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EXHIBIT 13
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The purpose of this discussion is to provide information about Parkvale
Financial Corporation ("Parkvale") which is not readily apparent from the
consolidated financial statements included in this annual report. Reference
should be made to those statements and the selected financial data presented
elsewhere in this report for an understanding of the following discussion and
analysis.
Parkvale functions as a financial intermediary and as such its financial
condition should be examined in terms of its ability to manage its interest rate
risk, and diversify its credit risk. Effective January 1, 1993, Parkvale Savings
Bank, a wholly-owned subsidiary of Parkvale, converted to a state chartered
savings bank. Such charter conversion resulted in the replacement of the Office
of Thrift Supervision ("OTS") by the Federal Deposit Insurance Corporation
("FDIC") and the Pennsylvania Department of Banking as the Bank's primary
regulators. The OTS retains jurisdiction over Parkvale Financial Corporation due
to its status as a unitary savings and loan holding company.
This marks the fifth consecutive year that Parkvale has reported record
earnings. For this fiscal year, Parkvale increased net income by $1.5 million or
19.2% over fiscal 1995. This increase is primarily reflective of the recognition
of a $969,000 gain ($736,000 net of taxes) related to the payoff of a first
mortgage loan facilitating the sale of a previously owned real estate. Without
this nonrecurring item, net income would have increased by $811,000 or 10.1%
over fiscal 1995. This reflects Parkvale's ability to adapt to the changing
interest rate environment experienced throughout fiscal 1996 and 1995 as net
interest income increased to $26.5 million from $25.6 million for fiscal 1995.
In fiscal 1996, Parkvale continued to focus on improving net interest margin and
controlling operating expenses. Previously stated goals of attaining capital
levels by June 30, 1996 and 1994 of 7% and 6%, respectively, were achieved. The
return on average equity and return on average assets improved in fiscal 1996 to
13.99% and 0.98%, respectively, from 13.89% and 0.93% for fiscal 1995. The 1996
ratios exclude the benefits of the non-recurring gain.
In fiscal 1997, as in prior years, given Parkvale's relative high liquidity
levels, the pricing of deposits is not anticipated to be dictated by short-term
cash flow requirements. Parkvale has not utilized derivative instruments and has
positioned itself to remain flexible to volatility associated with financial
markets. Parkvale continues to seek controlled growth through acquisition and/or
de novo branch openings to ultimately increase shareholder value. In July 1996,
Parkvale agreed to purchase $12.5 million in deposits from another Pittsburgh
community bank with the deposits expected to be merged into Parkvale's Crafton
office in early 1997. The Bank's twenty-ninth office is planned for opening in
the Raceway Plaza located in Scott Township before the end of 1996.
AVERAGE EQUITY TO AVERAGE TOTAL ASSETS
1992 4.66%
1993 5.17
1994 5.98
1995 6.87
1996 7.01
ASSET AND LIABILITY MANAGEMENT
A necessary prerequisite of asset and liability management is the ability to
manage interest rate risk ("IRR"). IRR is the exposure of the Bank's current and
future earnings and capital arising from movements in interest rates. This
exposure occurs because the present value of future cash flows, and in many
cases the cashflows
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themselves, change when interest rates change. Parkvale's IRR is measured and
analyzed using static interest rate sensitivity gap indicators, net interest
income simulation estimates and net present value sensitivity measures. These
combined methods enable Parkvale's management to regularly monitor both the
direction and magnitude of potential changes in the relationship between
interest-earning assets and interest-bearing liabilities.
Interest rate sensitivity gap analysis provides one indicator of potential
interest rate risk by comparing interest-earning assets and interest-bearing
liabilities maturing or repricing at similar intervals. The gap ratio is defined
as rate-sensitive assets minus rate sensitive liabilities for a given time
period divided by total assets. Parkvale continually monitors gap ratios and
within the IRR framework and in conjunction with the net interest income
simulations, implements actions to reduce exposure to fluctuating interest
rates. Such actions have included maintaining high liquidity, deploying excess
liquidity, increasing the repricing frequency of the loan portfolio, and
lengthening the overall maturities of interest-bearing liabilities. Management
believes these ongoing actions minimize Parkvale's overall vulnerability to
fluctuations in interest rates. As of June 30, 1996, Parkvale has reduced the
one year gap ratio from 6.03% to 0.24% and the five year gap ratio from 12.25%
to 2.20%, compared to the previous year.
ONE YEAR GAP TO TOTAL ASSETS
1992 (6.63)%
1993 5.37
1994 1.65
1995 6.03
1996 0.24
Gap indicators of IRR are not necessarily consistent with IRR simulation
estimates. Parkvale utilizes net interest income simulation estimates under
various assumed interest rate environments to more fully capture the details of
IRR. Assumptions included in the simulation process include measurement over a
probable range of potential interest rate changes, prepayment speeds on
amortizing financial instruments, other imbedded options, loan and deposit
volumes and rates, non-maturity deposit assumptions and management's capital
requirements. The estimated impact on net interest income in fiscal 1997 under a
+/-100 and +/-200 basis point (bp) immediate shift in rates would result in the
following percentage changes over the fiscal 1996 actual net interest income:
+100 bp, +5.9%; +200 bp, +0.8%; -100 bp, +7.3%; -200 bp, +2.0%. This compares to
the projected net interest income for fiscal 1996 made at June 30, 1995 over the
fiscal 1995 actual net interest income: +100 bp, +4.4%; +200 bp, +0.9%; -100 bp,
+1.9%; and, -200 bp, -4.1%.
Asset Management. A primary goal of Parkvale's asset management is to maintain
a high level of liquid assets. Parkvale defines the following as liquid assets:
cash, federal funds sold, certain corporate debt maturing in less than one year,
U.S. Government and agency obligations maturing in less than one year and
short-term bank deposit accounts. The average daily liquidity for June 1996 was
20.4% and was 23.2% for the quarter ended June 30, 1996. During fiscal 1996,
Parkvale's investment strategy was to deploy excess liquidity by purchasing
single-family ARM loans to enhance yields and reduce the risk associated with
rate volatility. Such investments reduce the inherent risk of the volatility of
overnight interest rates. If interest rates were to fall substantially, net
interest income may decrease if the yield on liquid assets, such as Federal
funds sold were to fall faster than liabilities would reprice. The purchases of
ARM loans improved overall portfolio yields by reducing the lower yielding
federal funds sold portfolio from 13.0% of total assets at June 30, 1995 to 7.2%
of total assets at June 30, 1996.
Parkvale's lending strategy has been designed to shorten the average maturity of
its assets and increase the rate sensitivity of its loan portfolio. In fiscal
1996, 1995 and 1994, 77.4%, 82.6% and 56.3%, respectively, of mortgage loans
originated or purchased were adjustable-rate loans. Parkvale has continually
emphasized the origination and purchase of ARM loans. ARMs totaled $316.6
million or 56.9% of total mortgage loans at June 30, 1996 versus $237.9 million
or 50.9% of total mortgage loans at June 30, 1995. To supplement local
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mortgage originations, Parkvale purchased loans aggregating $104.9 million from
mortgage bankers and other financial institutions. Of these purchased loans,
$104.7 million or 99.8% were ARMs.
At June 30, 1996, Parkvale had commitments to originate loans totalling $4.1
million. Construction loans in process at June 30, 1996 were $4.4 million. Such
commitments were funded from current liquidity.
Parkvale continues to increase its consumer loan portfolio through new
originations. Home equity lines of credit are granted at up to 120% of
collateral value at competitive rates. In general, these loans have shorter
maturities and greater interest rate sensitivity and margins than residential
real estate loans. At June 30, 1996 and 1995, consumer loans were $76.2 and
$69.2 million which represented a 10.2% and 12.0% increase over the balances at
June 30, 1995 and 1994, respectively.
Parkvale adheres to policies designed to reduce credit risk concentrations
within its asset portfolio. One such vehicle has been mortgage-backed securities
which consist of pools of individual residential mortgage notes. The majority of
the mortgage-backed securities held by Parkvale are guaranteed as to the timely
repayment of principal and interest by a government sponsored enterprise, the
Federal Home Loan Mortgage Corporation ("FHLMC"). At June 30, 1996, Parkvale had
$99.4 million or 10.8% of total assets invested in mortgage-backed securities.
See Note B of Notes to Consolidated Financial Statements.
Investments in other securities, such as U.S. Government and agency obligations
and corporate debt are purchased to enhance Parkvale's overall net interest
margin. Parkvale's investment policy focuses on long term trends, rather than
short term swings in the financial markets. Accordingly, all debt securities are
classified as held to maturity, and are not available for sale nor held for
trading.
Liability Management. Parkvale's high level of liquidity permits investment
decisions to be determined with the funding source a secondary issue. Deposits
are priced according to management's asset/liability objectives, alternate
funding sources and competition. A concentrated effort is made to extend the
maturities of deposits by offering highly competitive rates for longer term
certificates. Certificates of deposit maturing after one year as a percent of
total deposits are 33.9% at June 30, 1996 and 33.7% at June 30, 1995.
Parkvale's primary source of funds are deposits received through its branch
network, loan and mortgage-backed security repayments and advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB"). FHLB advances can be used on a
short-term basis for liquidity purposes or on a long-term basis to support
expanded lending and investment activities.
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Interest-Sensitivity Analysis. The following table reflects the repricing
characteristics of Parkvale's assets and liabilities at June 30, 1996:
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<3 MONTHS 4-12 MONTHS YEARS 5+ YEARS TOTAL
---------- ----------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-sensitive assets:
ARM and other variable
rate loans........... $ 93,316 $ 83,801 $182,096 $ 14,528 $373,741
Other fixed rate loans,
net (1).............. 7,323 22,804 97,382 139,381 266,890
Variable rate mortgage
backed securities.... 9,959 10,684 -- -- 20,643
Fixed rate mortgage
backed securities
(1).................. 2,294 27,305 39,478 8,986 78,063
Investments and Federal
funds sold........... 89,231 17,470 52,010 3,000 161,711
Equities, primarily FHLB
and FHLMC............ -- -- 5,927 4,566 10,493
-------- -------- -------- -------- --------
Total interest-sensitive
assets.................. $202,123 $162,064 $376,893 $170,461 $911,541
======== ======== ======== ======== ========
Ratio of
interest-sensitive
assets to total
assets.................. 22.0% 17.6% 41.0% 18.5% 99.2%
==== ==== ==== ==== ====
Interest-sensitive
liabilities:
Passbook deposits and
club accounts (2).... $ 8,523 $ 23,947 $ 81,317 $ 37,428 $151,215
Checking accounts (3)... -- 26,910 26,910 13,455 67,275
Money market deposit
accounts............. -- 23,828 23,829 -- 47,657
Certificates of
deposit.............. 90,255 177,922 216,825 56,910 541,912
FHLB advances and other
borrowings........... 10,569 -- 10,000 6,342 26,911
-------- -------- -------- -------- --------
Total interest-sensitive
liabilities.......... $109,347 $252,607 $358,881 $114,135 $834,970
======== ======== ======== ======== ========
Ratio of
interest-sensitive
liabilities to total
liabilities and
equity.................. 11.9% 27.5% 39.0% 12.4% 90.8%
==== ==== ==== ==== ====
Ratio of
interest-sensitive
assets to
interest-sensitive
liabilities............. 184.8% 64.2% 105.0% 149.4% 109.2%
===== ==== ===== ===== =====
Periodic Gap to total
assets.................. 10.09% (9.85%) 1.96% 6.13% 8.33%
===== ==== ===== ===== =====
Cumulative Gap to total
assets.................. 10.09% 0.24% 2.20% 8.33%
===== ==== ===== =====
(1) Includes total repayments and prepayments at an assumed rate of 12% per
annum for fixed-rate mortgage loans and mortgage-backed securities, with the
amounts for other loans based on the estimated remaining loan maturity by
loan type.
(2) Assumes passbook deposits are withdrawn at the rate of 21.0% per annum.
(3) Assumes checking accounts are withdrawn at 40% in the first year and 10% per
annum thereafter.
CAPITAL RESOURCES
Regulations require Parkvale Savings Bank ("the Bank") to maintain a minimum
Tier 1 (Core) capital of 4.0% of total assets, and Tier 2 (Supplementary)
risk-based capital equal to a minimum of 8% of net risk-weighted assets. At June
30, 1996, the Bank was in compliance with all applicable requirements, with Tier
1 and Tier 2 capital ratios of 7.09% and 14.87%, respectively. See Note G of
Notes to Consolidated Financial Statements. The Bank's management does not
anticipate difficulty in meeting the capital requirements in the future;
however, there can be no assurance that this will be the case.
The Bank has maintained a "well capitalized" status since fiscal 1993, achieving
a 7% capital level at June 30, 1996. The Bank's capitalization allows the
continuance of building stockholder value through traditionally conservative
operations and by taking advantage of profitable growth opportunities as they
arise. Management is not aware of any trends, events, uncertainties or
recommendations by any regulatory authority that will have, or that are
reasonably likely to have, material effects on the Bank's liquidity, capital
resources or operations except as follows.
The Bank is insured by the FDIC through the Savings Association Insurance Fund
("SAIF") and pays annual insurance fees of 23 basis points on insured deposits,
the lowest rate currently permitted. The FDIC insures commercial banks and
certain savings banks through the Bank Insurance Fund ("BIF"), which has reduced
the well capitalized bank's insurance premium to zero as the BIF has reached the
required capitalization level of 1.25% of insured deposits. This BIF and SAIF
insurance premium disparity places SAIF insured institutions at a
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significant competitive disadvantage since the average SAIF premium currently
remains at 24 basis points. An equitable solution to this problem was proposed
in 1995 and agreed upon by Congress, the White House and the banking regulators.
The Bank and other thrift banks throughout the country were to be assessed 85-90
basis points on SAIF-insured deposits in order to recapitalize SAIF, ultimately
merging the BIF and SAIF charter by January 1, 1998. In August 1996, the FDIC
indicated the proposed one-time assessment could be reduced to 68 basis points.
While the one-time assessment to the Bank would range from $5.3 million to $6.8
million on a pre-tax basis, it would allow SAIF-insured institutions like the
Bank to compete on equal footing with BIF-insured institutions by eliminating
the current annual deposit insurance premium disparity. Should the current
proposal be enacted, the Bank's annual FDIC deposit insurance costs could be
reduced by as much as $1.5 million. Parkvale supports this proposal of enacting
a one-time assessment as a means of recapitalizing SAIF and successfully
resolving the BIF/SAIF premium disparity.
The Budget Reconciliation Bill that was approved by Congress in December 1995
contained these provisions but it was subsequently vetoed by President Clinton
for reasons other than the FDIC-SAIF capitalization. Unfortunately for Parkvale
shareholders and SAIF insured customers, Parkvale continues to pay 23 basis
points for government mandated deposit insurance while similarly capitalized BIF
insured banks effectively pay nothing. Parkvale is hopeful that equitable
treatment will ultimately prevail, but is cognizant the legislative process is
unduly influenced by continuing partisan disputes.
A portion of the 1995 legislation involved a thrift charter realignment and the
elimination of the "tax bad debt deduction" granted solely to thrifts. The tax
bad debt deduction allowed thrifts to deduct various percentages of taxable
income rather than actual bad debt losses since 1953. Since 1987, the tax bad
debt deduction was 8% of taxable income. The Small Business Job Protection Act
of 1996 signed on August 20, 1996 eliminates such bad debt tax deduction,
consequently requiring the recapture of past taxes for permanent deductions
arising from accumulated excess reserves over the base year reserve as of
December 31, 1987. At December 31, 1995, Parkvale's most recent tax year-end,
there was approximately $4.1 million in excess of the base year reserves.
Subject to prevailing corporate tax rates, Parkvale owes $1.4 million in federal
taxes, which is reflected as a deferred tax liability. Consequently, this
legislation has no impact on reported current or future earnings. See Note H to
the Consolidated Financial Statements.
In June 1993, lawsuits were filed against Parkvale by the current owners of the
former Parkvale headquarters building located in the Oakland section of
Pittsburgh which was sold in 1984. The plaintiffs allege that Parkvale did not
fully disclose the environmental condition of the building at the time of sale.
Parkvale believes that possible exposure to loss may arise under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980;
however, complaints have not been filed in this case nor have court proceedings
begun. Accordingly, it is not possible to make a reasonable estimate of
financial exposure; however, management believes such exposure would not be
material to Parkvale's financial position or liquidity.
CONCENTRATION OF CREDIT RISK
Financial institutions, such as Parkvale, generate income primarily through
lending and investing activities. The risk of loss from lending and investing
activities includes the possibility that losses may occur from the failure of
another party to perform according to the terms of the loan or investment
agreement. This possibility of loss is known as credit risk.
Credit risk is increased by lending and/or investing activities that concentrate
a financial institution's earning assets in such a way as to expose the
institution to a material loss from any single occurrence or group of related
occurrences. Diversifying loans and investments to prevent concentrations of
risks is one manner a financial institution can reduce potential losses due to
credit risk. Examples of asset concentrations would include, but not be limited
to, geographic concentrations, loans or investments of a single type, multiple
loans to a single borrower, loans made to a single type of industry and loans of
an imprudent size relative to the overall capitalization of the institution.
For loans purchased and originated, Parkvale has taken steps to reduce its
exposure to credit risk by emphasizing low risk single family mortgage loans,
which comprise 80.2% of the gross loan portfolio. Notwithstanding
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Parkvale's efforts to reduce its credit risk exposure, Parkvale previously
incurred credit losses relative to multi-family residential and commercial real
estate loans, primarily originated in the early 1980's. These loan types
amounted to $36.9 million outstanding or 4.0% and 5.9% of Parkvale's total
assets and total loan portfolio, respectively, at June 30, 1996. See Notes A and
C of Notes to Consolidated Financial Statements for additional discussion on
loans as to credit risk and loan losses.
RESULTS OF OPERATIONS
Operating results are substantially dependent on net interest income. Net
interest income is the difference between interest earned on loans and
investments and interest paid for deposits and borrowings. Operating results are
also materially affected by the levels of non-interest income and expense.
Interest-earning assets in excess of interest-bearing liabilities contributes to
a positive interest rate spread and results in increased net interest income. In
fiscal 1996, increasing net interest income was favorably impacted by higher
loan volumes. In fiscal 1995, increasing net interest income was directly
impacted by higher yielding investments and loans. Parkvale's net yield on
average interest-earning assets was 2.98% in fiscal 1996, 3.01% in fiscal 1995,
and 2.78% in fiscal 1994.
INTEREST INCOME
Interest income from loans increased by $5.0 million or 12.1% in 1996. Average
loan outstandings increased $55.2 million or 10.8%, primarily due to purchasing
approximately $105 million in loan packages in fiscal 1996. This is compounded
by an increase in the average loan yield from 8.14% in 1995 to 8.23% in 1996.
However, the yield at June 30, 1996 was 8.12% reflecting moderately declining
rates throughout the latter half of fiscal 1996 and the large volume of new ARM
loans. Interest income on loans increased by $1.2 million or 2.9% from 1994 to
1995. Although the average yield on loans decreased from 8.15% in 1994 to 8.14%
in 1995, the average outstanding loan balance increased $15.3 million or 3.1%.
Interest income on mortgage-backed securities decreased slightly by $132,000 or
1.9% in fiscal 1996. Although the average yield on mortgage-backed securities
increased 10 basis points from 6.51% in 1995 to 6.61% in 1996, this was not
sufficient to offset an average balance decrease of $3.6 million from 1995 to
1996. The decline in the average balance outstanding is due to deploying
payments on mortgage-backed securities into higher yielding loans. Similarly,
interest income on mortgage-backed securities decreased $730,000 million in 1995
from 1994, attributable to a $14.6 million decrease in the average outstanding
balance, offset by an increase in the average yield from 6.33% in 1994 to 6.51%
in 1995.
Interest income on investments decreased $1.3 million or 15.1% in fiscal 1996.
This is a result of a $38.7 million decrease in the average balance, which was
partially offset by a 66 basis point increase in the average yield from 5.30% in
1995 to 5.96% in 1996. Interest income on investments increased slightly by
$167,000 or 2.0% from fiscal 1994 to 1995. This is a result of a $1.4 million
increase in the average balance, compounded by a slight 5 basis point increase
in the average yield.
Interest income from federal funds sold increased $1.5 million from 1995. The
increase was attributable to an increase in the average federal funds sold
balance from $75.5 million in 1995 to $99.4 million in 1996. This is compounded
by a slight increase in the average yield from 5.51% in fiscal 1995 to 5.67% in
fiscal 1996. Although the average balance of federal funds sold decreased $13.4
million or 15.1% between 1994 and 1995, interest income increased $1.0 million
or 32.6% from significant increases in the average yield between the two years.
The average yield increased from 3.53% in fiscal 1994 to 5.51% in fiscal 1995.
These average yields reflect the changes in the target federal funds interest
rate from a low of 4.25% at the beginning of fiscal 1995 to a high of 6.00% at
the end of fiscal 1995 before leveling off to 5.25% by the end of fiscal 1996.
INTEREST EXPENSE
Interest expense on deposits increased $4.2 million or 12.3% between 1995 and
1996. The average deposit balance increased $32.7 million in fiscal 1996,
magnified by an increase in the average yield from 4.41% in 1995 to 4.75% in
1996. Interest expense on deposits slightly increased by $360,000 between 1994
and 1995.
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Although the average balance decreased $18.0 million between the two
fiscal years, this was offset by an increase in the average cost from 4.26% in
1994 to 4.41% in 1995. As rates began to increase in fiscal 1995, average
deposits decreased as deposit customers shifted core deposits into higher
yielding investments.
Interest expense on borrowed money increased slightly by $27,000 in 1996,
primarily resulting from an increase of $908,000 in the average balance. In
fiscal 1995, the interest expense declined slightly by $328,000 as a result of a
$3.2 million decrease in the average balance and a 46 basis point decline in the
average cost.
Net interest income increased $891,000 from 1995 to 1996. Although the average
interest rate spread decreased slightly to 2.66% in 1996 from 2.71% in 1995, the
average net earning assets increased $3.2 million. In fiscal 1995, net interest
income increased $1.6 million or 6.6%. This was the result of the Federal
Reserve increasing short-term rates 175 basis points and to an increase in the
average net interest earning assets increasing $9.9 million. The average
interest rate spread increased from 2.55% in 1994 to 2.71% in 1995.
At June 30, 1996, the weighted average yield on loans and investments was 7.45%.
The average rate payable on liabilities was 4.56% for deposits, 6.02% for
borrowings and 4.61% for combined deposits and borrowings.
PROVISION FOR LOAN LOSSES
Specific loss provisions are made when the perceived market value of property
collateralizing delinquent loans is less than the loan's book value, and reflect
management's current estimate of potential losses on such loans. In addition,
general loss provisions are made based on economic trends, perceived risk in the
loan portfolio, previous loss experience and other factors. The adequacy of loss
reserves is based upon a regular monthly review of loan delinquencies and
"classified assets," as well as local and national economic trends. The
provision for loan losses was $686,000 in fiscal 1996 compared to $1.1 million
and $1.8 million in fiscal 1995 and 1994, respectively. Non-performing assets,
which are defined as non-accrual loans and real estate owned were $1.2 million,
$2.1 million and $1.2 million at June 30, 1996, 1995 and 1994, representing
0.14%, 0.24% and 0.13% of total assets at the end of each respective year. Of
the non-performing assets at June 30, 1996, $240,000 was real estate owned and
$1.0 million represented non-accrual loans. In addition, loans totalling
$758,000 were classified as substandard for regulatory purposes. These loans,
while current or less than 90 days past due, have exhibited characteristics
which warrant special monitoring. Examples of these concerns include irregular
payment histories, questionable collateral values, investment properties having
cash flows insufficient to service debt, and other financial inadequacies of the
borrower. These loans are continuously monitored with efforts being directed
towards resolving the underlying concerns while continuing the performing status
of the loans. The aggregate valuation allowances were 2.17% of gross loans at
June 30, 1996, compared to 2.41% at June 30, 1995. The adequacy of these
reserves in relation to current or anticipated trends in the loan portfolio will
continue to be monitored by management.
OTHER INCOME
Other income was $3.1 million, $2.0 million and $2.3 million for the fiscal
years ended June 30, 1996, 1995 and 1994. This significant fiscal 1996 increase
is due to the recognition of a $969,000 previously deferred gain related to the
payoff of a commercial real estate loan made in fiscal 1994 to facilitate the
sale of a multi-family apartment complex located in a Pittsburgh suburb. Without
this gain, other income would have increased $65,000 or 3.2%. Other income
decreased $296,000 or 12.8% in fiscal 1995 from fiscal 1994 as miscellaneous
income decreased $361,000.
The $969,000 gain recognized in fiscal 1996 was related to a loan that was
classified as special mention for regulatory purposes due to the loan-to-value
ratio being higher than the Bank's normal underwriting standards for
multi-family loans. The gain resulting from the fiscal 1994 sale of the related
property had been deferred and accreted into income over the term of the loan.
There were no gains or losses on sale of assets in fiscal 1995. Losses on asset
sales during fiscal 1994 consisted of a $100,000 loss on the sale of two
adjustable rate mortgage funds, offset by a $91,000 gain on the sale of FHLMC
stock.
Loan fees and service charges decreased by less than 0.5% in fiscal 1996. In
fiscal 1995, the balance increased slightly by $56,000 or 3.6% primarily from
increased checking account fees.
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Miscellaneous income increased $69,000 or 16.9% in fiscal 1996. During fiscal
1996, income from tax deferred annuity and mutual fund products increased
$152,000 and rental income increased by $58,000. Miscellaneous income decreased
by $361,000 or 46.9% in fiscal 1995 over fiscal 1994. Net rental income on an
REO apartment complex sold in fiscal 1994 generated income of $179,000, which
was absent in fiscal year 1995. Annuity fee income decreased $163,000 in fiscal
1995 as customer demand for such products from 1994 through 1995 declined. A
recurring primary component of other income is the income generated from a tax
deferred annuity program made available to our customers through an unaffiliated
third party marketing firm (Spectrum Financial Services) in which Parkvale has
no ownership interest. Spectrum Financial Services offers fixed and variable
rate annuities and mutual funds to Parkvale customers. Such income was $283,000,
$131,000 and $294,000 in fiscal 1996, 1995 and 1994, respectively.
OTHER EXPENSE
Other expense increased by $419,000 or 3.0% in fiscal 1996 and increased by
$830,000 or 6.4% in fiscal 1995 over the respective prior periods. The increase
in 1996 was due to increases in compensation and benefit expenses and office
occupancy. The increase in 1995 was due to increases in compensation and
employee benefits, office occupancy, and marketing. Parkvale's ratio of other
expenses to average assets was 1.57% for fiscal 1996, 1.59% for fiscal 1995, and
1.47% for fiscal 1994. Such ratios are significantly lower than peer depository
institutions.
Compensation and employee benefits increased by $270,000 or 4.1% during fiscal
1996 and by $559,000 or 9.2% during fiscal 1995 over the respective prior
periods. Compensation expense increased $242,000 or 4.4% in fiscal 1996 and
increased $228,000 or 4.3% in fiscal 1995. These increases represent normal
merit pay increases. ESOP contribution expense increased $82,000 in fiscal 1996
and $146,000 in fiscal 1995 for estimated awards to be granted for service
rendered in the respective fiscal years. A portion of the contributions are
based on the average common stock price for the applicable calendar year. In
prior fiscal years, all the contributions were based on a much lower historical
value of subscribed stock from a third party loan executed in 1987. As the
subscribed stock has been fully exhausted, ESOP contributions will be from
treasury stock. Consequently, in accordance with SOP 93-6, "Employers'
Accounting for Stock Ownership Plans," compensation expense for ESOP
contributions is based on the average common stock price for the calendar year
in which the services were rendered.
Office occupancy expense increased $47,000 or 2.4% in fiscal 1996 and $106,000
or 5.7% in fiscal 1995 over the respective prior periods. The increase in fiscal
1996 was primarily due to the full year effect of a branch opened in February
1995. The increase in fiscal 1995 was due to the opening of the branch as
previously mentioned in February 1995 and to the full year effect of costs of
two offices opened in the latter half of fiscal 1994.
Marketing expenses decreased slightly by $28,000 or 7.6% in fiscal 1996 and
increased by $99,000 or 36.7% in fiscal 1995. The significant increase in 1995
is attributable to various savings deposit advertisements and promotion of home
equity credit lines.
INCOME TAXES
As discussed in Note H of Notes to Consolidated Financial Statements, income tax
expense for fiscal 1996, 1995 and 1994, which amounted to $5.0 million, $4.6
million and $4.3 million, respectively, varied from the normal statutory federal
tax provisions primarily due to tax exempt interest and the Pennsylvania Mutual
Thrift Institutions Tax.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services as measured by the consumer price index.
12
9
REPORT OF INDEPENDENT AUDITORS
- - -------------------------------------------------------------------------------
[ERNST & YOUNG LLP LOGO]
- - -------------------------------------------------------------------------------
The Board of Directors
Parkvale Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Parkvale Financial Corporation as of June 30, 1996 and 1995, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of Parkvale's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial condition of Parkvale
Financial Corporation at June 30, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1996 in conformity with generally accepted accounting
principles.
Pittsburgh, Pennsylvania /s/ ERNST & YOUNG LLP
July 18, 1996
- - -------------------------------------------------------------------------------
13
10
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
---------------------
ASSETS 1996 1995
- - ------------------------------------------------------------------------------------------------
Cash and noninterest-earning deposits $ 10,905 $ 10,003
Federal funds sold 66,557 116,581
Interest-earning deposits in other banks 173 194
Investment securities available for sale (cost of $6,804 in 1996 and
$5,890 in 1995)
(Note B) 10,493 8,738
Investment securities held to maturity (fair value of $194,061 in 1996
and $224,470 in 1995) (Note B) 194,393 224,698
Loans, net of allowance of $13,990 in 1996 and $13,136 in 1995 (Note C) 625,452 524,545
Foreclosed real estate, net of allowance of $19 in 1996 and $0 in 1995 240 96
Office properties and equipment, net (Note D) 2,005 2,261
Intangible assets and deferred charges 276 434
Prepaid expenses and other assets (Note L) 8,748 8,872
- - ------------------------------------------------------------------------------------------------
Total Assets $919,242 $896,422
- - ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
- - ------------------------------------------------------------------------------------------------
Savings deposits (Note E) $807,087 $794,445
Advances from Federal Home Loan Bank (Note F) 20,693 20,607
Advance payments from borrowers for taxes and insurance 10,828 12,132
Other liabilities (Note L) 4,651 4,177
Other debt (Note F) 6,218 3,997
- - ------------------------------------------------------------------------------------------------
Total Liabilities 849,477 835,358
- - ------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (NOTES G AND I)
Preferred stock ($1.00 par value; 5,000,000 shares authorized; 0 shares
issued) -- --
Common stock ($1.00 par value; 10,000,000 shares authorized;
1996--3,448,736 shares issued, 1995--2,757,563 shares issued) 3,449 2,758
Additional paid-in capital 9,138 10,056
Treasury stock at cost--213,093 shares in 1996 and 244,525 shares in
1995 (3,028) (3,434)
Employee stock ownership plan debt (104) (154)
Unrealized gains on securities available for sale 2,342 1,808
Retained earnings 57,968 50,030
- - ------------------------------------------------------------------------------------------------
Total Shareholders' Equity 69,765 61,064
- - ------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $919,242 $896,422
- - ------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
14
11
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED JUNE 30,
-------------------------------
1996 1995 1994
- - --------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $46,585 $41,567 $40,404
Mortgage-backed securities 6,775 6,907 7,637
Investments 7,127 8,394 8,227
Federal funds sold and repurchase agreements 5,630 4,158 3,136
- - --------------------------------------------------------------------------------------------------
Total interest income 66,117 61,026 59,404
- - --------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings deposits (Note E) 38,044 33,871 33,511
Borrowings 1,587 1,560 1,888
- - --------------------------------------------------------------------------------------------------
Total interest expense 39,631 35,431 35,399
- - --------------------------------------------------------------------------------------------------
Net interest income 26,486 25,595 24,005
Provision for loan losses (Note C) 686 1,094 1,829
- - --------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,800 24,501 22,176
- - --------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges and fees 1,611 1,615 1,559
Gain (loss) on sale of assets (Note J) 969 -- (9)
Miscellaneous 478 409 770
- - --------------------------------------------------------------------------------------------------
Total other income 3,058 2,024 2,320
- - --------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and employee benefits 6,899 6,629 6,070
Office occupancy 2,022 1,975 1,869
Marketing 341 369 270
FDIC and other insurance 1,951 1,889 1,849
Office supplies, telephone, and postage 841 831 799
Miscellaneous 2,186 2,128 2,134
- - --------------------------------------------------------------------------------------------------
Total other expenses 14,240 13,821 12,991
- - --------------------------------------------------------------------------------------------------
Income before income taxes 14,618 12,704 11,505
Income tax expense (Note H) 5,000 4,633 4,277
- - --------------------------------------------------------------------------------------------------
NET INCOME $ 9,618 $ 8,071 $ 7,228
- - --------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 2.86 $ 2.34 $ 2.07
- - --------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
15
12
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED JUNE 30,
-------------------------------------
1996 1995 1994
- - -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Interest received $ 65,694 $ 61,123 $ 61,758
Loan fees received 364 267 980
Other fees and commissions received 1,965 1,787 1,958
Interest paid (39,640) (35,435) (35,429)
Cash paid to suppliers and employees (13,562) (13,853) (12,755)
Income taxes paid (4,784) (4,378) (4,533)
- - -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,037 9,511 11,979
Cash flows from investing activities:
Proceeds from sales of investment securities available for
sale 48 36 25,763
Proceeds from maturities of investments 125,150 117,524 96,444
Purchase of investment securities available for sale (968) (330) (10,747)
Purchase of investment securities (96,127) (89,255) (113,392)
Maturity of deposits in other banks 21 1,347 6,681
Purchase of mortgage-backed securities (25,211) -- (60,449)
Purchase of loans (104,940) (27,808) (15,209)
Proceeds from sales of loans 2,479 2,578 2,010
Principal collected on mortgage-backed securities 26,721 14,162 44,178
Principal collected on loans 149,608 100,727 176,889
Loans made to customers, net of loans in process (148,057) (105,900) (152,190)
Capital expenditures (114) (199) (192)
- - -------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED IN) BY INVESTING ACTIVITIES (71,390) 12,882 (214)
Cash flows from financing activities:
Net increase (decrease) in checking and savings accounts 3,407 (49,595) 1,948
Net increase (decrease) in certificates of deposit 9,236 65,485 (15,366)
Proceeds from FHLB advances 96 -- 371
Repayment of FHLB advances (10) (96) (5,008)
Net increase (decrease) in other borrowings 2,220 304 (119)
Net (decrease) increase in borrowers advances for tax and
insurance (1,304) 818 350
Dividends paid (1,592) (1,291) (1,063)
Allocation of treasury stock to retirement plans 178 39 49
Payment for treasury stock -- (3,031) --
- - -------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED IN) BY FINANCING ACTIVITIES 12,231 12,633 (18,838)
- - -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (49,122) 35,026 (7,073)
Cash and cash equivalents at beginning of year 126,584 91,558 98,631
- - -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 77,462 $ 126,584 $ 91,558
- - -------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
16
13
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED JUNE 30,
----------------------------------
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 9,618 $8,071 $ 7,228
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 528 568 803
Accretion and amortization of fees and discounts (442) (319) 899
Loan fees collected and deferred 364 268 981
Provision for loan losses 686 1,094 1,829
(Gain) loss on sale of assets (969) -- 9
(Increase) decrease in accrued interest receivable (369) 121 975
Increase in other assets (90) (371) (33)
Decrease in accrued interest payable (9) (4) (30)
Decrease (increase) in deferred income tax asset 276 (45) (32)
Increase (decrease) in other liabilities 444 128 (650)
- - ---------------------------------------------------------------------------------------------------------------------
Total adjustments 419 1,440 4,751
- - ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $10,037 $9,511 $11,979
- - ---------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
ADDITIONAL UNREALIZED TOTAL
COMMON PAID IN TREASURY ESOP GAINS ON RETAINED SHAREHOLDERS'
STOCK CAPITAL STOCK DEBT SECURITIES EARNINGS EQUITY
- - -------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 $1,745 $10,981 $ (403) $(227) $ -- $37,226 $ 49,322
- - -------------------------------------------------------------------------------------------------------------------------------
1994 net income 7,228 7,228
Principal payments on ESOP debt 86 86
Transfer to reflect 5 for 4 split 436 (436) --
Exercise of stock options 19 30 49
Cash dividends declared on common stock
at $.333 per share (1,120) (1,120)
- - -------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 2,200 10,575 (403) (141) -- 43,334 55,565
- - -------------------------------------------------------------------------------------------------------------------------------
Adjustment to beginning balance for
change in accounting method, net of
income taxes of $910 1,536 1,536
1995 net income 8,071 8,071
Principal payments on ESOP debt 86 86
Transfer to reflect 5 for 4 split 551 (551) --
Treasury stock purchased (3,031) (3,031)
Additional borrowings by ESOP (99) (99)
Change in unrealized gains, net of
income taxes of $130 272 272
Exercise of stock options 7 32 39
Cash dividends declared on common stock
at $.416 per share (1,375) (1,375)
- - -------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 2,758 10,056 (3,434) (154) 1,808 50,030 61,064
- - -------------------------------------------------------------------------------------------------------------------------------
1996 net income 9,618 9,618
Principal payments on ESOP debt 185 185
Transfer to reflect 5 for 4 split 690 (690) --
Treasury stock contributed to benefit
plan 66 66
Additional borrowings by ESOP (135) (135)
Change in unrealized gains, net of
income taxes of $307 534 534
Exercise of stock options 1 (228) 340 113
Cash dividends declared on common stock
at $.52 per share (1,680) (1,680)
- - -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 $3,449 $ 9,138 $ (3,028) $(104) $2,342 $57,968 $ 69,765
- - -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
17
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- - ------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Parkvale Financial Corporation ("Parkvale" or "PFC"), its wholly owned
subsidiary, Parkvale Savings Bank (the "Bank") and its wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated
in consolidation.
Business
The primary business of Parkvale consists of attracting deposits from the
general public in the communities that it serves and investing such deposits,
together with other funds, in residential real estate loans, consumer loans,
commercial loans and investment securities. Parkvale focuses on providing a
wide range of consumer and commercial services to individuals, partnerships and
corporations in the greater Pittsburgh metropolitan area, which comprises its
primary market area. Parkvale is also subject to the regulations of certain
federal and state agencies and undergoes periodic examinations by certain
regulatory authorities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expense during the reported period. Actual
results could differ from those estimates.
Cash and Non-interest Earning Deposits
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. The reserve calculation is 0% of the first $4.3 million of
checking deposits, 3% of the next $47.7 million of checking deposits and 10% of
total checking deposits over $52.0 million. These required reserves, net of
allowable credits, amounted to $1.3 million at June 30, 1996.
Investment Securities Available for Sale
Securities available-for-sale consist solely of equity securities. Unrealized
holding gains and losses, net of tax, on available for sale securities are
reported as a net amount in a separate component of shareholders' equity until
realized. Gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Declines in the fair value
of individual available-for-sale securities below their cost that are other
than temporary will result in write-downs of the individual securities to their
fair value. Any related write-downs will be included in earnings as realized
losses. No securities have been classified as trading.
Investment Securities Held to Maturity
Securities for which the Bank has the positive intent and ability to hold to
maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Declines in the fair value of individual held-to-maturity securities
below their amortized cost that are other than temporary will result in
write-downs of the individual securities to their fair value. Any related
write-downs will be included in earnings as realized losses.
Loans
Loans are reported at their outstanding principal adjusted for any
charge-offs, the allowance for loan losses, and any deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased loans.
Loan origination and commitment fees and certain direct origination costs have
been deferred and recognized as an adjustment of the yield of the related loan,
adjusted for anticipated loan prepayments. Discounts and premiums
18
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- - ------------------------------------------------------------------------------
on purchased residential real estate loans are amortized to income using the
interest method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when the loan becomes more than 90 days past due. Parkvale
provides an allowance for the loss of accrued but uncollected interest at the
time the interest accrual is discontinued. Interest ultimately collected is
credited to income in the period of recovery.
Effective July 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114 ("FAS 114"), "Accounting by Creditors for Impairment of a
Loan," as amended by FAS 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure". These Statements require impaired
loans to be identified and measured based on the present value of the expected
future cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price or at the fair value of the collateral if the
loan is collateral dependent. If the recorded investment in the loan exceeds
the measure of fair value, a valuation allowance is established as a component
of the allowance for loan losses. Impaired loans consist of non homogeneous
loans, which based on the evaluation of current information and events,
management has determined that it is probable that the Bank will not be able to
collect all of the amounts due on these loans in accordance with the
contractual terms of the loan agreements. For purposes of these Statements,
nonaccrual, substandard and doubtful commercial and other real estate loans are
evaluated for impairment under the provisions of FAS 114 and 118. The adoption
of these Statements did not have a material impact on the overall allowance for
loan losses and did not affect the Bank's charge-off or income recognition
policies.
An additional general provision is made for the estimated losses on loans based
on loss experience and prevailing market conditions. While management believes
that the allowance is adequate to absorb estimated potential credit losses,
future adjustments may be necessary in circumstances that differ substantially
from the assumptions used in evaluating the adequacy of the allowance for loan
losses.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are recorded at the lower of the carrying amount of the loan or
fair value of the property less cost to sell. After foreclosure, valuations are
periodically performed by management and a valuation allowance is established
for any declines in the fair value less cost to sell below the property's
carrying amount. Revenues and expenses and changes in the valuation allowance
are included in the statement of operations. Gains and losses upon disposition
are reflected in earnings as realized. Loans which were transferred to
foreclosed real estate during fiscal 1996, 1995 and 1994 amounted to $1.2
million, $170,000 and $374,000, respectively. The transfers in 1996 primarily
consisted of a $902,000 multi-family residential apartment complex which was
subsequently sold in February 1996.
Office Property and Equipment
Office property and equipment is recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
useful lives of the various classes of assets. Amortization of leasehold
improvements is computed using the straight-line method over the useful lives
of the leasehold improvements.
Earnings per Share
Primary earnings per share are based upon the weighted average number of issued
and outstanding common shares including shares subject to stock options, which
are deemed common stock equivalents. For the years ended June 30, 1996, 1995
and 1994, earnings per share were based upon the following share amounts:
1996 1995 1994
---- ---- ----
Actual average shares outstanding...................... 3,214,152 3,307,263 3,349,000
Option equivalents..................................... 150,435 134,845 140,930
--------- --------- ---------
Weighted average aggregate............................. 3,364,587 3,442,108 3,489,930
--------- --------- ---------
19
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- - -------------------------------------------------------------------------------
On September 21, 1995, the Board of Directors declared a 5 for 4 stock split on
Parkvale's common stock. The additional shares were paid on October 16, 1995 to
stockholders of record at the close of business on October 2, 1995. This
increased the outstanding shares by 640,706. No fractional shares were issued.
All share amounts in this report have been restated to reflect the effect of
this stock split and similar splits in 1994 and 1993.
Stock Options
In October 1995, the Financial Accounting Standards Board (FASB) issued FAS
123, "Accounting for Stock-Based Compensation." FAS 123 defines a fair
value-based method of accounting for stock-based employee compensation plans.
Under the fair value-based method, compensation cost is measured at the grant
date based upon the value of the award and is recognized over the service
period. The standard encourages all entities to adopt this method of accounting
for all employee stock compensation plans. However, it also allows an entity to
continue to measure compensation costs for its plans as prescribed in APB
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." If an
entity elects to continue to use the accounting in Opinion 25, pro forma
disclosures of net income and earnings per share must be made as if the fair
value method of accounting, as defined by FAS 123 had been applied. FAS 123 is
effective for Parkvale's fiscal year ending June 30, 1997.
Parkvale grants stock options at exercise prices not less than the fair market
value of common stock on the date of grant. Under APB 25, no compensation
expense is recognized pursuant to the Parkvale's stock option plan. Parkvale
will continue its accounting in accordance with APB 25 and provide the required
proforma disclosures.
Statement of Cash Flows
For the purposes of reporting cash flows, cash and cash equivalents include
cash and non-interest earning deposits and federal funds sold. Additionally,
allocation of treasury stock to retirement plans includes exercise of stock
options and allocation to the employee stock ownership plan.
Treasury Stock
The purchase of PFC common stock is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the average cost basis, with any excess proceeds being credited to
Additional Paid-in Capital. In July 1996, a stock repurchase program was
announced authorizing repurchases of up to 161,000 shares, representing 5% of
outstanding stock. The repurchases are authorized to be made from time to time
in open-market transactions during the next 12 months at prevailing market
prices. The repurchased shares will be available for general corporate
purposes, including approximately 125,000 shares for contributions to employee
benefit plans.
Effect of New Accounting Standards
In May 1995, the FASB issued FAS 122, "Accounting for Mortgage Servicing
Rights." This Statement amends certain provisions of Statement 65, "Accounting
for Certain Mortgage Banking Activities," and requires enterprises engaging in
mortgage banking activities to recognize as separate assets rights to service
mortgage loans for loans originated by the enterprise. The adoption of FAS 122
has had no impact on the result of operations as the Bank does not engage in
the sale of mortgage loans.
In June 1996, the FASB issued FAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." Under the FASB's
"financial components" approach, both the transferor and transferee would
recognize the asset and liabilities (or components thereof) that it controls in
a physical sense and "derecognize" the assets and liabilities that were
surrendered or extinguished in the transfer. Prior rules emphasize the economic
risks or rewards of ownership of the assets. This Statement is effective for
transactions occurring after December 31, 1996. Parkvale does not anticipate
any impact on results of operations and financial condition from the adoption
of this Statement.
- - -------------------------------------------------------------------------------
20
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
NOTE B--INVESTMENT SECURITIES
1996 1995
---------------------------------------------- -----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Investments available for sale at June 30 consisted of:
FHLMC common stock
(42,424 shares)........ $ 166 $3,461 $ -- $ 3,627 $ 166 $2,751 $ -- $ 2,917
FHLB of Pittsburgh
stock.................. 5,927 -- -- 5,927 5,388 -- -- 5,388
Equity
securities--other...... 711 228 -- 939 336 97 -- 433
-------- ----- ------ -------- -------- ------- ------ --------
Total equity
investments
available for
sale.............. $ 6,804 $3,689 $ -- $ 10,493 $ 5,890 $2,848 $ -- $ 8,738
-------- ------ ------ -------- -------- ------ ------ --------
Investment securities at June 30 classified as held to maturity consisted of
the following:
U.S. Government and agency
obligations due:
Within 1 year............ $ 9,000 $ 3 $ 7 $ 8,996 $ 32,874 $ 75 $ 66 $ 32,883
Within 5 years........... 53,936 -- 891 53,045 53,986 108 401 53,693
-------- ------ ------ -------- -------- ------ ----- --------
Total U.S.
Government and
agency
obligations....... 62,936 3 898 62,041 86,860 183 467 86,576
Corporate debt:
Within 1 year............ 17,089 21 16 17,094 21,219 4 86 21,137
Within 5 years........... 14,997 45 31 15,011 15,738 34 137 15,635
-------- ------ ------ ------- -------- ------ ----- --------
Total Corporate
debt.............. 32,086 66 47 32,105 36,957 38 223 36,772
Total U.S. Government and
agency obligations and
corporate debt............. 95,022 69 945 94,146 123,817 221 690 123,348
-------- ------ ------- ------- -------- ------ ----- --------
Mortgage-backed securities at June 30 consisted of:
FHLMC........................ 61,730 968 344 62,354 61,602 1,099 316 62,385
FNMA......................... 7,791 70 30 7,831 4,442 101 -- 4,543
GNMA......................... 1,326 43 -- 1,369 1,583 54 1 1,636
Collateralized mortgage
obligations (CMOs)......... 26,965 59 222 26,802 31,540 5 701 30,844
Other participation
certificates............... 1,559 -- -- 1,559 1,714 -- -- 1,714
-------- --------- ---------- -------- -------- --------- ---------- --------
Total mortgage
backed
securities........ 99,371 1,140 596 99,915 100,881 1,259 1,018 101,122
-------- --------- ---------- -------- -------- --------- ---------- --------
Total investments classified
as held to maturity........ 194,393 1,209 1,541 194,061 224,698 1,480 1,708 224,470
-------- --------- ---------- -------- -------- --------- ---------- --------
Total investment
portfolio......... $201,197 $4,898 $1,541 $204,554 $230,588 $4,328 $1,708 $233,208
======== ========= ========== ======== ======== ========= ========== ========
The FHLB of Pittsburgh stock is a restricted equity security that does not have
a readily determinable fair value. The FHLB requires member institutions to
maintain a minimum level of stock ownership based on a percentage of
residential mortgages, subject to periodic redemption at par if the stock owned
is over the minimum requirement. As such, FHLB stock is recorded at cost with
no unrealized gains or losses as an investment available for sale.
Mortgage-backed securities are not due at a single maturity date; periodic
payments are received on the securities based on the payment patterns of the
underlying collateral.
The CMOs at June 30, 1996 consist of $8,523 of adjustable rate securities and
$18,442 of fixed rate instruments with a weighted average lives of less than
one year. The CMOs are not deemed to be "high risk" securities as defined by
the Federal Financial Institutions Examination Council.
- - -------------------------------------------------------------------------------
21
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:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Mortgage loans:
Residential:
1-4 Family.................................. $517,082 $423,439 $403,492 $417,079 $435,371
Multi-family................................ 17,375 22,894 22,735 16,826 20,677
Commercial..................................... 19,516 18,435 18,113 17,851 21,045
Other.......................................... 2,387 3,196 1,931 1,472 1,577
-------- -------- -------- -------- --------
556,360 467,964 446,271 453,228 478,670
Consumer loans................................... 76,224 69,197 61,805 55,296 50,090
Commercial business loans........................ 8,925 4,542 6,135 8,996 10,654
Loans on savings accounts........................ 3,285 3,253 3,206 3,314 3,431
-------- -------- -------- -------- --------
Gross loans.................................... 644,794 544,956 517,417 520,834 542,845
Less:
Loans in process............................... 4,386 4,816 7,506 4,782 8,238
Allowance for loan losses...................... 13,990 13,136 12,056 10,283 7,619
Unamortized discount and deferred loan fees.... 966 2,459 2,861 2,337 3,654
-------- -------- -------- -------- --------
$625,452 $524,545 $494,994 $503,432 $523,334
======== ======== ======== ======== ========
The following summary sets forth the activity in the allowance for loan losses
for the years ended June 30:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Beginning balance...................................... $13,136 $12,056 $10,283 $ 7,619 $3,866
Provision for losses--mortgage loans................... 440 972 1,668 3,247 3,369
Provision for losses--consumer loans................... 246 122 111 445 73
Provision for losses--commercial business loans........ -- -- 50 57 --
Loss reserves acquired through merger.................. -- -- -- -- 478
Loans recovered........................................ 329 95 157 370 360
Loans charged off...................................... (161) (109) (213) (1,455) (527)
------- ------- ------- ------- ------
Ending balance......................................... $13,990 $13,136 $12,056 $10,283 $7,619
======= ======= ======= ======= ======
Loans charged off and recovered are as follows:
1996 1995 1994 1993 1992
------- ------- ------- ------- ------
Loans recovered:
Commercial...................................... $ -- $ -- $ -- $ 1 $ --
Consumer........................................ 70 47 9 6 3
Mortgage........................................ 259 48 148 363 357
------- ------- ------- ------- ------
Total recoveries.................................. 329 95 157 370 360
------- ------- ------- ------- ------
Loans charged off:
Commercial...................................... -- -- -- -- (121)
Consumer........................................ (125) (39) (45) (22) (47)
Mortgage........................................ (36) (70) (168) (1,433) (359)
------- ------- ------- ------- ------
Total charge offs................................. (161) (109) (213) (1,455) (527)
------- ------- ------- ------- ------
Net recoveries (charge offs)...................... $ 168 $ (14) $ (56) $(1,085) $ (167)
======= ======= ======= ======= ======
The allowance for loan losses at June 30 consisted of:
Mortgage loans.............................. $12,579 $11,915 $10,923 $9,274 $7,096
Consumer loans.............................. 1,194 1,004 916 843 414
Commercial business loans................... 217 217 217 166 109
Ratio of net charge-offs to average loans........... 0.00% 0.00% 0.01% 0.21% 0.03%
22
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - ------------------------------------------------------------------------------
At June 30, 1996, Parkvale was committed under various agreements to originate
fixed and adjustable rate mortgage loans aggregating $1,087 and $2,019,
respectively, at rates ranging from 7.63% to 8.15% for fixed rate and 5.63% to
7.85% for adjustable rate loans and had $52,932 of unused consumer lines of
credit and $3,828 in unused commercial lines of credit. In addition, Parkvale
was committed to originate mortgage loans aggregating $300 at rates ranging
from 6.00% to 7.63% under bond programs secured by the City of Pittsburgh.
Parkvale was also committed to originate commercial loans totalling $727 at
June 30, 1996. Available but unused consumer and commercial credit card lines
amounted to $8,531 and $194, respectively, at June 30, 1996.
At June 30, Parkvale serviced loans for the benefit of others as follows:
1996--$13,001, 1995--$15,555, and 1994--$18,228. Decreases represent repayments
on the underlying loans.
At June 30, 1996, Parkvale's loan portfolio consisted primarily of residential
real estate loans collateralized by single and multifamily residences,
nonresidential real estate loans secured by industrial and retail properties
and consumer loans including lines of credit.
Parkvale has geographically diversified its mortgage loan portfolio, having
loans outstanding in over 40 states and the District of Columbia. Parkvale's
highest concentrations are in the following states/area along with their
respective share of the outstanding mortgage loan balance: Pennsylvania--53.5%;
greater Washington, D.C. area--10.7%; and, Ohio--8.0%. The ability of debtors
to honor these contracts depends largely on economic conditions affecting the
Pittsburgh, greater Washington D.C., and Columbus metropolitan areas, with
repayment risk dependent on the cash flow of the individual debtors.
Substantially all mortgage loans are secured by real property with a loan
amount of generally no more than 80% of the appraised value at the time of
origination. Loans in excess of 80% of appraised value require private mortgage
insurance.
At July 30, 1996, management has determined that $642 of loans were considered
to be impaired in conformity with FAS 114, as amended by FAS 118. The average
recorded investment in impaired loans during 1996 was $937. The total allowance
for loan losses related to these loans was $95 at June 30, 1996.
- - -------------------------------------------------------------------------------
NOTE D--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30 are summarized by major
classification as follows:
1996 1995
------ ------
Land....................................................... $ 318 $ 318
Office buildings and leasehold improvements................ 3,489 3,446
Furniture, fixtures and equipment.......................... 3,145 3,127
------ ------
6,952 6,891
Less accumulated depreciation and amortization............. 4,947 4,630
------ ------
Office properties and equipment, net....................... $2,005 $2,261
====== ======
Depreciation expense....................................... $ 370 $ 410
====== ======
- - ------------------------------------------------------------------------------
NOTE E--SAVINGS DEPOSITS
The following schedule sets forth interest expense for the years ended June 30
by type of savings deposit:
1996 1995 1994
------- ------- -------
Checking and money market accounts.................. $ 2,154 $ 2,355 $ 3,052
Passbook accounts................................... 3,630 3,970 4,442
Certificates........................................ 32,260 27,546 26,017
------- ------- -------
$38,044 $33,871 $33,511
======= ======= =======
23
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
A summary of savings deposits at June 30:
1996 1995
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
Savings:
Checking accounts.............................. $ 54,138 6.7 $ 50,064 6.3
Checking accounts--non-interest bearing........ 16,308 2.0 12,515 1.6
Money market accounts.......................... 47,657 5.9 51,148 6.4
Passbook accounts.............................. 140,908 17.5 141,791 17.9
-------- ----- -------- -----
259,011 32.1 255,518 32.2
Certificates of deposit.......................... 541,912 67.1 533,831 67.2
-------- ----- -------- -----
800,923 99.2 789,349 99.4
Accrued interest................................. 6,164 0.8 5,096 0.6
-------- ----- -------- -----
$807,087 100.0 $794,445 100.0
======== ===== ======== =====
At June 30, the scheduled maturities of certificate accounts were as follows:
MATURITY PERIOD 1996 1995
--------------- -------- --------
1-12 months................................................ $268,177 $266,128
13-24 months............................................... 88,166 74,974
25-36 months............................................... 47,180 69,664
37-48 months............................................... 49,235 23,858
49-60 months............................................... 32,385 37,900
Thereafter................................................. 56,769 61,307
-------- --------
$541,912 $533,831
======== ========
- - ------------------------------------------------------------------------------
NOTE F--ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER DEBT
The advances from the FHLB at June 30 consisted of the following:
1996 1995
--------------------- ---------------------
INTEREST INTEREST
BALANCE RATE % BALANCE RATE %
------- --------- ------- ---------
Due within one year.................... $ 5,000 8.44 $ --
Due within five years.................. 10,000 6.24-7.98 15,000 6.24-8.44
Due within ten years................... 5,000 6.82 5,000 6.82
Due within twenty years................ 693 3.00-6.27 607 3.00-5.00
------- -------
$20,693 $20,607
======= =======
Weighted average interest rate
at end of period..................... 7.25% 7.25%
==== ====
The FHLB advances are secured by Parkvale's FHLB stock and mortgage-backed
securities and are subject to substantial prepayment penalties. Parkvale has a
line of credit with the FHLB. The total amount of credit available to Parkvale
through this product is approximately $50 million. To date, Parkvale has not
borrowed on the line of credit and has no current plans to do so.
Other debt consists of recourse loans and commercial investment agreements with
certain commercial checking account customers. These daily borrowings had
balances of $6,218 and $3,997 at June 30, 1996 and 1995, respectively.
- - -------------------------------------------------------------------------------
24
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - --------------------------------------------------------------------------------
NOTE G--STOCKHOLDERS' EQUITY
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") requires the Bank to maintain specific amounts of capital. The
following table sets forth certain information concerning the Bank's regulatory
capital:
JUNE 30, 1996 JUNE 30, 1995
------------------------------------ --------------------------------------
TIER I TIER I TIER II TIER I TIER I TIER II
CORE RISK-BASED RISK-BASED CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL CAPITAL
-------- ---------- ---------- -------- ----------- -----------
Equity capital (1)................ $ 68,446 $ 68,446 $ 68,446 $ 60,354 $ 60,354 $ 60,354
Less non-allowable intangible
assets.......................... (276) (276) (276) (434) (434) (434)
Less unrealized securities
gains........................... (2,255) (2,255) (2,255) (1,782) (1,782) (1,782)
Plus general valuation allowances
(2)............................. -- -- 6,155 -- -- 5,619
-------- -------- -------- -------- --------- ---------
Total regulatory capital.......... 65,915 65,915 72,070 58,138 58,138 63,757
Minimum required capital.......... 37,189 19,698 38,786 36,274 17,982 35,375
-------- -------- -------- -------- --------- ---------
Excess regulatory capital......... $ 28,726 $ 46,217 $ 33,284 $ 21,864 $ 40,156 $ 28,382
======== ======== ======== ======== ========= =========
Adjusted total assets........ $929,729 $492,447 $484,824 $906,839 $ 449,546 $ 442,182
Regulatory capital as a
percentage...................... 7.09% 13.39% 14.87% 6.41% 12.93% 14.42%
Minimum capital required as a
percentage...................... 4.00% 4.00% 8.00% 4.00% 4.00% 8.00%
-------- -------- -------- -------- ---------- ---------
Excess regulatory capital as a
percentage...................... 3.09% 9.39% 6.87% 2.41% 8.93% 6.42%
======== ======== ======== ======== ========= =========
Well capitalized requirement...... 5.00% 6.00% 10.00% 5.00% 6.00% 10.00%
======== ======== ======== ======== ========= =========
(1) Represents equity capital of the Bank as reported to the Pennsylvania
Department of Banking and FDIC.
(2) Limited to 1.25% of risk adjusted total assets.
- - -------------------------------------------------------------------------------
NOTE H--INCOME TAXES
1996 1995 1994
------ ------ ------
Federal:
Current............................................ $3,923 $4,071 $3,734
Deferred........................................... 276 (45) (32)
State................................................ 801 607 575
------ ------ ------
$5,000 $4,633 $4,277
====== ====== ======
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:
1996 1995
------ ------
Deferred tax assets:
Book bad debt reserves........................................ $4,685 $4,404
Deferred loan fees............................................ 379 413
Purchase accounting adjustments............................... 105 115
Deferred gains................................................ -- 165
Deferred compensation......................................... 113 80
------ ------
Total deferred tax assets.................................. 5,282 5,177
------ ------
Deferred tax liabilities:
Tax bad debt reserves......................................... 1,803 1,232
Fixed assets.................................................. (22) 8
Unrealized gains on securities available for sale............. 1,346 1,039
Other, net.................................................... 237 397
------ ------
Total deferred tax liabilities............................. 3,364 2,676
------ ------
Net deferred tax assets.................................... $1,918 $2,501
====== ======
25
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
No valuation allowance was required at June 30, 1996 or 1995.
Parkvale's effective tax rate differs from the expected federal income tax rate
for the years ended June 30 as follows:
1996 1995 1994
-------------- -------------- --------------
Expected federal statutory income tax
provision/rate................................ $4,970 34.0% $4,319 34.0% $3,912 34.0%
Tax exempt interest............................. (197) -1.3% (215) -1.7% (221) -1.9%
State income taxes, net of federal benefit...... 529 3.6% 401 3.2% 379 3.3%
Other........................................... (302) -2.1% 128 1.0% 207 1.8%
------ ---- ------ ---- ------ ----
Effective total income tax provision............ $5,000 34.2% $4,633 36.5% $4,277 37.2%
====== ==== ====== ==== ====== ====
Savings institutions which meet certain definitional tests and operating
requirements prescribed by the Internal Revenue Code of 1986, as amended, are
allowed a special bad debt deduction, extended expiration dates for net
operating loss carryforwards, and other special tax provisions. If a savings
institution does not continue to meet the federal income tax requirements
necessary to meet these definitions, the institution may lose the benefits of
these special provisions. Taxable income of subsidiaries is generally computed
without the benefit of these special provisions.
The special bad debt deduction is based on either specified experience formulas
or a specified percentage of taxable income before such deduction. For tax
years from 1987 to 1995, the percentage of taxable income bad debt deduction is
8% of adjusted taxable income. Retained earnings at December 31, 1995 include
financial statement tax bad debt reserves of $12,013. The Small Business Job
Protection Act of 1996 passed on August 20, 1996 eliminates this special bad
debt deduction granted solely to thrifts. This has consequently evoked the
recapture of past taxes for permanent deductions arising from "applicable
excess reserve." This "applicable excess reserve" is the total amount of the
reserve over the base year reserve as of December 31, 1987. The recapture tax
is to be paid in six equal annual installments beginning after 1995. Deferral
of these payments for up to 2 years is permitted contingent upon the Bank
satisfying a specified mortgage origination test for 1996 and/or 1997. At
December 31, 1995, Parkvale had $4,137 in excess of the base year reserves.
Subject to prevailing corporate tax rates, Parkvale owes $1,407 in federal
taxes, which is reflected as a deferred tax liability. In addition, $396 has
been accrued as a deferred tax liability for activity in the first half of
calendar year 1996. No provision has been made for the $7,876 of base year
reserves.
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax which is
calculated at 11.5% of earnings based on generally accepted accounting
principles with certain adjustments.
- - -------------------------------------------------------------------------------
26
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
NOTE I--EMPLOYEE COMPENSATION PLANS
Retirement Plan
Parkvale provides eligible employees participation in a 401(k) defined
contribution plan. Benefit expense was $172, $171, and $157 in fiscal years
1996, 1995, and 1994, respectively, which represented a 50% company match on
deferred compensation and a profit sharing contribution equal to 2% of eligible
compensation.
Employee Stock Ownership Plan ("ESOP")
Parkvale adopted a leveraged ESOP in fiscal 1987 in conjunction with the
conversion to a stock form of ownership. Participants in the plan are all
employees who have met minimum service and age requirements. The balance of the
ESOP loan at June 30, 1995 was $55 and was paid off in March 1996. Parkvale
recognized expense of $336 in fiscal 1996, $253 in fiscal 1995, and $99 in
fiscal 1994 for ESOP contributions, which were used to make debt service
payments and for the purchase of additional shares of Parkvale's Common Stock
in open-market transactions. At June 30, 1996, the ESOP owned 279,023 shares of
Parkvale Common Stock.
Stock Option Plans
Parkvale has Stock Option Plans for the benefit of directors, officers and
other selected key employees of Parkvale who are deemed to be responsible for
the future growth of Parkvale. All of the original shares under the 1987 Plan
have been awarded. In October 1993, the 1993 Directors' Stock Option Plan was
adopted. An aggregate of 97,657 shares of authorized but unissued Common Stock
of Parkvale were reserved for future issuance. As of June 30, 1996, 29,295
option shares have been granted under this plan. Additionally, the 1993 Key
Employee Stock Compensation Program was adopted in October 1993. An aggregate
of 236,328 shares of authorized but unissued Common Stock of Parkvale were
reserved for future issuance. As of June 30, 1996, 42,968 option shares have
been granted under this plan. The 1993 Director's Stock Option Plan shares were
exercisable on the date of the grant. The 1993 Key Employee Stock Compensation
Program option shares are 50% exercisable upon 6 months of continuous service
after the grant date and the remaining 50% is exercisable after a year of
continuous service from the grant date. At June 30, 1996, all option shares are
exercisable. The following table presents option share data related to the
Stock Option Plans for the years indicated, adjusted for the 1995, 1994 and
1993 stock splits:
OPTION PRICE PER SHARE $4.096 $5.568 $19.456 $20.160 $18.848 $26.625 Total
------- ------- ------- ------- ------- ------- -------
Share balances at
June 30, 1993.............. 112,304 112,304 224,608
Granted................. 9,765 9,765
Exercised............... (20,039) (17,578) (37,617)
------- ------- ------ ------ ------- ------- -------
June 30, 1994.............. 92,265 94,726 9,765 196,756
Granted................. 62,500 9,765 72,265
Exercised............... (8,282) (1,953) (10,235)
------- ------- ------ ------ ------- ------- -------
June 30, 1995.............. 83,983 92,773 9,765 62,500 9,765 258,786
Granted................. 9,765 9,765
Exercised............... (26,906) (4,453) (31,359)
------- ------- ------ ------ ------- ------- -------
June 30, 1996.............. 57,077 88,320 9,765 62,500 9,765 9,765 237,192
- - ------------------------------------------------------------------------------------------------------------
NOTE J--GAIN (LOSS) ON SALE OF ASSETS
The components of gain on sale of assets for the years ended June 30 consist of
the following:
1996 1995 1994
---------------- --------------- -----------------
BOOK GAIN BOOK GAIN BOOK GAIN
VALUE (LOSS) VALUE (LOSS) VALUE (LOSS)
------ ------ ----- ------ ------- ------
Investment securities.................. $ -- $ -- $36 $ -- $25,772 $ (9)
Loan facilitating sale of real
estate............................... $4,547 $969 -- -- -- --
------ ---- --- ---- ------- ----
$4,547 $969 $36 $ -- $25,772 $ (9)
====== ==== === ==== ======= ====
27
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - ------------------------------------------------------------------------------
The $969 gain recognized in fiscal 1996 was related to the payoff of a loan
that had been classified as special mention for regulatory purposes due to the
loan-to-value ratio being higher than the Bank's normal underwriting standards
for multi-family loans. The loan was granted in fiscal 1994 in connection with
the sale of real estate with the gain from the sale deferred and accreted into
income over the term of the loan.
- - -------------------------------------------------------------------------------
NOTE K--LEASES
Parkvale's rent expense for leased real properties amounted to approximately
$992 in fiscal 1996, $911 in 1995 and $818 in 1994. At June 30, 1996, Parkvale
was obligated under 19 noncancellable operating leases, which expire through
2014. The minimum rental commitments for the fiscal years subsequent to June
30, 1996 are as follows: 1997--$934, 1998--$605, 1999--$459, 2000--$299,
2001--$248, later years--$1,169.
- - ------------------------------------------------------------------------------
NOTE L--SELECTED BALANCE SHEET INFORMATION
JUNE 30,
--------------------
1996 1995
-------- ------
Prepaid expenses and other assets:
Accrued interest on loans................................... $3,775 $3,196
Reserve for uncollected interest............................ (137) (127)
Accrued interest on investments............................. 2,453 2,653
Other prepaids.............................................. 739 649
Net deferred tax asset...................................... 1,918 2,501
------ ------
$8,748 $8,872
====== ======
Other liabilities:
Accounts payable and accrued expenses....................... $1,837 $1,479
Negative goodwill........................................... 793 917
Other liabilities........................................... 1,078 723
Employee stock ownership plan debt.......................... -- 55
Federal and state income taxes payable...................... 943 1,003
------ ------
$4,651 $4,177
====== ======
- - ------------------------------------------------------------------------------
NOTE M--QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED YEAR THREE MONTHS ENDED YEAR
------------------------------------- ENDED ------------------------------------- ENDED
SEP. 95 DEC. 95 MAR. 96 JUNE 96 JUNE 96 SEP. 94 DEC. 94 MAR. 95 JUNE 95 JUNE 95
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income...... $16,561 $16,559 $16,532 $16,465 $66,117 $14,726 $14,932 $15,328 $16,040 $61,026
Total interest expense..... 10,073 9,985 9,881 9,692 39,631 8,489 8,488 8,786 9,668 35,431
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income........ 6,488 6,574 6,651 6,773 26,486 6,237 6,444 6,542 6,372 25,595
Provision for loan
losses................... 185 149 168 184 686 299 293 273 229 1,094
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest income after
provision for losses..... 6,303 6,425 6,483 6,589 25,800 5,938 6,151 6,269 6,143 24,501
Gain on sale of assets..... -- -- 969 -- 969 -- -- -- -- --
Other income............... 510 533 556 490 2,089 482 492 496 554 2,024
Total other expense........ 3,521 3,604 3,582 3,533 14,240 3,307 3,473 3,556 3,485 13,821
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................... 3,292 3,354 4,426 3,546 14,618 3,113 3,170 3,209 3,212 12,704
Income tax expense......... 1,149 1,172 1,443 1,236 5,000 1,175 1,160 1,163 1,135 4,633
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income................. $ 2,143 $ 2,182 $ 2,983 $ 2,310 $ 9,618 $ 1,938 $ 2,010 $ 2,046 $ 2,077 $ 8,071
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per share....... $ 0.64 $ 0.65 $ 0.88 $ 0.69 $ 2.86 $ 0.55 $ 0.58 $ 0.60 $ 0.61 $ 2.34
- - ------------------------------------------------------------------------------
28
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - ------------------------------------------------------------------------------
NOTE N--PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet and statements of income and cash flows for
Parkvale Financial Corporation as of June 30, 1996 and 1995 and the years then
ended are presented below. PFC's sole subsidiary is Parkvale Savings Bank
("PSB").
PARKVALE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
BALANCE SHEETS
1996 1995
Assets:
Investment in PSB............ $68,446 $60,354
Cash......................... 963 748
Other equity investments..... 840 371
------- -------
Total Assets.............. $70,249 $61,473
======= =======
Liabilities and Stockholders'
Equity:
Accounts payable............. $ 13 $ 6
Deferred taxes............... 50 15
Dividends payable............ 421 333
ESOP debt.................... -- 55
Stockholders' equity......... 69,765 61,064
------- -------
Total liabilities and
stockholders' equity.... $70,249 $61,473
======= =======
STATEMENTS OF INCOME
1996 1995 1994
---- ---- ----
Dividends from PSB....... $2,000 $4,400 $1,000
Other income............. 82 68 60
Operating expenses....... (82) (68) (59)
Amortization expense..... -- -- (1)
------ ------ ------
Income before equity in
undistributed earnings
of subsidiary.......... 2,000 4,400 1,000
Equity in undistributed
income of PSB.......... 7,618 3,671 6,228
------ ------ ------
Net income.......... $9,618 $8,071 $7,228
====== ====== ======
STATEMENTS OF CASH FLOWS
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Management fee income received......................... $ 82 $ 68 $ 60
Dividends received..................................... 2,000 4,400 1,000
Cash paid to suppliers................................. (75) (85) (53)
------- ------- -------
Net cash provided by operating activities........... 2,007 4,383 1,007
------- ------- -------
Cash flows from investing activities:
Equity investments purchased........................... (373) (330) --
Cash flows from financing activities:
Payment for treasury stock............................. -- (3,031) --
Allocation of treasury stock to retirement plans....... 178 39 49
Dividends paid to stockholders......................... (1,592) (1,321) (1,062)
Loan to PFC ESOP....................................... (135) (112) --
Principal collected on ESOP loan....................... 130 13 --
------- ------- -------
Net cash used in financing activities............... (1,419) (4,412) (1,013)
------- ------- -------
Net increase (decrease) in cash and cash equivalents..... 215 (359) (6)
Cash and cash equivalents at beginning of year........... 748 1,107 1,113
------- ------- -------
Cash and cash equivalents at end of year................. $ 963 $ 748 $ 1,107
======= ======= =======
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................. $ 9,618 $ 8,071 $ 7,228
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of PSB...................... (7,618) (3,671) (6,228)
Increase (decrease) in accrued expenses.......... 7 (17) 6
Amortization expense............................. -- -- 1
------- ------- -------
Net cash provided by operating activities........... $ 2,007 $ 4,383 $ 1,007
======= ======= =======
- - ------------------------------------------------------------------------------
29
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- - -------------------------------------------------------------------------------
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("FAS 107"), "Disclosure
About Fair Value of Financial Instruments," requires the determination of fair
value for certain of the Bank's assets, liabilities and contingent liabilities.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND NONINTEREST BEARING DEPOSITS: The carrying amount of cash which
includes noninterest-bearing demand deposits approximates fair value.
FEDERAL FUNDS SOLD: The carrying amount of overnight federal funds
approximates fair value.
INTEREST-EARNING DEPOSITS IN OTHER BANKS: The carrying amount of other
overnight interest-bearing balances approximates fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: The fair values of investment
securities are obtained from the Wall Street Journal, the Interactive Data
Corporation pricing service and various investment brokers for securities not
available from public sources.
LOANS RECEIVABLE: Fair values were estimated by discounting contractual cash
flows using interest rates currently being offered for loans with similar
credit quality adjusted for standard prepayment assumptions.
DEPOSIT LIABILITIES: For checking, savings and money market accounts, fair
value is the amount payable on demand at June 30. The fair values of
fixed-maturity certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on time
deposits of similar remaining maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK: Fair value is determined by discounting
the advances using current rates of advances with comparable maturities as of
the reporting date.
COMMERCIAL INVESTMENT AGREEMENTS: The carrying amount of these overnight
borrowings approximates fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair value for off-balance-sheet instruments
(primarily loan commitments) are estimated using internal valuation models and
are limited to fees charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. Unused consumer and commercial lines of credit are assumed equal to
the outstanding commitment amount due to the variable interest rate attached to
these lines of credit.
1996 1995
----------------------- -----------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FINANCIAL ASSETS: FAIR VALUE VALUE FAIR VALUE VALUE
----------- -------- ----------- --------
Cash and noninterest-earning deposits........ $ 10,905 $ 10,905 $ 10,003 $ 10,003
Federal funds sold........................... 66,557 66,557 116,581 116,581
Interest-earning deposits in other banks..... 173 173 194 194
Investment securities........................ 104,639 105,515 132,086 132,555
Mortgage-backed securities................... 99,915 99,371 101,122 100,881
Loans receivable............................. 644,936 625,452 551,023 524,545
--------- -------- --------- --------
$ 927,125 $907,973 $ 911,009 $884,759
========= ======== ========= ========
FINANCIAL LIABILITIES:
Checking, savings and money market
accounts.................................. $ 259,011 $259,011 $ 255,518 $255,518
Savings certificates......................... 539,433 541,912 539,108 533,831
Advances from Federal Home Loan Bank......... 20,795 20,693 21,026 20,607
Commercial investment agreements............. 6,218 6,218 3,997 3,997
--------- -------- --------- --------
$ 825,457 $827,834 $ 819,649 $813,953
========= ======== ========= ========
Off-Balance Sheet Instruments.................. $ (24) $ -- $ 18 $ --
- - ------------------------------------------------------------------------------
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CAPITAL STOCK INFORMATION
o ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m., Thursday,
October 24, 1996, at the Pittsburgh Athletic Association, 4215 Fifth
Avenue, Pittsburgh, Pennsylvania.
o STOCK LISTING & DIVIDENDS
Parkvale's Common Stock is traded in the over-the-counter market and
quoted on the NASDAQ National Market System under the symbol "PVSA."
Prices shown below are based on the prices reported by the NASDAQ
system, with appropriate adjustments for the 5 for 4 stock split in
October 1995.
FOR THE QUARTER ENDED HIGH LOW DIVIDENDS
--------------------- ---- --- ---------
June 96 ........................... $29.25 $24.50 $0.13
March 96 .......................... 28.50 25.75 0.13
December 95 ....................... 28.50 25.24 0.13
September 95 ...................... 28.40 20.40 0.13
June 95 ........................... 21.20 18.80 0.104
March 95 .......................... 20.40 17.40 0.104
December 94 ....................... 20.96 17.20 0.104
September 94 ...................... 20.80 19.20 0.104
There were 3,243,243 shares of Common Stock outstanding as of August 26,
1996, the Voting Record Date, which shares were held as of such date by
approximately 520 holders of record.
o TRANSFER AGENT
ChaseMellon Shareholders Services
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
1-800-756-3353
Telecommunications Devices for the Deaf: 1-800-231-5469
o INFORMATION REQUESTS
A copy of the 1996 Annual Report of Parkvale Financial Corporation on
Form 10-K filed with the Securities and Exchange Commission, and a list
of exhibits thereto, will be furnished to stockholders without charge
upon their written request to the Treasurer of the Corporation at
its Headquarters Office, 4220 William Penn Highway, Monroeville,
PA 15146. The telephone number is (412) 373-7200.
Parkvale's web site is http://www.parkvale.com
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