lieu of the Department's examination. The present
practice is for the Department and the FDIC to conduct examinations annually on
an alternating basis. The Department may order any bank to discontinue any
violation of law or unsafe or unsound business practice and may direct any
director, officer, attorney or employee of a bank engaged in an objectionable
activity, after the Department has ordered the activity to be terminated, to
show cause at a hearing before the Department why such person should not be
removed.
TAXATION
FEDERAL TAXATION
For federal income tax purposes, PFC and its subsidiaries file consolidated
returns on a calendar year basis and report their income and expenses on the
accrual basis of accounting.
Under applicable provisions of the Internal Revenue Code of 1986 ("the Code"),
certain thrift institutions were allowed deductions for bad debts under rules
more favorable than those accorded to other corporate taxpayers, including
other depository institutions. On August 20, 1996, President Clinton signed a
bill that repealed the special deduction of bad debts under the reserve method
which allowed Parkvale to deduct 8% from taxable income before the deduction.
In making the change from the reserve method previously allowed, thrifts are
required to recapture the "applicable excess reserve." The applicable excess
reserve is the total amount of the thrift's reserve over the base year reserve
as of December 31, 1987. The law exempts pre-1988 reserves from recapture on
acquisition
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<PAGE> 27
by a commercial bank, asset diversification or charter change. If Parkvale
meets an annual residential loan origination test, the payment of taxes can be
delayed up to two years.
Since 1987, corporations are subject to the corporate alternative minimum tax
to the extent this tax would exceed the regular tax liability. Parkvale has not
been subject to this tax in the past and does not anticipate being subject to
this tax in future years given its current level of financial and taxable
income.
With certain exceptions, no deduction is allowed for interest expense allocable
to the purchase or carrying of tax exempt obligations acquired after August 7,
1986.
Parkvale's income tax returns for calendar 1995, 1994 and 1993 have been filed
with the IRS and are open to examination. However, Parkvale has not yet been
advised by the IRS if such an examination will be performed. All income tax
returns prior to calendar 1993 have been settled with the IRS and settlement of
all issues did not result in a significant charge to income.
STATE TAXATION
For state tax purposes, Parkvale reports its income and expenses on the accrual
basis of accounting and files its tax returns on a calendar year basis.
Parkvale is subject to the Pennsylvania Mutual Thrift Institutions Tax
("MTIT"). This tax is imposed at the rate of 11.5% on net income computed
substantially in accordance with Generally Accepted Accounting Principles
("GAAP"). Under the Mutual Thrift Institution Act, Parkvale is not subject to
any state or local taxes except for the MTIT described above and taxes imposed
upon real estate and the transfer thereof.
See Note H of Notes to Consolidated Financial Statements for additional
information regarding federal and state taxation.
ITEM 2. PROPERTIES
Parkvale presently conducts its business from its main office and 27 branch
offices located in the Pittsburgh metropolitan area. Parkvale owns the building
and land for thirteen of its offices and leases its remaining fifteen offices.
Such leases expire between July 1996 and August 2013. At June 30, 1996,
Parkvale's land, building and equipment had a net book value of $2.0 million.
The following table sets forth certain information regarding Parkvale's office
facilities at June 30, 1996.
<TABLE>
<CAPTION>
LEASED % OF
OWNED OR EXPIRATION NET BOOK TOTAL
LOCATION LEASED DATE VALUE DEPOSITS
- - -------- --------- ----------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
MAIN OFFICE: Leased
4220 William Penn Hwy Headquarters 08/31/97
Monroeville, PA 15146 Branch 08/31/13 $175 13.1%
</TABLE>
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<PAGE> 28
<TABLE>
<CAPTION>
BRANCH OFFICES:
<S> <C> <C> <C> <C>
913 23rd Street
Aliquippa, PA 15001 Owned -- 213 2.5%
160 Allegheny Center Mall
Pittsburgh, PA 15212 Leased 12/31/00 8 1.6%
2132 Arlington Avenue
Pittsburgh, PA 15210 Owned -- 34 2.6%
1400 Seventh Avenue
Beaver Falls, PA 15010 Owned -- 222 3.5%
650 CasteVillage
Pittsburgh, PA 15236 Leased 12/31/00 15 6.5%
10 Foster Avenue
Pittsburgh, PA 15205 Leased 04/30/04 27 3.2%
Cranberry Mall
Cranberry Twp., PA 16066 Leased 07/31/96 9 1.4%
559 Grant Street
Pittsburgh, PA 15219 Leased 01/31/05 118 1.2%
503 Greenfield Avenue
Pittsburgh, PA 15207 Owned -- 8 4.2%
1970 Greentree Road
Pittsburgh, PA 15220 Leased 04/17/99 61 0.9%
1789 Pine Hollow Road
McKees Rocks, PA 15136 Leased 12/30/97 20 3.2%
200 Fifth Avenue
Pittsburgh, PA 15222 Leased 09/30/96 8 3.3%
420 Grant Avenue
Millvale, PA 15209 Owned -- 96 4.3%
55 Wyoming Street
Pittsburgh, PA 15211 Owned -- 6 2.3%
4300 Murray Avenue
Pittsburgh, PA 15217 Owned -- 151 2.9%
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C>
931 Fifth Avenue
New Kensington, PA 15068 Owned -- 27 4.9%
2300 Noblestown Road
Pittsburgh, PA 15205 Owned -- 67 3.3%
4885 McKnight Road
Pittsburgh, PA 15237 Leased 01/31/99 35 3.8%
90 Malts Lane
North Huntingdon, PA 15642 Owned -- 285 5.2%
3530 Forbes Avenue
Pittsburgh, PA 15213 Leased 04/30/99 2 2.4%
3908 Perrysville Avenue
Pittsburgh, PA 15214 Owned -- 97 2.5%
90 Tarentum Bridge Road
New Kensington, PA 15068 Owned -- 151 3.1%
1940 Murray Avenue
Pittsburgh, PA 15217 Leased 11/30/96 3 5.3%
736 Allegheny River Blvd.
Verona, PA 15147 Owned -- 105 2.8%
1500 Oxford Drive
Village Square, Suite 100
Bethel Park, PA 15102 Leased 12/31/98 40 3.1%
997 West View Park Drive
Pittsburgh, PA 15229 Leased 06/30/01 11 2.1%
4128 Brownsville Road
Pittsburgh, PA 15227 Leased 02/28/02 7 4.8%
MORTGAGE ORIGINATION OFFICES:
3900 Jermantown Road, Suite 180
Fairfax, VA 22030 Leased 12/31/96 2 --
2550 Corporate Exchange Drive
Suite 100
Columbus, OH 43231 Leased 12/31/96 2 --
</TABLE>
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<PAGE> 30
ITEM 3. LEGAL PROCEEDINGS.
Neither PFC nor any of its subsidiaries is involved in any pending legal
proceedings other than routine, insignificant litigation occurring in the
ordinary course of business, except as follows. The Bank is a defendant in two
related suits involving its former headquarters building in Pittsburgh.
Complaints have not yet been filed in either case, which makes it difficult to
determine the nature and amounts of potential exposure. See PFC's 1996 Annual
Report to Shareholders filed herewith as Exhibit 13 (the "1996 Annual Report"),
under "Capital Resources" in the Management Discussion and Analysis of
Financial Condition and Results of Operations section.
PFC and its subsidiaries, in the normal course of business, are subject to
various other pending and threatened lawsuits in which claims for monetary
damages are asserted. Management, after consultation with legal counsel, does
not anticipate that the ultimate aggregate liability, if any, arising out of
such other lawsuits will have a material adverse effect on PFC's nor its
subsidiaries' financial positions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS
MATTERS.
The information required herein is incorporated by reference from page 33 of
the PFC's 1996 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 4 of
PFC's 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages 5 to 12
of PFC's 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 14 to
30 of PFC's 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
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<PAGE> 31
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein with respect to directors and executive
officers of PFC and Parkvale is incorporated by reference from pages 5 to 9 of
the definitive proxy statement of the Corporation for the 1996 Annual Meeting
of Shareholders, which was filed on September 16, 1996 (the "definitive proxy
statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from page 13 of
the definitive proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages 2 to 4
of the definitive proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page 15 of
the definitive proxy statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors...............................................................13
Consolidated Statements of Financial Condition at June 30, 1996 and 1995.....................14
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1996...................................................15
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1996...................................................16
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended June 30, 1996...................................................17
Notes to Consolidated Financial Statements...................................................18
</TABLE>
31
<PAGE> 32
(2) The following exhibits are filed as part of this Form 10-K and this
list includes Exhibit Index.
<TABLE>
<CAPTION>
NO. EXHIBITS PAGE
<S> <C> <C>
3(a) Articles of Incorporation.............................................................*
3(b) Bylaws................................................................................#
3(c) Amendments to the Bylaws......................................................C-1 - C-9
10(a) Common Stock Certificate..............................................................*
10(b) 1987 Stock Option Plan................................................................@
10(c) 1993 Key Employee Stock Compensation Program..........................................x
10(d) 1993 Directors' Stock Option Plan.....................................................x
10(e) Consulting Agreement with Robert D. Pfischner.........................................!
10(f) Employment Agreement with Robert J. McCarthy, Jr......................................*
10(g) Employee Stock Ownership Plan.........................................................!
10(h) Executive Deferred Compensation Plan..................................................+
10(i) Supplemental Employee Benefit Plan....................................................+
13 Excerpts of the 1996 Annual Report to Shareholders filed herewith. Such Annual Report,
except those portions thereof that are expressly incorporated by reference herein,
is furnished for information of the Securities and Exchange Commission only and is not
deemed to be "filed" as part of this Form 10-K.
22 Subsidiaries of Registrant.......................................................... 20
Reference is made to Item 1. Business - Subsidiaries for the required information
23 Consent of Ernst & Young LLP, independent auditors..................................F-1
* Incorporated by reference to the Registrant's Form 8-B filed with the Commission on
January 5, 1989.
# Incorporated by reference to Form 10-K filed by the Registrant with the Commission on
September 28, 1988.
@ Incorporated by reference, as amended, to Form S-8 at File No. 33-26173 filed by the
Registrant with the Commission on November 1, 1995.
x Incorporated by reference, as amended, to Form S-8 at File No. 33-98812 filed by the
Registrant with the Commission on November 1, 1995.
! Incorporated by reference to Form 10-K filed by the Registrant with the Commission on
September 28, 1994.
+ Incorporated by reference to Form 10-K filed by the Registrant with the Commission on
September 21, 1995.
</TABLE>
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the 1996 fiscal
year or prior to the filing of this Form 10-K.
(c) See (a) (2) above for all exhibits filed herewith and the Exhibit
Index.
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<PAGE> 33
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report to
Shareholders which are required to be included herein.
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.
PARKVALE FINANCIAL CORPORATION
Date: September 17, 1996 By: /s/ ROBERT J. MCCARTHY, JR.
---------------------------
Robert J. McCarthy, Jr.
Director, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ ROBERT J. MCCARTHY, JR. September 17, 1996
- - --------------------------- ------------------
Robert J. McCarthy, Jr., Date
Director, President and Chief
Executive Officer
/s/ TIMOTHY G. RUBRITZ September 17, 1996
- - --------------------------- ------------------
Timothy G. Rubritz, Date
Vice President - Treasurer
(Chief Financial & Accounting Officer)
/s/ ROBERT D. PFISCHNER September 17, 1996
- - --------------------------- ------------------
Robert D. Pfischner, Chairman of the Board Date
/s/ FRED P. BURGER, JR. September 17, 1996
- - --------------------------- ------------------
Fred P. Burger, Jr., Director Date
/s/ PAUL A. MOONEY September 17, 1996
- - --------------------------- ------------------
Paul A. Mooney, Director Date
/s/ GEORGE W. NEWLAND September 17, 1996
- - --------------------------- ------------------
George W. Newland, Director Date
/s/ WARREN R. WENNER September 17, 1996
- - --------------------------- ------------------
Warren R. Wenner, Director Date
33
<PAGE> 1
EXHIBIT 3(c)
C-1
BYLAWS OF
PARKVALE FINANCIAL CORPORATION
AS AMENDED OCTOBER 26, 1995
ARTICLE I
PRINCIPAL PLACE OF BUSINESS
The principal place of business of the Corporation shall be at William
Penn Highway, Monroeville, Pennsylvania 15146 or such other place within
Allegheny County, Pennsylvania as the Board of Directors may determine.
ARTICLE II
SEAL
The Corporation's seal shall have inscribed thereon the name of the
Corporation and the year in which the Corporation was first organized.
ARTICLE III
STOCKHOLDERS
Section 1. Place of Meeting. Meetings of the stockholders shall be
held at the Corporation's principal place of business or at such other place
within the Commonwealth of Pennsylvania as the Board of Directors may
determine.
Section 2. Annual Meeting. There shall be an annual meeting of the
Corporation for the election of directors and any other business which the
stockholders may present to that meeting. The annual meeting shall be held on
the fourth Thursday in October of each year, if not a legal holiday, or if a
legal holiday, then on the next day following which is not a legal holiday at
the same time, or on such other date as the Board of Directors may determine by
resolution.
Section 3. Special Meetings. Special meetings of the stockholders may
be called at any time by the President, by the Board of Directors and by the
stockholders entitled to cast at least one-fifth of the votes which all
stockholders are entitled to cast at the particular meeting. At any time, upon
the written request of a person or persons who are entitled to call a special
meeting, the Secretary shall call a special meeting at such date as the
Secretary shall fix, not less than thirty (30) nor more than sixty (60) days
after receipt of the request and shall give notice thereof. If the Secretary
shall fail to fix the date or give notice within thirty (30) days after receipt
of the request, the person or persons making the request may call upon the
Pennsylvania Department of State to issue an order to compel the calling and
holding of such meeting.
<PAGE> 2
C-2
Section 4. Notice.
(a) Written notice of the annual meeting of stockholders shall be
given to each stockholder of record entitled to vote at the meeting at least
ten (10) and not more than sixty (60) days prior to the date thereof, unless a
longer period of notice is required by the Pennsylvania Business Corporation
Law, as amended and supplemented (the "Business Corporation Law"). The notice
shall specify the place, day and hour of the meeting and the general nature of
the business to be transacted.
(b) Written notice of each special meeting of the stockholders shall
be given to each member of record entitled to vote at the meeting at least ten
(10) and not more than sixty (60) days prior to the date thereof, unless a
longer period of notice is required by the Business Corporation Law. The notice
shall specify the place, day and hour of the meeting and the general nature of
the business to be transacted.
Section 5. Quorum. A meeting of the stockholders duly called shall not
be organized for the transaction of business unless a quorum is present. The
presence, in person or by proxy, of stockholders entitled to cast at least a
majority of the votes which all stockholders are entitled to cast on a
particular matter shall constitute a quorum for the purpose of considering such
matter.
Section 6. Action by Stockholders. A quorum being present, the acts of
the stockholders present who are entitled to cast at least a majority of the
votes which all stockholders present are entitled to cast shall be the acts of
the stockholders, except as otherwise provided in the Corporation's Articles of
Incorporation.
Section 7. Voting. Every stockholder entitled to vote at any
stockholder meeting shall be entitled, unless otherwise provided in the
Articles of Incorporation or by law, to one vote for every share of stock
appearing in his name on the books of the Corporation. Voting may be in person
or by proxy. All proxies shall be in writing and filed with the Secretary.
Stockholders may not cumulate votes for the election of directors.
Section 8. Conduct of Meetings. All meetings of stockholders shall be
called to order and presided over by the Chairman of the Board or in his
absence by a person designated by the Board of Directors. Any stockholder
proposal to be considered at the annual meeting, including any proposal to
amend these bylaws or to change any action of the Board of Directors with
respect thereto, shall be stated in writing and filed with the Secretary at
least thirty (30) days prior to the date of the annual meeting. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (a) a brief description of the
proposal desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting; (b) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business; (c) the class and number of shares of the Corporation's stock which
are beneficially owned by the stockholder on the date of such stockholder
notice; and (d) any financial interest of the stockholder in such proposal. No
proposal which has not been so stated and filed shall be considered. Minutes
shall be kept of all meetings.
<PAGE> 3
C-3
ARTICLE IV
DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation
shall be under the direction of its Board of Directors of not less than five
(5) nor more than fifteen (15) directors, the exact size to be resolved from
time to time by the Board and subject to Section 4 of this Article IV. The
Board of Directors shall elect a Chairman from amongst its membership at the
first Board of Directors meeting following the Annual Meeting and the Chairman
shall preside at all meetings of the Board of Directors and of stockholders of
the Corporation.
Section 2. Term in Office. The directors shall serve for a term of
three (3) years in office and until their successors are duly elected and
qualified and shall be divided into three classes as nearly equal in number as
possible with the term in office of one class to expire each year.
Section 3. Nomination. The Corporation shall have a Nominating
Committee consisting of three (3) or more persons who are directors of the
Corporation. In case a person is to be elected to the Board by the Board of
Directors because of a vacancy existing on the Board, nominations shall be made
by the Nominating Committee pursuant to the affirmative vote of a majority of
its entire membership. The Nominating Committee shall also make nominations for
directors to be elected by the stockholders of the Corporation as provided in
the remainder of this section. The Nominating Committee shall deliver to the
Secretary a written nomination for each directorship to be filled at each
annual meeting of the stockholders at least sixty (60) days in advance of the
date of that meeting. If the Nominating Committee makes such nominations, only
its nominations and that of any stockholder made in writing and delivered to
the Secretary of the Corporation at least thirty (30) days in advance of the
annual meeting shall be voted upon at the annual meeting. Such stockholder's
notice shall set forth as to each person whom the stockholder proposes to
nominate for election or re-election as a director (a) the name, age, business
address and residence address of such person; (b) the principal occupation or
employment of such person; (c) the class and number of shares of Corporation
stock which are beneficially owned by such person on the date of the
stockholder notice, and (d) any other information relating to such person that
is required to be disclosed in solicitation of proxies with respect to nominees
for election as directors pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, and any successor thereto. The Board of Directors may
reject any nomination by a stockholder not made in accordance with the terms
hereof.
Section 4. Vacancies. Vacancies existing on the Board of Directors
shall be filled by a majority vote of the remaining directors, though less than
a quorum, following the nominating procedure of Section 3 of this Article, and
each person so designated as director shall serve for the unexpired term to
which he is appointed and until his successor is duly elected and qualified.
Vacancies created by an increase in the number of directors shall be similarly
filled by the Board of Directors and each person so designated as director
shall serve until the next annual meeting of the stockholders and until his
successor is duly elected and qualified.
<PAGE> 4
C-4
Section 5. Meetings. The Board of Directors shall hold a regular
meeting at least once each month at the time and place fixed by resolution of
the Board of Directors. No notice of regular meetings need be given. Special
meetings of the Board of Directors may be held at any time and place and shall
be called by the Secretary upon the written request of the President, or any
three (3) directors specifying the general purpose of the meeting. Upon receipt
of such a request, the Secretary shall fix the place and time for such special
meeting, which shall not be less than five (5) nor more than thirty (30) days
after receipt of the request. The Secretary shall give at least three (3) days
prior written notice of a special meeting to each director, stating the place,
time and purpose of the meeting; provided however, that such notice may be
waived in writing before or after such meeting. Minutes shall be kept of all
meetings.
Section 6. Quorum. A majority of all the directors in office shall
constitute a quorum for the transaction of business and actions of a majority
of those present at a meeting at which a quorum is present shall be actions of
the Board.
Section 7. Committees. The Board of Directors may by resolution
adopted by a majority of the whole Board delegate three or more of its number
to constitute a committee or committees which, to the extent provided in the
resolution, shall have and exercise the authority of the Board of Directors in
the management of the business of the Corporation. Minutes shall be kept of all
meetings.
Section 8. Age Limitation of Directors. No person shall be eligible
for election, re-election, appointment or re-appointment to the Board of
Directors of the Corporation who is, at the time of such action, more than
seventy (70) years of age; provided, however, that this Section 8 shall not
apply to any director who was a member of the Board of Directors of Parkvale
Savings Association, Pittsburgh, Pennsylvania, as of January 18, 1973.
Section 9. Action Without a Meeting. Any action which may be taken at
a meeting of the Board of Directors or at any meeting of a committee thereof
may be taken without a meeting if consent or consents in writing setting forth
the action shall be signed by all the directors or all of the members of the
committee and filed with the Secretary. One or more directors may participate
in a meeting of the Board of Directors or of a committee of the Board of
Directors by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other.
Section 10. Resignations of Directors. A director may resign at any
time by written resignation delivered to the Secretary. Unless otherwise
specified in the resignation, it shall take effect upon receipt by the
Secretary. More than three consecutive absences from regular meetings of the
Board of Directors, unless excused by resolution of the Board of Directors,
shall automatically constitute a resignation, effective upon acceptance by the
Board of Directors.
Section 11. Other Powers. In addition to the powers and authorities
expressly granted by these Bylaws, the Board of Directors may exercise all
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the Articles of Incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders.
<PAGE> 5
C-5
Section 12. Advisory Boards. The Board of Directors may establish any
number of Advisory Boards and may appoint any number of individuals to such
Boards. Any individual so appointed may be compensated but may not attend any
meeting of the Board of Directors, except pursuant to an invitation. They shall
not have any official responsibility or be subject to any liability.
ARTICLE V
DIRECTORS' COMMITTEES
Section 1. Committees Established. Until further action of the Board
of Directors by resolution, the following Committees shall constitute
committees of the Board of Directors which shall be responsible for making
recommendations to the Board and which shall have and exercise the authority of
the Board of Directors in the management of the business of the Corporation,
which authority, however, shall be subject to ratification and approval by the
full Board of Directors: Executive Committee, Audit Finance Committee and
Nominating Committee. The members of these committees shall be appointed by the
President with the approval of the Board of Directors. The President, with the
concurrence of the Board, may establish additional committees of the Board
other than those listed herein. Members of the Board of Directors and the
Advisory Directors are eligible for appointment to committees of the
Corporation.
Section 2. Executive Committee. The Executive Committee shall consist
of not less than three (3) director members. The Committee shall have a
Chairman appointed from its members by the Board of Directors. The Executive
Committee shall have the authority to exercise all the powers of the Board of
Directors between Board meetings.
Section 3. Audit-Finance Committee. The Audit-Finance Committee shall
consist of not less than three (3) director members, none of whom shall be
full-time employees of the Corporation. The Committee shall have a Chairman
appointed from its members by the Board of Directors. The Committee, which
shall meet as often as deemed necessary by the Chairman but not less frequently
than annually with the Corporation's independent auditors, shall review the
Corporation's budget, the scope and results of the audit performed by the
Corporation's independent auditors, the Corporation's system of internal
control and audit with management and such independent auditors, and monitor
compliance with the Corporation's established investment, financial futures and
options policies. In addition, the Committee shall consider and act upon all
transactions with respect to the investment portfolio and hedging activities
within the guidelines and parameters approved by the Board of Directors. It
shall meet with the executive officers of the Corporation and with others as it
deems appropriate and shall report to the Board of Directors not less
frequently than annually.
Section 4. Nominating Committee. This committee shall consist of at
least three (3) director members, as provided in Section 3 of Article IV of
these Bylaws. It shall perform the functions described in Article IV, Section 3
and will establish fair and equitable levels of director compensation and the
basis of performance to qualify therefor. In doing so, it will attempt to
establish director compensation, within the ability of the Corporation to pay,
in an amount which will attract and retain qualified and competent persons of
mature judgment as members of the Board of Directors.
<PAGE> 6
C-6
ARTICLE VI
OFFICERS
Section 1. Officers. The officers of the Corporation shall include a
President, one or more Vice Presidents (which may include Executive or Senior
Vice Presidents), a Treasurer, and a Secretary. The Board of Directors may also
elect one or more Assistant Vice Presidents, one or more Assistant Treasurers,
one or more Assistant Secretaries, and such other officers as it deems
desirable. The same individual may hold two offices except that the President
(who, in accordance with applicable law, shall be a member of the Board of
Directors) shall not hold any other of the specified offices. The
responsibilities of the persons holding Executive Management positions may be
clarified, if the Board of Directors directs, by adding descriptive words to
the office they hold such as "Chief Executive Officer," "Chief Administrative
Officer," "Chief Operating Officer," and "Chief Financial Officer."
Section 2. Election and Term of Office. The officers of the
Corporation shall be elected annually at the first meeting of the Board of
Directors held after each annual meeting of the stockholders. Each officer
shall hold office until his successor shall have been duly elected and
qualified or until his death or until he shall resign or shall have been
removed in the manner hereinafter provided. A vacancy in an officership may be
filled by the Board of Directors at any time for the unexpired portion of the
term.
Section 3. Removal of Officers. Any officer or agent elected or
appointed by the Board of Directors may be removed by the Board of Directors,
by a vote of the majority of the Board of Directors whenever, in its sole
judgment, the best interests of the Corporation will be served thereby.
Section 4. President. The President shall manage the affairs of the
Corporation. He shall see that all resolutions and orders of the Board of
Directors are carried into effect and shall have the power to appoint such
subordinate officers and agents other than those actually appointed or elected
by the Board of Directors as the business of the Corporation may require. The
President shall exercise all the powers and perform all the duties of the
Chairman of the Board of Directors in the case of a vacancy in such office, the
absence or disability of the Chairman, or when so requested by the Chairman. He
shall perform such other duties and exercise such other powers as may be
assigned from time to time by the Board of Directors.
Section 5. Treasurer. The Treasurer, in addition to the powers and
duties prescribed by law, shall perform all duties and have all powers incident
to the office of treasurer and shall perform such other duties as may be
assigned from time to time by the Board of Directors.
Section 6. Secretary. The Secretary, in addition to the powers and
duties prescribed by law, shall perform all duties and have all powers incident
to the office of secretary, and shall perform such other duties as may be
assigned from time to time by the Board of Directors.
Section 7. Vice President. The Vice President or Vice Presidents
shall perform such duties and exercise such powers as may be assigned by the
President or by the Board of Directors.
<PAGE> 7
C-7
Section 8. Other Officers. Other officers, agents and employees shall
perform such duties and exercise such powers as may be assigned to them from
time to time by the President or by the Board of Directors.
Section 9. Age Limitation of Officers. No person shall be eligible for
election, re-election, appointment or re-appointment as an officer who, at the
time of such action, is more than seventy-two (72) years of age; provided,
however, that the foregoing shall not restrict the Board of Directors from
establishing a compulsory retirement requirement for those officers attaining
age 65 but not age 72 who fall within the definition of persons covered by
Section 3(c)(1) of the Age Discrimination in Employment Act Amendments of 1978,
29 USCA Section 631 (c)(1).
ARTICLE VII
STOCK CERTIFICATES
Section 1. Stock Certificates. Stock certificates shall be in such
form as the Board of Directors may from time to time determine. Every stock
certificate shall be signed by the President or any Vice President and
countersigned by the Treasurer or an Assistant Treasurer or by the Secretary or
an Assistant Secretary and sealed with the corporate seal, which may be an
engraved or printed facsimile.
Section 2. Transfers. Shares of the Corporation shall, upon surrender
and cancellation of the certificate or certificates representing the same, be
transferred upon the books of the Corporation at the request of the holder
thereof named in the surrendered certificate or certificates, in person or by
his legal representative, or by his attorney duly authorized by written power
of attorney filed with the corporation.
Section 3. Loss or Destruction of Certificates. In case of loss or
destruction of a stock certificate, another may be issued in lieu thereof in
such manner and upon such terms as the Board of Directors shall determine.
Section 4. Determination of Stockholders of Record. The Board of
Directors may fix a time, not more than sixty (60) days prior to the date of
any meeting of stockholders or the date fixed for the payment of any dividend
or distribution, or the date for the allotment of rights, or the date when any
change or conversion or exchange of shares will be made or go in effect, as a
record date for the determination of the stockholders entitled to notice of,
and to vote at, any such meeting, or entitled to receive payment of any such
dividend or distribution, or to receive any such allotment of rights, or to
exercise the rights in respect to any such change, conversion or exchange of
shares. In such case, only such stockholders as shall be stockholders of record
on the date so fixed shall be entitled to notice of, and to vote at, such a
meeting, or to receive payment of such dividend, to receive such allotment of
rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after any record date
fixed, as aforesaid.
The Board of Directors may close the books of the Corporation against
transfer of shares during the whole or any part of such period, and in such
case, written or printed notice thereof shall be mailed at least
<PAGE> 8
C-8
ten (10) days before the closing thereof to each stockholder of record at the
address appearing on the records of the Corporation or supplied by him to the
Corporation for the purpose of notice. While the stock transfer books of the
Corporation are closed, no transfer of shares shall be made thereon.
Unless a record date is fixed by the Board of Directors for the
determination of stockholders entitled to receive notice of, or vote at, a
stockholders' meeting, transferees of shares which are transferred on the books
of the Corporation within ten (10) days next preceding the date of such meeting
shall not be entitled to notice of or to vote at such meeting.
ARTICLE VIII
Section 1. Personal Liability of Directors. A director of the
Corporation shall not be personally liable for monetary damages for any action
taken, or any failure to take any action, as a director except to the extent
that by law a director's liability for monetary damages may not be limited.
Section 2. Indemnification. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, including actions by or in the
right of the Corporation, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of the Corporation, against expenses (including attorney's fees),
judgments, fines, excise taxes and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding to the full extent permissible under Pennsylvania law.
Section 3. Advancement of Expenses. Reasonable expenses incurred by an
officer or director of the Corporation in defending a civil or criminal action,
suit or proceeding described in Section 2 shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such person to repay such amount
if it shall ultimately be determined that the person is not entitled to be
indemnified by the Corporation.
Section 4. Other Rights. The indemnification and advancement of
expenses provided by or pursuant to this Article shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under the Corporation's Articles of Incorporation, any
insurance or other agreement, vote of stockholders or directors or otherwise,
both as to actions in their official capacity and as to actions in another
capacity while holding an office, and shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 5. Insurance. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of these Bylaws.
<PAGE> 9
C-9
Section 6. Security Fund; Indemnity Agreements. By action by the Board
of Directors (notwithstanding their interest in the transaction), the
Corporation may create and fund a trust fund or fund of any nature, and may
enter into agreements with its officers and directors, for the purpose of
securing or insuring in any manner its obligation to indemnify or advance
expenses provided for in this Article.
Section 7. Modification. The duties of the Corporation to indemnify
and to advance expenses to a director or officer provided in this Article shall
be in the nature of a contract between the Corporation and each such director
or officer, and no amendment or repeal of any provision of this Article, and no
amendment or termination of any trust or other fund created pursuant to Section
6 shall alter, to the detriment of such director or officer, the right of such
person to the advance of expenses or indemnification related to a claim based
on an act or failure to act which took place prior to such amendment, repeal or
termination.
ARTICLE IX
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall begin on the first day of
July in each year and end on the last day of June in the following calendar
year. The Corporation shall be subject to an annual audit as of the end of its
fiscal year by independent public accountants appointed by and responsible to
the Board of Directors.
ARTICLE X
CHANGES TO BYLAWS
Section 1. Power of Directors. The Board of Directors may make, alter,
amend and repeal the Bylaws of the Corporation except any part thereof relating
to the qualification, classification, and terms of office of directors, subject
to the power of the stockholders to change such action.
Section 2. Power of Stockholders. The stockholders may change any
action of the directors pursuant to Article X, Section 1 and, in addition,
shall have the power to make, alter, amend and repeal the Bylaws of this
Corporation insofar as they relate to the qualification, classification and
terms in office of directors.
Section 3. Vote Required. Unless otherwise specifically provided, the
powers conferred by this Article X shall be exercised by a vote of not less
than two-thirds of all of the directors or by a vote of not less than
two-thirds of the stockholders of the Corporation present in person or by proxy
at any regular or special meeting.
<PAGE> 1
EXHIBIT 13
- - --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The purpose of this discussion is to provide information about Parkvale
Financial Corporation ("Parkvale") which is not readily apparent from the
consolidated financial statements included in this annual report. Reference
should be made to those statements and the selected financial data presented
elsewhere in this report for an understanding of the following discussion and
analysis.
Parkvale functions as a financial intermediary and as such its financial
condition should be examined in terms of its ability to manage its interest rate
risk, and diversify its credit risk. Effective January 1, 1993, Parkvale Savings
Bank, a wholly-owned subsidiary of Parkvale, converted to a state chartered
savings bank. Such charter conversion resulted in the replacement of the Office
of Thrift Supervision ("OTS") by the Federal Deposit Insurance Corporation
("FDIC") and the Pennsylvania Department of Banking as the Bank's primary
regulators. The OTS retains jurisdiction over Parkvale Financial Corporation due
to its status as a unitary savings and loan holding company.
This marks the fifth consecutive year that Parkvale has reported record
earnings. For this fiscal year, Parkvale increased net income by $1.5 million or
19.2% over fiscal 1995. This increase is primarily reflective of the recognition
of a $969,000 gain ($736,000 net of taxes) related to the payoff of a first
mortgage loan facilitating the sale of a previously owned real estate. Without
this nonrecurring item, net income would have increased by $811,000 or 10.1%
over fiscal 1995. This reflects Parkvale's ability to adapt to the changing
interest rate environment experienced throughout fiscal 1996 and 1995 as net
interest income increased to $26.5 million from $25.6 million for fiscal 1995.
In fiscal 1996, Parkvale continued to focus on improving net interest margin and
controlling operating expenses. Previously stated goals of attaining capital
levels by June 30, 1996 and 1994 of 7% and 6%, respectively, were achieved. The
return on average equity and return on average assets improved in fiscal 1996 to
13.99% and 0.98%, respectively, from 13.89% and 0.93% for fiscal 1995. The 1996
ratios exclude the benefits of the non-recurring gain.
In fiscal 1997, as in prior years, given Parkvale's relative high liquidity
levels, the pricing of deposits is not anticipated to be dictated by short-term
cash flow requirements. Parkvale has not utilized derivative instruments and has
positioned itself to remain flexible to volatility associated with financial
markets. Parkvale continues to seek controlled growth through acquisition and/or
de novo branch openings to ultimately increase shareholder value. In July 1996,
Parkvale agreed to purchase $12.5 million in deposits from another Pittsburgh
community bank with the deposits expected to be merged into Parkvale's Crafton
office in early 1997. The Bank's twenty-ninth office is planned for opening in
the Raceway Plaza located in Scott Township before the end of 1996.
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS
<TABLE>
<CAPTION>
<S> <C>
1992 4.66%
1993 5.17
1994 5.98
1995 6.87
1996 7.01
</TABLE>
ASSET AND LIABILITY MANAGEMENT
A necessary prerequisite of asset and liability management is the ability to
manage interest rate risk ("IRR"). IRR is the exposure of the Bank's current and
future earnings and capital arising from movements in interest rates. This
exposure occurs because the present value of future cash flows, and in many
cases the cashflows
5
<PAGE> 2
themselves, change when interest rates change. Parkvale's IRR is measured and
analyzed using static interest rate sensitivity gap indicators, net interest
income simulation estimates and net present value sensitivity measures. These
combined methods enable Parkvale's management to regularly monitor both the
direction and magnitude of potential changes in the relationship between
interest-earning assets and interest-bearing liabilities.
Interest rate sensitivity gap analysis provides one indicator of potential
interest rate risk by comparing interest-earning assets and interest-bearing
liabilities maturing or repricing at similar intervals. The gap ratio is defined
as rate-sensitive assets minus rate sensitive liabilities for a given time
period divided by total assets. Parkvale continually monitors gap ratios and
within the IRR framework and in conjunction with the net interest income
simulations, implements actions to reduce exposure to fluctuating interest
rates. Such actions have included maintaining high liquidity, deploying excess
liquidity, increasing the repricing frequency of the loan portfolio, and
lengthening the overall maturities of interest-bearing liabilities. Management
believes these ongoing actions minimize Parkvale's overall vulnerability to
fluctuations in interest rates. As of June 30, 1996, Parkvale has reduced the
one year gap ratio from 6.03% to 0.24% and the five year gap ratio from 12.25%
to 2.20%, compared to the previous year.
ONE YEAR GAP TO TOTAL ASSETS
<TABLE>
<CAPTION>
<S> <C>
1992 (6.63)%
1993 5.37
1994 1.65
1995 6.03
1996 0.24
</TABLE>
Gap indicators of IRR are not necessarily consistent with IRR simulation
estimates. Parkvale utilizes net interest income simulation estimates under
various assumed interest rate environments to more fully capture the details of
IRR. Assumptions included in the simulation process include measurement over a
probable range of potential interest rate changes, prepayment speeds on
amortizing financial instruments, other imbedded options, loan and deposit
volumes and rates, non-maturity deposit assumptions and management's capital
requirements. The estimated impact on net interest income in fiscal 1997 under a
+/-100 and +/-200 basis point (bp) immediate shift in rates would result in the
following percentage changes over the fiscal 1996 actual net interest income:
+100 bp, +5.9%; +200 bp, +0.8%; -100 bp, +7.3%; -200 bp, +2.0%. This compares to
the projected net interest income for fiscal 1996 made at June 30, 1995 over the
fiscal 1995 actual net interest income: +100 bp, +4.4%; +200 bp, +0.9%; -100 bp,
+1.9%; and, -200 bp, -4.1%.
Asset Management. A primary goal of Parkvale's asset management is to maintain
a high level of liquid assets. Parkvale defines the following as liquid assets:
cash, federal funds sold, certain corporate debt maturing in less than one year,
U.S. Government and agency obligations maturing in less than one year and
short-term bank deposit accounts. The average daily liquidity for June 1996 was
20.4% and was 23.2% for the quarter ended June 30, 1996. During fiscal 1996,
Parkvale's investment strategy was to deploy excess liquidity by purchasing
single-family ARM loans to enhance yields and reduce the risk associated with
rate volatility. Such investments reduce the inherent risk of the volatility of
overnight interest rates. If interest rates were to fall substantially, net
interest income may decrease if the yield on liquid assets, such as Federal
funds sold were to fall faster than liabilities would reprice. The purchases of
ARM loans improved overall portfolio yields by reducing the lower yielding
federal funds sold portfolio from 13.0% of total assets at June 30, 1995 to 7.2%
of total assets at June 30, 1996.
Parkvale's lending strategy has been designed to shorten the average maturity of
its assets and increase the rate sensitivity of its loan portfolio. In fiscal
1996, 1995 and 1994, 77.4%, 82.6% and 56.3%, respectively, of mortgage loans
originated or purchased were adjustable-rate loans. Parkvale has continually
emphasized the origination and purchase of ARM loans. ARMs totaled $316.6
million or 56.9% of total mortgage loans at June 30, 1996 versus $237.9 million
or 50.9% of total mortgage loans at June 30, 1995. To supplement local
6
<PAGE> 3
mortgage originations, Parkvale purchased loans aggregating $104.9 million from
mortgage bankers and other financial institutions. Of these purchased loans,
$104.7 million or 99.8% were ARMs.
At June 30, 1996, Parkvale had commitments to originate loans totalling $4.1
million. Construction loans in process at June 30, 1996 were $4.4 million. Such
commitments were funded from current liquidity.
Parkvale continues to increase its consumer loan portfolio through new
originations. Home equity lines of credit are granted at up to 120% of
collateral value at competitive rates. In general, these loans have shorter
maturities and greater interest rate sensitivity and margins than residential
real estate loans. At June 30, 1996 and 1995, consumer loans were $76.2 and
$69.2 million which represented a 10.2% and 12.0% increase over the balances at
June 30, 1995 and 1994, respectively.
Parkvale adheres to policies designed to reduce credit risk concentrations
within its asset portfolio. One such vehicle has been mortgage-backed securities
which consist of pools of individual residential mortgage notes. The majority of
the mortgage-backed securities held by Parkvale are guaranteed as to the timely
repayment of principal and interest by a government sponsored enterprise, the
Federal Home Loan Mortgage Corporation ("FHLMC"). At June 30, 1996, Parkvale had
$99.4 million or 10.8% of total assets invested in mortgage-backed securities.
See Note B of Notes to Consolidated Financial Statements.
Investments in other securities, such as U.S. Government and agency obligations
and corporate debt are purchased to enhance Parkvale's overall net interest
margin. Parkvale's investment policy focuses on long term trends, rather than
short term swings in the financial markets. Accordingly, all debt securities are
classified as held to maturity, and are not available for sale nor held for
trading.
Liability Management. Parkvale's high level of liquidity permits investment
decisions to be determined with the funding source a secondary issue. Deposits
are priced according to management's asset/liability objectives, alternate
funding sources and competition. A concentrated effort is made to extend the
maturities of deposits by offering highly competitive rates for longer term
certificates. Certificates of deposit maturing after one year as a percent of
total deposits are 33.9% at June 30, 1996 and 33.7% at June 30, 1995.
Parkvale's primary source of funds are deposits received through its branch
network, loan and mortgage-backed security repayments and advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB"). FHLB advances can be used on a
short-term basis for liquidity purposes or on a long-term basis to support
expanded lending and investment activities.
7
<PAGE> 4
Interest-Sensitivity Analysis. The following table reflects the repricing
characteristics of Parkvale's assets and liabilities at June 30, 1996:
<TABLE>
<CAPTION>
1-5
<3 MONTHS 4-12 MONTHS YEARS 5+ YEARS TOTAL
---------- ----------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-sensitive assets:
ARM and other variable
rate loans........... $ 93,316 $ 83,801 $182,096 $ 14,528 $373,741
Other fixed rate loans,
net (1).............. 7,323 22,804 97,382 139,381 266,890
Variable rate mortgage
backed securities.... 9,959 10,684 -- -- 20,643
Fixed rate mortgage
backed securities
(1).................. 2,294 27,305 39,478 8,986 78,063
Investments and Federal
funds sold........... 89,231 17,470 52,010 3,000 161,711
Equities, primarily FHLB
and FHLMC............ -- -- 5,927 4,566 10,493
-------- -------- -------- -------- --------
Total interest-sensitive
assets.................. $202,123 $162,064 $376,893 $170,461 $911,541
======== ======== ======== ======== ========
Ratio of
interest-sensitive
assets to total
assets.................. 22.0% 17.6% 41.0% 18.5% 99.2%
==== ==== ==== ==== ====
Interest-sensitive
liabilities:
Passbook deposits and
club accounts (2).... $ 8,523 $ 23,947 $ 81,317 $ 37,428 $151,215
Checking accounts (3)... -- 26,910 26,910 13,455 67,275
Money market deposit
accounts............. -- 23,828 23,829 -- 47,657
Certificates of
deposit.............. 90,255 177,922 216,825 56,910 541,912
FHLB advances and other
borrowings........... 10,569 -- 10,000 6,342 26,911
-------- -------- -------- -------- --------
Total interest-sensitive
liabilities.......... $109,347 $252,607 $358,881 $114,135 $834,970
======== ======== ======== ======== ========
Ratio of
interest-sensitive
liabilities to total
liabilities and
equity.................. 11.9% 27.5% 39.0% 12.4% 90.8%
==== ==== ==== ==== ====
Ratio of
interest-sensitive
assets to
interest-sensitive
liabilities............. 184.8% 64.2% 105.0% 149.4% 109.2%
===== ==== ===== ===== =====
Periodic Gap to total
assets.................. 10.09% (9.85%) 1.96% 6.13% 8.33%
===== ==== ===== ===== =====
Cumulative Gap to total
assets.................. 10.09% 0.24% 2.20% 8.33%
===== ==== ===== =====
</TABLE>
(1) Includes total repayments and prepayments at an assumed rate of 12% per
annum for fixed-rate mortgage loans and mortgage-backed securities, with the
amounts for other loans based on the estimated remaining loan maturity by
loan type.
(2) Assumes passbook deposits are withdrawn at the rate of 21.0% per annum.
(3) Assumes checking accounts are withdrawn at 40% in the first year and 10% per
annum thereafter.
CAPITAL RESOURCES
Regulations require Parkvale Savings Bank ("the Bank") to maintain a minimum
Tier 1 (Core) capital of 4.0% of total assets, and Tier 2 (Supplementary)
risk-based capital equal to a minimum of 8% of net risk-weighted assets. At June
30, 1996, the Bank was in compliance with all applicable requirements, with Tier
1 and Tier 2 capital ratios of 7.09% and 14.87%, respectively. See Note G of
Notes to Consolidated Financial Statements. The Bank's management does not
anticipate difficulty in meeting the capital requirements in the future;
however, there can be no assurance that this will be the case.
The Bank has maintained a "well capitalized" status since fiscal 1993, achieving
a 7% capital level at June 30, 1996. The Bank's capitalization allows the
continuance of building stockholder value through traditionally conservative
operations and by taking advantage of profitable growth opportunities as they
arise. Management is not aware of any trends, events, uncertainties or
recommendations by any regulatory authority that will have, or that are
reasonably likely to have, material effects on the Bank's liquidity, capital
resources or operations except as follows.
The Bank is insured by the FDIC through the Savings Association Insurance Fund
("SAIF") and pays annual insurance fees of 23 basis points on insured deposits,
the lowest rate currently permitted. The FDIC insures commercial banks and
certain savings banks through the Bank Insurance Fund ("BIF"), which has reduced
the well capitalized bank's insurance premium to zero as the BIF has reached the
required capitalization level of 1.25% of insured deposits. This BIF and SAIF
insurance premium disparity places SAIF insured institutions at a
8
<PAGE> 5
significant competitive disadvantage since the average SAIF premium currently
remains at 24 basis points. An equitable solution to this problem was proposed
in 1995 and agreed upon by Congress, the White House and the banking regulators.
The Bank and other thrift banks throughout the country were to be assessed 85-90
basis points on SAIF-insured deposits in order to recapitalize SAIF, ultimately
merging the BIF and SAIF charter by January 1, 1998. In August 1996, the FDIC
indicated the proposed one-time assessment could be reduced to 68 basis points.
While the one-time assessment to the Bank would range from $5.3 million to $6.8
million on a pre-tax basis, it would allow SAIF-insured institutions like the
Bank to compete on equal footing with BIF-insured institutions by eliminating
the current annual deposit insurance premium disparity. Should the current
proposal be enacted, the Bank's annual FDIC deposit insurance costs could be
reduced by as much as $1.5 million. Parkvale supports this proposal of enacting
a one-time assessment as a means of recapitalizing SAIF and successfully
resolving the BIF/SAIF premium disparity.
The Budget Reconciliation Bill that was approved by Congress in December 1995
contained these provisions but it was subsequently vetoed by President Clinton
for reasons other than the FDIC-SAIF capitalization. Unfortunately for Parkvale
shareholders and SAIF insured customers, Parkvale continues to pay 23 basis
points for government mandated deposit insurance while similarly capitalized BIF
insured banks effectively pay nothing. Parkvale is hopeful that equitable
treatment will ultimately prevail, but is cognizant the legislative process is
unduly influenced by continuing partisan disputes.
A portion of the 1995 legislation involved a thrift charter realignment and the
elimination of the "tax bad debt deduction" granted solely to thrifts. The tax
bad debt deduction allowed thrifts to deduct various percentages of taxable
income rather than actual bad debt losses since 1953. Since 1987, the tax bad
debt deduction was 8% of taxable income. The Small Business Job Protection Act
of 1996 signed on August 20, 1996 eliminates such bad debt tax deduction,
consequently requiring the recapture of past taxes for permanent deductions
arising from accumulated excess reserves over the base year reserve as of
December 31, 1987. At December 31, 1995, Parkvale's most recent tax year-end,
there was approximately $4.1 million in excess of the base year reserves.
Subject to prevailing corporate tax rates, Parkvale owes $1.4 million in federal
taxes, which is reflected as a deferred tax liability. Consequently, this
legislation has no impact on reported current or future earnings. See Note H to
the Consolidated Financial Statements.
In June 1993, lawsuits were filed against Parkvale by the current owners of the
former Parkvale headquarters building located in the Oakland section of
Pittsburgh which was sold in 1984. The plaintiffs allege that Parkvale did not
fully disclose the environmental condition of the building at the time of sale.
Parkvale believes that possible exposure to loss may arise under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980;
however, complaints have not been filed in this case nor have court proceedings
begun. Accordingly, it is not possible to make a reasonable estimate of
financial exposure; however, management believes such exposure would not be
material to Parkvale's financial position or liquidity.
CONCENTRATION OF CREDIT RISK
Financial institutions, such as Parkvale, generate income primarily through
lending and investing activities. The risk of loss from lending and investing
activities includes the possibility that losses may occur from the failure of
another party to perform according to the terms of the loan or investment
agreement. This possibility of loss is known as credit risk.
Credit risk is increased by lending and/or investing activities that concentrate
a financial institution's earning assets in such a way as to expose the
institution to a material loss from any single occurrence or group of related
occurrences. Diversifying loans and investments to prevent concentrations of
risks is one manner a financial institution can reduce potential losses due to
credit risk. Examples of asset concentrations would include, but not be limited
to, geographic concentrations, loans or investments of a single type, multiple
loans to a single borrower, loans made to a single type of industry and loans of
an imprudent size relative to the overall capitalization of the institution.
For loans purchased and originated, Parkvale has taken steps to reduce its
exposure to credit risk by emphasizing low risk single family mortgage loans,
which comprise 80.2% of the gross loan portfolio. Notwithstanding
9
<PAGE> 6
Parkvale's efforts to reduce its credit risk exposure, Parkvale previously
incurred credit losses relative to multi-family residential and commercial real
estate loans, primarily originated in the early 1980's. These loan types
amounted to $36.9 million outstanding or 4.0% and 5.9% of Parkvale's total
assets and total loan portfolio, respectively, at June 30, 1996. See Notes A and
C of Notes to Consolidated Financial Statements for additional discussion on
loans as to credit risk and loan losses.
RESULTS OF OPERATIONS
Operating results are substantially dependent on net interest income. Net
interest income is the difference between interest earned on loans and
investments and interest paid for deposits and borrowings. Operating results are
also materially affected by the levels of non-interest income and expense.
Interest-earning assets in excess of interest-bearing liabilities contributes to
a positive interest rate spread and results in increased net interest income. In
fiscal 1996, increasing net interest income was favorably impacted by higher
loan volumes. In fiscal 1995, increasing net interest income was directly
impacted by higher yielding investments and loans. Parkvale's net yield on
average interest-earning assets was 2.98% in fiscal 1996, 3.01% in fiscal 1995,
and 2.78% in fiscal 1994.
INTEREST INCOME
Interest income from loans increased by $5.0 million or 12.1% in 1996. Average
loan outstandings increased $55.2 million or 10.8%, primarily due to purchasing
approximately $105 million in loan packages in fiscal 1996. This is compounded
by an increase in the average loan yield from 8.14% in 1995 to 8.23% in 1996.
However, the yield at June 30, 1996 was 8.12% reflecting moderately declining
rates throughout the latter half of fiscal 1996 and the large volume of new ARM
loans. Interest income on loans increased by $1.2 million or 2.9% from 1994 to
1995. Although the average yield on loans decreased from 8.15% in 1994 to 8.14%
in 1995, the average outstanding loan balance increased $15.3 million or 3.1%.
Interest income on mortgage-backed securities decreased slightly by $132,000 or
1.9% in fiscal 1996. Although the average yield on mortgage-backed securities
increased 10 basis points from 6.51% in 1995 to 6.61% in 1996, this was not
sufficient to offset an average balance decrease of $3.6 million from 1995 to
1996. The decline in the average balance outstanding is due to deploying
payments on mortgage-backed securities into higher yielding loans. Similarly,
interest income on mortgage-backed securities decreased $730,000 million in 1995
from 1994, attributable to a $14.6 million decrease in the average outstanding
balance, offset by an increase in the average yield from 6.33% in 1994 to 6.51%
in 1995.
Interest income on investments decreased $1.3 million or 15.1% in fiscal 1996.
This is a result of a $38.7 million decrease in the average balance, which was
partially offset by a 66 basis point increase in the average yield from 5.30% in
1995 to 5.96% in 1996. Interest income on investments increased slightly by
$167,000 or 2.0% from fiscal 1994 to 1995. This is a result of a $1.4 million
increase in the average balance, compounded by a slight 5 basis point increase
in the average yield.
Interest income from federal funds sold increased $1.5 million from 1995. The
increase was attributable to an increase in the average federal funds sold
balance from $75.5 million in 1995 to $99.4 million in 1996. This is compounded
by a slight increase in the average yield from 5.51% in fiscal 1995 to 5.67% in
fiscal 1996. Although the average balance of federal funds sold decreased $13.4
million or 15.1% between 1994 and 1995, interest income increased $1.0 million
or 32.6% from significant increases in the average yield between the two years.
The average yield increased from 3.53% in fiscal 1994 to 5.51% in fiscal 1995.
These average yields reflect the changes in the target federal funds interest
rate from a low of 4.25% at the beginning of fiscal 1995 to a high of 6.00% at
the end of fiscal 1995 before leveling off to 5.25% by the end of fiscal 1996.
INTEREST EXPENSE
Interest expense on deposits increased $4.2 million or 12.3% between 1995 and
1996. The average deposit balance increased $32.7 million in fiscal 1996,
magnified by an increase in the average yield from 4.41% in 1995 to 4.75% in
1996. Interest expense on deposits slightly increased by $360,000 between 1994
and 1995.
10
<PAGE> 7
Although the average balance decreased $18.0 million between the two
fiscal years, this was offset by an increase in the average cost from 4.26% in
1994 to 4.41% in 1995. As rates began to increase in fiscal 1995, average
deposits decreased as deposit customers shifted core deposits into higher
yielding investments.
Interest expense on borrowed money increased slightly by $27,000 in 1996,
primarily resulting from an increase of $908,000 in the average balance. In
fiscal 1995, the interest expense declined slightly by $328,000 as a result of a
$3.2 million decrease in the average balance and a 46 basis point decline in the
average cost.
Net interest income increased $891,000 from 1995 to 1996. Although the average
interest rate spread decreased slightly to 2.66% in 1996 from 2.71% in 1995, the
average net earning assets increased $3.2 million. In fiscal 1995, net interest
income increased $1.6 million or 6.6%. This was the result of the Federal
Reserve increasing short-term rates 175 basis points and to an increase in the
average net interest earning assets increasing $9.9 million. The average
interest rate spread increased from 2.55% in 1994 to 2.71% in 1995.
At June 30, 1996, the weighted average yield on loans and investments was 7.45%.
The average rate payable on liabilities was 4.56% for deposits, 6.02% for
borrowings and 4.61% for combined deposits and borrowings.
PROVISION FOR LOAN LOSSES
Specific loss provisions are made when the perceived market value of property
collateralizing delinquent loans is less than the loan's book value, and reflect
management's current estimate of potential losses on such loans. In addition,
general loss provisions are made based on economic trends, perceived risk in the
loan portfolio, previous loss experience and other factors. The adequacy of loss
reserves is based upon a regular monthly review of loan delinquencies and
"classified assets," as well as local and national economic trends. The
provision for loan losses was $686,000 in fiscal 1996 compared to $1.1 million
and $1.8 million in fiscal 1995 and 1994, respectively. Non-performing assets,
which are defined as non-accrual loans and real estate owned were $1.2 million,
$2.1 million and $1.2 million at June 30, 1996, 1995 and 1994, representing
0.14%, 0.24% and 0.13% of total assets at the end of each respective year. Of
the non-performing assets at June 30, 1996, $240,000 was real estate owned and
$1.0 million represented non-accrual loans. In addition, loans totalling
$758,000 were classified as substandard for regulatory purposes. These loans,
while current or less than 90 days past due, have exhibited characteristics
which warrant special monitoring. Examples of these concerns include irregular
payment histories, questionable collateral values, investment properties having
cash flows insufficient to service debt, and other financial inadequacies of the
borrower. These loans are continuously monitored with efforts being directed
towards resolving the underlying concerns while continuing the performing status
of the loans. The aggregate valuation allowances were 2.17% of gross loans at
June 30, 1996, compared to 2.41% at June 30, 1995. The adequacy of these
reserves in relation to current or anticipated trends in the loan portfolio will
continue to be monitored by management.
OTHER INCOME
Other income was $3.1 million, $2.0 million and $2.3 million for the fiscal
years ended June 30, 1996, 1995 and 1994. This significant fiscal 1996 increase
is due to the recognition of a $969,000 previously deferred gain related to the
payoff of a commercial real estate loan made in fiscal 1994 to facilitate the
sale of a multi-family apartment complex located in a Pittsburgh suburb. Without
this gain, other income would have increased $65,000 or 3.2%. Other income
decreased $296,000 or 12.8% in fiscal 1995 from fiscal 1994 as miscellaneous
income decreased $361,000.
The $969,000 gain recognized in fiscal 1996 was related to a loan that was
classified as special mention for regulatory purposes due to the loan-to-value
ratio being higher than the Bank's normal underwriting standards for
multi-family loans. The gain resulting from the fiscal 1994 sale of the related
property had been deferred and accreted into income over the term of the loan.
There were no gains or losses on sale of assets in fiscal 1995. Losses on asset
sales during fiscal 1994 consisted of a $100,000 loss on the sale of two
adjustable rate mortgage funds, offset by a $91,000 gain on the sale of FHLMC
stock.
Loan fees and service charges decreased by less than 0.5% in fiscal 1996. In
fiscal 1995, the balance increased slightly by $56,000 or 3.6% primarily from
increased checking account fees.
11
<PAGE> 8
Miscellaneous income increased $69,000 or 16.9% in fiscal 1996. During fiscal
1996, income from tax deferred annuity and mutual fund products increased
$152,000 and rental income increased by $58,000. Miscellaneous income decreased
by $361,000 or 46.9% in fiscal 1995 over fiscal 1994. Net rental income on an
REO apartment complex sold in fiscal 1994 generated income of $179,000, which
was absent in fiscal year 1995. Annuity fee income decreased $163,000 in fiscal
1995 as customer demand for such products from 1994 through 1995 declined. A
recurring primary component of other income is the income generated from a tax
deferred annuity program made available to our customers through an unaffiliated
third party marketing firm (Spectrum Financial Services) in which Parkvale has
no ownership interest. Spectrum Financial Services offers fixed and variable
rate annuities and mutual funds to Parkvale customers. Such income was $283,000,
$131,000 and $294,000 in fiscal 1996, 1995 and 1994, respectively.
OTHER EXPENSE
Other expense increased by $419,000 or 3.0% in fiscal 1996 and increased by
$830,000 or 6.4% in fiscal 1995 over the respective prior periods. The increase
in 1996 was due to increases in compensation and benefit expenses and office
occupancy. The increase in 1995 was due to increases in compensation and
employee benefits, office occupancy, and marketing. Parkvale's ratio of other
expenses to average assets was 1.57% for fiscal 1996, 1.59% for fiscal 1995, and
1.47% for fiscal 1994. Such ratios are significantly lower than peer depository
institutions.
Compensation and employee benefits increased by $270,000 or 4.1% during fiscal
1996 and by $559,000 or 9.2% during fiscal 1995 over the respective prior
periods. Compensation expense increased $242,000 or 4.4% in fiscal 1996 and
increased $228,000 or 4.3% in fiscal 1995. These increases represent normal
merit pay increases. ESOP contribution expense increased $82,000 in fiscal 1996
and $146,000 in fiscal 1995 for estimated awards to be granted for service
rendered in the respective fiscal years. A portion of the contributions are
based on the average common stock price for the applicable calendar year. In
prior fiscal years, all the contributions were based on a much lower historical
value of subscribed stock from a third party loan executed in 1987. As the
subscribed stock has been fully exhausted, ESOP contributions will be from
treasury stock. Consequently, in accordance with SOP 93-6, "Employers'
Accounting for Stock Ownership Plans," compensation expense for ESOP
contributions is based on the average common stock price for the calendar year
in which the services were rendered.
Office occupancy expense increased $47,000 or 2.4% in fiscal 1996 and $106,000
or 5.7% in fiscal 1995 over the respective prior periods. The increase in fiscal
1996 was primarily due to the full year effect of a branch opened in February
1995. The increase in fiscal 1995 was due to the opening of the branch as
previously mentioned in February 1995 and to the full year effect of costs of
two offices opened in the latter half of fiscal 1994.
Marketing expenses decreased slightly by $28,000 or 7.6% in fiscal 1996 and
increased by $99,000 or 36.7% in fiscal 1995. The significant increase in 1995
is attributable to various savings deposit advertisements and promotion of home
equity credit lines.
INCOME TAXES
As discussed in Note H of Notes to Consolidated Financial Statements, income tax
expense for fiscal 1996, 1995 and 1994, which amounted to $5.0 million, $4.6
million and $4.3 million, respectively, varied from the normal statutory federal
tax provisions primarily due to tax exempt interest and the Pennsylvania Mutual
Thrift Institutions Tax.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, 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 a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than 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 as measured by the consumer price index.
12
<PAGE> 9
REPORT OF INDEPENDENT AUDITORS
- - -------------------------------------------------------------------------------
[ERNST & YOUNG LLP LOGO]
- - -------------------------------------------------------------------------------
The Board of Directors
Parkvale Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Parkvale Financial Corporation as of June 30, 1996 and 1995, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of Parkvale's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial condition of Parkvale
Financial Corporation at June 30, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1996 in conformity with generally accepted accounting
principles.
Pittsburgh, Pennsylvania /s/ ERNST & YOUNG LLP
July 18, 1996
- - -------------------------------------------------------------------------------
13
<PAGE> 10
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
<S> <C> <C>
ASSETS 1996 1995
- - ------------------------------------------------------------------------------------------------
Cash and noninterest-earning deposits $ 10,905 $ 10,003
Federal funds sold 66,557 116,581
Interest-earning deposits in other banks 173 194
Investment securities available for sale (cost of $6,804 in 1996 and
$5,890 in 1995)
(Note B) 10,493 8,738
Investment securities held to maturity (fair value of $194,061 in 1996
and $224,470 in 1995) (Note B) 194,393 224,698
Loans, net of allowance of $13,990 in 1996 and $13,136 in 1995 (Note C) 625,452 524,545
Foreclosed real estate, net of allowance of $19 in 1996 and $0 in 1995 240 96
Office properties and equipment, net (Note D) 2,005 2,261
Intangible assets and deferred charges 276 434
Prepaid expenses and other assets (Note L) 8,748 8,872
- - ------------------------------------------------------------------------------------------------
Total Assets $919,242 $896,422
- - ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
- - ------------------------------------------------------------------------------------------------
Savings deposits (Note E) $807,087 $794,445
Advances from Federal Home Loan Bank (Note F) 20,693 20,607
Advance payments from borrowers for taxes and insurance 10,828 12,132
Other liabilities (Note L) 4,651 4,177
Other debt (Note F) 6,218 3,997
- - ------------------------------------------------------------------------------------------------
Total Liabilities 849,477 835,358
- - ------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (NOTES G AND I)
Preferred stock ($1.00 par value; 5,000,000 shares authorized; 0 shares
issued) -- --
Common stock ($1.00 par value; 10,000,000 shares authorized;
1996--3,448,736 shares issued, 1995--2,757,563 shares issued) 3,449 2,758
Additional paid-in capital 9,138 10,056
Treasury stock at cost--213,093 shares in 1996 and 244,525 shares in
1995 (3,028) (3,434)
Employee stock ownership plan debt (104) (154)
Unrealized gains on securities available for sale 2,342 1,808
Retained earnings 57,968 50,030
- - ------------------------------------------------------------------------------------------------
Total Shareholders' Equity 69,765 61,064
- - ------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $919,242 $896,422
- - ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE> 11
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1995 1994
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $46,585 $41,567 $40,404
Mortgage-backed securities 6,775 6,907 7,637
Investments 7,127 8,394 8,227
Federal funds sold and repurchase agreements 5,630 4,158 3,136
- - --------------------------------------------------------------------------------------------------
Total interest income 66,117 61,026 59,404
- - --------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings deposits (Note E) 38,044 33,871 33,511
Borrowings 1,587 1,560 1,888
- - --------------------------------------------------------------------------------------------------
Total interest expense 39,631 35,431 35,399
- - --------------------------------------------------------------------------------------------------
Net interest income 26,486 25,595 24,005
Provision for loan losses (Note C) 686 1,094 1,829
- - --------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,800 24,501 22,176
- - --------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges and fees 1,611 1,615 1,559
Gain (loss) on sale of assets (Note J) 969 -- (9)
Miscellaneous 478 409 770
- - --------------------------------------------------------------------------------------------------
Total other income 3,058 2,024 2,320
- - --------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and employee benefits 6,899 6,629 6,070
Office occupancy 2,022 1,975 1,869
Marketing 341 369 270
FDIC and other insurance 1,951 1,889 1,849
Office supplies, telephone, and postage 841 831 799
Miscellaneous 2,186 2,128 2,134
- - --------------------------------------------------------------------------------------------------
Total other expenses 14,240 13,821 12,991
- - --------------------------------------------------------------------------------------------------
Income before income taxes 14,618 12,704 11,505
Income tax expense (Note H) 5,000 4,633 4,277
- - --------------------------------------------------------------------------------------------------
NET INCOME $ 9,618 $ 8,071 $ 7,228
- - --------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 2.86 $ 2.34 $ 2.07
- - --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE> 12
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1996 1995 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 65,694 $ 61,123 $ 61,758
Loan fees received 364 267 980
Other fees and commissions received 1,965 1,787 1,958
Interest paid (39,640) (35,435) (35,429)
Cash paid to suppliers and employees (13,562) (13,853) (12,755)
Income taxes paid (4,784) (4,378) (4,533)
- - -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,037 9,511 11,979
Cash flows from investing activities:
Proceeds from sales of investment securities available for
sale 48 36 25,763
Proceeds from maturities of investments 125,150 117,524 96,444
Purchase of investment securities available for sale (968) (330) (10,747)
Purchase of investment securities (96,127) (89,255) (113,392)
Maturity of deposits in other banks 21 1,347 6,681
Purchase of mortgage-backed securities (25,211) -- (60,449)
Purchase of loans (104,940) (27,808) (15,209)
Proceeds from sales of loans 2,479 2,578 2,010
Principal collected on mortgage-backed securities 26,721 14,162 44,178
Principal collected on loans 149,608 100,727 176,889
Loans made to customers, net of loans in process (148,057) (105,900) (152,190)
Capital expenditures (114) (199) (192)
- - -------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED IN) BY INVESTING ACTIVITIES (71,390) 12,882 (214)
Cash flows from financing activities:
Net increase (decrease) in checking and savings accounts 3,407 (49,595) 1,948
Net increase (decrease) in certificates of deposit 9,236 65,485 (15,366)
Proceeds from FHLB advances 96 -- 371
Repayment of FHLB advances (10) (96) (5,008)
Net increase (decrease) in other borrowings 2,220 304 (119)
Net (decrease) increase in borrowers advances for tax and
insurance (1,304) 818 350
Dividends paid (1,592) (1,291) (1,063)
Allocation of treasury stock to retirement plans 178 39 49
Payment for treasury stock -- (3,031) --
- - -------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES 12,231 12,633 (18,838)
- - -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (49,122) 35,026 (7,073)
Cash and cash equivalents at beginning of year 126,584 91,558 98,631
- - -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 77,462 $ 126,584 $ 91,558
- - -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 13
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 9,618 $8,071 $ 7,228
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 528 568 803
Accretion and amortization of fees and discounts (442) (319) 899
Loan fees collected and deferred 364 268 981
Provision for loan losses 686 1,094 1,829
(Gain) loss on sale of assets (969) -- 9
(Increase) decrease in accrued interest receivable (369) 121 975
Increase in other assets (90) (371) (33)
Decrease in accrued interest payable (9) (4) (30)
Decrease (increase) in deferred income tax asset 276 (45) (32)
Increase (decrease) in other liabilities 444 128 (650)
- - ---------------------------------------------------------------------------------------------------------------------
Total adjustments 419 1,440 4,751
- - ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $10,037 $9,511 $11,979
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED TOTAL
COMMON PAID IN TREASURY ESOP GAINS ON RETAINED SHAREHOLDERS'
STOCK CAPITAL STOCK DEBT SECURITIES EARNINGS EQUITY
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 $1,745 $10,981 $ (403) $(227) $ -- $37,226 $ 49,322
- - -------------------------------------------------------------------------------------------------------------------------------
1994 net income 7,228 7,228
Principal payments on ESOP debt 86 86
Transfer to reflect 5 for 4 split 436 (436) --
Exercise of stock options 19 30 49
Cash dividends declared on common stock
at $.333 per share (1,120) (1,120)
- - -------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 2,200 10,575 (403) (141) -- 43,334 55,565
- - -------------------------------------------------------------------------------------------------------------------------------
Adjustment to beginning balance for
change in accounting method, net of
income taxes of $910 1,536 1,536
1995 net income 8,071 8,071
Principal payments on ESOP debt 86 86
Transfer to reflect 5 for 4 split 551 (551) --
Treasury stock purchased (3,031) (3,031)
Additional borrowings by ESOP (99) (99)
Change in unrealized gains, net of
income taxes of $130 272 272
Exercise of stock options 7 32 39
Cash dividends declared on common stock
at $.416 per share (1,375) (1,375)
- - -------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 2,758 10,056 (3,434) (154) 1,808 50,030 61,064
- - -------------------------------------------------------------------------------------------------------------------------------
1996 net income 9,618 9,618
Principal payments on ESOP debt 185 185
Transfer to reflect 5 for 4 split 690 (690) --
Treasury stock contributed to benefit
plan 66 66
Additional borrowings by ESOP (135) (135)
Change in unrealized gains, net of
income taxes of $307 534 534
Exercise of stock options 1 (228) 340 113
Cash dividends declared on common stock
at $.52 per share (1,680) (1,680)
- - -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 $3,449 $ 9,138 $ (3,028) $(104) $2,342 $57,968 $ 69,765
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE> 14
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Parkvale Financial Corporation ("Parkvale" or "PFC"), its wholly owned
subsidiary, Parkvale Savings Bank (the "Bank") and its wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated
in consolidation.
Business
The primary business of Parkvale consists of attracting deposits from the
general public in the communities that it serves and investing such deposits,
together with other funds, in residential real estate loans, consumer loans,
commercial loans and investment securities. Parkvale focuses on providing a
wide range of consumer and commercial services to individuals, partnerships and
corporations in the greater Pittsburgh metropolitan area, which comprises its
primary market area. Parkvale is also subject to the regulations of certain
federal and state agencies and undergoes periodic examinations by certain
regulatory authorities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expense during the reported period. Actual
results could differ from those estimates.
Cash and Non-interest Earning Deposits
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. The reserve calculation is 0% of the first $4.3 million of
checking deposits, 3% of the next $47.7 million of checking deposits and 10% of
total checking deposits over $52.0 million. These required reserves, net of
allowable credits, amounted to $1.3 million at June 30, 1996.
Investment Securities Available for Sale
Securities available-for-sale consist solely of equity securities. Unrealized
holding gains and losses, net of tax, on available for sale securities are
reported as a net amount in a separate component of shareholders' equity until
realized. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Declines in the fair value
of individual available-for-sale securities below their cost that are other
than temporary will result in write-downs of the individual securities to their
fair value. Any related write-downs will be included in earnings as realized
losses. No securities have been classified as trading.
Investment Securities Held to Maturity
Securities for which the Bank has the positive intent and ability to hold to
maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Declines in the fair value of individual held-to-maturity securities
below their amortized cost that are other than temporary will result in
write-downs of the individual securities to their fair value. Any related
write-downs will be included in earnings as realized losses.
Loans
Loans are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased loans.
Loan origination and commitment fees and certain direct origination costs have
been deferred and recognized as an adjustment of the yield of the related loan,
adjusted for anticipated loan prepayments. Discounts and premiums
18
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- - ------------------------------------------------------------------------------
on purchased residential real estate loans are amortized to income using the
interest method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when the loan becomes more than 90 days past due. Parkvale
provides an allowance for the loss of accrued but uncollected interest at the
time the interest accrual is discontinued. Interest ultimately collected is
credited to income in the period of recovery.
Effective July 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114 ("FAS 114"), "Accounting by Creditors for Impairment of a
Loan," as amended by FAS 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure". These Statements require impaired
loans to be identified and measured based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price or at the fair value of the collateral if the
loan is collateral dependent. If the recorded investment in the loan exceeds
the measure of fair value, a valuation allowance is established as a component
of the allowance for loan losses. Impaired loans consist of non homogeneous
loans, which based on the evaluation of current information and events,
management has determined that it is probable that the Bank will not be able to
collect all of the amounts due on these loans in accordance with the
contractual terms of the loan agreements. For purposes of these Statements,
nonaccrual, substandard and doubtful commercial and other real estate loans are
evaluated for impairment under the provisions of FAS 114 and 118. The adoption
of these Statements did not have a material impact on the overall allowance for
loan losses and did not affect the Bank's charge-off or income recognition
policies.
An additional general provision is made for the estimated losses on loans based
on loss experience and prevailing market conditions. While management believes
that the allowance is adequate to absorb estimated potential credit losses,
future adjustments may be necessary in circumstances that differ substantially
from the assumptions used in evaluating the adequacy of the allowance for loan
losses.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are recorded at the lower of the carrying amount of the loan or
fair value of the property less cost to sell. After foreclosure, valuations are
periodically performed by management and a valuation allowance is established
for any declines in the fair value less cost to sell below the property's
carrying amount. Revenues and expenses and changes in the valuation allowance
are included in the statement of operations. Gains and losses upon disposition
are reflected in earnings as realized. Loans which were transferred to
foreclosed real estate during fiscal 1996, 1995 and 1994 amounted to $1.2
million, $170,000 and $374,000, respectively. The transfers in 1996 primarily
consisted of a $902,000 multi-family residential apartment complex which was
subsequently sold in February 1996.
Office Property and Equipment
Office property and equipment is recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
useful lives of the various classes of assets. Amortization of leasehold
improvements is computed using the straight-line method over the useful lives
of the leasehold improvements.
Earnings per Share
Primary earnings per share are based upon the weighted average number of issued
and outstanding common shares including shares subject to stock options, which
are deemed common stock equivalents. For the years ended June 30, 1996, 1995
and 1994, earnings per share were based upon the following share amounts:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Actual average shares outstanding...................... 3,214,152 3,307,263 3,349,000
Option equivalents..................................... 150,435 134,845 140,930
--------- --------- ---------
Weighted average aggregate............................. 3,364,587 3,442,108 3,489,930
--------- --------- ---------
</TABLE>
19
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- - -------------------------------------------------------------------------------
On September 21, 1995, the Board of Directors declared a 5 for 4 stock split on
Parkvale's common stock. The additional shares were paid on October 16, 1995 to
stockholders of record at the close of business on October 2, 1995. This
increased the outstanding shares by 640,706. No fractional shares were issued.
All share amounts in this report have been restated to reflect the effect of
this stock split and similar splits in 1994 and 1993.
Stock Options
In October 1995, the Financial Accounting Standards Board (FASB) issued FAS
123, "Accounting for Stock-Based Compensation." FAS 123 defines a fair
value-based method of accounting for stock-based employee compensation plans.
Under the fair value-based method, compensation cost is measured at the grant
date based upon the value of the award and is recognized over the service
period. The standard encourages all entities to adopt this method of accounting
for all employee stock compensation plans. However, it also allows an entity to
continue to measure compensation costs for its plans as prescribed in APB
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." If an
entity elects to continue to use the accounting in Opinion 25, pro forma
disclosures of net income and earnings per share must be made as if the fair
value method of accounting, as defined by FAS 123 had been applied. FAS 123 is
effective for Parkvale's fiscal year ending June 30, 1997.
Parkvale grants stock options at exercise prices not less than the fair market
value of common stock on the date of grant. Under APB 25, no compensation
expense is recognized pursuant to the Parkvale's stock option plan. Parkvale
will continue its accounting in accordance with APB 25 and provide the required
proforma disclosures.
Statement of Cash Flows
For the purposes of reporting cash flows, cash and cash equivalents include
cash and non-interest earning deposits and federal funds sold. Additionally,
allocation of treasury stock to retirement plans includes exercise of stock
options and allocation to the employee stock ownership plan.
Treasury Stock
The purchase of PFC common stock is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the average cost basis, with any excess proceeds being credited to
Additional Paid-in Capital. In July 1996, a stock repurchase program was
announced authorizing repurchases of up to 161,000 shares, representing 5% of
outstanding stock. The repurchases are authorized to be made from time to time
in open-market transactions during the next 12 months at prevailing market
prices. The repurchased shares will be available for general corporate
purposes, including approximately 125,000 shares for contributions to employee
benefit plans.
Effect of New Accounting Standards
In May 1995, the FASB issued FAS 122, "Accounting for Mortgage Servicing
Rights." This Statement amends certain provisions of Statement 65, "Accounting
for Certain Mortgage Banking Activities," and requires enterprises engaging in
mortgage banking activities to recognize as separate assets rights to service
mortgage loans for loans originated by the enterprise. The adoption of FAS 122
has had no impact on the result of operations as the Bank does not engage in
the sale of mortgage loans.
In June 1996, the FASB issued FAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." Under the FASB's
"financial components" approach, both the transferor and transferee would
recognize the asset and liabilities (or components thereof) that it controls in
a physical sense and "derecognize" the assets and liabilities that were
surrendered or extinguished in the transfer. Prior rules emphasize the economic
risks or rewards of ownership of the assets. This Statement is effective for
transactions occurring after December 31, 1996. Parkvale does not anticipate
any impact on results of operations and financial condition from the adoption
of this Statement.
- - -------------------------------------------------------------------------------
20
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
NOTE B--INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- -----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments available for sale at June 30 consisted of:
FHLMC common stock
(42,424 shares)........ $ 166 $3,461 $ -- $ 3,627 $ 166 $2,751 $ -- $ 2,917
FHLB of Pittsburgh
stock.................. 5,927 -- -- 5,927 5,388 -- -- 5,388
Equity
securities--other...... 711 228 -- 939 336 97 -- 433
-------- ----- ------ -------- -------- ------- ------ --------
Total equity
investments
available for
sale.............. $ 6,804 $3,689 $ -- $ 10,493 $ 5,890 $2,848 $ -- $ 8,738
-------- ------ ------ -------- -------- ------ ------ --------
</TABLE>
Investment securities at June 30 classified as held to maturity consisted of
the following:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations due:
Within 1 year............ $ 9,000 $ 3 $ 7 $ 8,996 $ 32,874 $ 75 $ 66 $ 32,883
Within 5 years........... 53,936 -- 891 53,045 53,986 108 401 53,693
-------- ------ ------ -------- -------- ------ ----- --------
Total U.S.
Government and
agency
obligations....... 62,936 3 898 62,041 86,860 183 467 86,576
Corporate debt:
Within 1 year............ 17,089 21 16 17,094 21,219 4 86 21,137
Within 5 years........... 14,997 45 31 15,011 15,738 34 137 15,635
-------- ------ ------ ------- -------- ------ ----- --------
Total Corporate
debt.............. 32,086 66 47 32,105 36,957 38 223 36,772
Total U.S. Government and
agency obligations and
corporate debt............. 95,022 69 945 94,146 123,817 221 690 123,348
-------- ------ ------- ------- -------- ------ ----- --------
</TABLE>
Mortgage-backed securities at June 30 consisted of:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC........................ 61,730 968 344 62,354 61,602 1,099 316 62,385
FNMA......................... 7,791 70 30 7,831 4,442 101 -- 4,543
GNMA......................... 1,326 43 -- 1,369 1,583 54 1 1,636
Collateralized mortgage
obligations (CMOs)......... 26,965 59 222 26,802 31,540 5 701 30,844
Other participation
certificates............... 1,559 -- -- 1,559 1,714 -- -- 1,714
-------- --------- ---------- -------- -------- --------- ---------- --------
Total mortgage
backed
securities........ 99,371 1,140 596 99,915 100,881 1,259 1,018 101,122
-------- --------- ---------- -------- -------- --------- ---------- --------
Total investments classified
as held to maturity........ 194,393 1,209 1,541 194,061 224,698 1,480 1,708 224,470
-------- --------- ---------- -------- -------- --------- ---------- --------
Total investment
portfolio......... $201,197 $4,898 $1,541 $204,554 $230,588 $4,328 $1,708 $233,208
======== ========= ========== ======== ======== ========= ========== ========
</TABLE>
The FHLB of Pittsburgh stock is a restricted equity security that does not have
a readily determinable fair value. The FHLB requires member institutions to
maintain a minimum level of stock ownership based on a percentage of
residential mortgages, subject to periodic redemption at par if the stock owned
is over the minimum requirement. As such, FHLB stock is recorded at cost with
no unrealized gains or losses as an investment available for sale.
Mortgage-backed securities are not due at a single maturity date; periodic
payments are received on the securities based on the payment patterns of the
underlying collateral.
The CMOs at June 30, 1996 consist of $8,523 of adjustable rate securities and
$18,442 of fixed rate instruments with a weighted average lives of less than
one year. The CMOs are not deemed to be "high risk" securities as defined by
the Federal Financial Institutions Examination Council.
- - -------------------------------------------------------------------------------
21
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
NOTE C--LOANS
Loans at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
1-4 Family.................................. $517,082 $423,439 $403,492 $417,079 $435,371
Multi-family................................ 17,375 22,894 22,735 16,826 20,677
Commercial..................................... 19,516 18,435 18,113 17,851 21,045
Other.......................................... 2,387 3,196 1,931 1,472 1,577
-------- -------- -------- -------- --------
556,360 467,964 446,271 453,228 478,670
Consumer loans................................... 76,224 69,197 61,805 55,296 50,090
Commercial business loans........................ 8,925 4,542 6,135 8,996 10,654
Loans on savings accounts........................ 3,285 3,253 3,206 3,314 3,431
-------- -------- -------- -------- --------
Gross loans.................................... 644,794 544,956 517,417 520,834 542,845
Less:
Loans in process............................... 4,386 4,816 7,506 4,782 8,238
Allowance for loan losses...................... 13,990 13,136 12,056 10,283 7,619
Unamortized discount and deferred loan fees.... 966 2,459 2,861 2,337 3,654
-------- -------- -------- -------- --------
$625,452 $524,545 $494,994 $503,432 $523,334
======== ======== ======== ======== ========
</TABLE>
The following summary sets forth the activity in the allowance for loan losses
for the years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Beginning balance...................................... $13,136 $12,056 $10,283 $ 7,619 $3,866
Provision for losses--mortgage loans................... 440 972 1,668 3,247 3,369
Provision for losses--consumer loans................... 246 122 111 445 73
Provision for losses--commercial business loans........ -- -- 50 57 --
Loss reserves acquired through merger.................. -- -- -- -- 478
Loans recovered........................................ 329 95 157 370 360
Loans charged off...................................... (161) (109) (213) (1,455) (527)
------- ------- ------- ------- ------
Ending balance......................................... $13,990 $13,136 $12,056 $10,283 $7,619
======= ======= ======= ======= ======
</TABLE>
Loans charged off and recovered are as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Loans recovered:
Commercial...................................... $ -- $ -- $ -- $ 1 $ --
Consumer........................................ 70 47 9 6 3
Mortgage........................................ 259 48 148 363 357
------- ------- ------- ------- ------
Total recoveries.................................. 329 95 157 370 360
------- ------- ------- ------- ------
Loans charged off:
Commercial...................................... -- -- -- -- (121)
Consumer........................................ (125) (39) (45) (22) (47)
Mortgage........................................ (36) (70) (168) (1,433) (359)
------- ------- ------- ------- ------
Total charge offs................................. (161) (109) (213) (1,455) (527)
------- ------- ------- ------- ------
Net recoveries (charge offs)...................... $ 168 $ (14) $ (56) $(1,085) $ (167)
======= ======= ======= ======= ======
The allowance for loan losses at June 30 consisted of:
Mortgage loans.............................. $12,579 $11,915 $10,923 $9,274 $7,096
Consumer loans.............................. 1,194 1,004 916 843 414
Commercial business loans................... 217 217 217 166 109
Ratio of net charge-offs to average loans........... 0.00% 0.00% 0.01% 0.21% 0.03%
</TABLE>
22
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - ------------------------------------------------------------------------------
At June 30, 1996, Parkvale was committed under various agreements to originate
fixed and adjustable rate mortgage loans aggregating $1,087 and $2,019,
respectively, at rates ranging from 7.63% to 8.15% for fixed rate and 5.63% to
7.85% for adjustable rate loans and had $52,932 of unused consumer lines of
credit and $3,828 in unused commercial lines of credit. In addition, Parkvale
was committed to originate mortgage loans aggregating $300 at rates ranging
from 6.00% to 7.63% under bond programs secured by the City of Pittsburgh.
Parkvale was also committed to originate commercial loans totalling $727 at
June 30, 1996. Available but unused consumer and commercial credit card lines
amounted to $8,531 and $194, respectively, at June 30, 1996.
At June 30, Parkvale serviced loans for the benefit of others as follows:
1996--$13,001, 1995--$15,555, and 1994--$18,228. Decreases represent repayments
on the underlying loans.
At June 30, 1996, Parkvale's loan portfolio consisted primarily of residential
real estate loans collateralized by single and multifamily residences,
nonresidential real estate loans secured by industrial and retail properties
and consumer loans including lines of credit.
Parkvale has geographically diversified its mortgage loan portfolio, having
loans outstanding in over 40 states and the District of Columbia. Parkvale's
highest concentrations are in the following states/area along with their
respective share of the outstanding mortgage loan balance: Pennsylvania--53.5%;
greater Washington, D.C. area--10.7%; and, Ohio--8.0%. The ability of debtors
to honor these contracts depends largely on economic conditions affecting the
Pittsburgh, greater Washington D.C., and Columbus metropolitan areas, with
repayment risk dependent on the cash flow of the individual debtors.
Substantially all mortgage loans are secured by real property with a loan
amount of generally no more than 80% of the appraised value at the time of
origination. Loans in excess of 80% of appraised value require private mortgage
insurance.
At July 30, 1996, management has determined that $642 of loans were considered
to be impaired in conformity with FAS 114, as amended by FAS 118. The average
recorded investment in impaired loans during 1996 was $937. The total allowance
for loan losses related to these loans was $95 at June 30, 1996.
- - -------------------------------------------------------------------------------
NOTE D--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30 are summarized by major
classification as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Land....................................................... $ 318 $ 318
Office buildings and leasehold improvements................ 3,489 3,446
Furniture, fixtures and equipment.......................... 3,145 3,127
------ ------
6,952 6,891
Less accumulated depreciation and amortization............. 4,947 4,630
------ ------
Office properties and equipment, net....................... $2,005 $2,261
====== ======
Depreciation expense....................................... $ 370 $ 410
====== ======
</TABLE>
- - ------------------------------------------------------------------------------
NOTE E--SAVINGS DEPOSITS
The following schedule sets forth interest expense for the years ended June 30
by type of savings deposit:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Checking and money market accounts.................. $ 2,154 $ 2,355 $ 3,052
Passbook accounts................................... 3,630 3,970 4,442
Certificates........................................ 32,260 27,546 26,017
------- ------- -------
$38,044 $33,871 $33,511
======= ======= =======
</TABLE>
23
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
A summary of savings deposits at June 30:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Savings:
Checking accounts.............................. $ 54,138 6.7 $ 50,064 6.3
Checking accounts--non-interest bearing........ 16,308 2.0 12,515 1.6
Money market accounts.......................... 47,657 5.9 51,148 6.4
Passbook accounts.............................. 140,908 17.5 141,791 17.9
-------- ----- -------- -----
259,011 32.1 255,518 32.2
Certificates of deposit.......................... 541,912 67.1 533,831 67.2
-------- ----- -------- -----
800,923 99.2 789,349 99.4
Accrued interest................................. 6,164 0.8 5,096 0.6
-------- ----- -------- -----
$807,087 100.0 $794,445 100.0
======== ===== ======== =====
</TABLE>
At June 30, the scheduled maturities of certificate accounts were as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD 1996 1995
--------------- -------- --------
<S> <C> <C>
1-12 months................................................ $268,177 $266,128
13-24 months............................................... 88,166 74,974
25-36 months............................................... 47,180 69,664
37-48 months............................................... 49,235 23,858
49-60 months............................................... 32,385 37,900
Thereafter................................................. 56,769 61,307
-------- --------
$541,912 $533,831
======== ========
</TABLE>
- - ------------------------------------------------------------------------------
NOTE F--ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER DEBT
The advances from the FHLB at June 30 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
INTEREST INTEREST
BALANCE RATE % BALANCE RATE %
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Due within one year.................... $ 5,000 8.44 $ --
Due within five years.................. 10,000 6.24-7.98 15,000 6.24-8.44
Due within ten years................... 5,000 6.82 5,000 6.82
Due within twenty years................ 693 3.00-6.27 607 3.00-5.00
------- -------
$20,693 $20,607
======= =======
Weighted average interest rate
at end of period..................... 7.25% 7.25%
==== ====
</TABLE>
The FHLB advances are secured by Parkvale's FHLB stock and mortgage-backed
securities and are subject to substantial prepayment penalties. Parkvale has a
line of credit with the FHLB. The total amount of credit available to Parkvale
through this product is approximately $50 million. To date, Parkvale has not
borrowed on the line of credit and has no current plans to do so.
Other debt consists of recourse loans and commercial investment agreements with
certain commercial checking account customers. These daily borrowings had
balances of $6,218 and $3,997 at June 30, 1996 and 1995, respectively.
- - -------------------------------------------------------------------------------
24
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - --------------------------------------------------------------------------------
NOTE G--STOCKHOLDERS' EQUITY
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") requires the Bank to maintain specific amounts of capital. The
following table sets forth certain information concerning the Bank's regulatory
capital:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
------------------------------------ --------------------------------------
TIER I TIER I TIER II TIER I TIER I TIER II
CORE RISK-BASED RISK-BASED CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- ---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Equity capital (1)................ $ 68,446 $ 68,446 $ 68,446 $ 60,354 $ 60,354 $ 60,354
Less non-allowable intangible
assets.......................... (276) (276) (276) (434) (434) (434)
Less unrealized securities
gains........................... (2,255) (2,255) (2,255) (1,782) (1,782) (1,782)
Plus general valuation allowances
(2)............................. -- -- 6,155 -- -- 5,619
-------- -------- -------- -------- --------- ---------
Total regulatory capital.......... 65,915 65,915 72,070 58,138 58,138 63,757
Minimum required capital.......... 37,189 19,698 38,786 36,274 17,982 35,375
-------- -------- -------- -------- --------- ---------
Excess regulatory capital......... $ 28,726 $ 46,217 $ 33,284 $ 21,864 $ 40,156 $ 28,382
======== ======== ======== ======== ========= =========
Adjusted total assets........ $929,729 $492,447 $484,824 $906,839 $ 449,546 $ 442,182
Regulatory capital as a
percentage...................... 7.09% 13.39% 14.87% 6.41% 12.93% 14.42%
Minimum capital required as a
percentage...................... 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
-------- -------- -------- -------- ---------- ---------
Excess regulatory capital as a
percentage...................... 3.09% 9.39% 6.87% 2.41% 8.93% 6.42%
======== ======== ======== ======== ========= =========
Well capitalized requirement...... 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
======== ======== ======== ======== ========= =========
</TABLE>
(1) Represents equity capital of the Bank as reported to the Pennsylvania
Department of Banking and FDIC.
(2) Limited to 1.25% of risk adjusted total assets.
- - -------------------------------------------------------------------------------
NOTE H--INCOME TAXES
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal:
Current............................................ $3,923 $4,071 $3,734
Deferred........................................... 276 (45) (32)
State................................................ 801 607 575
------ ------ ------
$5,000 $4,633 $4,277
====== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of Parkvale's deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Book bad debt reserves........................................ $4,685 $4,404
Deferred loan fees............................................ 379 413
Purchase accounting adjustments............................... 105 115
Deferred gains................................................ -- 165
Deferred compensation......................................... 113 80
------ ------
Total deferred tax assets.................................. 5,282 5,177
------ ------
Deferred tax liabilities:
Tax bad debt reserves......................................... 1,803 1,232
Fixed assets.................................................. (22) 8
Unrealized gains on securities available for sale............. 1,346 1,039
Other, net.................................................... 237 397
------ ------
Total deferred tax liabilities............................. 3,364 2,676
------ ------
Net deferred tax assets.................................... $1,918 $2,501
====== ======
</TABLE>
25
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
No valuation allowance was required at June 30, 1996 or 1995.
Parkvale's effective tax rate differs from the expected federal income tax rate
for the years ended June 30 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Expected federal statutory income tax
provision/rate................................ $4,970 34.0% $4,319 34.0% $3,912 34.0%
Tax exempt interest............................. (197) -1.3% (215) -1.7% (221) -1.9%
State income taxes, net of federal benefit...... 529 3.6% 401 3.2% 379 3.3%
Other........................................... (302) -2.1% 128 1.0% 207 1.8%
------ ---- ------ ---- ------ ----
Effective total income tax provision............ $5,000 34.2% $4,633 36.5% $4,277 37.2%
====== ==== ====== ==== ====== ====
</TABLE>
Savings institutions which meet certain definitional tests and operating
requirements prescribed by the Internal Revenue Code of 1986, as amended, are
allowed a special bad debt deduction, extended expiration dates for net
operating loss carryforwards, and other special tax provisions. If a savings
institution does not continue to meet the federal income tax requirements
necessary to meet these definitions, the institution may lose the benefits of
these special provisions. Taxable income of subsidiaries is generally computed
without the benefit of these special provisions.
The special bad debt deduction is based on either specified experience formulas
or a specified percentage of taxable income before such deduction. For tax
years from 1987 to 1995, the percentage of taxable income bad debt deduction is
8% of adjusted taxable income. Retained earnings at December 31, 1995 include
financial statement tax bad debt reserves of $12,013. The Small Business Job
Protection Act of 1996 passed on August 20, 1996 eliminates this special bad
debt deduction granted solely to thrifts. This has consequently evoked the
recapture of past taxes for permanent deductions arising from "applicable
excess reserve." This "applicable excess reserve" is the total amount of the
reserve over the base year reserve as of December 31, 1987. The recapture tax
is to be paid in six equal annual installments beginning after 1995. Deferral
of these payments for up to 2 years is permitted contingent upon the Bank
satisfying a specified mortgage origination test for 1996 and/or 1997. At
December 31, 1995, Parkvale had $4,137 in excess of the base year reserves.
Subject to prevailing corporate tax rates, Parkvale owes $1,407 in federal
taxes, which is reflected as a deferred tax liability. In addition, $396 has
been accrued as a deferred tax liability for activity in the first half of
calendar year 1996. No provision has been made for the $7,876 of base year
reserves.
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax which is
calculated at 11.5% of earnings based on generally accepted accounting
principles with certain adjustments.
- - -------------------------------------------------------------------------------
26
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
NOTE I--EMPLOYEE COMPENSATION PLANS
Retirement Plan
Parkvale provides eligible employees participation in a 401(k) defined
contribution plan. Benefit expense was $172, $171, and $157 in fiscal years
1996, 1995, and 1994, respectively, which represented a 50% company match on
deferred compensation and a profit sharing contribution equal to 2% of eligible
compensation.
Employee Stock Ownership Plan ("ESOP")
Parkvale adopted a leveraged ESOP in fiscal 1987 in conjunction with the
conversion to a stock form of ownership. Participants in the plan are all
employees who have met minimum service and age requirements. The balance of the
ESOP loan at June 30, 1995 was $55 and was paid off in March 1996. Parkvale
recognized expense of $336 in fiscal 1996, $253 in fiscal 1995, and $99 in
fiscal 1994 for ESOP contributions, which were used to make debt service
payments and for the purchase of additional shares of Parkvale's Common Stock
in open-market transactions. At June 30, 1996, the ESOP owned 279,023 shares of
Parkvale Common Stock.
Stock Option Plans
Parkvale has Stock Option Plans for the benefit of directors, officers and
other selected key employees of Parkvale who are deemed to be responsible for
the future growth of Parkvale. All of the original shares under the 1987 Plan
have been awarded. In October 1993, the 1993 Directors' Stock Option Plan was
adopted. An aggregate of 97,657 shares of authorized but unissued Common Stock
of Parkvale were reserved for future issuance. As of June 30, 1996, 29,295
option shares have been granted under this plan. Additionally, the 1993 Key
Employee Stock Compensation Program was adopted in October 1993. An aggregate
of 236,328 shares of authorized but unissued Common Stock of Parkvale were
reserved for future issuance. As of June 30, 1996, 42,968 option shares have
been granted under this plan. The 1993 Director's Stock Option Plan shares were
exercisable on the date of the grant. The 1993 Key Employee Stock Compensation
Program option shares are 50% exercisable upon 6 months of continuous service
after the grant date and the remaining 50% is exercisable after a year of
continuous service from the grant date. At June 30, 1996, all option shares are
exercisable. The following table presents option share data related to the
Stock Option Plans for the years indicated, adjusted for the 1995, 1994 and
1993 stock splits:
<TABLE>
<CAPTION>
OPTION PRICE PER SHARE $4.096 $5.568 $19.456 $20.160 $18.848 $26.625 Total
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Share balances at
June 30, 1993.............. 112,304 112,304 224,608
Granted................. 9,765 9,765
Exercised............... (20,039) (17,578) (37,617)
------- ------- ------ ------ ------- ------- -------
June 30, 1994.............. 92,265 94,726 9,765 196,756
Granted................. 62,500 9,765 72,265
Exercised............... (8,282) (1,953) (10,235)
------- ------- ------ ------ ------- ------- -------
June 30, 1995.............. 83,983 92,773 9,765 62,500 9,765 258,786
Granted................. 9,765 9,765
Exercised............... (26,906) (4,453) (31,359)
------- ------- ------ ------ ------- ------- -------
June 30, 1996.............. 57,077 88,320 9,765 62,500 9,765 9,765 237,192
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE J--GAIN (LOSS) ON SALE OF ASSETS
The components of gain on sale of assets for the years ended June 30 consist of
the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------------- --------------- -----------------
BOOK GAIN BOOK GAIN BOOK GAIN
VALUE (LOSS) VALUE (LOSS) VALUE (LOSS)
------ ------ ----- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Investment securities.................. $ -- $ -- $36 $ -- $25,772 $ (9)
Loan facilitating sale of real
estate............................... $4,547 $969 -- -- -- --
------ ---- --- ---- ------- ----
$4,547 $969 $36 $ -- $25,772 $ (9)
====== ==== === ==== ======= ====
</TABLE>
27
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - ------------------------------------------------------------------------------
The $969 gain recognized in fiscal 1996 was related to the payoff of a loan
that had been classified as special mention for regulatory purposes due to the
loan-to-value ratio being higher than the Bank's normal underwriting standards
for multi-family loans. The loan was granted in fiscal 1994 in connection with
the sale of real estate with the gain from the sale deferred and accreted into
income over the term of the loan.
- - -------------------------------------------------------------------------------
NOTE K--LEASES
Parkvale's rent expense for leased real properties amounted to approximately
$992 in fiscal 1996, $911 in 1995 and $818 in 1994. At June 30, 1996, Parkvale
was obligated under 19 noncancellable operating leases, which expire through
2014. The minimum rental commitments for the fiscal years subsequent to June
30, 1996 are as follows: 1997--$934, 1998--$605, 1999--$459, 2000--$299,
2001--$248, later years--$1,169.
- - ------------------------------------------------------------------------------
NOTE L--SELECTED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1996 1995
-------- ------
<S> <C> <C>
Prepaid expenses and other assets:
Accrued interest on loans................................... $3,775 $3,196
Reserve for uncollected interest............................ (137) (127)
Accrued interest on investments............................. 2,453 2,653
Other prepaids.............................................. 739 649
Net deferred tax asset...................................... 1,918 2,501
------ ------
$8,748 $8,872
====== ======
Other liabilities:
Accounts payable and accrued expenses....................... $1,837 $1,479
Negative goodwill........................................... 793 917
Other liabilities........................................... 1,078 723
Employee stock ownership plan debt.......................... -- 55
Federal and state income taxes payable...................... 943 1,003
------ ------
$4,651 $4,177
====== ======
</TABLE>
- - ------------------------------------------------------------------------------
NOTE M--QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR
------------------------------------- ENDED ------------------------------------- ENDED
SEP. 95 DEC. 95 MAR. 96 JUNE 96 JUNE 96 SEP. 94 DEC. 94 MAR. 95 JUNE 95 JUNE 95
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income...... $16,561 $16,559 $16,532 $16,465 $66,117 $14,726 $14,932 $15,328 $16,040 $61,026
Total interest expense..... 10,073 9,985 9,881 9,692 39,631 8,489 8,488 8,786 9,668 35,431
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income........ 6,488 6,574 6,651 6,773 26,486 6,237 6,444 6,542 6,372 25,595
Provision for loan
losses................... 185 149 168 184 686 299 293 273 229 1,094
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income after
provision for losses..... 6,303 6,425 6,483 6,589 25,800 5,938 6,151 6,269 6,143 24,501
Gain on sale of assets..... -- -- 969 -- 969 -- -- -- -- --
Other income............... 510 533 556 490 2,089 482 492 496 554 2,024
Total other expense........ 3,521 3,604 3,582 3,533 14,240 3,307 3,473 3,556 3,485 13,821
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................... 3,292 3,354 4,426 3,546 14,618 3,113 3,170 3,209 3,212 12,704
Income tax expense......... 1,149 1,172 1,443 1,236 5,000 1,175 1,160 1,163 1,135 4,633
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income................. $ 2,143 $ 2,182 $ 2,983 $ 2,310 $ 9,618 $ 1,938 $ 2,010 $ 2,046 $ 2,077 $ 8,071
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per share....... $ 0.64 $ 0.65 $ 0.88 $ 0.69 $ 2.86 $ 0.55 $ 0.58 $ 0.60 $ 0.61 $ 2.34
</TABLE>
- - ------------------------------------------------------------------------------
28
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - ------------------------------------------------------------------------------
NOTE N--PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet and statements of income and cash flows for
Parkvale Financial Corporation as of June 30, 1996 and 1995 and the years then
ended are presented below. PFC's sole subsidiary is Parkvale Savings Bank
("PSB").
PARKVALE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
BALANCE SHEETS
1996 1995
<S> <C> <C>
Assets:
Investment in PSB............ $68,446 $60,354
Cash......................... 963 748
Other equity investments..... 840 371
------- -------
Total Assets.............. $70,249 $61,473
======= =======
Liabilities and Stockholders'
Equity:
Accounts payable............. $ 13 $ 6
Deferred taxes............... 50 15
Dividends payable............ 421 333
ESOP debt.................... -- 55
Stockholders' equity......... 69,765 61,064
------- -------
Total liabilities and
stockholders' equity.... $70,249 $61,473
======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Dividends from PSB....... $2,000 $4,400 $1,000
Other income............. 82 68 60
Operating expenses....... (82) (68) (59)
Amortization expense..... -- -- (1)
------ ------ ------
Income before equity in
undistributed earnings
of subsidiary.......... 2,000 4,400 1,000
Equity in undistributed
income of PSB.......... 7,618 3,671 6,228
------ ------ ------
Net income.......... $9,618 $8,071 $7,228
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Management fee income received......................... $ 82 $ 68 $ 60
Dividends received..................................... 2,000 4,400 1,000
Cash paid to suppliers................................. (75) (85) (53)
------- ------- -------
Net cash provided by operating activities........... 2,007 4,383 1,007
------- ------- -------
Cash flows from investing activities:
Equity investments purchased........................... (373) (330) --
Cash flows from financing activities:
Payment for treasury stock............................. -- (3,031) --
Allocation of treasury stock to retirement plans....... 178 39 49
Dividends paid to stockholders......................... (1,592) (1,321) (1,062)
Loan to PFC ESOP....................................... (135) (112) --
Principal collected on ESOP loan....................... 130 13 --
------- ------- -------
Net cash used in financing activities............... (1,419) (4,412) (1,013)
------- ------- -------
Net increase (decrease) in cash and cash equivalents..... 215 (359) (6)
Cash and cash equivalents at beginning of year........... 748 1,107 1,113
------- ------- -------
Cash and cash equivalents at end of year................. $ 963 $ 748 $ 1,107
======= ======= =======
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................. $ 9,618 $ 8,071 $ 7,228
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of PSB...................... (7,618) (3,671) (6,228)
Increase (decrease) in accrued expenses.......... 7 (17) 6
Amortization expense............................. -- -- 1
------- ------- -------
Net cash provided by operating activities........... $ 2,007 $ 4,383 $ 1,007
======= ======= =======
</TABLE>
- - ------------------------------------------------------------------------------
29
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("FAS 107"), "Disclosure
About Fair Value of Financial Instruments," requires the determination of fair
value for certain of the Bank's assets, liabilities and contingent liabilities.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND NONINTEREST BEARING DEPOSITS: The carrying amount of cash which
includes noninterest-bearing demand deposits approximates fair value.
FEDERAL FUNDS SOLD: The carrying amount of overnight federal funds
approximates fair value.
INTEREST-EARNING DEPOSITS IN OTHER BANKS: The carrying amount of other
overnight interest-bearing balances approximates fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: The fair values of investment
securities are obtained from the Wall Street Journal, the Interactive Data
Corporation pricing service and various investment brokers for securities not
available from public sources.
LOANS RECEIVABLE: Fair values were estimated by discounting contractual cash
flows using interest rates currently being offered for loans with similar
credit quality adjusted for standard prepayment assumptions.
DEPOSIT LIABILITIES: For checking, savings and money market accounts, fair
value is the amount payable on demand at June 30. The fair values of
fixed-maturity certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on time
deposits of similar remaining maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK: Fair value is determined by discounting
the advances using current rates of advances with comparable maturities as of
the reporting date.
COMMERCIAL INVESTMENT AGREEMENTS: The carrying amount of these overnight
borrowings approximates fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair value for off-balance-sheet instruments
(primarily loan commitments) are estimated using internal valuation models and
are limited to fees charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. Unused consumer and commercial lines of credit are assumed equal to
the outstanding commitment amount due to the variable interest rate attached to
these lines of credit.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FINANCIAL ASSETS: FAIR VALUE VALUE FAIR VALUE VALUE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Cash and noninterest-earning deposits........ $ 10,905 $ 10,905 $ 10,003 $ 10,003
Federal funds sold........................... 66,557 66,557 116,581 116,581
Interest-earning deposits in other banks..... 173 173 194 194
Investment securities........................ 104,639 105,515 132,086 132,555
Mortgage-backed securities................... 99,915 99,371 101,122 100,881
Loans receivable............................. 644,936 625,452 551,023 524,545
--------- -------- --------- --------
$ 927,125 $907,973 $ 911,009 $884,759
========= ======== ========= ========
FINANCIAL LIABILITIES:
Checking, savings and money market
accounts.................................. $ 259,011 $259,011 $ 255,518 $255,518
Savings certificates......................... 539,433 541,912 539,108 533,831
Advances from Federal Home Loan Bank......... 20,795 20,693 21,026 20,607
Commercial investment agreements............. 6,218 6,218 3,997 3,997
--------- -------- --------- --------
$ 825,457 $827,834 $ 819,649 $813,953
========= ======== ========= ========
Off-Balance Sheet Instruments.................. $ (24) $ -- $ 18 $ --
</TABLE>
- - ------------------------------------------------------------------------------
30
<PAGE> 27
================================================================================
CAPITAL STOCK INFORMATION
o ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m., Thursday,
October 24, 1996, at the Pittsburgh Athletic Association, 4215 Fifth
Avenue, Pittsburgh, Pennsylvania.
o STOCK LISTING & DIVIDENDS
Parkvale's Common Stock is traded in the over-the-counter market and
quoted on the NASDAQ National Market System under the symbol "PVSA."
Prices shown below are based on the prices reported by the NASDAQ
system, with appropriate adjustments for the 5 for 4 stock split in
October 1995.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED HIGH LOW DIVIDENDS
--------------------- ---- --- ---------
<S> <C> <C> <C>
June 96 ........................... $29.25 $24.50 $0.13
March 96 .......................... 28.50 25.75 0.13
December 95 ....................... 28.50 25.24 0.13
September 95 ...................... 28.40 20.40 0.13
June 95 ........................... 21.20 18.80 0.104
March 95 .......................... 20.40 17.40 0.104
December 94 ....................... 20.96 17.20 0.104
September 94 ...................... 20.80 19.20 0.104
</TABLE>
There were 3,243,243 shares of Common Stock outstanding as of August 26,
1996, the Voting Record Date, which shares were held as of such date by
approximately 520 holders of record.
o TRANSFER AGENT
ChaseMellon Shareholders Services
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
1-800-756-3353
Telecommunications Devices for the Deaf: 1-800-231-5469
o INFORMATION REQUESTS
A copy of the 1996 Annual Report of Parkvale Financial Corporation on
Form 10-K filed with the Securities and Exchange Commission, and a list
of exhibits thereto, will be furnished to stockholders without charge
upon their written request to the Treasurer of the Corporation at
its Headquarters Office, 4220 William Penn Highway, Monroeville,
PA 15146. The telephone number is (412) 373-7200.
Parkvale's web site is http://www.parkvale.com
33
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-26173) pertaining to the 1987 Stock Option Plan and (Form S-8
No. 33-98812) pertaining to the 1993 Key Employee Stock Compensation Program
and the 1993 Directors' Stock Option Plan of Parkvale Financial Corporation of
our report dated July 18, 1996, with respect to the consolidated financial
statements of Parkvale Financial Corporation incorporated by reference in the
Annual Report (Form 10-K) for the year ended June 30, 1996.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
September 17, 1996
F-1
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL INFORMATION INCORPORATED BY REFERENCE TO THE 1996
ANNUAL REPORT, EXCERPTS OF WHICH ARE FILED HEREWITH AS EXHIBIT 13, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000820907
<NAME> PARKVALE FINANCIAL CORP.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,905
<INT-BEARING-DEPOSITS> 173
<FED-FUNDS-SOLD> 66,557
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,493
<INVESTMENTS-CARRYING> 194,393
<INVESTMENTS-MARKET> 194,061
<LOANS> 639,442
<ALLOWANCE> 13,990
<TOTAL-ASSETS> 919,242
<DEPOSITS> 807,087
<SHORT-TERM> 6,218
<LIABILITIES-OTHER> 15,479
<LONG-TERM> 20,693
0
0
<COMMON> 3,449
<OTHER-SE> 66,316
<TOTAL-LIABILITIES-AND-EQUITY> 919,242
<INTEREST-LOAN> 46,585
<INTEREST-INVEST> 19,532
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 66,117
<INTEREST-DEPOSIT> 38,044
<INTEREST-EXPENSE> 39,631
<INTEREST-INCOME-NET> 26,486
<LOAN-LOSSES> 686
<SECURITIES-GAINS> 969
<EXPENSE-OTHER> 14,240
<INCOME-PRETAX> 14,618
<INCOME-PRE-EXTRAORDINARY> 14,618
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,618
<EPS-PRIMARY> 2.86
<EPS-DILUTED> 2.86
<YIELD-ACTUAL> 2.98
<LOANS-NON> 1,008
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,136
<CHARGE-OFFS> 161
<RECOVERIES> 329
<ALLOWANCE-CLOSE> 13,990
<ALLOWANCE-DOMESTIC> 13,990
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
