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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, 1997
Commission file no 0-17411
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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
- ------------------------- ----------
(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. [ X ]
As of September 15, 1997, the aggregate market value of the voting stock held
by nonaffiliates of the Registrant, computed by reference to the reported
closing sale price of $31.25 per share on such date was $97,806,270. Excluded
from this computation are 476,830 shares held by all directors and executive
officers as a group and 347,896 shares held by the Employee Stock Ownership
Plan.
Number of shares of Common Stock outstanding as of September 15, 1997:
4,084,935.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Annual Report to Shareholders for Fiscal Year ended June 30, 1997. With the
exception of those portions which are incorporated by reference in this Form
10-K Annual Report, the 1997 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 15, 1997.
The definitive proxy statement was filed with the Commission on September 12,
1997. 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., Columbus, Ohio and Raleigh, North Carolina areas through its
wholly-owned subsidiary, Parkvale Mortgage Corporation ("PMC"). 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 1997 Annual
Report to Shareholders filed as Exhibit 13 hereto ("1997 Annual Report") for
additional details regarding PFC.
THE BANK
GENERAL
The Bank conducts business in the greater Pittsburgh metropolitan area through
29 full-service offices in Allegheny, Beaver, Butler and Westmoreland Counties.
With total assets of $990 million at June 30, 1997, Parkvale was the fifth
largest financial institution headquartered in the Pittsburgh metropolitan area
and eleventh 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 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.
Lower housing demand in Parkvale's primary lending areas has spurred the Bank
to purchase residential mortgage loans from other financial institutions. This
purchase strategy also achieves geographic asset diversification. Parkvale
purchases adjustable rate residential mortgage loans subject to its normal
underwriting standards. Parkvale purchased loans aggregating $104.4 million and
$104.9 million in fiscal 1997 and 1996, respectively. These represent 63.5% and
55.4% of total mortgage loan originations and purchases for the fiscal year
1997 and 1996, respectively. In addition, Parkvale operates loan production
offices through its subsidiary, PMC with offices in Fairfax, Virginia;
Columbus, Ohio and Raleigh, North Carolina. During fiscal 1997, PMC originated
a total of $23.7 million or 14.4% of total mortgage loan originations and
purchases for inclusion in Parkvale's loan portfolio. See "Lending Activities"
and "Sources of Funds."
Total nonperforming assets, comprised of nonaccrual loans and foreclosed real
estate, increased from $1.2 million at June 30, 1996 to $2.7 million at June
30, 1997. The $1.5 million increase in fiscal 1997 related primarily to an
increase of residential mortgage loan delinquency over prior year. 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 the Asset and Liability Management section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1997 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 -4.44% of total
assets at June 30, 1997 from 0.24% of total assets at June 30, 1996. Similarly,
the cumulative five year gap ratio has been reduced from 2.20% at June 30, 1996
to -0.43% at June 30, 1997. Key components of the asset and liability
management program are as follows: ARM loans represented approximately 63.8% of
the Bank's real estate loan portfolio at June 30, 1997 compared to 56.9% and
50.9% at June 30, 1996 and 1995, respectively. Deposits with terms in excess of
one year or more increased $21 million from $456.7 million at June 30, 1996 to
$477.7 million at June 30, 1997.
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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
nonbanking 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, assessments 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 low inflation. During fiscal 1997, the Federal Reserve did not move
the federal funds rate until the end of the third quarter when the target rate
went up 25 basis points. This generally resulted in only slight fluctuations in
consumer and commercial loan interest rates throughout most of the year.
Deposit interest rates were also relatively stable. Throughout fiscal 1996,
federal reserve activity 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.
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
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remain flexible to the high volatility of the financial market. For additional
discussion of asset/liability management, see the Asset and Liability Management
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the 1997 Annual Report.
FDIC SPECIAL ASSESSMENT AND INSURANCE PREMIUMS
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was enacted to
recapitalize the Savings Association Insurance Fund (SAIF). As part of the
legislation, a one-time assessment of $0.657 per $100 of insured deposits ($5.0
million before tax) was mandated to restore SAIF to its required statutory
level of $1.25 per $100 of insured deposits. The one-time assessment, expensed
in the September 1996 quarter, was tax deductible and paid on November 27,
1996. As such, Parkvale reported a net loss for the quarter ended September 30,
1996 and lower net earnings for the year ended June 30, 1997 as a direct result
of the $5.0 million ($3.2 million, net of tax) assessment. The loss per share
impact of this one-time assessment is ($0.75).
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 SAIF member institutions. Despite the magnitude of the one-time assessment,
the legislation has had positive ramifications for Parkvale by significantly
reducing deposit insurance premiums and the competitive disadvantage that
SAIF-insured institutions have suffered relative to Bank Insurance Fund
(BIF)-insured institutions. Sharing in the Financing Corporation (FICO)
obligation began January 1, 1997 when the FICO premium to SAIF-insured
institutions dropped to 6.48 basis points annually, a reduction of 16.5 basis
points or $1.3 million annually.
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>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
TOTAL LOANS RECEIVABLE AT BEGINNING OF YEAR................ $644,794 $544,956 $517,417
-------- -------- --------
Real estate loan originations:
Residential:
Single family (1)...................................... 41,692 72,349 43,237
Multifamily............................................ 2,487 1,560 2,300
Construction -Single family.............................. 7,584 4,411 8,258
Commercial............................................... 8,259 6,019 1,287
-------- -------- --------
TOTAL REAL ESTATE LOAN ORIGINATIONS........................ 60,022 84,339 55,082
Consumer loan originations................................. 61,541 53,061 45,364
Commercial loan originations............................... 7,846 10,227 2,764
-------- -------- --------
TOTAL LOAN ORIGINATIONS.................................... 129,409 147,627 103,210
Purchase of loans.......................................... 104,428 104,940 27,808
-------- -------- --------
</TABLE>
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(1) Includes $23.7 million, $39.7 million and $20.2 million of loans
originated by PMC during fiscal 1997, 1996 and 1995, respectively.
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<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
TOTAL LOAN ORIGINATIONS AND PURCHASES..................... 233,837 252,567 131,018
-------- -------- --------
Principal loan repayments................................. 77,650 69,511 60,990
Mortgage loan payoffs..................................... 66,897 80,739 39,911
Sales of whole loans...................................... 1,758 2,479 2,578
-------- -------- --------
Net increase (decrease)in loans........................ 87,532 99,838 27,539
-------- -------- --------
TOTAL LOANS RECEIVABLE- END OF YEAR....................... 732,326 644,794 544,956
Less:
Loans in process........................................ 6,393 4,386 4,816
Allowance for loan losses............................... 14,266 13,990 13,136
Unamortized discounts & loan fees....................... 799 966 2,459
-------- -------- --------
NET LOANS RECEIVABLE AT END OF YEAR....................... $710,868 $625,452 $494,994
======== ======== ========
</TABLE>
At June 30, 1997, Parkvale's net loan portfolio amounted to $710.9 million,
representing 71.7% 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 multifamily residential
properties amounted to $599.6 million or 84.4% of the net loan portfolio at
June 30, 1997, and loans secured by commercial properties represented $17.7
million or 2.5% of the net loan portfolio. FHA/VA loans accounted for an
additional $3.9 million or 0.5% of the net loan portfolio at June 30, 1997. 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, 1997.
Total consumer loans were $93.4 million or 13.1% of the net loan portfolio at
June 30, 1997. Commercial loans represented 1.2% 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 at June 30.
<TABLE>
<CAPTION>
1997 1996 1995
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential: (Dollars in Thousands)
Single family (1) $582,790 82.0 507,566 81.2 412,145 78.6
Multi-family (2) 16,825 2.4 17,375 2.8 22,894 4.4
FHA/VA 3,945 0.5 9,516 1.5 11,294 2.1
Commercial 17,724 2.5 19,516 3.1 18,435 3.5
Other (3) 9,329 1.3 2,387 0.4 3,196 0.6
-------- ------ ------- ------ ---------- ------
Total real estate loans 630,613 88.7 556,360 89.0 467,964 89.2
Consumer loans (4) 90,305 12.7 76,224 12.2 69,197 13.2
Deposit loans 3,076 0.4 3,285 0.5 3,253 0.6
Commercial loans 8,332 1.2 8,925 1.4 4,542 0.9
-------- ------ -------- ------ ---------- ------
Total loans receivable 732,326 103.0 644,794 103.1 544,956 103.9
</TABLE>
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(1) Includes first mortgages secured by one to four unit residences.
(2) Includes short-term construction loans to developers.
(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.
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<TABLE>
<CAPTION>
1997 1996 1995
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Less:
Loans in process 6,393 0.9 4,386 0.7 4,816 0.9
Allowance for losses 14,266 2.0 13,990 2.2 13,136 2.5
Unamortized premiums
and discounts 799 0.1 966 0.2 2,459 0.5
-------- ------ -------- ------ -------- ------
Net loans receivable $710,868 100.0% $625,452 100.0% $524,545 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the percentage of loans in each category to
total loans at June 30.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate loans 86.1% 86.3% 85.9% 86.2% 87.0%
Consumer loans 12.8 12.3 13.3 12.6 11.3
Commercial loans 1.1 1.4 0.8 1.2 1.7
----- ----- ----- ----- -----
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 Commercial
YEARS ENDING JUNE 30, Loans (1) Loans
- --------------------- ----------- ----------
( Dollars in Thousands )
<S> <C> <C>
1998 $ 8,092 $3,646
1999 - 2002 23,287 3,135
2003 and thereafter 599,234 1,551
-------- ------
Gross loans receivable (2) $630,613 $8,332
======== ======
</TABLE>
- -------------------
(1) Includes all residential and commercial real estate loans, and loans
for the purchase and development of land.
(2) Variable rate and ARM loans represent approximately 63.8% of gross
loans receivable at June 30, 1997. Of the $622.5 million principal
amount of loans maturing after June 30, 1998, loans with an aggregate
principal amount of $224.5 million have fixed interest rates and loans
with an aggregate principal amount of $398.0 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,
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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 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, 1997, 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, 37.3% and 28.7% of Parkvale's total mortgage loan portfolio at June
30, 1997 and 1996, respectively, represent loans serviced by others, the
majority of which are secured by properties located outside of Pennsylvania,
including, in order of loan concentration: North Carolina, Texas, Illinois,
Colorado, Ohio, California and Missouri. The increase in loans secured by
out-of-state properties is due to the loan purchases of $104.4 million which
measures 63.5% of Parkvale's total origination and purchases for fiscal 1997.
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; Raleigh, NC 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.
Consumer and commercial loan originations are made by Parkvale within its
primary market area. Total loan originations for the fiscal years ending June
30, 1997, 1996 and 1995 were $129.4 million, $147.6 million and $103.2 million,
respectively. In fiscal 1996, increased origination were experienced in
mortgage, commercial and consumer loans. Originations in fiscal 1995
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and 1997 were lower than 1996 due to lower housing and refinancing demand,
primarily related to relatively higher interest rates.
LOAN PURCHASES. The asset/liability strategy of owning ARM loans to remain
flexible in a volatile interest rate environment was evident during fiscal 1997
and 1996 as Parkvale significantly increased loan purchases to $104.4 million
and 104.9 million, respectively, compared to $27.8 million and $15.2 million in
fiscal 1995 and 1994, respectively. In 1997, $103.4 million or 99.0% 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% to 3% per adjustment period, with a 6%
or 7% maximum rate increase over the life of the loan. ARMs comprised
approximately 88.0%, 77.4% and 82.6% of total mortgage loan originations and
purchases in fiscal 1997, 1996 and 1995, respectively. At June 30, 1997,
approximately 63.8% 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 decreased slightly from $19.5
million at June 30, 1996 to $17.7 million at June 30, 1997.
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 loans outstanding at June 30, 1997 increased by 18.5% to $90.3 million
from $76.2 million at June 30, 1996. 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.
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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.
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.
Parkvale offers Visa and Visa Gold cards through the Independent Bankers
Association of America. Annual fees were waived through June 30, 1997. Credit
cards outstanding totalled $5.0 million, $4.5 million and $3.4 million at June
30, 1997, 1996 and 1995, 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 $8.3 million
and $8.9 million at June 30, 1997 and 1996, 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 $13.0
million at June 30, 1996 to $8.0 million at June 30, 1997. There have been no
mortgage loan securitizations 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.
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<PAGE> 11
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 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, $1.1 million and $1.2
million at June 30, 1997, 1996 and 1995, 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 nonaccrual 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 nonaccrual 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
nonaccrual 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 1.95%, 2.17% and 2.41% of gross
loans at June 30, 1997, 1996 and 1995, 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 nonaccrual
loans and foreclosed real estate at June 30.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans: (in Thousands)
Mortgage $2,489 $1,008 $2,031 $1,016 $ 989
Consumer -- -- -- -- --
------ ------ ------ ------ -------
Total nonaccrual Loans $2,489 $1,008 $2,031 $1,016 $ 989
====== ====== ====== ====== =======
Total nonaccrual loans
as a percent of total loans 0.34% 0.16% 0.37% 0.20% 0.20%
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total foreclosed real estate, net $165 $240 $96 $147 $4,683
Total amount of nonaccrual
loans and foreclosed real estate $2,654 $1,248 $2,127 $1,163 $5,672
Total nonaccrual loans and
foreclosed real estate as a
percent of total assets 0.27% 0.14% 0.24% 0.13% 0.64%
</TABLE>
The amount of additional interest income that would have been included in
interest income for the years ended June 30, 1997 and 1996 if the nonaccrual
loans had been current in accordance with their original terms was $285,000 and
$137,000, respectively.
Each asset classified as substandard/nonaccrual or foreclosed real estate in
excess of $250,000, net of reserves, at June 30, 1997 is described below.
Parkvale has an aggregate $537,000 of first mortgage loans on rental properties
located in the Mount Washington area of Pittsburgh which are classified as
nonaccrual substandard at June 30, 1997. This balance represents 15 loans that
originated between 1974 through 1989 with various maturities. These credits are
classified as nonaccrual substandard due to inadequate debt service coverage.
Management does not anticipate any loss on the resolution of this credit
relationship.
As of June 30, 1997, $699,500 or 28% of the nonaccrual mortgage loans totaling
$2.5 million were purchased from others and $98,000 or 60.0% 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 multifamily 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 multifamily 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
12
<PAGE> 13
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.
Parkvale's investment portfolio consisted of the following securities at June
30 for the years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ------
(In Thousands)
<S> <C> <C> <C>
Federal funds sold $107,832 $ 66,557 $116,581
U.S. Government and agency obligations 51,950 62,936 86,860
Corporate debt 17,143 32,086 36,957
Mortgage backed securities 66,941 99,371 100,881
Equity securities (1) 13,546 10,493 8,738
-------- -------- --------
Total investment portfolio $257,412 $271,443 $350,017
======== ======== ========
</TABLE>
- -------------------
(1) Equity securities available for sale are stated at market value.
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 Treasury, while FHLMC and FNMA securities are
guaranteed by their respective agencies. At June 30, 1997, Parkvale had $66.9
million, or 6.8% of total assets invested in mortgage-backed securities, as
compared to 10.8% and 11.3% at June 30, 1996 and 1995, respectively. At June
30, 1997, the mortgage-backed securities consisted of FHLMC ($45.6 million);
GNMA ($1.2 million); FNMA ($6.3 million); collateralized mortgage obligations,
including REMIC's ($12.3 million) and private participation certificates ($1.5
million).
The following table shows Parkvale's mortgage-backed security activity during
the years ended June 30.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of year $ 99,371 $100,881 $ 115,043
Purchases -- 25,211 --
Principal repayments (32,430) (26,721) (14,162)
Sales -- -- --
--------- -------- --------
Mortgage-backed securities at end of year $ 66,941 $ 99,371 $100,881
========= ======== ========
</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
13
<PAGE> 14
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 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 years.
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. 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 and FHLB advances. 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, noninsured 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 nineteen 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.
14
<PAGE> 15
The following table shows the distribution of Parkvale's deposits by type of
deposit as of June 30.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
Balance % Balance % Balance %
-------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $139,089 15.8% $140,908 17.5% $141,791 17.9%
Checking accounts 81,701 9.2 70,446 8.7 62,578 7.9
Money market accounts 44,804 5.1 47,657 5.9 51,148 6.4
Certificate accounts 566,677 64.3 509,694 63.1 501,597 63.1
Jumbo certificates 41,354 4.7 32,218 4.0 32,234 4.1
Accrued interest 7,619 0.9 6,164 0.8 5,097 0.6
-------- ------ -------- ------ -------- ------
Total Savings Deposits $881,244 100.0% $807,087 100.0% $794,445 100.0%
======== ====== ======== ====== ======== ======
</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>
1997 1996 1995
---------- ---------- ----------
Average Average Average
Balance % Balance % Balance %
-------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $137,184 2.61% $138,647 2.62% $151,029 2.63%
Checking accounts 76,366 1.06 65,152 1.08 64,879 1.14
Money market accounts 45,825 2.93 49,159 2.95 60,807 2.66
Certificate accounts 577,691 5.78 542,390 5.95 487,426 5.65
Accrued interest 6,637 -- 5,699 -- 4,543 --
-------- ---- -------- ----- -------- ----
$843,704 4.64% $801,047 4.75% $768,684 4.41%
======== ==== ======== ==== ======== ====
</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 nonresidents of Pennsylvania at June 30, 1997.
The following table sets forth the net deposit flows of Parkvale during the
years ended June 30.
15
<PAGE> 16
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before interest credited $44,550 ($15,624) ($ 9,187)
Interest credited 29,607 28,266 25,077
------- -------- -------
Net deposit increase $74,157 $12,642 $15,890
======= ======= =======
</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, 1997, 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 $139,089 15.78% 2.61%
Checking accounts 81,701 9.27 1.06
Money market accounts 44,804 5.08 2.93
-------- ------ -----
Total non-certificate accounts $265,594 30.13 2.21
-------- ------ ----
Certificate accounts maturing in quarter ending:
September 30, 1997 96,787 10.98 5.17
December 31, 1997 82,584 9.37 5.52
March 31, 1998 52,533 5.96 5.72
June 30, 1998 85,441 9.70 5.94
September 30, 1998 23,485 2.67 5.87
December 31, 1998 29,009 3.29 6.05
March 31, 1999 27,412 3.11 6.02
June 30, 1999 20,037 2.27 6.34
September 30, 1999 20,969 2.38 6.38
December 31, 1999 10,045 1.14 6.12
March 31, 2000 18,248 2.07 6.37
June 30, 2000 19,764 2.24 6.44
Thereafter 121,717 13.81 6.43
-------- -----
Total certificate accounts 608,031 69.00 5.90
-------- -----
Accrued interest 7,619 0.87 0.00
-------- ------
Total deposits $881,244 100.00% 4.64%
======== ====== ====
</TABLE>
The following table presents, by various interest rate categories, the
outstanding amount of certificates of deposit at June 30, 1997 which mature
during the years ending June 30:
<TABLE>
<CAPTION>
1998 1999 2000 Thereafter Total
---------- ---------- ---------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit:
Under 6.00% $246,906 $48,786 $20,322 $ 19,310 $335,324
6.00% to 7.99% 66,973 48,730 48,685 102,407 266,795
8.00% to 9.99% 3,466 2,427 19 -- 5,912
-------- ------- ------- -------- --------
Total certificates of deposits $317,345 $99,943 $69,026 $121,717 $608,031
======== ======= ======= ======== ========
</TABLE>
16
<PAGE> 17
Maturities of certificates of deposit of $100,000 or more that were outstanding
as of June 30, 1997 are summarized as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
3 months or less $5,841
Over 3 months through 6 months 4,684
Over 6 months through 12 months 7,933
Over 12 months 22,896
-------
Total $41,354
=======
</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, 1997, Parkvale had $15.7 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>
1997 1996 1995
---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Average balance outstanding $15,687 $20,658 $20,648
Maximum amount outstanding at any month-end
during the period $15,692 $20,699 $20,703
Average interest rate 6.87% 7.25% 7.26%
</TABLE>
The decrease in the outstanding average balance from $20.7 million in 1996 to
$15.7 million in 1997 is due to the maturity of a $5.0 million advance in July
1996.
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 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 noninterest 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,
1997.
17
<PAGE> 18
<TABLE>
<CAPTION>
Year Ended June 30, At June 30,
-----------------------
1997 1996 1995 1997
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Average yields on (1):
Loans 8.01% 8.23% 8.14% 8.04%
Mortgage-backed securities 6.72 6.61 6.51 6.88
Investments (2) 5.97 5.96 5.30 5.92
Federal funds sold 5.41 5.67 5.51 5.51
---- ---- ---- ----
All interest-earning assets 7.38 7.45 7.17 7.50
---- ---- ---- ----
Average rates paid on (1):
Savings deposits 4.64 4.75 4.41 4.72
Borrowings 6.20 6.19 6.31 6.04
---- ---- ---- ----
All interest-bearing liabilities 4.67 4.79 4.46 4.75
---- ---- ---- ----
Average interest rate spread 2.71% 2.66% 2.71% 2.75%
==== ---- ----- ====
Net yield on interest-earning assets(3) 3.03% 2.98% 3.01%
==== ==== ====
</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, 1997 are based on the weighted average contractual
interest rates. Nonaccrual 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,
-------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest-earning assets: (In Thousands)
Loans $641,575 $566,134 $510,919
Mortgage-backed securities 82,626 102,470 106,073
Investments 88,967 119,573 158,267
Federal funds sold 113,324 99,382 75,503
-------- -------- --------
Total interest-earning assets 926,492 887,559 850,762
-------- -------- --------
Noninterest-earning assets 23,530 18,856 16,364
-------- -------- --------
Total assets $950,022 $906,415 $867,126
======== ======== ========
Interest-bearing liabilities:
Savings deposits 843,704 801,048 768,684
FHLB advances and other borrowings 19,579 25,634 24,727
-------- -------- --------
Total interest-bearing liabilities 863,283 826,682 793,411
-------- -------- --------
Noninterest-bearing liabilities 18,009 16,162 15,600
-------- -------- --------
Total liabilities 881,292 842,844 809,011
Shareholders' equity 68,730 63,571 58,115
-------- -------- --------
Total liabilities and equity $950,022 $906,415 $867,126
======== ======== ========
Net interest-earning assets $ 63,209 $ 60,877 $ 57,351
======== ======== ========
Interest-earning assets as a % of interest-
bearing liabilities 107.3% 107.4% 107.2%
</TABLE>
18
<PAGE> 19
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 1997 and 1996, net interest income was favorably impacted by
higher volumes of loan originations and purchases. In fiscal 1995, net interest
income was favorably impacted by higher yielding investments and loans.
Parkvale's net yield on average interest-earning assets was relatively constant
at 3.03% in fiscal 1997, 2.98% in fiscal 1996 and 3.01% in fiscal 1995.
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,
---------------------------------
1997 vs. 1996 1996 vs. 1995
----------------------- ------------------------
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 ($1,245) $6,209 ($161) $4,803 $460 $4,495 $63 $5,018
Mortgage-backed securities 113 (1,312) (19) (1,218) 106 (235) (3) (132)
Federal funds sold (258) 791 (38) 495 121 1,316 35 1,472
Investments 12 (1,824) (5) (1,817) 1,045 (2,051) (261) (1,267)
------- ------ ------ ------ ----- ------ ---- ------
Total (1,378) 3,864 (223) 2,263 1,732 3,525 (166) 5,091
------- ------ ------ ------ ----- ------ ---- ------
Interest-bearing liabilities:
Deposits (881) 2,026 (51) 1,094 2,614 1,441 118 4,173
FHLB advances and
other borrowings 3 (375) (1) (373) (30) 57 -- 27
------- ------ ------ ------ ----- ------ ---- ------
Total (878) 1,651 (52) 721 2,584 1,498 118 4,200
------- ------ ------ ------ ----- ------ ---- ------
Net change in net interest
income (expense) ($500) $2,213 ($171) $1,542 ($852) $2,027 ($284) $891
======= ====== ====== ====== ===== ====== ===== ======
</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.
At June 30, 1997, Parkvale was authorized to have an investment of $29.7
million in the capital stock and other securities of its service corporation
subsidiaries. At June 30, 1997, Parkvale had equity investments of $5,000, net
of cash balances, in its service corporation subsidiaries.
19
<PAGE> 20
Parkvale's wholly-owned service corporation, P.V. Financial Service Inc.
("PVFS"), was incorporated in 1972 and owns PMC as a wholly-owned subsidiary.
On June 1, 1997, PVFS began operating as a subprime lending subsidiary with the
intent of extending consumer loans to individuals who may otherwise not be able
to obtain funds based on their unfavorable or nonexistent credit history. PMC
was acquired in 1986 and currently operates three offices originating
residential mortgage loans for the Bank. At June 30, 1997, PVFS and its
subsidiary had net assets of $266,000. 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, 1997 is $26,000 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 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.
20
<PAGE> 21
EMPLOYEES
As of June 30, 1997, Parkvale and its subsidiaries had 235 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 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.
INSURANCE AND REGULATORY STRUCTURE. Pursuant to the provisions of Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("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 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
addition, FIRREA established the OTS. 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, 1997, Parkvale was in compliance with all applicable
regulatory requirements, with Tier I and Tier II ratios of 7.0% and 14.7%,
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 multifamily residential
loans. On June 26, 1996, the FDIC, the FRB and the Office of the Comptroller of
the Currency ("OCC"), collectively, "the agencies", 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
21
<PAGE> 22
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.
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. Parkvale fully complies with regulations governing
investments in corporate debt securities.
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
22
<PAGE> 23
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 the 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.
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
23
<PAGE> 24
obligations at the beginning of each year, or 5% of its advances (borrowings)
from the FHLB of Pittsburgh, whichever is greater. Parkvale had a $6.3 million
investment in stock of the FHLB of Pittsburgh at June 30, 1997, 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, 1997, the Bank
had $15.7 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
noninterest-earning reserves against their transaction accounts (primarily NOW
accounts and regular checking accounts) and certain nonpersonal time deposits.
Money market deposit accounts are subject to the reserve requirement applicable
to nonpersonal 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 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.
24
<PAGE> 25
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 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 1996, 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
25
<PAGE> 26
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 28 branch
offices located in the Pittsburgh metropolitan area. Parkvale owns the building
and land for 13 of its offices and leases its remaining 16 offices. Such leases
expire through 2014. PMC leases facilities outside of Pennsylvania for three
loan origination centers. At June 30, 1997, Parkvale's land, building and
equipment had a net book value of $2.1 million.
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. In June 1993, lawsuits were
instituted in the Court of Common Pleas of Allegheny County, Pennsylvania,
against Parkvale Savings Association, by the current owners of the former
Parkvale headquarters building which was sold in 1984. The plaintiffs are a
limited partnership known as 200 Meyran Associates and the two general partners
thereof, Charles D. and Madeleine S. Gross, who allege that Parkvale
misrepresented the environmental condition of the building at the time of sale,
which conduct they contend also constituted a breach of the Agreement of Sale.
Plaintiffs seek rescission of the Agreement of Sale or specific performance
thereof and compensatory and punitive damages. Discovery is proceeding, and
Parkvale intends to vigorously defend the suit. It is not possible to make a
reasonable estimate of financial exposure at this time; however management
believes such exposure would not be material to shareholders' equity, operating
results, financial position or liquidity.
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.
26
<PAGE> 27
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 1997 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 4 of
PFC's 1997 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 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 13 to
30 of PFC's 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
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 1997 Annual Meeting
of Stockholders, which was filed on September 12, 1997 (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.
27
<PAGE> 28
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...............................................................12
Consolidated Statements of Financial Condition at June 30, 1997 and 1996.....................13
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1997...................................................14
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1997...................................................15
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended June 30, 1997...................................................16
Notes to Consolidated Financial Statements...................................................17
</TABLE>
(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>
3(a) Articles of Incorporation.............................................................*
3(b) Bylaws................................................................................#
3(c) Amendments to the Bylaws..............................................................&
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........................... C-1 to C-12
10(g) Employee Stock Ownership Plan.........................................................~
10(h) Executive Deferred Compensation Plan..................................................+
10(i) Supplemental Employee Benefit Plan....................................................+
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
No. Exhibits Page
- ------------ ----
<S> <C> <C>
13 Excerpts of the 1997 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 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.
& Incorporated by reference to Form 10-K filed by the Registrant with the Commission on
September 16, 1996.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the 1997 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.
(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.
</TABLE>
29
<PAGE> 30
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 19, 1997 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 19, 1997
- --------------------------- ------------------
Robert J. McCarthy, Jr., Date
Director, President and Chief
Executive Officer
/s/ Timothy G. Rubritz September 19, 1997
- ---------------------- ------------------
Timothy G. Rubritz, Date
Vice President - Treasurer
(Chief Financial & Accounting Officer)
/s/ Robert D. Pfischner September 19, 1997
- ----------------------- ------------------
Robert D. Pfischner, Chairman of the Board Date
/s/ Fred P. Burger, Jr. September 19, 1997
- ----------------------- ------------------
Fred P. Burger, Jr., Director Date
/s/ Paul A. Mooney September 19, 1997
- ------------------ ------------------
Paul A. Mooney, Director Date
/s/ George W. Newland September 19, 1997
- --------------------- ------------------
George W. Newland, Director Date
/s/ Warren R. Wenner September 19, 1997
- -------------------- ------------------
Warren R. Wenner, Director Date
30
<PAGE> 1
Exhibit 10(f)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made effective as of this 1st day of January
1997 (the "Effective Date"), and is by and between Parkvale Financial
Corporation (the "Corporation"), a Pennsylvania-chartered corporation, Parkvale
Savings Bank (the "Savings Bank"), a Pennsylvania-chartered savings bank and a
wholly owned subsidiary of the Corporation, and Robert J. McCarthy, Jr. (the
"Executive").
WITNESSETH
WHEREAS, the Corporation and the Savings Bank (collectively, the
"Employers") desire to retain the services of the Executive on the terms and
conditions set forth herein and, for purpose of effecting the same, the Board of
Directors of each of the Employers has approved this Employment Agreement and
authorized its execution and delivery on behalf of the Employers to the
Executive;
WHEREAS, the Executive has been with the Savings Bank since December 1,
1984 and with the Corporation since its formation; is currently employed as the
President and Chief Executive Officer and member of the Board of Directors of
each of the Employers; is a highly experienced and knowledgeable executive
officer of the Employers; and is important and essential to the operation and
development of the Employers;
WHEREAS, the Employers consider the establishment and maintenance of
knowledgeable and vital management to be part of their overall corporate
strategy and to be essential to protecting and enhancing the best interest of
the Employers and their stockholders; and
WHEREAS, the Employers consider the continued services of the Executive to
be in the best interests of the Employers and they desire to induce the
Executive to remain in their employ on an impartial and objective basis and
without distraction or conflict of interest in the event of any attempt to
obtain control of the Employers.
AGREEMENT:
NOW, THEREFORE, intending to be legally bound hereby and in consideration
of the mutual covenants and agreements herein contained, the parties agree and
contract as follows:
1. EMPLOYMENT. The Employers hereby employ the Executive, and the Executive
hereby accepts such employment, on the terms and conditions set forth in this
Agreement.
2. DEFINITIONS. The following words and terms shall have the meanings set
forth below for the purposes of this Agreement:
C-1
<PAGE> 2
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in Section
3(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause" shall mean
termination because of personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement. As used herein, the term
"incompetency" shall mean the determination by a court that the Executive is
unable to manage his own affairs by reason of insanity, imbecility or feeble
mindedness. "Willful misconduct" as used herein shall mean the willful engaging
by the Executive in gross misconduct shown to be materially and substantially
injurious to the Employers. No act, or failure to act, on the Executive's part
shall be considered "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Employers. Notwithstanding the foregoing, the Executive
shall not be deemed to have been terminated for Cause without (i) reasonable
written notice to the Executive setting forth the reasons for the Employers'
intention to terminate for Cause, (ii) an opportunity for the Executive,
together with his counsel, to be heard before the Boards of Directors of the
Employers, and (iii) thereafter delivery to the Executive of a Notice of
Termination from the Boards of Directors of the Employers finding that, in the
good faith opinion of such Boards upon vote of at least 75% of the members of
each Board, the Executive was guilty of conduct set forth above.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act") or any successor thereto, whether or not any security of the Corporation
is registered under the Exchange Act; provided that, without limitation, such a
change in control shall be deemed to have occurred if either (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Exchange Act, but
excluding any person who on the date hereof is a director or officer of the
Corporation) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 10% or more of the combined voting power of the
Corporation's then outstanding securities; or (ii) within any period during the
term of this Agreement, individuals who at the beginning of such period
constitute the Board of Directors of the Corporation cease for any reason to
constitute at least a majority thereof, without the written consent of the
Executive.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
C - 2
<PAGE> 3
(f) DISABILITY. Termination by the Employers of the Executive's employment
based on "Disability" shall mean termination because of any physical or mental
impairment which qualifies the Executive for disability benefits under the
applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) FDIC. "FDIC" shall mean the Federal Deposit Insurance Corporation.
(h) GOOD REASON. Termination by the Executive of the Executive's employment
for "Good Reason" shall mean termination by the Executive of his employment
hereunder under any of the following circumstances, the occurrence of any of
which shall be deemed a breach of this Agreement by the Employers:
(i) without the Executive's express written consent, the failure to elect
or to re-elect or to appoint or to re-appoint the Executive to the
offices of President and Chief Executive Officer and a director of the
Employers or a material adverse change made by the Employers in the
Executive's functions, duties or responsibilities as President and
Chief Executive Officer of the Employers (except in the event the
Executive's employment is determined for Cause, Disability, Retirement
or death);
(ii) without the Executive's express written consent, a reduction by the
Employers in the Executive's Base Salary as the same may be increased
from time to time or, except to the extent permitted by Section 5(b)
hereof, a reduction in the package of fringe benefits provided to the
Executive, taken as a whole;
(iii) The principal executive office of the Employers is relocated outside
of the Pittsburgh, Pennsylvania area or, without the Executive's
express written consent, the Employers require the Executive to be
based anywhere other than an area in which the Employers' principal
executive office is located, except for required travel on business of
the Employers to an extent substantially consistent with the
Executive's present business travel obligations;
(iv) Any purported termination of the Executive's employment for Cause,
Disability or Retirement which is not effected pursuant to a Notice of
Termination satisfying the requirements of paragraph (j) below;
(v) The Employers shall fail to observe or perform any covenant or
agreement contained in this Agreement to be observed or performed by
the Employers;
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<PAGE> 4
(vi) The failure by the Employers to obtain the assumption of and agreement
to perform this Agreement by any successor as contemplated in Section
11 hereof; or
(vii) A Change in Control of the Corporation occurs.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) NOTICE OF TERMINATION. Any purported termination of the Executive's
employment by the Employers for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by a written "Notice
of Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated,
(iii) specifies a Date of Termination, which shall be not less than thirty (30)
nor more than ninety (90) days after such Notice of Termination is given, except
in the case of the Employers' termination of Executive's employment for Cause;
and (iv) is given in the manner specified in Section 12 hereof.
(k) PARACHUTE PAYMENT. The term "Parachute Payment" has the meaning as set
forth in Section 280G of the Code and applicable Treasury regulations.
(l) RETIREMENT. Termination by the Employers of the Executive's employment
based on "Retirement" shall mean voluntary termination by the Executive in
accordance with the Employers' retirement policies, including early retirement,
generally applicable to their salaried employees.
3. POSITION AND DUTIES. During the term of this Agreement, the Executive
agrees to serve as the President and Chief Executive Officer and a member of the
Board of Directors of each of the Employers and shall perform such managerial
duties and responsibilities for the Employers as the Boards of Directors of the
Employers may direct in accordance with the respective bylaws of the Employers,
which duties and responsibilities shall be of substantially the same character
as or equivalent character to those required by the Executive's position on the
Effective Date. Throughout the term of this Agreement, and except for illness,
vacation periods and leaves of absence granted by the Employers (if any), the
Executive shall devote all his business time, attention, skill and efforts to
the faithful performance of his duties hereunder.
4. TERM OF EMPLOYMENT. Unless extended as provided in this Section 4, this
Agreement shall terminate five years after the Effective Date. Prior to the
first anniversary of the Effective Date and each annual anniversary thereafter,
the Boards of Directors of the Employers shall consider, review (with
appropriate corporate documentation thereof,
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<PAGE> 5
and taking into account all relevant factors, including the Executive's
performance) and, if appropriate, explicitly approve a one-year extension of
the remaining term of this Agreement. The term of this Agreement shall continue
to extend each year if the Boards of Directors so approve such extension unless
the Executive gives written notice to the Employers of the Executive's election
not to extend the term, with such notice to be given not less than 30 days
prior to any such anniversary date. If any party gives timely notice that the
term will not be extended as of any annual anniversary date, then this
Agreement shall terminate at the conclusion of its remaining term. References
herein to the term of this Agreement shall refer both to the initial term and
successive terms. The last day of the term of this Agreement, as from time to
time extended, is hereinafter referred to as the "Expiration Date."
5. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay the Executive for his services
during the term of this Agreement a minimum salary of $262,000 per year, which
may be increased from time to time in such amounts as may be determined by the
Boards of Directors of the Employers and may not be decreased without the
Executive's express written consent (hereinafter referred to as the Executive's
"Base Salary"). Such salary shall be payable in semi-monthly installments or in
such other manner as determined in accordance with the Employers' policies. In
addition, the Executive may receive bonus payments when, as and if determined by
the Boards of Directors of the Employers.
(b) During the term of this Agreement, the Executive shall be entitled to
participate in and receive the benefits of all of the Employers' normal employee
benefit plans and arrangements in effect from time to time, including without
limitation the following: any pension or other retirement benefit plan; profit
sharing plan; stock option plans; employee stock ownership plan; medical, dental
(if any) and hospitalization coverage (family coverage); travel accident
insurance; long-term disability income insurance; group life insurance; and
thrift plans. The Employers shall not make any changes in such plans, benefits
or privileges which would adversely affect the Executive's rights or benefits
thereunder, unless such change does not result in an overall reduction in the
level of benefits to the Executive below the level of benefits provided to the
Executive as of the Effective Date. Nothing paid to the Executive under any plan
or arrangement presently in effect or made available in the future shall be
deemed to be in lieu of the salary payable to the Executive pursuant to Section
5(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Board of Directors of the Employers, which shall in no event be less
than four weeks per annum. The paid vacation time shall be taken at such times
as the Executive elects in his discretion, and the Executive may accumulate
unused vacation time from one year to the next, unless otherwise limited by the
Boards of Directors of the Employers. The Executive shall also be entitled to
all paid holidays provided by the Employers.
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<PAGE> 6
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with an automobile leased or
purchased by the Employers for the Executive. The Employers shall be responsible
and shall pay for all costs of insurance coverage, repairs, maintenance and
other incidental expenses, including license, fuel and oil. The Employers shall
provide the Executive with a replacement automobile of a similar type as
selected by the Executive at approximately the time that his present automobile
reaches three years of age and approximately every three years thereafter, upon
the same terms and conditions.
(e) During the term of this Agreement, in keeping with past practices, the
Employers shall pay the Executive's dues for membership in a country club
located in the Pittsburgh metropolitan area, which country club the Executive
has the right to choose.
(f) In the event of the Executive's death during the term of this
Agreement, the Employers shall pay to the Executive's spouse, estate, legal
representative or other named beneficiaries (as directed by the Executive in
writing) on a semi-monthly basis the Executive's Base Salary at the rate in
effect at the time of the Executive's death for a period of one year from the
date of death and, in addition, the Employers shall continue to provide medical,
dental (if any) and hospitalization coverage (family coverage if there are
dependents) until the semi-monthly payments cease.
(g) In the event of termination by the Employers of the Executive's
employment based on Disability (as defined herein), the Employers shall pay the
Executive a disability benefit which is equal to the Base Salary and benefits
provided in Sections 5(a), (b), (d) and (e) hereof, as the same may have been
increased from time to time, to the Executive at the commencement of the
Executive's total disability, reduced by the sum of (i) the amount of any
benefits to which the Executive may be entitled with respect to the same period
under any disability plan and (ii) the disability benefits payable under any
government regulated plan, including workers' compensation benefits. Payment of
such disability benefit shall commence with the week coincident with the
termination of the Executive's employment under this Agreement and shall
continue until the earlier of the Expiration Date or the Executive's death.
During any period the Executive shall be entitled to receive disability payments
from the Employers, to the extent that he is physically and mentally able to do
so, he shall furnish information and assistance to the Employers and, in
addition, upon reasonable request in writing from time to time, he shall make
himself available to the Employers to undertake reasonable assignments with the
dignity, importance, and scope of his prior position and his physical and mental
health.
6. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation,
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<PAGE> 7
automobile and traveling expenses, and all reasonable entertainment expenses
(whether incurred at the Executive's residence, while traveling or otherwise),
subject to such reasonable documentation and other limitations as may be
established by the Boards of Directors of the Employers. If such expenses are
paid in the first instance by the Executive, the Employers shall reimburse the
Executive therefor.
7. TERMINATION.
(a) The Employers shall have the right, at any time upon prior Notice of
Termination, to terminate the executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and the Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by the
Employers for Cause, Disability or Retirement or in the event of the Executive's
death, or (ii) the Executive terminates his employment hereunder other than for
Good Reason, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination other than as enumerated in Sections 5(f) and 5(g) of this
Agreement.
(c) In the event that (i) the Executive's employment is terminated by the
Employers for other than Cause, Disability, Retirement or the Executive's death
or (ii) such employment is terminated by the Executive (a) due to a breach of
this Agreement by the Employers, which breach has not been cured within fifteen
(15) days after a written notice of non-compliance has been given by the
Executive to the Employers, or (b) for any other Good Reason, then the Employers
shall:
(A) pay to the Executive, in either equal monthly installments over three
years beginning with the first business day of the month following the Date
of Termination or a lump sum cash payment within five business days of the
termination at the Executive's discretion, a cash severance amount equal to
the Executive's average Base Salary for the three calendar years preceding
the year in which the termination occurs, multiplied by 2.99;
(B) pay to the Executive, in either equal monthly installments over three
years beginning with the first business day of the month following the Date
of Termination or a lump sum cash payment within five business days of the
termination at the Executive's discretion, a cash amount equal to the
average incentive compensation or bonus paid to the Executive during the
three calendar years preceding the year in which the termination occurs,
multiplied by 2.99; and
C - 7
<PAGE> 8
(C) maintain and provide for a period ending on the Expiration Date in
effect prior to the Notice of Termination, at no cost to the Executive, the
Executive's continued participation in all life, disability and medical
insurance plans and other employee benefit plans, programs and arrangements
in which the Executive was entitled to participate immediately prior to the
Date of Termination (other than stock benefit plans of the Employers),
provided that in the event that the Executive's participation in any plan,
program or arrangement as provided in this subparagraph (C) is barred, or
during such period any such plan, program or arrangement is discontinued or
the benefits thereunder are materially reduced or such benefits are less
than the benefits provided to Executive immediately prior to his
termination of employment with the Employers, the Employers shall arrange
to provide the Executive with benefits which are substantially similar to
those which the Executive was entitled to receive under such plans,
programs and arrangements immediately prior to the Date of Termination.
(d) If the Executive becomes liable, in any taxable year, for the payment
of an excise tax under Section 4999 of the Code on account of any payments to
the Executive pursuant to this Section 7, and the Employers choose not to
contest the liability or have exhausted all administrative and judicial appeals
contesting the liability, the Employers shall pay the Executive (i) an amount
equal to the excise tax for which the Executive is liable under Section 4999 of
the Code, (ii) the federal, state and local income taxes, and interest if any,
for which the Executive is liable on account of the payments pursuant to item
(i), and (ii) any additional excise tax under Section 4999 of the Code and any
federal, state and local income taxes for which the Executive is liable on
account of payments made pursuant to items (i) and (ii).
(e) This subsection 7(e) applies if the amount of payments to the Executive
under subsection 7(d) has not been determined with finality by the exhaustion of
administrative and judicial appeals. In such circumstances, the Employers and
the Executive shall, as soon as practicable after the event or series of events
has occurred giving rise to the imposition of the excise tax, cooperate in
determining the amount of the Executive's excise tax liability for purposes of
paying the estimated tax. The Executive shall thereafter furnish to the
Employers or their successors a copy of each tax return which reflects a
liability for an excise tax under Section 4999 of the Code at least 20 days
before the date on which such return is required to be filed with the IRS. The
liability reflected on such return shall be dispositive for the purposes hereof
unless, within 15 days after such notice is given, the Employers furnish the
Executive with a letter of the auditors or tax advisor selected by the Employers
indicating a different liability or that the matter is not free from doubt under
the applicable laws and regulations and that the Executive may, in such
auditor's or advisor's opinion, cogently take a different position, which shall
be set forth in the letter with respect to the payments in question. Such letter
shall be addressed to the Executive and state that he is entitled to rely
thereon. If the Employers furnish such a letter to the Executive, the
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<PAGE> 9
position reflected in such letter shall be dispositive for purposes of this
Agreement, except as provided in subsection 7(f) below.
(f) Notwithstanding anything in this Agreement to the contrary, if the
Executive's liability for the excise tax under Section 4999 of the Code for a
taxable year is subsequently determined to be less than the amount paid by the
Employers pursuant to subsection 7(d), the Executive shall repay the Employers
at the time that the amount of such excise tax liability is finally determined,
the portion of such income and excise tax payments attributable to the reduction
(plus interest on the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code), and if the Executive's liability for the excise tax
under Section 4999 of the Code for a taxable year is subsequently determined to
exceed the amount paid by the Employers pursuant to this Section 7, the
Employers shall make an additional payment of income and excise taxes in the
amount of such excess, as well as the amount of any penalty and interest
assessed with respect thereto at the time that the amount of such excess and any
penalty and interest is finally determined.
8. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
9. WITHHOLDING. All payments required to be made by the Employers hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Employers may reasonably
determine should be withheld pursuant to any applicable law or regulation.
10. RESTRICTIVE COVENANT. During the Executive's employment hereunder, the
Employers, in addition to all other remedies provided herein, shall be entitled
to an injunction restraining the Executive from owning, managing, operating and
controlling, being employed by or participating in or being in any way so
connected with any business similar to the business of the Employers within the
Employers' market areas. Market areas shall include the Pennsylvania counties of
Allegheny, Armstrong, Butler, Beaver, Washington and Westmoreland. The business
of the Employer's shall mean any business in which depositors are covered by
FDIC insurance. In the event of any actual or threatened breach by the Executive
of the provisions of this paragraph, the Employers shall be entitled to an
injunction restraining the Executive from owning, managing, operating and
controlling, being employed by or participating in or being in any way connected
with any business similar to the business of the Employers covered by FDIC
insurance. For purposes of this Agreement,
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<PAGE> 10
"owning" shall not include the ownership of 1% or less of the stock of a public
corporation. Nothing herein stated shall be construed as prohibiting the
Employers from pursuing any other remedies available to them for such breach or
threatened breach, including the recovery of damages. This Section 10 shall
terminate and be of no force and effect in the event the Executive terminates
his employment for Good Reason or the Employers terminate the Executive's
employment in breach of this Agreement.
11. SUCCESSORS; BINDING AGREEMENT.
(a) The Employers will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Employers to expressly assume and agree (by
agreement in form and substance satisfactory to the Executive) to perform this
Agreement in the same manner and to the same extent that the Employers would be
required to perform it if no such succession had taken place. Failure of the
Employers to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to compensation from the Employers in the same amount and on the same terms as
he would be entitled to hereunder if he terminated his employment for Good
Reason, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed, without further
notice, the date of termination.
(b) This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive dies during the term of this Agreement,
the benefits specified in Section 5(f) of this Agreement shall be paid to the
Executive's designated beneficiaries.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below, or to such other address as any party may
have furnished to the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon receipt.
To the Employers: Parkvale Financial Corporation
Parkvale Savings Bank
4220 William Penn Highway
Monroeville, Pennsylvania 15146
To the Executive: Robert J. McCarthy, Jr.
1701 Lacosta Court
Pittsburgh, Pennsylvania 15237
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13. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Employers to sign on
its behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
14. GOVERNING LAW. This Agreement has been executed and delivered in the
Commonwealth of Pennsylvania and its validity, interpretation, performance and
enforcement shall be governed by and construed in accordance with the laws
thereof applicable to contracts executed and to be wholly performed in
Pennsylvania.
15. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require
the Employers to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent that the Executive acquires a right to
receive benefits from the Employers hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Employers.
16. INTERPRETATION. If any provision of this Agreement shall be the subject
of a dispute between the Employers and the Executive and a court or arbitrator
to which such dispute has been brought shall be unable to resolve which of two
reasonable interpretations of such provision is the proper interpretation
thereof, then the interpretation most favorable to the Executive shall control.
17. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of the terms of this Agreement.
18. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
19. PRIOR AGREEMENTS. This Agreement constitutes the entire agreement and
understanding between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements and understandings and any
and all prior employment agreements between the Employers and the Executive.
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
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<PAGE> 12
21. REGULATORY PROHIBITION. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any regulations
promulgated thereunder.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
ABOVE WRITTEN.
Attest: PARKVALE F. FINANCIAL CORPORATION
By:
- ----------------------------------- ---------------------------
Erna A. Golota, Corporate Secretary Robert D. Pfischner
Chairman of the Board
Attest: PARKVALE SAVINGS BANK
By:
- ----------------------------------- ---------------------------
Erna A. Golota, Corporate Secretary Robert D. Pfischner
Chairman of the Board
Witness: ROBERT J. MCCARTHY, JR.
By:
- ----------------------------------- -----------------------------
Erna A. Golota, Corporate Secretary Robert J. McCarthy, Jr.,
Individually
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<PAGE> 1
Exhibit 13
- --------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
BALANCE SHEET DATA AT JUNE 30: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $991,239 $919,242 $896,422 $873,786 $886,074
Loans 710,868 625,452 524,545 494,994 503,432
Investment securities 149,580 204,886 233,436 272,866 251,761
Savings deposits 881,244 807,087 794,445 778,555 791,973
FHLB advances and other debt 20,196 26,911 24,604 24,397 29,153
Shareholders' equity 75,183 69,765 61,064 55,565 49,322
Shareholders' equity per share 18.54 17.25 15.25 13.25 11.87
</TABLE>
<TABLE>
<CAPTION>
OPERATING DATA FOR THE YEAR ENDED JUNE 30: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 68,380 $ 66,117 $ 61,026 $ 59,404 $ 67,105
Total interest expense 40,352 39,631 35,431 35,399 40,817
- ------------------------------------------------------------------------------------------------------
Net interest income 28,028 26,486 25,595 24,005 26,288
Provision for loan losses 399 686 1,094 1,829 3,749
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 27,629 25,800 24,501 22,176 22,539
Other income 2,174 3,058 2,024 2,320 2,111
Other expense 18,808 14,240 13,821 12,991 12,831
- ------------------------------------------------------------------------------------------------------
Income before taxes and extraordinary items 10,995 14,618 12,704 11,505 11,819
Income tax expense 4,021 5,000 4,633 4,277 4,512
- ------------------------------------------------------------------------------------------------------
Income before extraordinary items 6,974 9,618 8,071 7,228 7,307
Extraordinary items -- -- -- -- (516)
- ------------------------------------------------------------------------------------------------------
Net income $ 6,974 $ 9,618 $ 8,071 $ 7,228 $ 6,791
- ------------------------------------------------------------------------------------------------------
Earnings per share $1.66 $2.29 $1.88 $1.66 $1.58
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OTHER SELECTED DATA (STATISTICAL PROFILE):
YEAR ENDED JUNE 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average yield earned on all
interest-earning assets 7.38% 7.45% 7.17% 6.89% 7.69%
Average rate paid on interest-bearing
liabilities 4.67 4.79 4.46 4.34 4.88
Average interest rate spread 2.71 2.66 2.71 2.55 2.81
Net yield on average interest-earning
assets 3.03 2.98 3.01 2.78 3.01
Other expenses to average assets 1.98 1.57 1.59 1.47 1.43
Other expenses to average assets** 1.45 1.57 1.59 1.47 1.43
Efficiency ratio 62.27 48.20 50.04 49.35 45.18
Efficiency ratio** 45.60 49.83 50.04 49.35 45.18
Return on average assets 0.73 1.06 0.93 0.82 0.76
Return on average assets** 1.07 0.98 0.93 0.82 0.76
Dividend payout ratio 31.36 18.19 17.74 16.07 13.51
Return on average equity 10.15 15.13 13.89 13.69 14.64
Return on average equity** 14.70 13.99 13.89 13.69 14.64
Average equity to average total assets 7.23 7.01 6.87 5.98 5.17
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One year gap to total assets -4.44% 0.24% 6.03% 1.65% 5.37%
Intangibles to total equity 0.74 0.40 0.71 1.07 1.94
Shareholders' equity to assets ratio 7.58 7.59 6.81 6.36 5.57
Ratio of classified assets to total assets 0.3 0.22 0.35 0.33 0.82
Nonperforming assets $ 2,654 $ 1,248 $ 2,127 $ 1,163 $ 5,672
Allowance for loan losses as a % of gross
loans 1.95% 2.17% 2.41% 2.33% 1.97%
Number of full-service offices 29 28 28 27 26
</TABLE>
** Excludes the effect of the one-time FDIC special assessment in fiscal 1997
and the gain on sale of asset in fiscal 1996.
4
<PAGE> 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to summarize the financial condition and
results of operations of Parkvale Financial Corporation ("Parkvale") and provide
other information which is not readily apparent from the consolidated financial
statements included in this annual report. Reference should be made to those
statements, the notes thereto and the selected financial data presented
elsewhere in this report for a complete understanding of the following
discussion and analysis.
FINANCIAL CONDITION
Parkvale increased average interest earning assets by $39 million over fiscal
year 1996. This growth was achieved through an increased loan portfolio funded
by a modest increase in deposits and investment maturities. Average loan and
average deposit balances rose $75 million and $43 million, respectively, over
fiscal year 1996. Average investments fell $50 million during fiscal year 1997
while Federal funds sold increased $14 million. Additionally, average borrowings
dropped approximately $6 million from the prior year.
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.
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 cash flows 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 vulnerability to fluctuations
in interest rates. The one-year gap ratio has shifted from 0.24% as of June 30,
1996 to -4.44% as of June 30, 1997, and the five-year gap ratio has shifted from
2.20% as of June 30, 1996 to -0.43% as of June 30, 1997.
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, nonmaturity deposit assumptions and management's capital
requirements. The estimated impact on projected net interest income in fiscal
1998 assuming an immediate shift in current interest rates versus current
interest rates would result in the following percentage changes over fiscal 1997
net interest
<TABLE>
<CAPTION>
MEASUREMENT PERIOD AVERAGE EQUITY TO AVERAGE TOTAL ASSETS
(FISCAL YEAR COVERED) YEAR ENDED JUNE 30
<S> <C>
1993 5.17
1994 5.98
1995 6.87
1996 7.01
1997 7.23
</TABLE>
5
<PAGE> 3
income: +100 bp, +5.7%; +200 bp, +2.3%; -100 bp, +5.2%; -200 bp, -0.8%. This
compares to projected net interest income for fiscal 1997 made at June 30, 1996
over fiscal 1996 actual net interest income of: +100 bp, +5.9%; +200 bp, +0.8%;
- -100 bp, +7.3%; -200 bp, +2.0%. The fluctuation in projected net interest income
between fiscal 1997 and 1996 is reflective of the change in asset mix during
fiscal 1997 as discussed in the Financial Condition section.
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 was 21.5% for the
quarter ended June 30, 1997. During fiscal 1997, Parkvale's investment strategy
was to deploy excess liquidity by purchasing single-family Adjustable Rate
Mortgage ("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.
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
1997, 1996 and 1995, 87.98%, 77.4% and 82.6%, respectively, of mortgage loans
originated or purchased were adjustable-rate loans. Parkvale has continually
emphasized the origination and purchase of ARM loans. ARMs totaled $402.3
million or 63.8% of total mortgage loans at June 30, 1997 versus $316.6 million
or 56.9% of total mortgage loans at June 30, 1996. To supplement local mortgage
originations, Parkvale purchased loans aggregating $104.4 million in fiscal 1997
and $104.9 million in fiscal 1996 from mortgage bankers and other financial
institutions. In both years, the loan packages purchased were predominately 3/1
and 5/1 ARMs, which had the effect of lowering the one-year gap from +6.03% at
June 30, 1995 to -4.44% at June 30, 1997. The practice of purchasing loans in
the secondary market is expected to continue in fiscal 1998 when liquidity
exceeds targeted levels. At June 30, 1997, Parkvale had commitments to originate
loans totaling $5.7 million. Construction loans in process at June 30, 1997 were
$6.4 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, 1997 and 1996, consumer loans were $90.3 and
$76.2 million which represented an 18.5% and a 10.2% increase over the balances
at June 30, 1996 and 1995, respectively.
Parkvale follows 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, 1997, Parkvale had
$66.9 million or 6.8% 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.
<TABLE>
<CAPTION>
Measurement Period One Year Gap to Total Assets
(Fiscal Year Covered) At June 30
<S> <C>
1993 5.37
1994 1.65
1995 6.03
1996 0.24
1997 -4.44
</TABLE>
6
<PAGE> 4
Interest-Sensitivity Analysis. The following table reflects the maturity and
repricing characteristics of Parkvale's assets and liabilities at June 30, 1997:
<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... $101,655 $ 79,695 $260,820 $ 20,794 $462,964
Other fixed rate loans, net (1)..... 5,794 17,826 86,256 152,955 262,831
Variable rate mortgage-backed
securities....................... 15,997 1,693 -- -- 17,690
Fixed rate mortgage-backed
securities (1)................... 3,726 11,782 25,142 8,099 48,749
Investments and Federal funds
sold............................. 116,832 12,000 48,160 -- 176,992
Equities, primarily FHLB and
FHLMC............................ -- -- 6,346 7,200 13,546
---------- ----------- -------- -------- --------
Total interest-sensitive assets....... $244,004 $ 122,996 $426,724 $189,048 $982,772
========== ========== ======== ======== ========
Ratio of interest-sensitive assets to
total assets........................ 24.6% 12.4% 43.0% 19.1% 99.1%
===== ===== ==== ==== ====
Interest-sensitive liabilities:
Passbook deposits and club accounts
(2).............................. $ 6,771 $ 23,983 $ 81,248 $ 36,609 $148,611
Checking accounts (3)............... 7,795 23,385 31,180 15,589 77,949
Money market deposit accounts....... 5,600 16,802 22,402 -- 44,804
Certificates of deposit............. 96,787 220,558 242,142 48,544 608,031
FHLB advances and other
borrowings....................... 9,313 -- 10,000 883 20,196
---------- ----------- -------- -------- --------
Total interest-sensitive
liabilities......................... $126,266 $ 284,728 $386,972 $101,625 $899,591
========== ========== ======== ======== ========
Ratio of interest-sensitive
liabilities to total liabilities and
equity.............................. 12.7% 28.7% 39.1% 10.3% 90.8%
===== ===== ==== ==== ====
Ratio of interest-sensitive assets to
interest-sensitive liabilities...... 193.2% 43.2% 110.3% 186.0% 109.2%
====== ====== ===== ===== =====
Periodic Gap to total assets.......... 11.88% (16.32%) 4.01% 8.82% 8.39%
====== ====== ===== ===== =====
Cumulative Gap to total assets........ 11.88% (4.44%) (.43%) 8.39%
====== ====== ===== =====
</TABLE>
(1) Includes total repayments and prepayments at an assumed rate of 10% 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 20.7% per annum.
(3) Assumes checking accounts are withdrawn at 40% in the first year and 10% per
annum thereafter.
Liability Management. Parkvale's high level of liquidity allows 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 32.9% at June 30, 1997 and 33.9% at June 30, 1996.
Parkvale's primary sources 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.
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 investing activities that concentrate a
financial institution's earning assets in a way that exposes 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
7
<PAGE> 5
to a single type of industry and loans of an imprudent size relative to the
total capitalization of the institution. For loans purchased and originated,
Parkvale has taken steps to reduce exposure to credit risk by emphasizing
low-risk, single-family mortgage loans, which comprise 80% of the gross loan
portfolio as of June 30, 1997.
CAPITAL RESOURCES
Shareholders' equity increased $5.4 million or 7.8% at June 30, 1997 compared to
June 30, 1996. Earnings retention is the main source of Parkvale's equity
growth. Net income was almost $7 million while dividends declared were $2.1
million resulting in 31.36% of net income paid to shareholders (equal to $.52
per share) for fiscal year ended June 30, 1997. Parkvale's fourth consecutive
5-for-4 stock split paid in October 1996 effectively increased the dividend
payment by 25%. Unrealized securities gains which increased $1.7 million over
prior year also favorably affected shareholders' equity. The book value of
Parkvale's common stock increased 7.5% to $18.54 at June 30, 1997 from $17.25 at
June 30, 1996 as a result of these increases in shareholders' equity.
Parkvale Savings Bank (the Bank), is a wholly owned subsidiary of Parkvale. The
Bank's primary regulators are the Federal Deposit Insurance Corporation ("FDIC")
and the Pennsylvania Department of Banking. The Office of Thrift Supervision
retains jurisdiction over Parkvale Financial Corporation due to its status as a
unitary savings and loan holding company. Parkvale continues to maintain a "well
capitalized" status, sustaining a 7% capital level as of June 30, 1997. Strong
capitalization allows Parkvale to continue building shareholder value through
traditionally conservative operations and potentially profitable growth
opportunities.
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 Parkvale's liquidity, capital resources or operations
except as follows.
In June 1993, lawsuits were instituted in the Court of Common Pleas of Allegheny
County, Pennsylvania, against Parkvale Savings Association, by the current
owners of the former Parkvale headquarters building which was sold in 1984. The
plaintiffs are a limited partnership known as 200 Meyran Associates and the two
general partners thereof, who allege that Parkvale misrepresented the
environmental condition of the building at the time of sale, which conduct, they
contend, also constituted a breach of the Agreement of Sale. Plaintiffs seek
recision of the Agreement of Sale or specific performance thereof and
compensatory and punitive damages. Discovery is proceeding, and Parkvale intends
to vigorously defend the suit. It is not possible to make a reasonable estimate
of financial exposure at this time; however, management believes such exposure
would not be material to shareholders' equity, operating results, financial
position or liquidity.
RESULTS OF OPERATIONS
Parkvale increased net interest income by $1.5 million or 5.8% over fiscal year
1996. Net interest income is the difference between interest earned on loans and
investments and interest paid for deposits and borrowings. A positive interest
rate spread is achieved with interest-earning assets in excess of
interest-bearing liabilities which results in increased net interest income.
Parkvale's growing loan portfolio has favorably impacted net interest income.
The net yield on average interest-earning assets was 3.03% in fiscal 1997, 2.98%
in fiscal 1996 and 3.01% in fiscal 1995.
Net income in fiscal year 1997 was adversely impacted by the one-time Savings
Association Insurance Fund ("SAIF") assessment of $5 million; coupled with this
adverse effect on net income was a nonrecurring gain of $969,000 recognized in
fiscal 1996. Absent these nonrecurring transactions, net income from normal
operations
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NET INTEREST INCOME
(FISCAL YEAR COVERED) YEAR ENDED JUNE 30
<S> <C>
1993 26.288
1994 24.005
1995 25.595
1996 26.486
1997 28.028
</TABLE>
8
<PAGE> 6
would have increased 14.5% from $8.9 million or $2.11 per share for fiscal 1996
to $10.2 million or $2.41 per share for the year ended June 30, 1997.
INTEREST INCOME
Interest income from loans increased by $4.8 million or 10.3% in fiscal 1997.
Average loans outstanding increased $75.4 million or 13%, primarily due to loan
package purchases amounting to $104 million during fiscal 1997. Interest income
increased despite a decrease in the average loan yield which was 8.23% in fiscal
1996 and fell to 8.01% in fiscal 1997. This is reflective of lower interest
rates sustained throughout the majority of fiscal 1997 and the large quantity of
ARM loans within the portfolio. Interest income on loans increased by $5 million
or 12.07% from fiscal 1995 to 1996. The average yield on loans increased from
8.14% in fiscal 1995 to 8.23% in fiscal 1996, and the average outstanding loan
balance increased $55.2 million or 10.8% between fiscal 1995 and 1996.
Interest income on mortgage-backed securities decreased by $1.2 million or 18%
in fiscal 1997. Although the average yield on mortgage-backed securities
increased 11 basis points from 6.61% in fiscal 1996 to 6.72% in fiscal 1997,
this was not sufficient to offset an average balance decrease of $19.8 million
from fiscal 1996 to 1997. 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 $132,000 in
fiscal 1996 from fiscal 1995 attributable to a $3.6 million decrease in the
average outstanding balance which was offset slightly by a 10 basis point
increase in the average yield from 6.51% in fiscal 1995 to 6.61% in fiscal 1996.
Interest income on investments decreased $1.8 million or 25.5% in fiscal 1997.
This is the result of a $30.6 million decrease in the average balance. The
average yield on investments was relatively unchanged at 5.97% in fiscal 1997
and 5.96% in fiscal 1996. Interest income on investments decreased by $1.3
million or 15.1% from fiscal 1995 to 1996. This is a result of a $38.7 million
decrease in the average balance, partially offset by a 66 basis point increase
in the average yield.
Interest income from federal funds sold increased $495,000 from fiscal 1996 to
1997. The increase was attributable to an increase in the average federal funds
sold balance from $99.4 million in fiscal 1996 to $113.3 million in fiscal 1997.
This is offset by a decrease in the average yield from 5.67% in fiscal 1996 to
5.41% in fiscal 1997. The average balance of federal funds sold increased $23.9
million or 32% between fiscal 1995 and 1996, and interest income increased $1.5
million or 35.4% between the two years. The average yield increased from 5.51%
in fiscal 1995 to 5.67% in fiscal 1996. 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. The target federal funds interest rate
remained at 5.25% throughout fiscal 1997 until the end of the third quarter when
the target was increased to 5.50%.
INTEREST EXPENSE
Interest expense on deposits increased $1.1 million or 2.9% between fiscal 1996
and 1997. The average deposit balance increased $42.7 million or 5.3% in fiscal
1997, offset somewhat by a decrease in the average cost from 4.75% in fiscal
1996 to 4.64% in 1997. The fiscal 1997 deposit increases are attributable to the
success of a "55 Plus" checking program initiated in June 1996 and a variety of
certificate of deposit promotional specials. These specials ranged in terms from
15 to 21 months with rates ranging from 6.0% to 6.25%. Additionally, in December
1996, Parkvale acquired $11.5 million in deposits from another financial
institution. Interest expense on deposits increased by $4.2 million or 12.3%
between fiscal 1995 and 1996. The average deposit balance also increased by
$32.7 million between the two fiscal years, along with an increase in the
average cost from 4.41% in fiscal 1995 to 4.75% in fiscal 1996. Deposit
customers were attracted to rising deposit interest rates in an uncertain market
throughout most of fiscal 1996.
Interest expense on borrowed money decreased by $373,000 or 23.5% in fiscal
1997, primarily resulting from a decrease of $6.1 million in the average
balance. The average cost of borrowings increased from 6.19% in fiscal 1996 to
6.20% in fiscal 1997. In fiscal 1996, interest expense increased slightly by
$27,000 or 1.7% as a result of an increase of $908,000 in the average balance
and a 12 basis point rise in the average cost, from 6.07% in fiscal 1995 to
6.19% in fiscal 1996.
9
<PAGE> 7
Net interest income increased $1.5 million or 5.8% from fiscal 1996 to 1997. The
average interest rate spread increased slightly to 2.71% in fiscal 1997 from
2.66% in fiscal 1996, and the average net earning assets increased $2.3 million.
In fiscal 1996, net interest income increased $891,000 or 3.5%. Although the
average interest rate spread decreased from 2.71% in fiscal 1995 to 2.66% in
1996, average net earning assets increased $3.2 million between the two years.
At June 30, 1997, the weighted average yield on loans and investments was 7.5%.
The average rate payable on liabilities was 4.72% for deposits, 6.04% for
borrowings and 4.75% for combined deposits and borrowings.
PROVISION FOR LOAN LOSSES
Specific loss provisions, in the form of additions to the allowance for loan
losses, 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 also added to the allowance for loan losses 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 decreased by $287,000 or 41.8%
compared to fiscal year 1996. Management believes the allowance for loan losses
is adequate to cover the amount of possible credit losses inherent in the loan
portfolio as of June 30, 1997.
Nonperforming assets, which are defined as nonaccrual loans and real estate
owned were $2.7 million, $1.2 million and $2.1 million at June 30, 1997, 1996
and 1995, respectively, representing 0.27%, 0.14% and 0.24% of total assets at
the end of each respective year. Of the nonperforming assets at June 30, 1997,
$165,000 was real estate owned and $2.5 million represented nonaccrual loans.
In addition, loans totaling $284,000 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.
Aggregate valuation allowances were 1.95% of gross loans as of June 30, 1997,
compared to 2.17% as of June 30, 1996. 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 decreased $884,000 or 28.9% in fiscal 1997 compared to fiscal 1996.
This decline is primarily due to the nonrecurring gain of $969,000 recognized in
fiscal 1996 which related to the sale of real estate. There were no gains or
losses on sale of assets in fiscal 1997 or 1995. Without the fiscal 1996
nonrecurring gain, other income would have increased $85,000 or 4.7% between
fiscal 1996 and 1997.
Service charges on deposit accounts increased by $194,000 or 18.23% in fiscal
1997, and other service charges and fees increased by $90,000 or 16.45%. This is
mainly due to increased services for all types of deposit and loan products
given the increase in average balances over fiscal 1996. Loan fees and service
charges decreased by less than .5% between fiscal 1996 and 1995.
Miscellaneous income decreased $199,000 or 41.7% in fiscal 1997. The main
component of the decrease was in annuity fee income which decreased $146,000 in
fiscal 1997. During fiscal 1996 and most of fiscal 1997, annuity fee income was
generated from a tax deferred annuity program made available to Parkvale
customers through an unaffiliated third party marketing firm who offered fixed
and variable rate annuities and mutual funds to Parkvale customers. Parkvale
received a fee from the third party for providing the customer base. This type
of income fell with reduced customer demand for these products. Such income was
$137,000, $283,000 and $131,000 in fiscal 1997, 1996 and 1995, respectively.
Effective April 1, 1997, Parkvale eliminated the third party and began a new
in-house program to offer nondeposit investment products directly to customers
through a division of the Bank, Parkvale Financial Services.
10
<PAGE> 8
OTHER EXPENSE
Other expense increased by $4.6 million or 32.1% in fiscal 1997 as a direct
result of the one-time SAIF assessment of $5 million expensed in fiscal 1997.
Without this one-time assessment, other expenses would have decreased by
$467,000 or 3.28% for the year ended June 30, 1997.
Compensation and employee benefits increased by $345,000 or 5.0% during fiscal
1997 and by $270,000 or 4.1% during fiscal 1996 over the respective prior
periods. Compensation expense increased $279,000 or 4.8% in fiscal 1997 and
increased $242,000 or 4.4% in fiscal 1996. These increases represent normal
merit pay increases and increased staffing related to new offices and products.
ESOP contribution expense decreased $47,000 in fiscal 1997 and increased $82,000
in fiscal 1996 for estimated awards to be granted for service rendered in the
respective fiscal years. A portion of the ESOP contribution is based on the
average common stock price for the applicable calendar year. ESOP contribution
expense decreased in fiscal 1997 due to a 26% reduction in the number of shares
awarded to eligible participants in calendar year 1996. In 1995 and prior fiscal
years, the ESOP 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, the ESOP contributions will come 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 $126,000 or 6.2% in fiscal 1997 and $47,000
or provided 2.4% in fiscal 1996 over the respective prior periods. The increase
in both years was due to the full year effect of branches opened during February
1995 and November 1996.
Marketing expenses increased by $39,000 or 11.28% in fiscal 1997 and decreased
by $28,000 or 7.6% in fiscal 1996. The fiscal 1997 increase is primarily due to
branch promotions relative to the two new branches mentioned in the previous
paragraph. The decrease in fiscal 1996 was due to various savings deposit
advertisements and promotion of home equity credit lines during 1995.
The Bank is insured by the FDIC through the SAIF, mentioned in the Results of
Operations section. FDIC insurance expense was $734,000 in fiscal 1997, $1.8
million in fiscal 1996 and $1.8 million in fiscal 1995. The Bank paid annual
insurance premiums of 23 basis points on insured deposits throughout fiscal
1995, 1996 and the first quarter of fiscal 1997. During fiscal 1997, the
one-time SAIF assessment representing 65.7 basis points on insured deposits was
enacted to reach the required capitalization level for the SAIF. As of October
1, 1996, this legislation had a favorable effect on other expense by reducing
deposit insurance premiums. Annual insurance premiums for the last half of
fiscal 1997 were 6.48 basis points of insured deposits. The effect of these rate
changes was a 59.6% decrease in FDIC insurance expense in fiscal 1997 compared
to fiscal 1996. Effective July 1, 1997, the insurance premium was further
reduced to 6.30 basis points for the first half of fiscal 1998.
INCOME TAXES
Federal income tax expense decreased by $979,000 or 19.6% due to lower pretax
income for fiscal 1997. The effective tax rate for fiscal 1997 varied from the
normal statutory federal tax provisions primarily due to tax-exempt interest and
the Pennsylvania Mutual Thrift Institutions Tax. See Note H for additional
income tax information.
<TABLE>
<CAPTION>
NET INTEREST INCOME vs. OTHER EXPENSE*
YEAR ENDED JUNE 30
Measurement Period
(Fiscal Year Covered) Net Interest Income Other Expense
<S> <C> <C>
1993 26.288 12.288
1994 24.005 12.991
1995 25.595 13.821
1996 26.486 14.821
1997 28.028 13.773
</TABLE>
*Excludes the effect of the one time FDIC special assessment in fiscal 1997.
11
<PAGE> 9
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.
FORWARD LOOKING STATEMENTS
The statements in this Annual Report which are not historical fact are forward
looking statements. Forward looking information should not be construed as
guarantees of future performance. Actual results may differ from expectations
contained in such forward looking information as a result of factors including
but not limited to the interest rate environment, economic policy or conditions,
federal and state banking and tax regulations and competitive factors in the
marketplace. Each of these factors could affect estimates, assumptions,
uncertainties and risks considered in the development of forward looking
information and could cause actual results to differ materially from
management's expectations regarding future performance.
- --------------------------------------------------------------------------------
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 ("Parkvale") as of June 30, 1997 and 1996, and
the related consolidated statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP [Logo]
Pittsburgh, Pennsylvania
July 18, 1997
12
<PAGE> 10
- --------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and noninterest-earning deposits $ 12,104 $ 10,905
Federal funds sold 107,832 66,557
Interest-earning deposits in other banks 219 173
Investment securities available for sale (cost of $7,223 in 1997 and
$6,804
in 1996) (Note B) 13,546 10,493
Investment securities held to maturity (fair value of $136,834 in 1997
and $194,061
in 1996) (Note B) 136,034 194,393
Loans, net of allowance of $14,266 in 1997 and $13,990 in 1996 (Note C) 710,868 625,452
Foreclosed real estate, net of allowance of $0 in 1997 and $19 in 1996 165 240
Office properties and equipment, net (Note D) 2,125 2,005
Intangible assets and deferred charges 553 276
Prepaid expenses and other assets (Note L) 7,793 8,748
- ------------------------------------------------------------------------------------------------
Total assets $991,239 $919,242
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
- ------------------------------------------------------------------------------------------------
Savings deposits (Note E) $881,244 $807,087
Advances from Federal Home Loan Bank and other debt (Note F) 20,196 26,911
Advance payments from borrowers for taxes and insurance 10,104 10,828
Other liabilities (Note L) 4,512 4,651
- ------------------------------------------------------------------------------------------------
Total liabilities 916,056 849,477
- ------------------------------------------------------------------------------------------------
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;
1997--4,310,679 shares issued, 1996--3,448,736 shares issued 4,311 3,449
Additional paid-in capital 8,034 9,138
Treasury stock at cost--255,537 shares in 1997 and 266,366 shares in
1996 (3,676) (3,028)
Employee stock ownership plan debt (330) (104)
Unrealized gains on securities available for sale 4,015 2,342
Retained earnings 62,829 57,968
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 75,183 69,765
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $991,239 $919,242
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE> 11
- --------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $51,388 $46,585 $41,567
Mortgage-backed securities 5,557 6,775 6,907
Investments 5,310 7,127 8,394
Federal funds sold 6,125 5,630 4,158
- --------------------------------------------------------------------------------------------------
Total interest income 68,380 66,117 61,026
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings deposits (Note E) 39,138 38,044 33,871
Borrowings 1,214 1,587 1,560
- --------------------------------------------------------------------------------------------------
Total interest expense 40,352 39,631 35,431
- --------------------------------------------------------------------------------------------------
Net interest income 28,028 26,486 25,595
Provision for loan losses (Note C) 399 686 1,094
- --------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 27,629 25,800 24,501
- --------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,258 1,064 1,092
Other service charges and fees 637 547 523
Gain on sale of assets (Note J) -- 969 --
Miscellaneous 279 478 409
- --------------------------------------------------------------------------------------------------
Total other income 2,174 3,058 2,024
- --------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and employee benefits 7,243 6,899 6,629
Office occupancy 2,148 2,022 1,975
Marketing 380 341 369
FDIC insurance 734 1,816 1,763
FDIC special assessment 5,035 -- --
Office supplies, telephone, and postage 906 841 831
Miscellaneous 2,362 2,321 2,254
- --------------------------------------------------------------------------------------------------
Total other expenses 18,808 14,240 13,821
- --------------------------------------------------------------------------------------------------
Income before income taxes 10,995 14,618 12,704
Income tax expense (Note H) 4,021 5,000 4,633
- --------------------------------------------------------------------------------------------------
NET INCOME $ 6,974 $ 9,618 $ 8,071
- --------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 1.66 $ 2.29 $ 1.88
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
14
<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,
-------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 68,745 $ 65,694 $ 61,123
Loan fees received 328 364 267
Other fees and commissions received 2,012 1,965 1,787
Interest paid (40,391) (39,640) (35,435)
Cash paid to suppliers and employees (18,911) (13,562) (13,853)
Income taxes paid (4,218) (4,784) (4,378)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,565 10,037 9,511
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale -- 48 36
Proceeds from maturities of investments 73,399 151,871 131,686
Purchase of investment securities available for sale (419) (968) (330)
Purchase of investment securities held to maturity (15,102) (121,338) (89,255)
Maturity of deposits in other banks (46) 21 1,347
Purchase of loans (104,428) (104,940) (27,808)
Proceeds from sales of loans 1,758 2,479 2,578
Principal collected on loans 144,239 149,608 100,727
Loans made to customers, net of loans in process (127,403) (148,057) (105,900)
Proceeds from branch deposit acquisition 11,084 -- --
Capital expenditures (448) (114) (199)
- ----------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (17,366) (71,390) 12,882
Cash flows from financing activities:
Net increase (decrease) in checking and savings accounts 2,115 3,407 (49,595)
Net increase in certificates of deposit 60,496 9,236 65,485
Proceeds from FHLB advances -- 96 --
Repayment of FHLB advances (5,011) (10) (96)
Net (decrease) increase in other borrowings (1,704) 2,220 304
Net (decrease) increase in borrowers advances for tax and insurance (724) (1,304) 818
Dividends paid (2,007) (1,592) (1,291)
Allocation of treasury stock to retirement plans 450 178 39
Payment for treasury stock (1,340) -- (3,031)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,275 12,231 12,633
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 42,474 (49,122) 35,026
Cash and cash equivalents at beginning of year 77,462 126,584 91,558
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 119,936 $ 77,462 $ 126,584
- ----------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash provided by operating
activities:
Net income $ 6,974 $ 9,618 $ 8,071
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 513 528 568
Accretion and amortization of fees and discounts (174) (442) (319)
Loan fees collected and deferred 328 364 268
Provision for loan losses 399 686 1,094
Gain on sale of assets -- (969) --
Decrease (increase) in accrued interest receivable 199 (369) 121
Decrease (increase) in other assets 301 (90) (371)
Decrease in accrued interest payable (39) (9) (4)
(Increase) decrease in deferred income tax asset (197) 276 (45)
(Decrease) increase in other liabilities (739) 444 128
- ----------------------------------------------------------------------------------------------------------
Total adjustments 591 419 1,440
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 7,565 $ 10,037 $ 9,511
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE> 13
- --------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<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, 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) 0
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 $.333 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) 0
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 $.416 per
share (1,680) (1,680)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 3,449 9,138 (3,028) (104) 2,342 57,968 69,765
- ----------------------------------------------------------------------------------------------------------------------
1997 NET INCOME 6,974 6,974
PRINCIPAL PAYMENTS ON ESOP
DEBT 224 224
TRANSFER TO REFLECT 5-FOR-4
SPLIT 862 (862) 0
TREASURY STOCK PURCHASED (1,340) (1,340)
TREASURY STOCK CONTRIBUTED TO
BENEFIT PLAN 165 179 344
ADDITIONAL BORROWINGS BY ESOP (450) (450)
CHANGE IN UNREALIZED GAINS,
NET OF INCOME TAXES OF $962 1,673 1,673
EXERCISE OF STOCK OPTIONS (407) 513 106
CASH DIVIDENDS DECLARED ON
COMMON STOCK AT $.52 PER
SHARE (2,113) (2,113)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 $4,311 $ 8,034 $ (3,676) $(330) $4,015 $62,829 $ 75,183
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
16
<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 Noninterest-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 $4.4 million of
checking deposits, 3% of the next $44.9 million of checking deposits and 10% of
total checking deposits over $49.3 million. These required reserves, net of
allowable credits, amounted to $753,000 at June 30, 1997.
Investment Securities Available for Sale
Investment 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
17
<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.
Loans are placed on nonaccrual status when in the judgment of management, the
probability of collection of principal and interest is deemed to be insufficient
to warrant further accrual. All loans which are 90 or more days delinquent are
treated as nonaccrual loans. 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.
Nonaccrual, substandard and doubtful commercial and other real estate loans are
considered impaired. Impaired loans are generally evaluated based on the present
value of the expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. Impaired loans have been
included in management's assessment of the adequacy of general provision. This
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 1997, 1996, and 1995 amounted to $311,000,
$1.2 million and $170,000, respectively. The transfers in 1996 primarily
consisted of a $902,000 multifamily 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 (EPS)
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, 1997, 1996 and
1995, earnings per share were based upon the following share amounts:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Actual average shares outstanding...................... 4,047,408 4,017,690 4,134,079
Option equivalents..................................... 163,662 188,044 168,556
--------- --------- ---------
Weighted average aggregate............................. 4,211,070 4,205,734 4,302,635
========= ========= =========
</TABLE>
On September 17, 1996, the Board of Directors declared a 5-for-4 stock split on
Parkvale's common stock. The additional shares were paid on October 14, 1996 to
stockholders of record at the close of business on September 30, 1996. This
increased the outstanding shares by 808,129. 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 1995, 1994 and 1993.
Stock Options
In October 1995, the Financial Accounting Standards Board (FASB) issued FAS 123,
"Accounting for Stock-Based Compensation," which was effective for fiscal years
beginning after December 15, 1995. FAS 123
18
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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." As Parkvale elected to continue using the accounting in APB 25, pro
forma disclosures of net income and earnings per share are made for options
granted on or after July 1, 1995 as if the fair value method of accounting, as
defined by FAS 123 had been applied. See Note I.
Statement of Cash Flows
For the purposes of reporting cash flows, cash and cash equivalents include cash
and noninterest-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. A stock repurchase program which commenced in July 1996,
permitting up to 5% of outstanding stock to be repurchased through July 1997,
has been completed. As of June 30, 1997, PFC repurchased 55,427 shares of the
201,250 shares available at the inception of the 1996/1997 program. These shares
were repurchased at an average cost of $24.17 per share and they represent 1.37%
of the outstanding stock at the inception of the program.
Reclassification
Certain prior year amounts have been reclassified for comparative purposes.
Effect of New Accounting Standards
In June 1996, the FASB issued FAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." FAS 125 provides new
accounting and reporting standards for sales, securitizations and servicing of
receivables and other financial assets, for certain secured borrowing and
collateral transactions, and for extinguishments of liabilities. FAS 125 as
amended by FAS 127, "Deferral of Effective Date of Certain Provisions of FAS
125," is generally to be applied to transactions occurring after December 31,
1996, with certain provisions having been delayed until 1998. FAS 125 has not
materially impacted Parkvale's financial position or results of operations as a
result of adoption.
In February 1997, the FASB issued FAS 128, "Earnings per Share," which
supersedes APB 15, "Earnings per Share," in order to simplify the standards for
computing EPS. FAS 128 replaces the presentation of primary and fully diluted
EPS with presentation of basic and diluted EPS and requires retroactive
restatement for all periods presented. This standard is effective for periods
ending after December 15, 1997. The effect of FAS 128 on Parkvale's EPS is not
expected to be significant.
In February 1997, the FASB issued FAS 129, "Disclosure of Information about
Capital Structure," which consolidates existing guidance relating to capital
structure. This standard is also effective for reporting periods ending after
December 15, 1997 and will be adopted by Parkvale as of December 31, 1997. The
standard is not expected to significantly change the current presentation
regarding capital structure.
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
standard is also effective for fiscal years beginning after December 15, 1997,
and will be adopted by Parkvale as of December 31, 1997. The impact of adoption
is not expected to be significant based on conditions in existence at June 30,
1997.
- --------------------------------------------------------------------------------
19
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE B--INVESTMENT SECURITIES
The amortized cost, gross unrecorded gains and losses and fair values for
investment securities classified as available for sale or held to maturity at
June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------- ----------------------------------------------
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>
Available for sale:
FHLMC common stock
(169,696 shares in 1997;
42,424 shares in
1996)................... $ 166 $5,773 $ -- $ 5,939 $ 166 $3,461 $ -- $ 3,627
FHLB of Pittsburgh
stock................... 6,346 -- -- 6,346 5,927 -- -- 5,927
Equity
securities--other....... 711 550 -- 1,261 711 228 -- 939
-------- ------ ------ -------- -------- ------ ------ --------
Total equity
investments
available for
sale............... $ 7,223 $6,323 $ -- $ 13,546 $ 6,804 $3,689 $ -- $ 10,493
-------- ------ ------ -------- -------- ------ ------ --------
</TABLE>
Held to maturity:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations due:
Within 1 year............ $ 9,971 $ 11 $ -- $ 9,982 $ 9,000 $ 3 $ 7 $ 8,996
Within 5 years........... 41,979 45 309 41,715 53,936 -- 891 53,045
-------- ------ ------ -------- -------- ------ ------ --------
Total U.S.
Government and
agency
obligations....... 51,950 56 309 51,697 62,936 3 898 62,041
Corporate debt:
Within 1 year............ 7,017 14 -- 7,031 17,089 21 16 17,094
Within 5 years........... 10,126 47 4 10,169 14,997 45 31 15,011
-------- ------ ------ -------- -------- ------ ------ --------
Total corporate
debt.............. 17,143 61 4 17,200 32,086 66 47 32,105
Total U.S. Government and
agency obligations and
corporate debt............. 69,093 117 313 68,897 95,022 69 945 94,146
-------- ------ ------ -------- -------- ------ ------ --------
</TABLE>
Mortgage-backed securities at June 30:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC........................ 45,644 914 68 46,490 61,730 968 344 62,354
FNMA......................... 6,284 127 1 6,410 7,791 70 30 7,831
GNMA......................... 1,187 54 -- 1,241 1,326 43 -- 1,369
Collateralized mortgage
obligations (CMOs)......... 12,336 89 119 12,306 26,965 59 222 26,802
Other participation
certificates............... 1,490 -- -- 1,490 1,559 -- -- 1,559
-------- ------ ------ -------- -------- ------ ------ --------
Total
mortgage-backed
securities........ 66,941 1,184 188 67,937 99,371 1,140 596 99,915
-------- ------ ------ -------- -------- ------ ------ --------
Total investments classified
as held to maturity........ $136,034 $1,301 $ 501 $136,834 $194,393 $1,209 $1,541 $194,061
-------- ------ ------ -------- -------- ------ ------ --------
Total investment
portfolio......... $143,257 $7,624 $ 501 $150,380 $201,197 $4,898 $1,541 $204,554
======== ======== ====== ======== ======== ====== ====== ========
</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. Approximately $31,000 of the total mortgage-backed
portfolio consists of balloon securities which have stated maturities within
three years. The CMOs at June 30, 1997 consist of $8,343 of adjustable rate
securities and $3,993 of fixed rate instruments with 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.
- --------------------------------------------------------------------------------
20
<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>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
1-4 Family.................................. $586,735 $517,082 $423,439 $403,492 $417,079
Multifamily................................. 16,825 17,375 22,894 22,735 16,826
Commercial..................................... 17,724 19,516 18,435 18,113 17,851
Other.......................................... 9,329 2,387 3,196 1,931 1,472
-------- -------- -------- -------- --------
630,613 556,360 467,964 446,271 453,228
Consumer loans................................... 90,305 76,224 69,197 61,805 55,296
Commercial business loans........................ 8,332 8,925 4,542 6,135 8,996
Loans on savings accounts........................ 3,076 3,285 3,253 3,206 3,314
-------- -------- -------- -------- --------
Gross loans.................................... 732,326 644,794 544,956 517,417 520,834
Less:
Loans in process............................... 6,393 4,386 4,816 7,506 4,782
Allowance for loan losses...................... 14,266 13,990 13,136 12,056 10,283
Unamortized discount and deferred loan fees.... 799 966 2,459 2,861 2,337
-------- -------- -------- -------- --------
$710,868 $625,452 $524,545 $494,994 $503,432
======== ======== ======== ======== ========
</TABLE>
The following summary sets forth the activity in the allowance for loan losses
for the years ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Beginning balance..................................... $13,990 $13,136 $12,056 $10,283 $ 7,619
Provision for losses--mortgage loans.................. 29 440 972 1,668 3,247
Provision for losses--consumer loans.................. 370 246 122 111 445
Provision for losses--commercial business loans....... -- -- -- 50 57
Loans recovered....................................... 116 329 95 157 370
Loans charged off..................................... (239) (161) (109) (213) (1,455)
------- ------- ------- ------- -------
Ending balance........................................ $14,266 $13,990 $13,136 $12,056 $10,283
======= ======= ======= ======= =======
</TABLE>
Loans charged off and recovered are as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans recovered:
Commercial..................................... $ -- $ -- $ -- $ -- $ 1
Consumer....................................... 56 70 47 9 6
Mortgage....................................... 60 259 48 148 363
------- ------- ------- ------- -------
Total recoveries................................. 116 329 95 157 370
------- ------- ------- ------- -------
Loans charged off:
Consumer....................................... (227) (125) (39) (45) (22)
Mortgage....................................... (12) (36) (70) (168) (1,433)
------- ------- ------- ------- -------
Total charge-offs................................ (239) (161) (109) (213) (1,455)
------- ------- ------- ------- -------
Net recoveries (charge-offs)..................... $ (123) $ 168 $ (14) $ (56) $(1,085)
======= ======= ======= ======= =======
</TABLE>
The allowance for loan losses at June 30 consisted of:
<TABLE>
<S> <C> <C> <C> <C> <C>
Mortgage loans............................ $12,645 $12,579 $11,915 $10,923 $ 9,274
Consumer loans............................ 1,405 1,194 1,004 916 843
Commercial business loans................. 216 217 217 217 166
Ratio of net charge-offs to average loans......... 0.02% 0.00% 0.00% 0.01% 0.21%
</TABLE>
21
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
At June 30, 1997, Parkvale was committed under various agreements to originate
fixed and adjustable rate mortgage loans aggregating $1,266 and $1,441,
respectively, at rates ranging from 7.50% to 7.63% for fixed rate and 7.13% to
7.60% for adjustable rate loans, and had $55,542 of unused consumer lines of
credit and $3,108 in unused commercial lines of credit. In addition, Parkvale
was committed to originate mortgage loans aggregating $565 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 totaling $2,402 at June 30,
1997. Available but unused consumer and commercial credit card lines amounted to
$9,429 and $189, respectively, at June 30, 1997.
At June 30, Parkvale serviced loans for the benefit of others as follows:
1997--$8,006, 1996--$13,001 and 1995--$15,555. Decreases represent repayments on
the underlying loans.
At June 30, 1997, 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 45 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--46.4%; greater
Washington, D.C. area--15%; and Ohio--8.6%. 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 June 30, the amount of interest income of nonaccrual loans that had not been
recognized in interest income was $285 for 1997, and $137 for 1996. The Bank had
$859 and $642 of impaired loans as of June 30, 1997 and 1996, respectively, and
recorded $104 and $95 of reserves related to these loans as of June 30, 1997 and
1996, respectively. Additionally, the loans have been included in management's
assessment of the adequacy of general valuation allowances. The average recorded
investment in impaired loans was $975 during fiscal 1997 and $937 during fiscal
1996.
- --------------------------------------------------------------------------------
NOTE D--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30 are summarized by major
classification as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land....................................................... $ 318 $ 318
Office buildings and leasehold improvements................ 3,779 3,489
Furniture, fixtures and equipment.......................... 3,294 3,145
------ ------
7,391 6,952
Less accumulated depreciation and amortization............. 5,266 4,947
------ ------
Office properties and equipment, net....................... $2,125 $2,005
====== ======
Depreciation expense....................................... $ 328 $ 370
====== ======
</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>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Checking and money market accounts.................. $ 2,152 $ 2,154 $ 2,355
Passbook accounts................................... 3,574 3,630 3,970
Certificates........................................ 33,412 32,260 27,546
------- ------- -------
$39,138 $38,044 $33,871
======= ======= =======
</TABLE>
22
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
A summary of savings deposits at June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Savings:
Checking accounts.............................. $ 64,394 7.3 $ 54,138 6.7
Checking accounts--noninterest-bearing......... 17,307 1.9 16,308 2.0
Money market accounts.......................... 44,804 5.1 47,657 5.9
Passbook accounts.............................. 139,089 15.8 140,908 17.5
-------- ----- -------- -----
265,594 30.1 259,011 32.1
Certificates of deposit.......................... 608,031 69.0 541,912 67.1
-------- ----- -------- -----
873,625 99.1 800,923 99.2
Accrued interest................................. 7,619 0.9 6,164 0.8
-------- ----- -------- -----
$881,244 100.0 $807,087 100.0
======== ===== ======== =====
</TABLE>
The aggregate amount of time deposits over $100 was $41,354 and $32,218 at June
30, 1997 and 1996, respectively.
At June 30, the scheduled maturities of certificate accounts were as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD 1997 1996
--------------- -------- --------
<S> <C> <C>
1-12 months................................................ $317,345 $268,177
13-24 months............................................... 99,943 88,166
25-36 months............................................... 69,026 47,180
37-48 months............................................... 37,855 49,235
49-60 months............................................... 26,848 32,385
Thereafter................................................. 57,014 56,769
-------- --------
$608,031 $541,912
======== ========
</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>
1997 1996
--------------------- ---------------------
INTEREST INTEREST
BALANCE RATE % BALANCE RATE %
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Due within one year.................... $ 5,000 7.98 $ 5,000 8.44
Due within five years.................. 10,000 6.24-6.82 10,000 6.24-7.98
Due within ten years................... -- -- 5,000 6.82
Due within twenty years................ 682 3.00-6.27 693 3.00-6.27
-------
$15,682 $20,693
======= =======
Weighted average interest rate
at end of period..................... 6.88% 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 $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 $4,514 and $6,218 at June 30, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
23
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE G--REGULATORY CAPITAL
Parkvale is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
Parkvale's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Parkvale must meet specific
capital guidelines that involve quantitative measures of Parkvale's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Parkvale's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Parkvale to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of June 30, 1997, that Parkvale meets all capital
adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized Parkvale Savings Bank as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the institution's category.
Parkvale's actual regulatory capital amounts and ratios compared to minimum
levels are as follows:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF JUNE 30, 1997:
TOTAL CAPITAL TO RISK WEIGHTED ASSETS.......... $76,751 14.65% $41,904 8.00% $52,380 10.00%
TIER I CAPITAL TO RISK WEIGHTED ASSETS......... 70,112 13.20% 21,243 4.00% 31,865 6.00%
TIER I CAPITAL TO AVERAGE ASSETS............... 70,112 7.38% 38,001 4.00% 47,501 5.00%
As of June 30, 1996:
Total Capital to Risk Weighted Assets.......... $72,070 14.87% $38,786 8.00% $48,482 10.00%
Tier I Capital to Risk Weighted Assets......... 65,915 13.39% 19,698 4.00% 29,547 6.00%
Tier I Capital to Average Assets............... 65,915 7.27% 36,257 4.00% 45,321 5.00%
</TABLE>
- --------------------------------------------------------------------------------
NOTE H--INCOME TAXES
Income tax expense (credits) for the years ended June 30 are comprised of:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal:
Current............................................ $3,835 $3,923 $4,071
Deferred........................................... (506) 276 (45)
State................................................ 692 801 607
------ ------ ------
$4,021 $5,000 $4,633
====== ====== ======
</TABLE>
24
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
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>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Book bad debt reserves........................................ $4,735 $4,685
Deferred loan fees............................................ 365 379
Purchase accounting adjustments............................... 97 105
Fixed assets.................................................. 50 22
Deferred compensation......................................... 188 113
------ ------
Total deferred tax assets.................................. 5,435 5,304
------ ------
Deferred tax liabilities:
Tax bad debt reserves......................................... 1,407 1,803
Unrealized gains on securities available for sale............. 2,308 1,346
Other, net.................................................... 258 237
------ ------
Total deferred tax liabilities............................. 3,973 3,386
------ ------
Net deferred tax assets.................................... $1,462 $1,918
====== ======
</TABLE>
No valuation allowance was required at June 30, 1997 or 1996.
Parkvale's effective tax rate differs from the expected federal income tax rate
for the years ended June 30 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Expected federal statutory income tax
provision/rate................................ $3,738 34.0% $4,970 34.0% $4,319 34.0%
Tax-exempt interest............................. (118) -1.1% (197) -1.3% (215) -1.7%
State income taxes, net of federal benefit...... 457 4.2% 529 3.6% 401 3.2%
Other........................................... (56) -0.5% (302) -2.1% 128 1.0%
------ ---- ------ ---- ------ ----
Effective total income tax provision............ $4,021 36.6% $5,000 34.2% $4,633 36.5%
====== ==== ====== ==== ====== ====
</TABLE>
Prior to 1996, savings institutions that met certain definitional tests and
operating requirements prescribed by the Internal Revenue Code of 1986, as
amended, were allowed a special bad debt deduction and other special tax
provisions. The special bad debt deduction was 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 was 8% of adjusted taxable income. The Small Business Job
Protection Act of 1996 passed in August 1996 eliminated the special bad debt
deduction granted solely to thrifts. This results in the recapture of past taxes
for permanent deductions arising from the "applicable excess reserve." This
"applicable excess reserve" is the total amount of the reserve over the base
year reserve as of December 31, 1987. Retained earnings at December 31, 1995
included financial statement tax bad debt reserves of $12,013, which includes
$7,876 of base year reserves for which no tax provision has been made. Subject
to prevailing corporate tax rates, Parkvale owes federal taxes on $4,137 in
excess of the base year reserves estimated at $1,407, which is reflected as a
deferred tax liability. The recapture tax of $1,407 is to be paid in six equal
annual installments. Deferral of these payments for up to two years is permitted
contingent upon the Bank continuing to satisfy a specified mortgage origination
test in 1997, which was passed in 1996.
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.
- --------------------------------------------------------------------------------
25
<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 $177, $172 and $171 in fiscal years 1997,
1996 and 1995, 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
Parkvale also provides an Employee Stock Ownership Plan ("ESOP") to all
employees who have met minimum service and age requirements. Parkvale recognized
expense of $287 in fiscal 1997, $336 in fiscal 1996 and $253 in fiscal 1995 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, 1997, the ESOP owned 358,120 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 122,071 shares of authorized but unissued Common Stock
of Parkvale was reserved for future issuance. As of June 30, 1997, 48,820 option
shares have been granted under this plan. Additionally, the 1993 Key Employee
Stock Compensation Program was adopted in October 1993. An aggregate of 295,410
shares of authorized but unissued Common Stock of Parkvale were reserved for
future issuance. As of June 30, 1997, 136,706 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 six 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, 1997, all option shares are
exercisable, except for 41,500 which become exercisable on December 17, 1997.
The following table presents option share data related to the Stock Option Plans
for the years indicated, adjusted for the 1996, 1995, 1994 and 1993 stock
splits:
<TABLE>
<CAPTION>
EXERCISE PRICE PER
SHARE $3.277 $4.454 $15.565 $16.128 $15,078 $21.30 $24.875 $25.50 Total
------- ------- ------- ------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Share balances at
June 30, 1994... 115,331 118,408 12,206 245,945
Granted....... 78,125 12,206 90,331
Exercised..... (10,352) (2,441) (12,793)
------- ------- ------- ------- ------- ------ ------- ------ -------
June 30, 1995... 104,979 115,967 12,206 78,125 12,206 323,483
Granted....... 12,206 12,206
Exercised..... (33,633) (5,566) (39,199)
------- ------- ------- ------- ------- ------ ------- ------ -------
June 30, 1996... 71,346 110,401 12,206 78,125 12,206 12,206 296,490
Granted....... 12,206 83,000 95,206
Exercised..... (39,902) (11,999) (6,835) (58,736)
------- ------- ------- ------- ------- ------ ------- ------ -------
June 30, 1997... 31,444 98,402 12,206 71,290 12,206 12,206 12,206 83,000 332,960
</TABLE>
For options granted on or after July 1, 1995, pro forma information regarding
net income and earnings per share is required by FAS 123, and has been
determined as if the Company had accounted for its stock options using that
method. The fair value for these options was estimated at the date of the grant
using a Black-Scholes option pricing model with the following respective
assumptions: for the 1993 Director's Stock Option Plan, the risk-free interest
rate is 6.5%, dividend yield is 1.8%, volatility factor of the expected market
price of PFC's common stock of 0.159 and an expected life of the options of nine
years; for the 1993 Key Employee Stock Compensation Program, the risk-free
interest rate of 6.4%, dividend yield is 1.8%, volatility factor of the expected
market price of PFC's common stock of 0.157 and an expected life of the options
of six years.
In management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. In addition, option valuation
models require input of highly subjective assumptions including the expected
stock price volatility.
26
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Parkvale's pro forma
information follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30,
-----------------
1997 1996
------ ------
<S> <C> <C>
Net income before stock options................................... $6,974 $9,618
Compensation expense from stock options:
Fiscal year ended June 30, 1996 grant........................... -- 51
Fiscal year ended June 30, 1997 grant........................... 241 --
------ ------
Pro forma net income.............................................. $6,733 $9,567
====== ======
Pro forma earnings per share...................................... $ 1.60 $ 2.27
====== ======
</TABLE>
- --------------------------------------------------------------------------------
NOTE J--GAIN (LOSS) ON SALE OF ASSETS
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 multifamily 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. The book value of the loan was $4,547 at the
time of payoff.
- --------------------------------------------------------------------------------
NOTE K--LEASES
Parkvale's rent expense for leased real properties amounted to approximately
$1,036 in fiscal 1997, $992 in 1996 and $911 in 1995. At June 30, 1997, Parkvale
was obligated under 20 noncancellable operating leases, which expire through
2014. The minimum rental commitments for the fiscal years subsequent to June 30,
1996 are as follows: 1998--$1,070, 1999--$989, 2000--$518, 2001--$410,
2002--$260, later years--$1,302.
- --------------------------------------------------------------------------------
NOTE L--SELECTED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
-------- ------
<S> <C> <C>
Prepaid expenses and other assets:
Accrued interest on loans................................... $5,038 $3,775
Reserve for uncollected interest............................ (284) (137)
Accrued interest on investments............................. 1,138 2,453
Other prepaids.............................................. 439 739
Net deferred tax asset...................................... 1,462 1,918
-------- ------
$7,793 $8,748
======== ======
Other liabilities:
Accounts payable and accrued expenses....................... $1,729 $1,837
Negative goodwill........................................... 669 793
Other liabilities........................................... 863 1,078
Federal and state income taxes payable...................... 1,251 943
-------- ------
$4,512 $4,651
======== ======
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE M--QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR
--------------------------------------------- ENDED
SEP. 96 DEC. 96 MAR. 97 JUNE 97 JUNE 97
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total interest income...................... $16,666 $16,778 $17,257 $17,679 $68,380
Total interest expense..................... 9,737 9,906 10,242 10,467 40,352
------- ------- ------- ------- -------
Net interest income........................ 6,929 6,872 7,015 7,212 28,028
Provision for loan losses.................. 135 114 71 79 399
------- ------- ------- ------- -------
Total interest income after provision for
losses................................... 6,794 6,758 6,944 7,133 27,629
Other income............................... 519 583 514 558 2,174
FDIC special assessment.................... 5,035 -- -- -- 5,035
Other expense.............................. 3,530 3,214 3,437 3,592 13,773
------- ------- ------- ------- -------
Income (loss) before income taxes.......... (1,252) 4,127 4,021 4,099 10,995
Income tax expense (credit)................ (464) 1,528 1,467 1,490 4,021
------- ------- ------- ------- -------
Net income (loss).......................... $ (788) $ 2,599 $ 2,554 $ 2,609 $ 6,974
======= ======= ======= ======= =======
Net income (loss) per share................ $ (0.19) $ 0.62 $ 0.61 $ 0.62 $ 1.66
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR
---------------------------------------------- ENDED
SEP. 95 DEC. 95 MAR. 96 JUNE 96 JUNE 96
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total interest income...................... $16,561 $16,559 $16,532 $16,465 $66,117
Total interest expense..................... 10,073 9,985 9,881 9,692 39,631
------- ------- ------- ------- -------
Net interest income........................ 6,488 6,574 6,651 6,773 26,486
Provision for loan losses.................. 185 149 168 184 686
------- ------- ------- ------- -------
Total interest income after provision for
losses................................... 6,303 6,425 6,483 6,589 25,800
Gain on sale of assets..................... -- -- 969 -- 969
Other income............................... 510 533 556 490 2,089
Total other expense........................ 3,521 3,604 3,582 3,533 14,240
------- ------- ------- ------- -------
Income before income taxes................. 3,292 3,354 4,426 3,546 14,618
Income tax expense......................... 1,149 1,172 1,443 1,236 5,000
------- ------- ------- ------- -------
Net income................................. $ 2,143 $ 2,182 $ 2,983 $ 2,310 $ 9,618
======= ======= ======= ======= =======
Net income per share....................... $ 0.51 $ 0.52 $ 0.71 $ 0.55 $ 2.29
- --------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 26
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, 1997 and 1996 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
1997 1996
---- ----
<S> <C> <C>
Assets:
Investment in PSB............ $74,424 $68,446
Cash......................... 370 963
Other equity investments..... 1,106 840
------- -------
Total assets.............. $75,900 $70,249
======= =======
Liabilities and Shareholders'
Equity:
Accounts payable............. $ 43 $ 13
Deferred taxes............... 147 50
Dividends payable............ 527 421
Shareholders' equity......... 75,183 69,765
------- -------
Total liabilities and
shareholders' equity.... $75,900 $70,249
======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividends from PSB....... $2,500 $2,000 $4,400
Other income............. 95 82 68
Operating expenses....... (95) (82) (68)
------ ------ ------
Income before equity in
undistributed earnings
of subsidiary.......... 2,500 2,000 4,400
Equity in undistributed
income of PSB.......... 4,474 7,618 3,671
------ ------ ------
Net income.......... $6,974 $9,618 $8,071
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Management fee income received........................ $ 95 $ 82 $ 68
Dividends received.................................... 2,500 2,000 4,400
Cash paid to suppliers................................ (65) (75) (85)
------- ------- -------
Net cash provided by operating activities.......... 2,530 2,007 4,383
------- ------- -------
Cash flows from investing activities:
Equity investments purchased.......................... -- (373) (330)
Cash flows from financing activities:
Payment for treasury stock............................ (1,340) -- (3,031)
Allocation of treasury stock to retirement plans...... 450 178 39
Dividends paid to stockholders........................ (2,007) (1,592) (1,321)
Loan to PFC ESOP...................................... (450) (135) (112)
Principal collected on ESOP loan...................... 224 130 13
------- ------- -------
Net cash used in financing activities.............. (3,123) (1,419) (4,412)
------- ------- -------
Net (decrease) increase in cash and cash equivalents.... (593) 215 (359)
Cash and cash equivalents at beginning of year.......... 963 748 1,107
------- ------- -------
Cash and cash equivalents at end of year................ $ 370 $ 963 $ 748
======= ======= =======
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................ $ 6,974 $ 9,618 $ 8,071
Adjustments to reconcile net income to net cash
provided by
operating activities:
Undistributed income of PSB..................... (4,474) (7,618) (3,671)
Increase (decrease) in accrued expenses......... 30 7 (17)
------- ------- -------
Net cash provided by operating activities.......... $ 2,530 $ 2,007 $ 4,383
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE> 27
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, "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>
1997 1996
------------------------ ------------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FINANCIAL ASSETS: FAIR VALUE VALUE FAIR VALUE VALUE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Cash and noninterest-earning deposits..... $ 12,104 $ 12,104 $ 10,905 $ 10,905
Federal funds sold........................ 107,832 107,832 66,557 66,557
Interest-earning deposits in other
banks.................................. 219 219 173 173
Investment securities..................... 82,443 82,639 104,639 105,515
Mortgage-backed securities................ 67,937 66,941 99,915 99,371
Loans receivable.......................... 738,663 710,868 644,936 625,452
---------- -------- -------- --------
$1,009,198 $980,603 $927,125 $907,973
========== ======== ======== ========
FINANCIAL LIABILITIES:
Checking, savings and money market
accounts............................... $ 265,594 $265,594 $259,011 $259,011
Savings certificates...................... 605,186 608,031 539,433 541,912
Advances from Federal Home Loan Bank...... 15,763 15,682 20,795 20,693
Commercial investment agreements.......... 4,514 4,514 6,218 6,218
---------- -------- -------- --------
$ 891,057 $893,821 $825,457 $827,834
========== ======== ======== ========
Off-balance-sheet instruments............... $ (2) $ -- $ (24) $ --
</TABLE>
- --------------------------------------------------------------------------------
30
<PAGE> 28
- --------------------------------------------------------------------------------
CAPITAL STOCK INFORMATION
- ANNUAL MEETING
The Annual Meeting of Stockholders will be held at
10:00 a.m., Thursday, October 23, 1997, at the
Pittsburgh Athletic Association, 4215 Fifth Avenue,
Pittsburgh, Pennsylvania.
- 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 1996.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED HIGH LOW DIVIDENDS
--------------------- ------ ------ ----------
<S> <C> <C> <C>
June 97................ $29.00 $25.75 $ 0.13
March 97............... 30.00 24.50 0.13
December 96............ 26.50 22.60 0.13
September 96........... 23.60 19.60 0.13
June 96................ $23.40 $19.60 $ 0.104
March 96............... 22.80 20.60 0.104
December 95............ 22.80 20.19 0.104
September 95........... 22.72 16.32 0.104
</TABLE>
There were 4,084,935 shares of Common Stock outstanding
as of August 25, 1997, the Voting Record Date, which
shares were held as of such date by approximately 520
holders of record.
- TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Toll free phone: 1 (800) 368-5948
Fax: (908) 497-2312
- INFORMATION REQUESTS
A copy of the 1997 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 shareholders 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 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 the
Registration Statement (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, 1997, 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, 1997.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
September 19, 1997
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 1997 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-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,104
<INT-BEARING-DEPOSITS> 219
<FED-FUNDS-SOLD> 107,832
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,546
<INVESTMENTS-CARRYING> 136,034
<INVESTMENTS-MARKET> 136,834
<LOANS> 725,134
<ALLOWANCE> 14,266
<TOTAL-ASSETS> 991,239
<DEPOSITS> 881,244
<SHORT-TERM> 4,514
<LIABILITIES-OTHER> 14,616
<LONG-TERM> 15,682
0
0
<COMMON> 4,311
<OTHER-SE> 70,872
<TOTAL-LIABILITIES-AND-EQUITY> 991,239
<INTEREST-LOAN> 51,388
<INTEREST-INVEST> 16,992
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 68,380
<INTEREST-DEPOSIT> 39,138
<INTEREST-EXPENSE> 40,352
<INTEREST-INCOME-NET> 28,028
<LOAN-LOSSES> 399
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 18,808
<INCOME-PRETAX> 10,995
<INCOME-PRE-EXTRAORDINARY> 10,995
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,974
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.66
<YIELD-ACTUAL> 3.03
<LOANS-NON> 2,489
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,990
<CHARGE-OFFS> 239
<RECOVERIES> 116
<ALLOWANCE-CLOSE> 14,266
<ALLOWANCE-DOMESTIC> 14,266
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
