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Exhibit 13
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PARKVALE FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA AT JUNE 30: 1997 1996 1995 1994 1993
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Total assets $991,239 $919,242 $896,422 $873,786 $886,074
Loans 710,868 625,452 524,545 494,994 503,432
Investment securities 149,580 204,886 233,436 272,866 251,761
Savings deposits 881,244 807,087 794,445 778,555 791,973
FHLB advances and other debt 20,196 26,911 24,604 24,397 29,153
Shareholders' equity 75,183 69,765 61,064 55,565 49,322
Shareholders' equity per share 18.54 17.25 15.25 13.25 11.87
OPERATING DATA FOR THE YEAR ENDED JUNE 30: 1997 1996 1995 1994 1993
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Total interest income $ 68,380 $ 66,117 $ 61,026 $ 59,404 $ 67,105
Total interest expense 40,352 39,631 35,431 35,399 40,817
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Net interest income 28,028 26,486 25,595 24,005 26,288
Provision for loan losses 399 686 1,094 1,829 3,749
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Net interest income after provision for
loan losses 27,629 25,800 24,501 22,176 22,539
Other income 2,174 3,058 2,024 2,320 2,111
Other expense 18,808 14,240 13,821 12,991 12,831
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Income before taxes and extraordinary items 10,995 14,618 12,704 11,505 11,819
Income tax expense 4,021 5,000 4,633 4,277 4,512
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Income before extraordinary items 6,974 9,618 8,071 7,228 7,307
Extraordinary items -- -- -- -- (516)
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Net income $ 6,974 $ 9,618 $ 8,071 $ 7,228 $ 6,791
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Earnings per share $1.66 $2.29 $1.88 $1.66 $1.58
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OTHER SELECTED DATA (STATISTICAL PROFILE):
YEAR ENDED JUNE 30, 1997 1996 1995 1994 1993
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Average yield earned on all
interest-earning assets 7.38% 7.45% 7.17% 6.89% 7.69%
Average rate paid on interest-bearing
liabilities 4.67 4.79 4.46 4.34 4.88
Average interest rate spread 2.71 2.66 2.71 2.55 2.81
Net yield on average interest-earning
assets 3.03 2.98 3.01 2.78 3.01
Other expenses to average assets 1.98 1.57 1.59 1.47 1.43
Other expenses to average assets** 1.45 1.57 1.59 1.47 1.43
Efficiency ratio 62.27 48.20 50.04 49.35 45.18
Efficiency ratio** 45.60 49.83 50.04 49.35 45.18
Return on average assets 0.73 1.06 0.93 0.82 0.76
Return on average assets** 1.07 0.98 0.93 0.82 0.76
Dividend payout ratio 31.36 18.19 17.74 16.07 13.51
Return on average equity 10.15 15.13 13.89 13.69 14.64
Return on average equity** 14.70 13.99 13.89 13.69 14.64
Average equity to average total assets 7.23 7.01 6.87 5.98 5.17
AT JUNE 30, 1997 1996 1995 1994 1993
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One year gap to total assets -4.44% 0.24% 6.03% 1.65% 5.37%
Intangibles to total equity 0.74 0.40 0.71 1.07 1.94
Shareholders' equity to assets ratio 7.58 7.59 6.81 6.36 5.57
Ratio of classified assets to total assets 0.3 0.22 0.35 0.33 0.82
Nonperforming assets $ 2,654 $ 1,248 $ 2,127 $ 1,163 $ 5,672
Allowance for loan losses as a % of gross
loans 1.95% 2.17% 2.41% 2.33% 1.97%
Number of full-service offices 29 28 28 27 26
** Excludes the effect of the one-time FDIC special assessment in fiscal 1997
and the gain on sale of asset in fiscal 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to summarize the financial condition and
results of operations of Parkvale Financial Corporation ("Parkvale") and provide
other information which is not readily apparent from the consolidated financial
statements included in this annual report. Reference should be made to those
statements, the notes thereto and the selected financial data presented
elsewhere in this report for a complete understanding of the following
discussion and analysis.
FINANCIAL CONDITION
Parkvale increased average interest earning assets by $39 million over fiscal
year 1996. This growth was achieved through an increased loan portfolio funded
by a modest increase in deposits and investment maturities. Average loan and
average deposit balances rose $75 million and $43 million, respectively, over
fiscal year 1996. Average investments fell $50 million during fiscal year 1997
while Federal funds sold increased $14 million. Additionally, average borrowings
dropped approximately $6 million from the prior year.
Parkvale functions as a financial intermediary, and as such, its financial
condition should be examined in terms of its ability to manage its interest rate
risk, and diversify its credit risk.
ASSET AND LIABILITY MANAGEMENT
A necessary prerequisite of asset and liability management is the ability to
manage interest rate risk ("IRR"). IRR is the exposure of the Bank's current and
future earnings and capital arising from movements in interest rates. This
exposure occurs because the present value of future cash flows, and in many
cases the cash flows themselves, change when interest rates change. Parkvale's
IRR is measured and analyzed using static interest rate sensitivity gap
indicators, net interest income simulation estimates and net present value
sensitivity measures. These combined methods enable Parkvale's management to
regularly monitor both the direction and magnitude of potential changes in the
relationship between interest-earning assets and interest-bearing liabilities.
Interest rate sensitivity gap analysis provides one indicator of potential
interest rate risk by comparing interest-earning assets and interest-bearing
liabilities maturing or repricing at similar intervals. The gap ratio is defined
as rate-sensitive assets minus rate-sensitive liabilities for a given time
period divided by total assets. Parkvale continually monitors gap ratios, and
within the IRR framework and in conjunction with the net interest income
simulations, implements actions to reduce exposure to fluctuating interest
rates. Such actions have included maintaining high liquidity, deploying excess
liquidity, increasing the repricing frequency of the loan portfolio and
lengthening the overall maturities of interest-bearing liabilities. Management
believes these ongoing actions minimize Parkvale's vulnerability to fluctuations
in interest rates. The one-year gap ratio has shifted from 0.24% as of June 30,
1996 to -4.44% as of June 30, 1997, and the five-year gap ratio has shifted from
2.20% as of June 30, 1996 to -0.43% as of June 30, 1997.
Gap indicators of IRR are not necessarily consistent with IRR simulation
estimates. Parkvale utilizes net interest income simulation estimates under
various assumed interest rate environments to more fully capture the details of
IRR. Assumptions included in the simulation process include measurement over a
probable range of potential interest rate changes, prepayment speeds on
amortizing financial instruments, other imbedded options, loan and deposit
volumes and rates, nonmaturity deposit assumptions and management's capital
requirements. The estimated impact on projected net interest income in fiscal
1998 assuming an immediate shift in current interest rates versus current
interest rates would result in the following percentage changes over fiscal 1997
net interest
MEASUREMENT PERIOD AVERAGE EQUITY TO AVERAGE TOTAL ASSETS
(FISCAL YEAR COVERED) YEAR ENDED JUNE 30
1993 5.17
1994 5.98
1995 6.87
1996 7.01
1997 7.23
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income: +100 bp, +5.7%; +200 bp, +2.3%; -100 bp, +5.2%; -200 bp, -0.8%. This
compares to projected net interest income for fiscal 1997 made at June 30, 1996
over fiscal 1996 actual net interest income of: +100 bp, +5.9%; +200 bp, +0.8%;
- -100 bp, +7.3%; -200 bp, +2.0%. The fluctuation in projected net interest income
between fiscal 1997 and 1996 is reflective of the change in asset mix during
fiscal 1997 as discussed in the Financial Condition section.
Asset Management. A primary goal of Parkvale's asset management is to maintain a
high level of liquid assets. Parkvale defines the following as liquid assets:
cash, federal funds sold, certain corporate debt maturing in less than one year,
U.S. Government and agency obligations maturing in less than one year and
short-term bank deposit accounts. The average daily liquidity was 21.5% for the
quarter ended June 30, 1997. During fiscal 1997, Parkvale's investment strategy
was to deploy excess liquidity by purchasing single-family Adjustable Rate
Mortgage ("ARM") loans to enhance yields and reduce the risk associated with
rate volatility. Such investments reduce the inherent risk of the volatility of
overnight interest rates. If interest rates were to fall substantially, net
interest income may decrease if the yield on liquid assets, such as Federal
funds sold, were to fall faster than liabilities would reprice.
Parkvale's lending strategy has been designed to shorten the average maturity of
its assets and increase the rate sensitivity of its loan portfolio. In fiscal
1997, 1996 and 1995, 87.98%, 77.4% and 82.6%, respectively, of mortgage loans
originated or purchased were adjustable-rate loans. Parkvale has continually
emphasized the origination and purchase of ARM loans. ARMs totaled $402.3
million or 63.8% of total mortgage loans at June 30, 1997 versus $316.6 million
or 56.9% of total mortgage loans at June 30, 1996. To supplement local mortgage
originations, Parkvale purchased loans aggregating $104.4 million in fiscal 1997
and $104.9 million in fiscal 1996 from mortgage bankers and other financial
institutions. In both years, the loan packages purchased were predominately 3/1
and 5/1 ARMs, which had the effect of lowering the one-year gap from +6.03% at
June 30, 1995 to -4.44% at June 30, 1997. The practice of purchasing loans in
the secondary market is expected to continue in fiscal 1998 when liquidity
exceeds targeted levels. At June 30, 1997, Parkvale had commitments to originate
loans totaling $5.7 million. Construction loans in process at June 30, 1997 were
$6.4 million. Such commitments were funded from current liquidity.
Parkvale continues to increase its consumer loan portfolio through new
originations. Home equity lines of credit are granted at up to 120% of
collateral value at competitive rates. In general, these loans have shorter
maturities and greater interest rate sensitivity and margins than residential
real estate loans. At June 30, 1997 and 1996, consumer loans were $90.3 and
$76.2 million which represented an 18.5% and a 10.2% increase over the balances
at June 30, 1996 and 1995, respectively.
Parkvale follows policies designed to reduce credit risk concentrations within
its asset portfolio. One such vehicle has been mortgage-backed securities which
consist of pools of individual residential mortgage notes. The majority of the
mortgage-backed securities held by Parkvale are guaranteed as to the timely
repayment of principal and interest by a government-sponsored enterprise, the
Federal Home Loan Mortgage Corporation ("FHLMC"). At June 30, 1997, Parkvale had
$66.9 million or 6.8% of total assets invested in mortgage-backed securities.
See Note B of Notes to Consolidated Financial Statements.
Investments in other securities, such as U.S. Government and agency obligations
and corporate debt are purchased to enhance Parkvale's overall net interest
margin. Parkvale's investment policy focuses on long-term trends, rather than
short-term swings in the financial markets. Accordingly, all debt securities are
classified as held to maturity, and are not available for sale nor held for
trading.
Measurement Period One Year Gap to Total Assets
(Fiscal Year Covered) At June 30
1993 5.37
1994 1.65
1995 6.03
1996 0.24
1997 -4.44
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Interest-Sensitivity Analysis. The following table reflects the maturity and
repricing characteristics of Parkvale's assets and liabilities at June 30, 1997:
1-5
<3 MONTHS 4-12 MONTHS YEARS 5+ YEARS TOTAL
---------- ----------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-sensitive assets:
ARM and other variable rate loans... $101,655 $ 79,695 $260,820 $ 20,794 $462,964
Other fixed rate loans, net (1)..... 5,794 17,826 86,256 152,955 262,831
Variable rate mortgage-backed
securities....................... 15,997 1,693 -- -- 17,690
Fixed rate mortgage-backed
securities (1)................... 3,726 11,782 25,142 8,099 48,749
Investments and Federal funds
sold............................. 116,832 12,000 48,160 -- 176,992
Equities, primarily FHLB and
FHLMC............................ -- -- 6,346 7,200 13,546
---------- ----------- -------- -------- --------
Total interest-sensitive assets....... $244,004 $ 122,996 $426,724 $189,048 $982,772
========== ========== ======== ======== ========
Ratio of interest-sensitive assets to
total assets........................ 24.6% 12.4% 43.0% 19.1% 99.1%
===== ===== ==== ==== ====
Interest-sensitive liabilities:
Passbook deposits and club accounts
(2).............................. $ 6,771 $ 23,983 $ 81,248 $ 36,609 $148,611
Checking accounts (3)............... 7,795 23,385 31,180 15,589 77,949
Money market deposit accounts....... 5,600 16,802 22,402 -- 44,804
Certificates of deposit............. 96,787 220,558 242,142 48,544 608,031
FHLB advances and other
borrowings....................... 9,313 -- 10,000 883 20,196
---------- ----------- -------- -------- --------
Total interest-sensitive
liabilities......................... $126,266 $ 284,728 $386,972 $101,625 $899,591
========== ========== ======== ======== ========
Ratio of interest-sensitive
liabilities to total liabilities and
equity.............................. 12.7% 28.7% 39.1% 10.3% 90.8%
===== ===== ==== ==== ====
Ratio of interest-sensitive assets to
interest-sensitive liabilities...... 193.2% 43.2% 110.3% 186.0% 109.2%
====== ====== ===== ===== =====
Periodic Gap to total assets.......... 11.88% (16.32%) 4.01% 8.82% 8.39%
====== ====== ===== ===== =====
Cumulative Gap to total assets........ 11.88% (4.44%) (.43%) 8.39%
====== ====== ===== =====
(1) Includes total repayments and prepayments at an assumed rate of 10% per
annum for fixed-rate mortgage loans and mortgage-backed securities, with the
amounts for other loans based on the estimated remaining loan maturity by
loan type.
(2) Assumes passbook deposits are withdrawn at the rate of 20.7% per annum.
(3) Assumes checking accounts are withdrawn at 40% in the first year and 10% per
annum thereafter.
Liability Management. Parkvale's high level of liquidity allows investment
decisions to be determined with the funding source a secondary issue. Deposits
are priced according to management's asset/liability objectives, alternate
funding sources and competition. A concentrated effort is made to extend the
maturities of deposits by offering highly competitive rates for longer term
certificates. Certificates of deposit maturing after one year as a percent of
total deposits are 32.9% at June 30, 1997 and 33.9% at June 30, 1996.
Parkvale's primary sources of funds are deposits received through its branch
network, loan and mortgage-backed security repayments and advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB"). FHLB advances can be used on a
short-term basis for liquidity purposes or on a long-term basis to support
expanded lending and investment activities.
CONCENTRATION OF CREDIT RISK
Financial institutions, such as Parkvale, generate income primarily through
lending and investing activities. The risk of loss from lending and investing
activities includes the possibility that losses may occur from the failure of
another party to perform according to the terms of the loan or investment
agreement. This possibility of loss is known as credit risk.
Credit risk is increased by lending and investing activities that concentrate a
financial institution's earning assets in a way that exposes the institution to
a material loss from any single occurrence or group of related occurrences.
Diversifying loans and investments to prevent concentrations of risks is one
manner a financial institution can reduce potential losses due to credit risk.
Examples of asset concentrations would include, but not be limited to,
geographic concentrations, loans or investments of a single type, multiple loans
to a single borrower, loans made
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to a single type of industry and loans of an imprudent size relative to the
total capitalization of the institution. For loans purchased and originated,
Parkvale has taken steps to reduce exposure to credit risk by emphasizing
low-risk, single-family mortgage loans, which comprise 80% of the gross loan
portfolio as of June 30, 1997.
CAPITAL RESOURCES
Shareholders' equity increased $5.4 million or 7.8% at June 30, 1997 compared to
June 30, 1996. Earnings retention is the main source of Parkvale's equity
growth. Net income was almost $7 million while dividends declared were $2.1
million resulting in 31.36% of net income paid to shareholders (equal to $.52
per share) for fiscal year ended June 30, 1997. Parkvale's fourth consecutive
5-for-4 stock split paid in October 1996 effectively increased the dividend
payment by 25%. Unrealized securities gains which increased $1.7 million over
prior year also favorably affected shareholders' equity. The book value of
Parkvale's common stock increased 7.5% to $18.54 at June 30, 1997 from $17.25 at
June 30, 1996 as a result of these increases in shareholders' equity.
Parkvale Savings Bank (the Bank), is a wholly owned subsidiary of Parkvale. The
Bank's primary regulators are the Federal Deposit Insurance Corporation ("FDIC")
and the Pennsylvania Department of Banking. The Office of Thrift Supervision
retains jurisdiction over Parkvale Financial Corporation due to its status as a
unitary savings and loan holding company. Parkvale continues to maintain a "well
capitalized" status, sustaining a 7% capital level as of June 30, 1997. Strong
capitalization allows Parkvale to continue building shareholder value through
traditionally conservative operations and potentially profitable growth
opportunities.
Management is not aware of any trends, events, uncertainties or recommendations
by any regulatory authority that will have, or that are reasonably likely to
have, material effects on Parkvale's liquidity, capital resources or operations
except as follows.
In June 1993, lawsuits were instituted in the Court of Common Pleas of Allegheny
County, Pennsylvania, against Parkvale Savings Association, by the current
owners of the former Parkvale headquarters building which was sold in 1984. The
plaintiffs are a limited partnership known as 200 Meyran Associates and the two
general partners thereof, who allege that Parkvale misrepresented the
environmental condition of the building at the time of sale, which conduct, they
contend, also constituted a breach of the Agreement of Sale. Plaintiffs seek
recision of the Agreement of Sale or specific performance thereof and
compensatory and punitive damages. Discovery is proceeding, and Parkvale intends
to vigorously defend the suit. It is not possible to make a reasonable estimate
of financial exposure at this time; however, management believes such exposure
would not be material to shareholders' equity, operating results, financial
position or liquidity.
RESULTS OF OPERATIONS
Parkvale increased net interest income by $1.5 million or 5.8% over fiscal year
1996. Net interest income is the difference between interest earned on loans and
investments and interest paid for deposits and borrowings. A positive interest
rate spread is achieved with interest-earning assets in excess of
interest-bearing liabilities which results in increased net interest income.
Parkvale's growing loan portfolio has favorably impacted net interest income.
The net yield on average interest-earning assets was 3.03% in fiscal 1997, 2.98%
in fiscal 1996 and 3.01% in fiscal 1995.
Net income in fiscal year 1997 was adversely impacted by the one-time Savings
Association Insurance Fund ("SAIF") assessment of $5 million; coupled with this
adverse effect on net income was a nonrecurring gain of $969,000 recognized in
fiscal 1996. Absent these nonrecurring transactions, net income from normal
operations
MEASUREMENT PERIOD NET INTEREST INCOME
(FISCAL YEAR COVERED) YEAR ENDED JUNE 30
1993 26.288
1994 24.005
1995 25.595
1996 26.486
1997 28.028
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would have increased 14.5% from $8.9 million or $2.11 per share for fiscal 1996
to $10.2 million or $2.41 per share for the year ended June 30, 1997.
INTEREST INCOME
Interest income from loans increased by $4.8 million or 10.3% in fiscal 1997.
Average loans outstanding increased $75.4 million or 13%, primarily due to loan
package purchases amounting to $104 million during fiscal 1997. Interest income
increased despite a decrease in the average loan yield which was 8.23% in fiscal
1996 and fell to 8.01% in fiscal 1997. This is reflective of lower interest
rates sustained throughout the majority of fiscal 1997 and the large quantity of
ARM loans within the portfolio. Interest income on loans increased by $5 million
or 12.07% from fiscal 1995 to 1996. The average yield on loans increased from
8.14% in fiscal 1995 to 8.23% in fiscal 1996, and the average outstanding loan
balance increased $55.2 million or 10.8% between fiscal 1995 and 1996.
Interest income on mortgage-backed securities decreased by $1.2 million or 18%
in fiscal 1997. Although the average yield on mortgage-backed securities
increased 11 basis points from 6.61% in fiscal 1996 to 6.72% in fiscal 1997,
this was not sufficient to offset an average balance decrease of $19.8 million
from fiscal 1996 to 1997. The decline in the average balance outstanding is due
to deploying payments on mortgage-backed securities into higher yielding loans.
Similarly, interest income on mortgage-backed securities decreased $132,000 in
fiscal 1996 from fiscal 1995 attributable to a $3.6 million decrease in the
average outstanding balance which was offset slightly by a 10 basis point
increase in the average yield from 6.51% in fiscal 1995 to 6.61% in fiscal 1996.
Interest income on investments decreased $1.8 million or 25.5% in fiscal 1997.
This is the result of a $30.6 million decrease in the average balance. The
average yield on investments was relatively unchanged at 5.97% in fiscal 1997
and 5.96% in fiscal 1996. Interest income on investments decreased by $1.3
million or 15.1% from fiscal 1995 to 1996. This is a result of a $38.7 million
decrease in the average balance, partially offset by a 66 basis point increase
in the average yield.
Interest income from federal funds sold increased $495,000 from fiscal 1996 to
1997. The increase was attributable to an increase in the average federal funds
sold balance from $99.4 million in fiscal 1996 to $113.3 million in fiscal 1997.
This is offset by a decrease in the average yield from 5.67% in fiscal 1996 to
5.41% in fiscal 1997. The average balance of federal funds sold increased $23.9
million or 32% between fiscal 1995 and 1996, and interest income increased $1.5
million or 35.4% between the two years. The average yield increased from 5.51%
in fiscal 1995 to 5.67% in fiscal 1996. These average yields reflect the changes
in the target federal funds interest rate from a low of 4.25% at the beginning
of fiscal 1995 to a high of 6.00% at the end of fiscal 1995 before leveling off
to 5.25% by the end of fiscal 1996. The target federal funds interest rate
remained at 5.25% throughout fiscal 1997 until the end of the third quarter when
the target was increased to 5.50%.
INTEREST EXPENSE
Interest expense on deposits increased $1.1 million or 2.9% between fiscal 1996
and 1997. The average deposit balance increased $42.7 million or 5.3% in fiscal
1997, offset somewhat by a decrease in the average cost from 4.75% in fiscal
1996 to 4.64% in 1997. The fiscal 1997 deposit increases are attributable to the
success of a "55 Plus" checking program initiated in June 1996 and a variety of
certificate of deposit promotional specials. These specials ranged in terms from
15 to 21 months with rates ranging from 6.0% to 6.25%. Additionally, in December
1996, Parkvale acquired $11.5 million in deposits from another financial
institution. Interest expense on deposits increased by $4.2 million or 12.3%
between fiscal 1995 and 1996. The average deposit balance also increased by
$32.7 million between the two fiscal years, along with an increase in the
average cost from 4.41% in fiscal 1995 to 4.75% in fiscal 1996. Deposit
customers were attracted to rising deposit interest rates in an uncertain market
throughout most of fiscal 1996.
Interest expense on borrowed money decreased by $373,000 or 23.5% in fiscal
1997, primarily resulting from a decrease of $6.1 million in the average
balance. The average cost of borrowings increased from 6.19% in fiscal 1996 to
6.20% in fiscal 1997. In fiscal 1996, interest expense increased slightly by
$27,000 or 1.7% as a result of an increase of $908,000 in the average balance
and a 12 basis point rise in the average cost, from 6.07% in fiscal 1995 to
6.19% in fiscal 1996.
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Net interest income increased $1.5 million or 5.8% from fiscal 1996 to 1997. The
average interest rate spread increased slightly to 2.71% in fiscal 1997 from
2.66% in fiscal 1996, and the average net earning assets increased $2.3 million.
In fiscal 1996, net interest income increased $891,000 or 3.5%. Although the
average interest rate spread decreased from 2.71% in fiscal 1995 to 2.66% in
1996, average net earning assets increased $3.2 million between the two years.
At June 30, 1997, the weighted average yield on loans and investments was 7.5%.
The average rate payable on liabilities was 4.72% for deposits, 6.04% for
borrowings and 4.75% for combined deposits and borrowings.
PROVISION FOR LOAN LOSSES
Specific loss provisions, in the form of additions to the allowance for loan
losses, are made when the perceived market value of property collateralizing
delinquent loans is less than the loan's book value, and reflect management's
current estimate of potential losses on such loans. In addition, general loss
provisions are also added to the allowance for loan losses based on economic
trends, perceived risk in the loan portfolio, previous loss experience and other
factors. The adequacy of loss reserves is based upon a regular monthly review of
loan delinquencies and "classified assets," as well as local and national
economic trends. The provision for loan losses decreased by $287,000 or 41.8%
compared to fiscal year 1996. Management believes the allowance for loan losses
is adequate to cover the amount of possible credit losses inherent in the loan
portfolio as of June 30, 1997.
Nonperforming assets, which are defined as nonaccrual loans and real estate
owned were $2.7 million, $1.2 million and $2.1 million at June 30, 1997, 1996
and 1995, respectively, representing 0.27%, 0.14% and 0.24% of total assets at
the end of each respective year. Of the nonperforming assets at June 30, 1997,
$165,000 was real estate owned and $2.5 million represented nonaccrual loans.
In addition, loans totaling $284,000 were classified as substandard for
regulatory purposes. These loans, while current or less than 90 days past due,
have exhibited characteristics which warrant special monitoring. Examples of
these concerns include irregular payment histories, questionable collateral
values, investment properties having cash flows insufficient to service debt,
and other financial inadequacies of the borrower. These loans are continuously
monitored with efforts being directed towards resolving the underlying concerns
while continuing the performing status of the loans.
Aggregate valuation allowances were 1.95% of gross loans as of June 30, 1997,
compared to 2.17% as of June 30, 1996. The adequacy of these reserves in
relation to current or anticipated trends in the loan portfolio will continue to
be monitored by management.
OTHER INCOME
Other income decreased $884,000 or 28.9% in fiscal 1997 compared to fiscal 1996.
This decline is primarily due to the nonrecurring gain of $969,000 recognized in
fiscal 1996 which related to the sale of real estate. There were no gains or
losses on sale of assets in fiscal 1997 or 1995. Without the fiscal 1996
nonrecurring gain, other income would have increased $85,000 or 4.7% between
fiscal 1996 and 1997.
Service charges on deposit accounts increased by $194,000 or 18.23% in fiscal
1997, and other service charges and fees increased by $90,000 or 16.45%. This is
mainly due to increased services for all types of deposit and loan products
given the increase in average balances over fiscal 1996. Loan fees and service
charges decreased by less than .5% between fiscal 1996 and 1995.
Miscellaneous income decreased $199,000 or 41.7% in fiscal 1997. The main
component of the decrease was in annuity fee income which decreased $146,000 in
fiscal 1997. During fiscal 1996 and most of fiscal 1997, annuity fee income was
generated from a tax deferred annuity program made available to Parkvale
customers through an unaffiliated third party marketing firm who offered fixed
and variable rate annuities and mutual funds to Parkvale customers. Parkvale
received a fee from the third party for providing the customer base. This type
of income fell with reduced customer demand for these products. Such income was
$137,000, $283,000 and $131,000 in fiscal 1997, 1996 and 1995, respectively.
Effective April 1, 1997, Parkvale eliminated the third party and began a new
in-house program to offer nondeposit investment products directly to customers
through a division of the Bank, Parkvale Financial Services.
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OTHER EXPENSE
Other expense increased by $4.6 million or 32.1% in fiscal 1997 as a direct
result of the one-time SAIF assessment of $5 million expensed in fiscal 1997.
Without this one-time assessment, other expenses would have decreased by
$467,000 or 3.28% for the year ended June 30, 1997.
Compensation and employee benefits increased by $345,000 or 5.0% during fiscal
1997 and by $270,000 or 4.1% during fiscal 1996 over the respective prior
periods. Compensation expense increased $279,000 or 4.8% in fiscal 1997 and
increased $242,000 or 4.4% in fiscal 1996. These increases represent normal
merit pay increases and increased staffing related to new offices and products.
ESOP contribution expense decreased $47,000 in fiscal 1997 and increased $82,000
in fiscal 1996 for estimated awards to be granted for service rendered in the
respective fiscal years. A portion of the ESOP contribution is based on the
average common stock price for the applicable calendar year. ESOP contribution
expense decreased in fiscal 1997 due to a 26% reduction in the number of shares
awarded to eligible participants in calendar year 1996. In 1995 and prior fiscal
years, the ESOP contributions were based on a much lower historical value of
subscribed stock from a third party loan executed in 1987. As the subscribed
stock has been fully exhausted, the ESOP contributions will come from treasury
stock. Consequently, in accordance with SOP 93-6, "Employers' Accounting for
Stock Ownership Plans," compensation expense for ESOP contributions is based on
the average common stock price for the calendar year in which the services were
rendered.
Office occupancy expense increased $126,000 or 6.2% in fiscal 1997 and $47,000
or provided 2.4% in fiscal 1996 over the respective prior periods. The increase
in both years was due to the full year effect of branches opened during February
1995 and November 1996.
Marketing expenses increased by $39,000 or 11.28% in fiscal 1997 and decreased
by $28,000 or 7.6% in fiscal 1996. The fiscal 1997 increase is primarily due to
branch promotions relative to the two new branches mentioned in the previous
paragraph. The decrease in fiscal 1996 was due to various savings deposit
advertisements and promotion of home equity credit lines during 1995.
The Bank is insured by the FDIC through the SAIF, mentioned in the Results of
Operations section. FDIC insurance expense was $734,000 in fiscal 1997, $1.8
million in fiscal 1996 and $1.8 million in fiscal 1995. The Bank paid annual
insurance premiums of 23 basis points on insured deposits throughout fiscal
1995, 1996 and the first quarter of fiscal 1997. During fiscal 1997, the
one-time SAIF assessment representing 65.7 basis points on insured deposits was
enacted to reach the required capitalization level for the SAIF. As of October
1, 1996, this legislation had a favorable effect on other expense by reducing
deposit insurance premiums. Annual insurance premiums for the last half of
fiscal 1997 were 6.48 basis points of insured deposits. The effect of these rate
changes was a 59.6% decrease in FDIC insurance expense in fiscal 1997 compared
to fiscal 1996. Effective July 1, 1997, the insurance premium was further
reduced to 6.30 basis points for the first half of fiscal 1998.
INCOME TAXES
Federal income tax expense decreased by $979,000 or 19.6% due to lower pretax
income for fiscal 1997. The effective tax rate for fiscal 1997 varied from the
normal statutory federal tax provisions primarily due to tax-exempt interest and
the Pennsylvania Mutual Thrift Institutions Tax. See Note H for additional
income tax information.
NET INTEREST INCOME vs. OTHER EXPENSE*
YEAR ENDED JUNE 30
Measurement Period
(Fiscal Year Covered) Net Interest Income Other Expense
1993 26.288 12.288
1994 24.005 12.991
1995 25.595 13.821
1996 26.486 14.821
1997 28.028 13.773
*Excludes the effect of the one time FDIC special assessment in fiscal 1997.
11
9
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services as measured by the consumer price index.
FORWARD LOOKING STATEMENTS
The statements in this Annual Report which are not historical fact are forward
looking statements. Forward looking information should not be construed as
guarantees of future performance. Actual results may differ from expectations
contained in such forward looking information as a result of factors including
but not limited to the interest rate environment, economic policy or conditions,
federal and state banking and tax regulations and competitive factors in the
marketplace. Each of these factors could affect estimates, assumptions,
uncertainties and risks considered in the development of forward looking
information and could cause actual results to differ materially from
management's expectations regarding future performance.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
ERNST & YOUNG LLP [Logo]
- --------------------------------------------------------------------------------
The Board of Directors
Parkvale Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Parkvale Financial Corporation ("Parkvale") as of June 30, 1997 and 1996, and
the related consolidated statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of Parkvale's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial condition of Parkvale
Financial Corporation at June 30, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP [Logo]
Pittsburgh, Pennsylvania
July 18, 1997
12
10
- --------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
---------------------
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------
Cash and noninterest-earning deposits $ 12,104 $ 10,905
Federal funds sold 107,832 66,557
Interest-earning deposits in other banks 219 173
Investment securities available for sale (cost of $7,223 in 1997 and
$6,804
in 1996) (Note B) 13,546 10,493
Investment securities held to maturity (fair value of $136,834 in 1997
and $194,061
in 1996) (Note B) 136,034 194,393
Loans, net of allowance of $14,266 in 1997 and $13,990 in 1996 (Note C) 710,868 625,452
Foreclosed real estate, net of allowance of $0 in 1997 and $19 in 1996 165 240
Office properties and equipment, net (Note D) 2,125 2,005
Intangible assets and deferred charges 553 276
Prepaid expenses and other assets (Note L) 7,793 8,748
- ------------------------------------------------------------------------------------------------
Total assets $991,239 $919,242
- ------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
- ------------------------------------------------------------------------------------------------
Savings deposits (Note E) $881,244 $807,087
Advances from Federal Home Loan Bank and other debt (Note F) 20,196 26,911
Advance payments from borrowers for taxes and insurance 10,104 10,828
Other liabilities (Note L) 4,512 4,651
- ------------------------------------------------------------------------------------------------
Total liabilities 916,056 849,477
- ------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (NOTES G AND I)
Preferred stock ($1.00 par value; 5,000,000 shares authorized; 0 shares
issued) -- --
Common stock ($1.00 par value; 10,000,000 shares authorized;
1997--4,310,679 shares issued, 1996--3,448,736 shares issued 4,311 3,449
Additional paid-in capital 8,034 9,138
Treasury stock at cost--255,537 shares in 1997 and 266,366 shares in
1996 (3,676) (3,028)
Employee stock ownership plan debt (330) (104)
Unrealized gains on securities available for sale 4,015 2,342
Retained earnings 62,829 57,968
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 75,183 69,765
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $991,239 $919,242
- ------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
13
11
- --------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
-------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $51,388 $46,585 $41,567
Mortgage-backed securities 5,557 6,775 6,907
Investments 5,310 7,127 8,394
Federal funds sold 6,125 5,630 4,158
- --------------------------------------------------------------------------------------------------
Total interest income 68,380 66,117 61,026
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings deposits (Note E) 39,138 38,044 33,871
Borrowings 1,214 1,587 1,560
- --------------------------------------------------------------------------------------------------
Total interest expense 40,352 39,631 35,431
- --------------------------------------------------------------------------------------------------
Net interest income 28,028 26,486 25,595
Provision for loan losses (Note C) 399 686 1,094
- --------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 27,629 25,800 24,501
- --------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,258 1,064 1,092
Other service charges and fees 637 547 523
Gain on sale of assets (Note J) -- 969 --
Miscellaneous 279 478 409
- --------------------------------------------------------------------------------------------------
Total other income 2,174 3,058 2,024
- --------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and employee benefits 7,243 6,899 6,629
Office occupancy 2,148 2,022 1,975
Marketing 380 341 369
FDIC insurance 734 1,816 1,763
FDIC special assessment 5,035 -- --
Office supplies, telephone, and postage 906 841 831
Miscellaneous 2,362 2,321 2,254
- --------------------------------------------------------------------------------------------------
Total other expenses 18,808 14,240 13,821
- --------------------------------------------------------------------------------------------------
Income before income taxes 10,995 14,618 12,704
Income tax expense (Note H) 4,021 5,000 4,633
- --------------------------------------------------------------------------------------------------
NET INCOME $ 6,974 $ 9,618 $ 8,071
- --------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 1.66 $ 2.29 $ 1.88
- --------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
14
12
- --------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED JUNE 30,
-------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Interest received $ 68,745 $ 65,694 $ 61,123
Loan fees received 328 364 267
Other fees and commissions received 2,012 1,965 1,787
Interest paid (40,391) (39,640) (35,435)
Cash paid to suppliers and employees (18,911) (13,562) (13,853)
Income taxes paid (4,218) (4,784) (4,378)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,565 10,037 9,511
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale -- 48 36
Proceeds from maturities of investments 73,399 151,871 131,686
Purchase of investment securities available for sale (419) (968) (330)
Purchase of investment securities held to maturity (15,102) (121,338) (89,255)
Maturity of deposits in other banks (46) 21 1,347
Purchase of loans (104,428) (104,940) (27,808)
Proceeds from sales of loans 1,758 2,479 2,578
Principal collected on loans 144,239 149,608 100,727
Loans made to customers, net of loans in process (127,403) (148,057) (105,900)
Proceeds from branch deposit acquisition 11,084 -- --
Capital expenditures (448) (114) (199)
- ----------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (17,366) (71,390) 12,882
Cash flows from financing activities:
Net increase (decrease) in checking and savings accounts 2,115 3,407 (49,595)
Net increase in certificates of deposit 60,496 9,236 65,485
Proceeds from FHLB advances -- 96 --
Repayment of FHLB advances (5,011) (10) (96)
Net (decrease) increase in other borrowings (1,704) 2,220 304
Net (decrease) increase in borrowers advances for tax and insurance (724) (1,304) 818
Dividends paid (2,007) (1,592) (1,291)
Allocation of treasury stock to retirement plans 450 178 39
Payment for treasury stock (1,340) -- (3,031)
- ----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,275 12,231 12,633
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 42,474 (49,122) 35,026
Cash and cash equivalents at beginning of year 77,462 126,584 91,558
- ----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 119,936 $ 77,462 $ 126,584
- ----------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash provided by operating
activities:
Net income $ 6,974 $ 9,618 $ 8,071
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 513 528 568
Accretion and amortization of fees and discounts (174) (442) (319)
Loan fees collected and deferred 328 364 268
Provision for loan losses 399 686 1,094
Gain on sale of assets -- (969) --
Decrease (increase) in accrued interest receivable 199 (369) 121
Decrease (increase) in other assets 301 (90) (371)
Decrease in accrued interest payable (39) (9) (4)
(Increase) decrease in deferred income tax asset (197) 276 (45)
(Decrease) increase in other liabilities (739) 444 128
- ----------------------------------------------------------------------------------------------------------
Total adjustments 591 419 1,440
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 7,565 $ 10,037 $ 9,511
- ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
15
13
- --------------------------------------------------------------------------------
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN TREASURY ESOP GAINS ON RETAINED SHAREHOLDERS'
STOCK CAPITAL STOCK DEBT SECURITIES EARNINGS EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 $2,200 $10,575 $ (403) $(141) -- $43,334 $ 55,565
- ----------------------------------------------------------------------------------------------------------------------
Adjustment to beginning
balance for change in
accounting method, net of
income taxes of $910 $1,536 1,536
1995 net income 8,071 8,071
Principal payments on ESOP
debt 86 86
Transfer to reflect 5-for-4
split 551 (551) 0
Treasury stock purchased (3,031) (3,031)
Additional borrowings by ESOP (99) (99)
Change in unrealized gains,
net of income taxes of $130 272 272
Exercise of stock options 7 32 39
Cash dividends declared on
common stock at $.333 per
share (1,375) (1,375)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 2,758 10,056 (3,434) (154) 1,808 50,030 61,064
- ----------------------------------------------------------------------------------------------------------------------
1996 net income 9,618 9,618
Principal payments on ESOP
debt 185 185
Transfer to reflect 5-for-4
split 690 (690) 0
Treasury stock contributed to
benefit plan 66 66
Additional borrowings by ESOP (135) (135)
Change in unrealized gains,
net of income taxes of $307 534 534
Exercise of stock options 1 (228) 340 113
Cash dividends declared on
common stock at $.416 per
share (1,680) (1,680)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 3,449 9,138 (3,028) (104) 2,342 57,968 69,765
- ----------------------------------------------------------------------------------------------------------------------
1997 NET INCOME 6,974 6,974
PRINCIPAL PAYMENTS ON ESOP
DEBT 224 224
TRANSFER TO REFLECT 5-FOR-4
SPLIT 862 (862) 0
TREASURY STOCK PURCHASED (1,340) (1,340)
TREASURY STOCK CONTRIBUTED TO
BENEFIT PLAN 165 179 344
ADDITIONAL BORROWINGS BY ESOP (450) (450)
CHANGE IN UNREALIZED GAINS,
NET OF INCOME TAXES OF $962 1,673 1,673
EXERCISE OF STOCK OPTIONS (407) 513 106
CASH DIVIDENDS DECLARED ON
COMMON STOCK AT $.52 PER
SHARE (2,113) (2,113)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 $4,311 $ 8,034 $ (3,676) $(330) $4,015 $62,829 $ 75,183
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
16
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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 Noninterest-Earning Deposits
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. The reserve calculation is 0% of the first $4.4 million of
checking deposits, 3% of the next $44.9 million of checking deposits and 10% of
total checking deposits over $49.3 million. These required reserves, net of
allowable credits, amounted to $753,000 at June 30, 1997.
Investment Securities Available for Sale
Investment securities available for sale consist solely of equity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of shareholders'
equity until realized. Gains and losses on the sale of available-for-sale
securities are determined using the specific-identification method. Declines in
the fair value of individual available-for-sale securities below their cost that
are other than temporary will result in write-downs of the individual securities
to their fair value. Any related write-downs will be included in earnings as
realized losses. No securities have been classified as trading.
Investment Securities Held to Maturity
Securities for which the Bank has the positive intent and ability to hold to
maturity are reported at cost adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Declines in the fair value of individual held-to-maturity securities
below their amortized cost that are other than temporary will result in
write-downs of the individual securities to their fair value. Any related
write-downs will be included in earnings as realized losses.
Loans
Loans are reported at their outstanding principal adjusted for any charge-offs,
the allowance for loan losses, and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans. Loan origination
and commitment fees and certain direct origination costs have been deferred and
recognized as an adjustment of the yield of the related loan, adjusted for
anticipated loan prepayments. Discounts and premiums
17
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
on purchased residential real estate loans are amortized to income using the
interest method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Loans are placed on nonaccrual status when in the judgment of management, the
probability of collection of principal and interest is deemed to be insufficient
to warrant further accrual. All loans which are 90 or more days delinquent are
treated as nonaccrual loans. Parkvale provides an allowance for the loss of
accrued but uncollected interest at the time the interest accrual is
discontinued. Interest ultimately collected is credited to income in the period
of recovery.
Nonaccrual, substandard and doubtful commercial and other real estate loans are
considered impaired. Impaired loans are generally evaluated based on the present
value of the expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. Impaired loans have been
included in management's assessment of the adequacy of general provision. This
additional general provision is made for the estimated losses on loans based on
loss experience and prevailing market conditions. While management believes that
the allowance is adequate to absorb estimated potential credit losses, future
adjustments may be necessary in circumstances that differ substantially from the
assumptions used in evaluating the adequacy of the allowance for loan losses.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are recorded at the lower of the carrying amount of the loan or fair
value of the property less cost to sell. After foreclosure, valuations are
periodically performed by management and a valuation allowance is established
for any declines in the fair value less cost to sell below the property's
carrying amount. Revenues and expenses and changes in the valuation allowance
are included in the statement of operations. Gains and losses upon disposition
are reflected in earnings as realized. Loans which were transferred to
foreclosed real estate during fiscal 1997, 1996, and 1995 amounted to $311,000,
$1.2 million and $170,000, respectively. The transfers in 1996 primarily
consisted of a $902,000 multifamily residential apartment complex which was
subsequently sold in February 1996.
Office Property and Equipment
Office property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the various classes of assets. Amortization of leasehold improvements is
computed using the straight-line method over the useful lives of the leasehold
improvements.
Earnings per Share (EPS)
Primary earnings per share are based upon the weighted average number of issued
and outstanding common shares including shares subject to stock options, which
are deemed common stock equivalents. For the years ended June 30, 1997, 1996 and
1995, earnings per share were based upon the following share amounts:
1997 1996 1995
--------- --------- ---------
Actual average shares outstanding...................... 4,047,408 4,017,690 4,134,079
Option equivalents..................................... 163,662 188,044 168,556
--------- --------- ---------
Weighted average aggregate............................. 4,211,070 4,205,734 4,302,635
========= ========= =========
On September 17, 1996, the Board of Directors declared a 5-for-4 stock split on
Parkvale's common stock. The additional shares were paid on October 14, 1996 to
stockholders of record at the close of business on September 30, 1996. This
increased the outstanding shares by 808,129. No fractional shares were issued.
All share amounts in this report have been restated to reflect the effect of
this stock split and similar splits in 1995, 1994 and 1993.
Stock Options
In October 1995, the Financial Accounting Standards Board (FASB) issued FAS 123,
"Accounting for Stock-Based Compensation," which was effective for fiscal years
beginning after December 15, 1995. FAS 123
18
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
defines a fair value-based method of accounting for stock-based employee
compensation plans. Under the fair value-based method, compensation cost is
measured at the grant date based upon the value of the award and is recognized
over the service period. The standard encourages all entities to adopt this
method of accounting for all employee stock compensation plans. However, it also
allows an entity to continue to measure compensation costs for its plans as
prescribed in APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." As Parkvale elected to continue using the accounting in APB 25, pro
forma disclosures of net income and earnings per share are made for options
granted on or after July 1, 1995 as if the fair value method of accounting, as
defined by FAS 123 had been applied. See Note I.
Statement of Cash Flows
For the purposes of reporting cash flows, cash and cash equivalents include cash
and noninterest-earning deposits and federal funds sold. Additionally,
allocation of treasury stock to retirement plans includes exercise of stock
options and allocation to the employee stock ownership plan.
Treasury Stock
The purchase of PFC common stock is recorded at cost. At the date of subsequent
reissue, the treasury stock account is reduced by the cost of such stock on the
average cost basis, with any excess proceeds being credited to Additional
Paid-in Capital. A stock repurchase program which commenced in July 1996,
permitting up to 5% of outstanding stock to be repurchased through July 1997,
has been completed. As of June 30, 1997, PFC repurchased 55,427 shares of the
201,250 shares available at the inception of the 1996/1997 program. These shares
were repurchased at an average cost of $24.17 per share and they represent 1.37%
of the outstanding stock at the inception of the program.
Reclassification
Certain prior year amounts have been reclassified for comparative purposes.
Effect of New Accounting Standards
In June 1996, the FASB issued FAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." FAS 125 provides new
accounting and reporting standards for sales, securitizations and servicing of
receivables and other financial assets, for certain secured borrowing and
collateral transactions, and for extinguishments of liabilities. FAS 125 as
amended by FAS 127, "Deferral of Effective Date of Certain Provisions of FAS
125," is generally to be applied to transactions occurring after December 31,
1996, with certain provisions having been delayed until 1998. FAS 125 has not
materially impacted Parkvale's financial position or results of operations as a
result of adoption.
In February 1997, the FASB issued FAS 128, "Earnings per Share," which
supersedes APB 15, "Earnings per Share," in order to simplify the standards for
computing EPS. FAS 128 replaces the presentation of primary and fully diluted
EPS with presentation of basic and diluted EPS and requires retroactive
restatement for all periods presented. This standard is effective for periods
ending after December 15, 1997. The effect of FAS 128 on Parkvale's EPS is not
expected to be significant.
In February 1997, the FASB issued FAS 129, "Disclosure of Information about
Capital Structure," which consolidates existing guidance relating to capital
structure. This standard is also effective for reporting periods ending after
December 15, 1997 and will be adopted by Parkvale as of December 31, 1997. The
standard is not expected to significantly change the current presentation
regarding capital structure.
In June 1997, the FASB issued FAS 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
standard is also effective for fiscal years beginning after December 15, 1997,
and will be adopted by Parkvale as of December 31, 1997. The impact of adoption
is not expected to be significant based on conditions in existence at June 30,
1997.
- --------------------------------------------------------------------------------
19
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE B--INVESTMENT SECURITIES
The amortized cost, gross unrecorded gains and losses and fair values for
investment securities classified as available for sale or held to maturity at
June 30 are as follows:
1997 1996
---------------------------------------------- ----------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- --------
Available for sale:
FHLMC common stock
(169,696 shares in 1997;
42,424 shares in
1996)................... $ 166 $5,773 $ -- $ 5,939 $ 166 $3,461 $ -- $ 3,627
FHLB of Pittsburgh
stock................... 6,346 -- -- 6,346 5,927 -- -- 5,927
Equity
securities--other....... 711 550 -- 1,261 711 228 -- 939
-------- ------ ------ -------- -------- ------ ------ --------
Total equity
investments
available for
sale............... $ 7,223 $6,323 $ -- $ 13,546 $ 6,804 $3,689 $ -- $ 10,493
-------- ------ ------ -------- -------- ------ ------ --------
Held to maturity:
U.S. Government and agency
obligations due:
Within 1 year............ $ 9,971 $ 11 $ -- $ 9,982 $ 9,000 $ 3 $ 7 $ 8,996
Within 5 years........... 41,979 45 309 41,715 53,936 -- 891 53,045
-------- ------ ------ -------- -------- ------ ------ --------
Total U.S.
Government and
agency
obligations....... 51,950 56 309 51,697 62,936 3 898 62,041
Corporate debt:
Within 1 year............ 7,017 14 -- 7,031 17,089 21 16 17,094
Within 5 years........... 10,126 47 4 10,169 14,997 45 31 15,011
-------- ------ ------ -------- -------- ------ ------ --------
Total corporate
debt.............. 17,143 61 4 17,200 32,086 66 47 32,105
Total U.S. Government and
agency obligations and
corporate debt............. 69,093 117 313 68,897 95,022 69 945 94,146
-------- ------ ------ -------- -------- ------ ------ --------
Mortgage-backed securities at June 30:
FHLMC........................ 45,644 914 68 46,490 61,730 968 344 62,354
FNMA......................... 6,284 127 1 6,410 7,791 70 30 7,831
GNMA......................... 1,187 54 -- 1,241 1,326 43 -- 1,369
Collateralized mortgage
obligations (CMOs)......... 12,336 89 119 12,306 26,965 59 222 26,802
Other participation
certificates............... 1,490 -- -- 1,490 1,559 -- -- 1,559
-------- ------ ------ -------- -------- ------ ------ --------
Total
mortgage-backed
securities........ 66,941 1,184 188 67,937 99,371 1,140 596 99,915
-------- ------ ------ -------- -------- ------ ------ --------
Total investments classified
as held to maturity........ $136,034 $1,301 $ 501 $136,834 $194,393 $1,209 $1,541 $194,061
-------- ------ ------ -------- -------- ------ ------ --------
Total investment
portfolio......... $143,257 $7,624 $ 501 $150,380 $201,197 $4,898 $1,541 $204,554
======== ======== ====== ======== ======== ====== ====== ========
The FHLB of Pittsburgh stock is a restricted equity security that does not have
a readily determinable fair value. The FHLB requires member institutions to
maintain a minimum level of stock ownership based on a percentage of residential
mortgages, subject to periodic redemption at par if the stock owned is over the
minimum requirement. As such, FHLB stock is recorded at cost with no unrealized
gains or losses as an investment available for sale.
Mortgage-backed securities are not due at a single maturity date; periodic
payments are received on the securities based on the payment patterns of the
underlying collateral. Approximately $31,000 of the total mortgage-backed
portfolio consists of balloon securities which have stated maturities within
three years. The CMOs at June 30, 1997 consist of $8,343 of adjustable rate
securities and $3,993 of fixed rate instruments with weighted average lives of
less than one year. The CMOs are not deemed to be "high risk" securities as
defined by the Federal Financial Institutions Examination Council.
- --------------------------------------------------------------------------------
20
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:
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Mortgage loans:
Residential:
1-4 Family.................................. $586,735 $517,082 $423,439 $403,492 $417,079
Multifamily................................. 16,825 17,375 22,894 22,735 16,826
Commercial..................................... 17,724 19,516 18,435 18,113 17,851
Other.......................................... 9,329 2,387 3,196 1,931 1,472
-------- -------- -------- -------- --------
630,613 556,360 467,964 446,271 453,228
Consumer loans................................... 90,305 76,224 69,197 61,805 55,296
Commercial business loans........................ 8,332 8,925 4,542 6,135 8,996
Loans on savings accounts........................ 3,076 3,285 3,253 3,206 3,314
-------- -------- -------- -------- --------
Gross loans.................................... 732,326 644,794 544,956 517,417 520,834
Less:
Loans in process............................... 6,393 4,386 4,816 7,506 4,782
Allowance for loan losses...................... 14,266 13,990 13,136 12,056 10,283
Unamortized discount and deferred loan fees.... 799 966 2,459 2,861 2,337
-------- -------- -------- -------- --------
$710,868 $625,452 $524,545 $494,994 $503,432
======== ======== ======== ======== ========
The following summary sets forth the activity in the allowance for loan losses
for the years ended June 30:
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Beginning balance..................................... $13,990 $13,136 $12,056 $10,283 $ 7,619
Provision for losses--mortgage loans.................. 29 440 972 1,668 3,247
Provision for losses--consumer loans.................. 370 246 122 111 445
Provision for losses--commercial business loans....... -- -- -- 50 57
Loans recovered....................................... 116 329 95 157 370
Loans charged off..................................... (239) (161) (109) (213) (1,455)
------- ------- ------- ------- -------
Ending balance........................................ $14,266 $13,990 $13,136 $12,056 $10,283
======= ======= ======= ======= =======
Loans charged off and recovered are as follows:
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Loans recovered:
Commercial..................................... $ -- $ -- $ -- $ -- $ 1
Consumer....................................... 56 70 47 9 6
Mortgage....................................... 60 259 48 148 363
------- ------- ------- ------- -------
Total recoveries................................. 116 329 95 157 370
------- ------- ------- ------- -------
Loans charged off:
Consumer....................................... (227) (125) (39) (45) (22)
Mortgage....................................... (12) (36) (70) (168) (1,433)
------- ------- ------- ------- -------
Total charge-offs................................ (239) (161) (109) (213) (1,455)
------- ------- ------- ------- -------
Net recoveries (charge-offs)..................... $ (123) $ 168 $ (14) $ (56) $(1,085)
======= ======= ======= ======= =======
The allowance for loan losses at June 30 consisted of:
Mortgage loans............................ $12,645 $12,579 $11,915 $10,923 $ 9,274
Consumer loans............................ 1,405 1,194 1,004 916 843
Commercial business loans................. 216 217 217 217 166
Ratio of net charge-offs to average loans......... 0.02% 0.00% 0.00% 0.01% 0.21%
21
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
At June 30, 1997, Parkvale was committed under various agreements to originate
fixed and adjustable rate mortgage loans aggregating $1,266 and $1,441,
respectively, at rates ranging from 7.50% to 7.63% for fixed rate and 7.13% to
7.60% for adjustable rate loans, and had $55,542 of unused consumer lines of
credit and $3,108 in unused commercial lines of credit. In addition, Parkvale
was committed to originate mortgage loans aggregating $565 at rates ranging from
6.00% to 7.63% under bond programs secured by the City of Pittsburgh. Parkvale
was also committed to originate commercial loans totaling $2,402 at June 30,
1997. Available but unused consumer and commercial credit card lines amounted to
$9,429 and $189, respectively, at June 30, 1997.
At June 30, Parkvale serviced loans for the benefit of others as follows:
1997--$8,006, 1996--$13,001 and 1995--$15,555. Decreases represent repayments on
the underlying loans.
At June 30, 1997, Parkvale's loan portfolio consisted primarily of residential
real estate loans collateralized by single and multifamily residences,
nonresidential real estate loans secured by industrial and retail properties and
consumer loans including lines of credit.
Parkvale has geographically diversified its mortgage loan portfolio, having
loans outstanding in 45 states and the District of Columbia. Parkvale's highest
concentrations are in the following states/area along with their respective
share of the outstanding mortgage loan balance: Pennsylvania--46.4%; greater
Washington, D.C. area--15%; and Ohio--8.6%. The ability of debtors to honor
these contracts depends largely on economic conditions affecting the Pittsburgh,
greater Washington D.C. and Columbus metropolitan areas, with repayment risk
dependent on the cash flow of the individual debtors. Substantially all mortgage
loans are secured by real property with a loan amount of generally no more than
80% of the appraised value at the time of origination. Loans in excess of 80% of
appraised value require private mortgage insurance.
At June 30, the amount of interest income of nonaccrual loans that had not been
recognized in interest income was $285 for 1997, and $137 for 1996. The Bank had
$859 and $642 of impaired loans as of June 30, 1997 and 1996, respectively, and
recorded $104 and $95 of reserves related to these loans as of June 30, 1997 and
1996, respectively. Additionally, the loans have been included in management's
assessment of the adequacy of general valuation allowances. The average recorded
investment in impaired loans was $975 during fiscal 1997 and $937 during fiscal
1996.
- --------------------------------------------------------------------------------
NOTE D--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at June 30 are summarized by major
classification as follows:
1997 1996
------ ------
Land....................................................... $ 318 $ 318
Office buildings and leasehold improvements................ 3,779 3,489
Furniture, fixtures and equipment.......................... 3,294 3,145
------ ------
7,391 6,952
Less accumulated depreciation and amortization............. 5,266 4,947
------ ------
Office properties and equipment, net....................... $2,125 $2,005
====== ======
Depreciation expense....................................... $ 328 $ 370
====== ======
- --------------------------------------------------------------------------------
NOTE E--SAVINGS DEPOSITS
The following schedule sets forth interest expense for the years ended June 30
by type of savings deposit:
1997 1996 1995
------- ------- -------
Checking and money market accounts.................. $ 2,152 $ 2,154 $ 2,355
Passbook accounts................................... 3,574 3,630 3,970
Certificates........................................ 33,412 32,260 27,546
------- ------- -------
$39,138 $38,044 $33,871
======= ======= =======
22
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
A summary of savings deposits at June 30 is as follows:
1997 1996
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
Savings:
Checking accounts.............................. $ 64,394 7.3 $ 54,138 6.7
Checking accounts--noninterest-bearing......... 17,307 1.9 16,308 2.0
Money market accounts.......................... 44,804 5.1 47,657 5.9
Passbook accounts.............................. 139,089 15.8 140,908 17.5
-------- ----- -------- -----
265,594 30.1 259,011 32.1
Certificates of deposit.......................... 608,031 69.0 541,912 67.1
-------- ----- -------- -----
873,625 99.1 800,923 99.2
Accrued interest................................. 7,619 0.9 6,164 0.8
-------- ----- -------- -----
$881,244 100.0 $807,087 100.0
======== ===== ======== =====
The aggregate amount of time deposits over $100 was $41,354 and $32,218 at June
30, 1997 and 1996, respectively.
At June 30, the scheduled maturities of certificate accounts were as follows:
MATURITY PERIOD 1997 1996
--------------- -------- --------
1-12 months................................................ $317,345 $268,177
13-24 months............................................... 99,943 88,166
25-36 months............................................... 69,026 47,180
37-48 months............................................... 37,855 49,235
49-60 months............................................... 26,848 32,385
Thereafter................................................. 57,014 56,769
-------- --------
$608,031 $541,912
======== ========
- --------------------------------------------------------------------------------
NOTE F--ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER DEBT
The advances from the FHLB at June 30 consisted of the following:
1997 1996
--------------------- ---------------------
INTEREST INTEREST
BALANCE RATE % BALANCE RATE %
------- --------- ------- ---------
Due within one year.................... $ 5,000 7.98 $ 5,000 8.44
Due within five years.................. 10,000 6.24-6.82 10,000 6.24-7.98
Due within ten years................... -- -- 5,000 6.82
Due within twenty years................ 682 3.00-6.27 693 3.00-6.27
-------
$15,682 $20,693
======= =======
Weighted average interest rate
at end of period..................... 6.88% 7.25%
==== ====
The FHLB advances are secured by Parkvale's FHLB stock and mortgage-backed
securities and are subject to substantial prepayment penalties. Parkvale has a
line of credit with the FHLB. The total amount of credit available to Parkvale
through this product is $50 million. To date, Parkvale has not borrowed on the
line of credit and has no current plans to do so.
Other debt consists of recourse loans and commercial investment agreements with
certain commercial checking account customers. These daily borrowings had
balances of $4,514 and $6,218 at June 30, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
23
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE G--REGULATORY CAPITAL
Parkvale is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
Parkvale's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Parkvale must meet specific
capital guidelines that involve quantitative measures of Parkvale's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Parkvale's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Parkvale to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of June 30, 1997, that Parkvale meets all capital
adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized Parkvale Savings Bank as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the institution's category.
Parkvale's actual regulatory capital amounts and ratios compared to minimum
levels are as follows:
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ----- ------- ------
AS OF JUNE 30, 1997:
TOTAL CAPITAL TO RISK WEIGHTED ASSETS.......... $76,751 14.65% $41,904 8.00% $52,380 10.00%
TIER I CAPITAL TO RISK WEIGHTED ASSETS......... 70,112 13.20% 21,243 4.00% 31,865 6.00%
TIER I CAPITAL TO AVERAGE ASSETS............... 70,112 7.38% 38,001 4.00% 47,501 5.00%
As of June 30, 1996:
Total Capital to Risk Weighted Assets.......... $72,070 14.87% $38,786 8.00% $48,482 10.00%
Tier I Capital to Risk Weighted Assets......... 65,915 13.39% 19,698 4.00% 29,547 6.00%
Tier I Capital to Average Assets............... 65,915 7.27% 36,257 4.00% 45,321 5.00%
- --------------------------------------------------------------------------------
NOTE H--INCOME TAXES
Income tax expense (credits) for the years ended June 30 are comprised of:
1997 1996 1995
------ ------ ------
Federal:
Current............................................ $3,835 $3,923 $4,071
Deferred........................................... (506) 276 (45)
State................................................ 692 801 607
------ ------ ------
$4,021 $5,000 $4,633
====== ====== ======
24
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Parkvale's deferred tax assets and liabilities at June 30 are as follows:
1997 1996
------ ------
Deferred tax assets:
Book bad debt reserves........................................ $4,735 $4,685
Deferred loan fees............................................ 365 379
Purchase accounting adjustments............................... 97 105
Fixed assets.................................................. 50 22
Deferred compensation......................................... 188 113
------ ------
Total deferred tax assets.................................. 5,435 5,304
------ ------
Deferred tax liabilities:
Tax bad debt reserves......................................... 1,407 1,803
Unrealized gains on securities available for sale............. 2,308 1,346
Other, net.................................................... 258 237
------ ------
Total deferred tax liabilities............................. 3,973 3,386
------ ------
Net deferred tax assets.................................... $1,462 $1,918
====== ======
No valuation allowance was required at June 30, 1997 or 1996.
Parkvale's effective tax rate differs from the expected federal income tax rate
for the years ended June 30 as follows:
1997 1996 1995
-------------- -------------- --------------
Expected federal statutory income tax
provision/rate................................ $3,738 34.0% $4,970 34.0% $4,319 34.0%
Tax-exempt interest............................. (118) -1.1% (197) -1.3% (215) -1.7%
State income taxes, net of federal benefit...... 457 4.2% 529 3.6% 401 3.2%
Other........................................... (56) -0.5% (302) -2.1% 128 1.0%
------ ---- ------ ---- ------ ----
Effective total income tax provision............ $4,021 36.6% $5,000 34.2% $4,633 36.5%
====== ==== ====== ==== ====== ====
Prior to 1996, savings institutions that met certain definitional tests and
operating requirements prescribed by the Internal Revenue Code of 1986, as
amended, were allowed a special bad debt deduction and other special tax
provisions. The special bad debt deduction was based on either specified
experience formulas or a specified percentage of taxable income before such
deduction. For tax years from 1987 to 1995, the percentage of taxable income bad
debt deduction was 8% of adjusted taxable income. The Small Business Job
Protection Act of 1996 passed in August 1996 eliminated the special bad debt
deduction granted solely to thrifts. This results in the recapture of past taxes
for permanent deductions arising from the "applicable excess reserve." This
"applicable excess reserve" is the total amount of the reserve over the base
year reserve as of December 31, 1987. Retained earnings at December 31, 1995
included financial statement tax bad debt reserves of $12,013, which includes
$7,876 of base year reserves for which no tax provision has been made. Subject
to prevailing corporate tax rates, Parkvale owes federal taxes on $4,137 in
excess of the base year reserves estimated at $1,407, which is reflected as a
deferred tax liability. The recapture tax of $1,407 is to be paid in six equal
annual installments. Deferral of these payments for up to two years is permitted
contingent upon the Bank continuing to satisfy a specified mortgage origination
test in 1997, which was passed in 1996.
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax which is
calculated at 11.5% of earnings based on generally accepted accounting
principles with certain adjustments.
- --------------------------------------------------------------------------------
25
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE I--EMPLOYEE COMPENSATION PLANS
Retirement Plan
Parkvale provides eligible employees participation in a 401(k) defined
contribution plan. Benefit expense was $177, $172 and $171 in fiscal years 1997,
1996 and 1995, respectively, which represented a 50% company match on deferred
compensation and a profit sharing contribution equal to 2% of eligible
compensation.
Employee Stock Ownership Plan
Parkvale also provides an Employee Stock Ownership Plan ("ESOP") to all
employees who have met minimum service and age requirements. Parkvale recognized
expense of $287 in fiscal 1997, $336 in fiscal 1996 and $253 in fiscal 1995 for
ESOP contributions, which were used to make debt service payments and for the
purchase of additional shares of Parkvale's Common Stock in open-market
transactions. At June 30, 1997, the ESOP owned 358,120 shares of Parkvale Common
Stock.
Stock Option Plans
Parkvale has Stock Option Plans for the benefit of directors, officers and other
selected key employees of Parkvale who are deemed to be responsible for the
future growth of Parkvale. All of the original shares under the 1987 Plan have
been awarded. In October 1993, the 1993 Directors' Stock Option Plan was
adopted. An aggregate of 122,071 shares of authorized but unissued Common Stock
of Parkvale was reserved for future issuance. As of June 30, 1997, 48,820 option
shares have been granted under this plan. Additionally, the 1993 Key Employee
Stock Compensation Program was adopted in October 1993. An aggregate of 295,410
shares of authorized but unissued Common Stock of Parkvale were reserved for
future issuance. As of June 30, 1997, 136,706 option shares have been granted
under this plan. The 1993 Director's Stock Option Plan shares were exercisable
on the date of the grant. The 1993 Key Employee Stock Compensation Program
option shares are 50% exercisable upon six months of continuous service after
the grant date and the remaining 50% is exercisable after a year of continuous
service from the grant date. At June 30, 1997, all option shares are
exercisable, except for 41,500 which become exercisable on December 17, 1997.
The following table presents option share data related to the Stock Option Plans
for the years indicated, adjusted for the 1996, 1995, 1994 and 1993 stock
splits:
EXERCISE PRICE PER
SHARE $3.277 $4.454 $15.565 $16.128 $15,078 $21.30 $24.875 $25.50 Total
------- ------- ------- ------- ------- ------ ------- ------ -------
Share balances at
June 30, 1994... 115,331 118,408 12,206 245,945
Granted....... 78,125 12,206 90,331
Exercised..... (10,352) (2,441) (12,793)
------- ------- ------- ------- ------- ------ ------- ------ -------
June 30, 1995... 104,979 115,967 12,206 78,125 12,206 323,483
Granted....... 12,206 12,206
Exercised..... (33,633) (5,566) (39,199)
------- ------- ------- ------- ------- ------ ------- ------ -------
June 30, 1996... 71,346 110,401 12,206 78,125 12,206 12,206 296,490
Granted....... 12,206 83,000 95,206
Exercised..... (39,902) (11,999) (6,835) (58,736)
------- ------- ------- ------- ------- ------ ------- ------ -------
June 30, 1997... 31,444 98,402 12,206 71,290 12,206 12,206 12,206 83,000 332,960
For options granted on or after July 1, 1995, pro forma information regarding
net income and earnings per share is required by FAS 123, and has been
determined as if the Company had accounted for its stock options using that
method. The fair value for these options was estimated at the date of the grant
using a Black-Scholes option pricing model with the following respective
assumptions: for the 1993 Director's Stock Option Plan, the risk-free interest
rate is 6.5%, dividend yield is 1.8%, volatility factor of the expected market
price of PFC's common stock of 0.159 and an expected life of the options of nine
years; for the 1993 Key Employee Stock Compensation Program, the risk-free
interest rate of 6.4%, dividend yield is 1.8%, volatility factor of the expected
market price of PFC's common stock of 0.157 and an expected life of the options
of six years.
In management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. In addition, option valuation
models require input of highly subjective assumptions including the expected
stock price volatility.
26
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Parkvale's pro forma
information follows:
FISCAL YEAR ENDED
JUNE 30,
-----------------
1997 1996
------ ------
Net income before stock options................................... $6,974 $9,618
Compensation expense from stock options:
Fiscal year ended June 30, 1996 grant........................... -- 51
Fiscal year ended June 30, 1997 grant........................... 241 --
------ ------
Pro forma net income.............................................. $6,733 $9,567
====== ======
Pro forma earnings per share...................................... $ 1.60 $ 2.27
====== ======
- --------------------------------------------------------------------------------
NOTE J--GAIN (LOSS) ON SALE OF ASSETS
The $969 gain recognized in fiscal 1996 was related to the payoff of a loan that
had been classified as special mention for regulatory purposes due to the
loan-to-value ratio being higher than the Bank's normal underwriting standards
for multifamily loans. The loan was granted in fiscal 1994 in connection with
the sale of real estate with the gain from the sale deferred and accreted into
income over the term of the loan. The book value of the loan was $4,547 at the
time of payoff.
- --------------------------------------------------------------------------------
NOTE K--LEASES
Parkvale's rent expense for leased real properties amounted to approximately
$1,036 in fiscal 1997, $992 in 1996 and $911 in 1995. At June 30, 1997, Parkvale
was obligated under 20 noncancellable operating leases, which expire through
2014. The minimum rental commitments for the fiscal years subsequent to June 30,
1996 are as follows: 1998--$1,070, 1999--$989, 2000--$518, 2001--$410,
2002--$260, later years--$1,302.
- --------------------------------------------------------------------------------
NOTE L--SELECTED BALANCE SHEET INFORMATION
JUNE 30,
--------------------
1997 1996
-------- ------
Prepaid expenses and other assets:
Accrued interest on loans................................... $5,038 $3,775
Reserve for uncollected interest............................ (284) (137)
Accrued interest on investments............................. 1,138 2,453
Other prepaids.............................................. 439 739
Net deferred tax asset...................................... 1,462 1,918
-------- ------
$7,793 $8,748
======== ======
Other liabilities:
Accounts payable and accrued expenses....................... $1,729 $1,837
Negative goodwill........................................... 669 793
Other liabilities........................................... 863 1,078
Federal and state income taxes payable...................... 1,251 943
-------- ------
$4,512 $4,651
======== ======
- --------------------------------------------------------------------------------
27
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE M--QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED YEAR
--------------------------------------------- ENDED
SEP. 96 DEC. 96 MAR. 97 JUNE 97 JUNE 97
------- ------- ------- ------- -------
Total interest income...................... $16,666 $16,778 $17,257 $17,679 $68,380
Total interest expense..................... 9,737 9,906 10,242 10,467 40,352
------- ------- ------- ------- -------
Net interest income........................ 6,929 6,872 7,015 7,212 28,028
Provision for loan losses.................. 135 114 71 79 399
------- ------- ------- ------- -------
Total interest income after provision for
losses................................... 6,794 6,758 6,944 7,133 27,629
Other income............................... 519 583 514 558 2,174
FDIC special assessment.................... 5,035 -- -- -- 5,035
Other expense.............................. 3,530 3,214 3,437 3,592 13,773
------- ------- ------- ------- -------
Income (loss) before income taxes.......... (1,252) 4,127 4,021 4,099 10,995
Income tax expense (credit)................ (464) 1,528 1,467 1,490 4,021
------- ------- ------- ------- -------
Net income (loss).......................... $ (788) $ 2,599 $ 2,554 $ 2,609 $ 6,974
======= ======= ======= ======= =======
Net income (loss) per share................ $ (0.19) $ 0.62 $ 0.61 $ 0.62 $ 1.66
THREE MONTHS ENDED YEAR
---------------------------------------------- ENDED
SEP. 95 DEC. 95 MAR. 96 JUNE 96 JUNE 96
------- ------- ------- ------- -------
Total interest income...................... $16,561 $16,559 $16,532 $16,465 $66,117
Total interest expense..................... 10,073 9,985 9,881 9,692 39,631
------- ------- ------- ------- -------
Net interest income........................ 6,488 6,574 6,651 6,773 26,486
Provision for loan losses.................. 185 149 168 184 686
------- ------- ------- ------- -------
Total interest income after provision for
losses................................... 6,303 6,425 6,483 6,589 25,800
Gain on sale of assets..................... -- -- 969 -- 969
Other income............................... 510 533 556 490 2,089
Total other expense........................ 3,521 3,604 3,582 3,533 14,240
------- ------- ------- ------- -------
Income before income taxes................. 3,292 3,354 4,426 3,546 14,618
Income tax expense......................... 1,149 1,172 1,443 1,236 5,000
------- ------- ------- ------- -------
Net income................................. $ 2,143 $ 2,182 $ 2,983 $ 2,310 $ 9,618
======= ======= ======= ======= =======
Net income per share....................... $ 0.51 $ 0.52 $ 0.71 $ 0.55 $ 2.29
- --------------------------------------------------------------------------------------------------------
28
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE N--PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet and statements of income and cash flows for Parkvale
Financial Corporation as of June 30, 1997 and 1996 and the years then ended are
presented below. PFC's sole subsidiary is Parkvale Savings Bank ("PSB").
PARKVALE FINANCIAL CORPORATION (PARENT COMPANY ONLY)
BALANCE SHEETS
1997 1996
---- ----
Assets:
Investment in PSB............ $74,424 $68,446
Cash......................... 370 963
Other equity investments..... 1,106 840
------- -------
Total assets.............. $75,900 $70,249
======= =======
Liabilities and Shareholders'
Equity:
Accounts payable............. $ 43 $ 13
Deferred taxes............... 147 50
Dividends payable............ 527 421
Shareholders' equity......... 75,183 69,765
------- -------
Total liabilities and
shareholders' equity.... $75,900 $70,249
======= =======
STATEMENTS OF INCOME
1997 1996 1995
---- ---- ----
Dividends from PSB....... $2,500 $2,000 $4,400
Other income............. 95 82 68
Operating expenses....... (95) (82) (68)
------ ------ ------
Income before equity in
undistributed earnings
of subsidiary.......... 2,500 2,000 4,400
Equity in undistributed
income of PSB.......... 4,474 7,618 3,671
------ ------ ------
Net income.......... $6,974 $9,618 $8,071
====== ====== ======
STATEMENTS OF CASH FLOWS
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Management fee income received........................ $ 95 $ 82 $ 68
Dividends received.................................... 2,500 2,000 4,400
Cash paid to suppliers................................ (65) (75) (85)
------- ------- -------
Net cash provided by operating activities.......... 2,530 2,007 4,383
------- ------- -------
Cash flows from investing activities:
Equity investments purchased.......................... -- (373) (330)
Cash flows from financing activities:
Payment for treasury stock............................ (1,340) -- (3,031)
Allocation of treasury stock to retirement plans...... 450 178 39
Dividends paid to stockholders........................ (2,007) (1,592) (1,321)
Loan to PFC ESOP...................................... (450) (135) (112)
Principal collected on ESOP loan...................... 224 130 13
------- ------- -------
Net cash used in financing activities.............. (3,123) (1,419) (4,412)
------- ------- -------
Net (decrease) increase in cash and cash equivalents.... (593) 215 (359)
Cash and cash equivalents at beginning of year.......... 963 748 1,107
------- ------- -------
Cash and cash equivalents at end of year................ $ 370 $ 963 $ 748
======= ======= =======
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................ $ 6,974 $ 9,618 $ 8,071
Adjustments to reconcile net income to net cash
provided by
operating activities:
Undistributed income of PSB..................... (4,474) (7,618) (3,671)
Increase (decrease) in accrued expenses......... 30 7 (17)
------- ------- -------
Net cash provided by operating activities.......... $ 2,530 $ 2,007 $ 4,383
======= ======= =======
- --------------------------------------------------------------------------------
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27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires the determination of fair value for
certain of the Bank's assets, liabilities and contingent liabilities. The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
CASH AND NONINTEREST BEARING DEPOSITS: The carrying amount of cash which
includes noninterest-bearing demand deposits approximates fair value.
FEDERAL FUNDS SOLD: The carrying amount of overnight federal funds approximates
fair value.
INTEREST-EARNING DEPOSITS IN OTHER BANKS: The carrying amount of other
overnight interest-bearing balances approximates fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: The fair values of investment
securities are obtained from the Wall Street Journal, the Interactive Data
Corporation pricing service and various investment brokers for securities not
available from public sources.
LOANS RECEIVABLE: Fair values were estimated by discounting contractual cash
flows using interest rates currently being offered for loans with similar credit
quality adjusted for standard prepayment assumptions.
DEPOSIT LIABILITIES: For checking, savings and money market accounts, fair
value is the amount payable on demand at June 30. The fair values of
fixed-maturity certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on time
deposits of similar remaining maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK: Fair value is determined by discounting
the advances using current rates of advances with comparable maturities as of
the reporting date.
COMMERCIAL INVESTMENT AGREEMENTS: The carrying amount of these overnight
borrowings approximates fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair value for off-balance-sheet instruments
(primarily loan commitments) are estimated using internal valuation models and
are limited to fees charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. Unused consumer and commercial lines of credit are assumed equal to
the outstanding commitment amount due to the variable interest rate attached to
these lines of credit.
1997 1996
------------------------ ------------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FINANCIAL ASSETS: FAIR VALUE VALUE FAIR VALUE VALUE
----------- -------- ----------- --------
Cash and noninterest-earning deposits..... $ 12,104 $ 12,104 $ 10,905 $ 10,905
Federal funds sold........................ 107,832 107,832 66,557 66,557
Interest-earning deposits in other
banks.................................. 219 219 173 173
Investment securities..................... 82,443 82,639 104,639 105,515
Mortgage-backed securities................ 67,937 66,941 99,915 99,371
Loans receivable.......................... 738,663 710,868 644,936 625,452
---------- -------- -------- --------
$1,009,198 $980,603 $927,125 $907,973
========== ======== ======== ========
FINANCIAL LIABILITIES:
Checking, savings and money market
accounts............................... $ 265,594 $265,594 $259,011 $259,011
Savings certificates...................... 605,186 608,031 539,433 541,912
Advances from Federal Home Loan Bank...... 15,763 15,682 20,795 20,693
Commercial investment agreements.......... 4,514 4,514 6,218 6,218
---------- -------- -------- --------
$ 891,057 $893,821 $825,457 $827,834
========== ======== ======== ========
Off-balance-sheet instruments............... $ (2) $ -- $ (24) $ --
- --------------------------------------------------------------------------------
30
28
- --------------------------------------------------------------------------------
CAPITAL STOCK INFORMATION
- ANNUAL MEETING
The Annual Meeting of Stockholders will be held at
10:00 a.m., Thursday, October 23, 1997, at the
Pittsburgh Athletic Association, 4215 Fifth Avenue,
Pittsburgh, Pennsylvania.
- STOCK LISTING & DIVIDENDS
Parkvale's Common Stock is traded in the
over-the-counter market and quoted on the NASDAQ
National Market System under the symbol "PVSA." Prices
shown below are based on the prices reported by the
NASDAQ system, with appropriate adjustments for the
5-for-4 stock split in October 1996.
FOR THE QUARTER ENDED HIGH LOW DIVIDENDS
--------------------- ------ ------ ----------
June 97................ $29.00 $25.75 $ 0.13
March 97............... 30.00 24.50 0.13
December 96............ 26.50 22.60 0.13
September 96........... 23.60 19.60 0.13
June 96................ $23.40 $19.60 $ 0.104
March 96............... 22.80 20.60 0.104
December 95............ 22.80 20.19 0.104
September 95........... 22.72 16.32 0.104
There were 4,084,935 shares of Common Stock outstanding
as of August 25, 1997, the Voting Record Date, which
shares were held as of such date by approximately 520
holders of record.
- TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Toll free phone: 1 (800) 368-5948
Fax: (908) 497-2312
- INFORMATION REQUESTS
A copy of the 1997 Annual Report of Parkvale Financial
Corporation on Form 10-K filed with the Securities and
Exchange Commission, and a list of exhibits thereto,
will be furnished to shareholders without charge upon
their written request to the Treasurer of the
Corporation at its Headquarters Office, 4220 William
Penn Highway, Monroeville, PA 15146. The telephone
number is (412) 373-7200.
Parkvale's web site is http://www.parkvale.com
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