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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1998
Commission file no 0-17411
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PARKVALE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1556590
- ----------------------- ---------------------
(State of incorporation) (I.R.S. Employer
Identification Number)
4220 William Penn Highway
Monroeville, PA 15146
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area
code:(412)373-7200 Securities registered pursuant to
Section 12(b) of the Act - None
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock ($1.00 par value)
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ X ]
As of September 18, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant, computed by reference to the reported closing
sale price of $29.75 per share on such date was $122,061,596. Excluded from this
computation are 726,438 shares held by all directors and executive officers as a
group and 427,584 shares held by the Employee Stock Ownership Plan.
Number of shares of Common Stock outstanding as of September 18, 1998:
5,106,937.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Annual Report to Shareholders for Fiscal Year ended June 30, 1998. With the
exception of those portions which are incorporated by reference in this Form
10-K Annual Report, the 1998 Annual Report to Shareholders is not deemed to be
filed as part of this report. Part II
Proxy Statement for Annual Meeting of Shareholders dated September 14, 1998. The
definitive proxy statement was filed with the Commission on September 14, 1998.
Part III
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PART I.
ITEM 1. BUSINESS
INTRODUCTION
Parkvale Financial Corporation ("PFC") is a unitary savings and loan holding
company incorporated under the laws of the Commonwealth of Pennsylvania. Its
subsidiary, Parkvale Savings Bank ("Parkvale" or "the Bank"), is a Pennsylvania
chartered permanent reserve fund stock savings bank headquartered in
Monroeville, Pennsylvania. Parkvale is also involved in lending in the greater
Washington, D.C.; Columbus, Ohio and Raleigh, North Carolina areas through its
wholly-owned subsidiary, Parkvale Mortgage Corporation ("PMC"). The primary
assets of PFC consist of the stock of Parkvale, equity securities and cash. See
Note N of Notes to the Consolidated Financial Statements in the 1998 Annual
Report to Shareholders filed as Exhibit 13 hereto ("1998 Annual Report") for
additional details regarding PFC. In July 1998, the Bank adopted the use of name
Parkvale Bank for advertising and signage purposes.
THE BANK
GENERAL
The Bank conducts business in the greater Pittsburgh metropolitan area through
29 full-service offices in Allegheny, Beaver, Butler and Westmoreland Counties.
With total assets of $1.1 billion at June 30, 1998, Parkvale was the fifth
largest financial institution headquartered in the Pittsburgh metropolitan area
and twelveth largest financial institution with a significant presence in
Western Pennsylvania. Parkvale was originally chartered in 1943 as Park Savings
and Loan Association and was renamed as a result of its merger with Millvale
Savings and Loan Association in 1968.
Parkvale converted to a state chartered savings bank in 1993. Such charter
conversion resulted in the replacement of the Office of Thrift Supervision
("OTS") by the Federal Deposit Insurance Corporation ("FDIC") and the
Pennsylvania Department of Banking ("Department") as the Bank's primary
regulators. As a Pennsylvania-chartered savings bank, deposits continue to be
insured by the FDIC and Parkvale retains its membership in the Federal Home Loan
Bank ("FHLB") of Pittsburgh. The savings bank continues to conduct business in a
manner substantially identical to the conduct of its business as a savings
association. The OTS retains jurisdiction over Parkvale Financial Corporation
due to its status as a unitary savings and loan holding company. Parkvale is
further subject to regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") governing reserves to be maintained against
deposits and certain other matters.
The primary business of Parkvale consists of attracting deposits from the
general public in the communities that it serves and investing such deposits,
together with other funds, in residential real estate loans, mortgage-backed
securities, consumer loans, commercial loans, and investment securities.
Parkvale focuses on providing a wide range of consumer and commercial services
to individuals, partnerships and corporations in the greater Pittsburgh
metropolitan area, which comprises its primary market area. In addition to the
loans described above, these services include various types of deposit and
checking accounts, including commercial checking accounts and automated teller
machines ("ATMs") as part of the Money Access Center ("MAC") System.
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Parkvale derives its income primarily from interest charged on loans and
interest on investments, and, to a lesser extent, service charges and fees.
Parkvale's principal expenses are interest on deposits and borrowings and
operating expenses. Funds for lending activities are provided principally by
deposits, loan repayments, FHLB advances and other borrowings, and earnings
provided by operations.
Lower housing demand in Parkvale's primary lending areas, relative to its
deposit growth, has spurred the Bank to purchase residential mortgage loans from
other financial institutions. This purchase strategy also achieves geographic
asset diversification. Parkvale purchases adjustable rate residential mortgage
loans subject to its normal underwriting standards. Parkvale purchased loans
aggregating $183.0 million and $104.4 million in fiscal 1998 and 1997,
respectively. These represent 65.4% and 63.5% of total mortgage loan
originations and purchases for the fiscal year 1998 and 1997, respectively. In
addition, Parkvale operates loan production offices through its subsidiary, PMC
with offices in Fairfax, Virginia; Columbus, Ohio and Raleigh, North Carolina.
During fiscal 1998, PMC originated a total of $54.9 million or 19.6% of total
mortgage loan originations and purchases for inclusion in Parkvale's loan
portfolio. See "Lending Activities" and "Sources of Funds."
Total nonperforming assets, comprised of nonaccrual loans and foreclosed real
estate, increased from $2.7 million at June 30, 1997 to $4.7 million at June 30,
1998. The $2.0 million increase in fiscal 1998 related primarily to foreclosed
real estate activity. See "Lending Activities- Nonperforming Loans and
Foreclosed Real Estate".
The exposure from interest rate risk ("IRR") is the impact on Parkvale's current
and future earnings and capital from movements in interest rates. To properly
manage its historically liability sensitive position and mitigate the financial
impact of IRR, Parkvale's management has implemented an asset and liability
management plan to increase the interest rate sensitivity of its assets and
extend the average maturity of its liabilities. As part of this program,
Parkvale has, among other things (1) promoted the origination and purchase of
adjustable rate mortgage ("ARM") loans, (2) maintained a high level of
liquidity, (3) deployed excess liquidity, (4) emphasized the origination of
short-term and/or variable rate consumer loans and (5) attempted to extend the
average maturity of its deposits through the promotion of certificate accounts
with terms of one year or more. For additional discussion of asset and liability
management, see the Asset and Liability Management section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1998 Annual Report.
Interest rate sensitivity gap analysis provides one indicator of potential IRR
by comparing interest-earning assets and interest-bearing liabilities maturing
or repricing at similar intervals. More recently from a gap perspective, the
excess of interest-bearing assets over interest-earning liabilities which
reprice or mature in one year or less was 0.07% of total assets at June 30, 1998
compared to -4.44% of total assets at June 30, 1997. Similarly, the cumulative
five year gap ratio has been reduced from -0.43% at June 30, 1997 to 0.86% at
June 30, 1998. Key components of the asset and liability management program are
as follows: ARM loans represented approximately 66.5% of the Bank's real estate
loan portfolio at June 30, 1998 compared to 63.8% and 56.9% at June 30, 1997 and
1996, respectively. Deposits with terms in excess of one year or more increased
$92 million from $477.7 million at June 30, 1997 to $569.9 million at June 30,
1998.
Parkvale's main office is located at 4220 William Penn Highway, Monroeville, PA
15146, and its telephone number is (412) 373-7200.
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THE SAVINGS INDUSTRY
The earnings of Parkvale are affected by the competitive, economic and
regulatory environment in which the savings industry operates. Consolidation, a
fundamental trend in the financial services industry, confronts the banking
industry with the challenge to survive and prosper in a dynamic market. Strong
alliances are likely as banks move to trim costs, expand geographically and
consolidate market strengths by diversifying the financial products offered.
The industry continues its consolidation efforts with an operating focus on
improving profitability, reallocation of capital and expense management. The
traditional banks' share of the overall loan market has been reduced
significantly. Corporate lending has abated since public companies found raising
funds on Wall Street is faster and cheaper via commercial paper and medium term
notes. At the same time, retail customers are increasingly abandoning
traditional commercial and local banks in favor of nonbank financial
institutions. Instead of buying a CD or opening a passbook savings account,
consumers increasingly place their savings and retirement funds with investment
management firms. Mutual fund total assets have increased substantially
throughout the 1990's to exceed total FDIC insured deposits. Banks in today's
market are faced with substantial competition from an array of outside financial
service providers, including brokerage firms, insurance companies and mutual
fund companies. These nonbanking entities continue to take lending and deposit
market share away from the banking industry without the regulatory burdens, FDIC
insurance premiums, assessments and other associated costs imposed upon banks
and savings institutions.
The challenge is the delivery of financial products at competitive prices. This
translates to spreading of costs of services over a greater number of customers
and has spurred banks to adopt technological skills so that customers will
ultimately do all their banking without ever having to walk into a branch,
consequently, reducing operating costs.
Parkvale does not foresee the dissolution of the community banking sector.
Parkvale expects a tiering of institutions with several large national and
regional firms on the one hand and a sizeable number of community institutions
and niche players on the other.
The economic outlook will be characterized by continuing moderate economic
growth and low inflation. The Federal Reserve has not moved the federal funds
target rate since the third quarter of fiscal 1997. This generally resulted in
only slight fluctuations in consumer and commercial loan interest rates
throughout most of fiscal 1998. Deposit interest rates were also relatively
stable throughout the year.
Parkvale will continue to be affected by these and other market and economic
conditions, such as inflation and factors affecting the markets for debt and
equity securities, as well as legislative, regulatory, accounting and tax
changes which are beyond its control. Parkvale has positioned its liquidity
level to remain flexible to the high volatility of the financial market. For
additional discussion of asset/liability management, see the Asset and Liability
Management section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1998 Annual Report.
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BUSINESS
LENDING ACTIVITIES
LOAN ACTIVITY AND PORTFOLIO COMPOSITION
The following table shows Parkvale's loan origination, purchase and sale
activity on a consolidated basis during the years ended June 30.
1998 1997 1996
(In Thousands)
TOTAL LOANS RECEIVABLE AT BEGINNING OF YEAR.....................$732,326 $644,794 $544,956
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Real estate loan originations:
Residential:
Single family (1)........................................... 76,719 41,692 72,349
Multifamily 1,530 2,487 1,560
Construction -Single family................................... 6,325 7,584 4,411
Commercial 12,076 8,259 6,019
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TOTAL REAL ESTATE LOAN ORIGINATIONS............................. 96,650 60,022 84,339
Consumer loan originations...................................... 84,660 61,541 53,061
Commercial loan originations 11,904 7,846 10,227
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TOTAL LOAN ORIGINATIONS......................................... 193,214 129,409 147,627
Purchase of loans 182,974 104,428 104,940
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TOTAL LOAN ORIGINATIONS AND PURCHASES 376,188 233,837 252,567
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Principal loan repayments....................................... 101,850 77,650 69,511
Mortgage loan payoffs........................................... 150,004 66,897 80,739
Sales of whole loans 2,653 1,758 2,479
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Net increase in loans 121,681 87,532 99,838
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TOTAL LOANS RECEIVABLE- END OF YEAR............................. 854,005 732,326 644,794
Less:
Loans in process.............................................. 7,652 6,393 4,386
Allowance for loan losses..................................... 13,223 14,266 13,990
Unamortized discounts & loan fees 372 799 966
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NET LOANS RECEIVABLE AT END OF YEAR.............................$832,758 $710,868 $625,452
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(1) Includes $54.9 million, $23.7 million and $39.7 million of loans
originated by PMC during fiscal 1998, 1997 and 1996, respectively.
At June 30, 1998, Parkvale's net loan portfolio amounted to $832.8 million,
representing 76.1% of Parkvale's total assets at that date. Parkvale, like most
other savings institutions, has traditionally concentrated its lending
activities on conventional first mortgage loans secured by residential property.
Conventional loans are not insured by the Federal Housing Administration ("FHA")
or guaranteed by the Department of Veteran's Affairs ("VA"). Conventional loans
secured by single family and multifamily residential properties amounted to
$690.2 million or 82.9% of the net loan portfolio at June 30, 1998, and loans
secured by commercial properties represented $24.9 million or 2.9% of the net
loan portfolio. FHA/VA loans accounted for an additional $6.3 million or 0.8% of
the net loan portfolio at June 30, 1998.
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The Bank is a traditional mortgage lender and if it were subject to the
"Qualified Thrift Lender" ("QTL") requirements, 93.9% of its assets are
considered to be "qualifying" at June 30, 1998.
Total consumer loans were $108.9 million or 13.1% of the net loan portfolio at
June 30, 1998. Commercial loans represented 1.4% of the net loan portfolio at
that date.
The following table sets forth the composition of the Bank's loan portfolio by
type of loan at June 30.
1998 1997 1996
Amount % Amount % Amount %
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Real estate loans:
Residential:
Single family (1) $677,175 81.3 $578,906 81.4 $507,566 81.2
Multi-family (2) 13,024 1.6 16,825 2.4 17,375 2.8
FHA/VA 6,329 0.8 7,829 1.1 9,516 1.5
Commercial 24,869 2.9 17,724 2.5 19,516 3.1
Other (3) 12,085 1.5 9,329 1.3 2,387 0.4
----------- ------ ---------- ------ ---------- ------
Total real estate loans 733,482 88.1 630,613 88.7 556,360 89.0
Consumer loans (4) 106,266 12.8 90,305 12.7 76,224 12.2
Deposit loans 2,665 0.3 3,076 0.4 3,285 0.5
Commercial loans 11,592 1.4 8,332 1.2 8,925 1.4
----------- ------ ---------- ------ ---------- ------
Total loans receivable 854,005 102.6 732,326 103.0 644,794 103.1
Less:
Loans in process 7,652 0.9 6,393 0.9 4,386 0.7
Allowance for losses 13,223 1.6 14,266 2.0 13,990 2.2
Unamortized premiums
and discounts 372 0.1 799 0.1 966 0.2
----------- ------ ------------ ------ -------- ------
Net loans receivable $832,758 100.0% $710,868 100.0% $625,452 100.0%
======== ====== ======== ====== ======== ======
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(1) Includes first mortgages secured by one to four unit residences.
(2) Includes short-term construction loans to developers.
(3) Loans for purchase and development of land.
(4) Primarily includes home equity loans, home equity and personal
lines of credit, student loans, personal loans, deposit loans, charge
cards, home improvement loans and automobile loans.
The following table sets forth the percentage of loans in each category to total
loans at June 30.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Real estate loans 85.9% 86.1% 86.3% 85.9% 86.2%
Consumer loans 12.7 12.8 12.3 13.3 12.6
Commercial loans 1.4 1.1 1.4 0.8 1.2
----- ----- ----- ----- -----
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
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CONTRACTUAL MATURITIES OF LOANS
The following table presents information regarding loan contractual maturities
by loan categories during the periods indicated. Mortgage loans with adjustable
interest rates are shown in the year in which they are contractually due rather
than in the year in which they reprice. The amounts shown for each period do not
take into account loan prepayments and normal amortization of the Bank's loan
portfolio.
AMOUNTS DUE IN Real Estate Commercial
YEARS ENDING JUNE 30, Loans (1) Loans
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(Dollars in Thousands)
1999 $ 6,755 $ 3,942
2000 - 2003 26,161 5,569
2004 and thereafter 700,566 2,081
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Gross loans receivable (2) $733,482 $11,592
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(1) Includes all residential and commercial real estate loans, and loans
for the purchase and development of land.
(2) Variable rate and ARM loans represent approximately 66.45% of gross
loans receivable at June 30, 1998. Of the $726.7 million principal
amount of loans maturing after June 30, 1999, loans with an aggregate
principal amount of $241.6 million have fixed interest rates and loans
with an aggregate principal amount of $485.1 million have variable or
adjustable interest rates.
The average life of mortgage loans has been substantially less than the average
contractual terms of such loans because of loan prepayments and, to a lesser
extent, because of enforcement of due-on-sale clauses, which enable Parkvale to
declare a loan immediately due and payable in the event that the borrower sells
or otherwise disposes of the real property. The average life of mortgage loans
tends to increase, however, when market rates on new mortgages substantially
exceed rates on existing mortgages and, conversely, decrease when rates on new
mortgages are substantially below rates on existing mortgages. Currently,
borrowers are refinancing their mortgage loans in order to take advantage of the
lower market rates, as was the case in the early 1990's.
ORIGINATION, PURCHASE AND SALE OF LOANS
As a Pennsylvania-chartered, federally-insured savings bank, Parkvale has the
ability to originate or purchase real estate loans secured by properties located
throughout the United States. At June 30, 1998, the majority of loans in
Parkvale's portfolio have been secured by real estate located in its primary
market area, which consists of the greater Pittsburgh metropolitan area.
However, 45.3% and 37.3% of Parkvale's total mortgage loan portfolio at June 30,
1998 and 1997, respectively, represent loans serviced by others, the majority of
which are secured by properties located outside of Pennsylvania, including, in
order of loan concentration: Michigan, North Carolina, Colorado and Texas. The
increase in loans secured by out-of-state properties is due to the loan
purchases of $183.0 million which measures 65.4% of Parkvale's total origination
and purchases for fiscal 1998. See further discussion below.
Currently, new loans are originated by Parkvale primarily within its primary
market area or through the PMC offices. In addition, Parkvale purchases loan
participations and whole loans from other institutions.
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All of Parkvale's mortgage lending is subject to its written underwriting
standards and to loan origination procedures approved by the Board of Directors.
Decisions on loan applications are made on a number of factors including, but
not limited to, property valuations by independent appraisers, credit history
and cash flow available to service debt. The Loan Committee of Parkvale consists
of executive officers and is authorized to approve all loans up to $350,000. At
least three executive officers must be present to hold a meeting of the Loan
Committee. Loans exceeding $350,000 must be approved by the Board of Directors.
Under policies adopted by Parkvale's Board of Directors, Parkvale limits the
loan-to-value ratio to 80% on newly originated residential mortgage loans, or up
to 95% with private mortgage insurance. Depending upon the amount of private
mortgage insurance obtained by the borrower, Parkvale's loan exposure may be
reduced to as low as 65% of the value of the property. Commercial real estate
loans generally do not exceed 80% of the value of the secured property. In
addition, it is Parkvale's policy to obtain title insurance policies insuring
that Parkvale has a valid first lien on mortgaged real estate.
ORIGINATIONS BY PARKVALE. Historically, mortgage loans have been originated by
Parkvale primarily through referrals from real estate brokers, builders and
direct customers, as well as through refinancings for existing customers.
Consumer and commercial loan originations are made by Parkvale within its
primary market area. Total loan originations for the fiscal years ending June
30, 1998, 1997 and 1996 were $193.2 million, $129.4 million and $147.6 million,
respectively. Similar to fiscal 1996, favorable rates throughout fiscal 1998
increased housing and refinancing demand as well as commercial and consumer loan
demand. Conversely, originations were relatively lower in fiscal 1997 due to a
decrease in mortgage demand.
LOAN PURCHASES. The asset/liability strategy of owning ARM loans to remain
flexible in a volatile interest rate environment was evident during fiscal 1998
as Parkvale increased loan purchases to $183.0 million from $104.4 million in
fiscal 1997. In fiscal 1998, $180.1 million or 98.4% of the total purchased
loans were ARM loans. Typically, Parkvale purchases loans to supplement the
portfolio during periods of loan origination shortfalls or when yields on whole
loans are greater than similarly securitized loans. These loan purchases are
subject to Parkvale's underwriting standards and are purchased from reputable
mortgage banking institutions.
RESIDENTIAL REAL ESTATE LOANS
Parkvale offers ARMs with amortization periods of up to 30 years. The monthly
payment amounts on all Parkvale residential mortgage ARMs are reset at each
interest rate adjustment period without affecting the maturity of the ARM.
Interest rate adjustments generally occur on either a one, three or five year
basis and allow a maximum change of 2% to 3% per adjustment period, with a 6% or
7% maximum rate increase over the life of the loan. ARMs comprised approximately
84.9%, 88.0% and 77.4% of total mortgage loan originations and purchases in
fiscal 1998, 1997 and 1996, respectively. At June 30, 1998, 66.5% of Parkvale's
total residential loan portfolio was represented by ARMs. ARM loans generally do
not adjust as rapidly as Parkvale's cost of funds. Parkvale has been emphasizing
the origination of adjustable-rate versus long-term fixed-rate residential
mortgages for its portfolio as part of the asset and liability plan to increase
the rate sensitivity of its assets.
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COMMERCIAL REAL ESTATE LOANS
The balance of commercial real estate mortgages increased from $17.7 million at
June 30, 1997 to $24.9 million at June 30, 1998.
CONSUMER LOANS
Parkvale offers a full complement of consumer loans, including home equity
loans, home equity and personal lines of credit, student loans, personal loans,
deposit loans, home improvement loans, charge card, automobile and sub-prime
loans. Total consumer loans outstanding at June 30, 1998 increased by 16.7% to
$108.9 million from $93.4 million at June 30, 1997. Parkvale has been granting
home equity lines of credit at up to 120% of collateral value at competitive
introductory rates. These loans have shorter maturities and greater interest
rate sensitivity and margins than residential real estate loans.
Home equity lines are revolving and range from $5,000 to $250,000. The amount of
the available line of credit is determined by the borrower's ability to pay,
their credit history and the amount of collateral equity. Personal and overdraft
lines of credit are generally unsecured and are extended for $500 to $50,000.
Line of credit interest rates are variable and are priced at a margin above
Parkvale's prime rate.
Parkvale offers student loans through its community banking network. Parkvale
receives a guaranteed rate on such loans indexed to the 91-day United States
Treasury bill rate and generally sells the loans to the Student Loan Marketing
Association when the student graduates or leaves school in order to avoid costly
servicing expenses.
Parkvale's deposit loans are made on a demand basis for up to 90% of the balance
of the account securing the loan. The interest rate on deposit loans equals the
rate on the underlying account plus a minimum of 200 basis points.
Parkvale offers Visa and Visa Gold cards through the Independent Bankers
Association of America. Annual fees were waived through June 30, 1998. Credit
cards outstanding totalled $5.6 million, $5.0 million and $4.5 million at June
30, 1998, 1997 and 1996, respectively.
Parkvale began offering subprime loans through our subsidiary, Parkvale
Financial Service beginning in fiscal 1998. This new portfolio has generated
$4.6 million of secured loans during fiscal 1998.
COMMERCIAL LOANS
Parkvale's commercial loans are primarily of a short-term nature and are
extended to small businesses and professionals located within the communities
served by Parkvale. Generally, the purpose of the loan dictates the basis for
its repayment. Both secured and unsecured commercial loans are offered by
Parkvale. In originating commercial loans, the borrower's historical and
projected ability to service the proposed debt is of primary importance.
Interest rates are generally variable and indexed to Parkvale's prime rate.
Fixed-rate commercial loans are extended based upon Parkvale's ability to match
available funding sources to loan maturities. Parkvale generally requires
personal guarantees on its commercial loans. Commercial loans were $11.6 million
and $8.3 million at June 30, 1998 and 1997, respectively.
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LOAN SERVICING AND LOAN FEES
Interest rates and fees charged by Parkvale on mortgage loans are primarily
determined by funding costs and competitive rates offered in its market area.
Mortgage loan rates reflect factors such as general interest rate levels, the
availability of money and loan demand.
After originating fixed rate mortgage loans, Parkvale has the ability to sell
its loans in the secondary mortgage market, primarily to the Federal Home Loan
Mortgage Corporation ("FHLMC"). Parkvale generally retains the right to service
loans sold or securitized in order to generate additional servicing fee income.
The amount of loans serviced by Parkvale for others decreased from $8.0 million
at June 30, 1997 to $5.8 million at June 30, 1998. There have been no mortgage
loan securitizations or sale transactions since fiscal 1991, with the exception
of certain loans made in conjunction with various state and local bond programs
designed to assist first time and/or low income home buyers. Parkvale may or may
not be the servicer of these loans depending on the terms of the specific
program.
In addition to interest earned on loans and income from servicing of loans,
Parkvale generally receives fees in connection with loan commitments and
originations, loan modifications, late payments, changes of property ownership
and for miscellaneous services related to its loans. Income from these
activities varies with the volume and type of loans originated. The fees
received by Parkvale in connection with the origination of conventional mortgage
loans on single family properties vary depending on the loan terms selected by
the borrower.
Parkvale accounts for loan fees and costs in accordance with Statement of
Financial Accounting Standards No. 91 ("FAS 91"). FAS 91 requires deferral of
all loan origination and commitment fees over the contractual life of a loan as
an adjustment of yield. In addition, certain direct loan origination costs are
required to be deferred and recognized over the contractual life of the loan as
a reduction of yield. Indirect loan origination costs are charged to expense as
incurred.
Net deferred loan origination fees were $0.9 million, $1.1 million and $1.1
million at June 30, 1998, 1997 and 1996, respectively. The decreasing balance
reflects the offering of various mortgage products with minimal points being
charged to the customer.
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE
A loan is considered delinquent when a borrower fails to make contractual
payments on the loan. If the delinquency exceeds 90 days, Parkvale generally
institutes legal action to remedy the default. In the case of real estate loans,
this includes foreclosure action. If a foreclosure action is instituted and the
loan is not reinstated, paid in full or refinanced, the property is sold at a
judicial sale at which, in most instances, Parkvale is the buyer. The acquired
property then becomes "foreclosed real estate" until it is sold. In the case of
consumer and commercial business loans, the measures to remedy defaults include
the repossession of the collateral, if any, and initiation of proceedings to
collect and/or liquidate the collateral and/or act against guarantees related to
the loans.
Loans are placed on nonaccrual status when, in management's judgment, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on nonaccrual status, previously accrued
but unpaid interest is deducted from interest income. As a result, no
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uncollected interest income is included in earnings for loans which are on
nonaccrual status. Parkvale provides an allowance for the loss of accrued but
uncollected interest on mortgage, consumer and commercial business loans which
are more than 90 days contractually past due.
Parkvale's policy is to establish specific reserves for potential losses on
delinquent loans, foreclosed real estate, and other assets where perceived
values have been impaired on the underlying assets. Loan loss reserves,
including general valuation allowances, were 1.55%, 1.95% and 2.17% of gross
loans at June 30, 1998, 1997 and 1996, respectively. The adequacy of these
reserves in relation to current or anticipated trends in the loan portfolio will
continue to be monitored by management.
The following table sets forth information regarding Parkvale's nonaccrual loans
and foreclosed real estate at June 30.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Nonaccrual Loans:
Mortgage $2,322 $2,489 $1,008 $2,031 $1,016
Consumer -- -- -- -- --
------ ------ ------ ------ ------
Total nonaccrual Loans $2,322 $2,489 $1,008 $2,031 $1,016
====== ====== ====== ====== ======
Total nonaccrual loans
as a percent of total loans 0.27% 0.34% 0.16% 0.37% 0.20%
Total foreclosed real estate, net $2,362 $ 165 $ 240 $ 96 $ 147
Total amount of nonaccrual
loans and foreclosed real estate $4,728 $2,654 $1,248 $2,127 $1,163
Total nonaccrual loans and
foreclosed real estate as a
percent of total assets 0.43% 0.27% 0.14% 0.24% 0.13%
The amount of additional interest income that would have been included in
interest income for the years ended June 30, 1998 and 1997 if the nonaccrual
loans had been current in accordance with their original terms was $181,000 and
$285,000, respectively.
Assets classified as substandard/nonaccrual or foreclosed real estate in excess
of $250,000, net of reserves, at June 30, 1998 consist of commercial properties.
Parkvale has a $630,600 first mortgage lien on a racket club located in Irwin,
Pennsylvania which was originated in 1996 and matures February 1, 2001. This
credit is classified as substandard nonaccrual due to inadequate debt service
coverage. Parkvale also has foreclosed real estate due to a deed in lieu of the
foreclosure on office buildings previously owned by 200 Meyran Associates. See
Item 3. Legal Proceedings.
As of June 30, 1998, $456,000 or 19.6% of the nonaccrual mortgage loans totaling
$2.3 million were purchased from others and $110,000 or 4.6% of foreclosed real
estate represented properties located outside of Pennsylvania with loans
originally purchased from others.
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INVESTMENT ACTIVITIES
Investment decisions are made by authorized officers including the Chief
Executive Officer or the Chief Financial Officer of Parkvale in accordance with
policies established by Parkvale's Board of Directors.
Under federal regulations, Parkvale is permitted to invest in commercial paper
having one of the two highest investment ratings of two nationally recognized
investment rating agencies and certain types of rated corporate debt securities,
provided, among other limitations, that the average maturity of Parkvale's
portfolio of such corporate debt securities does not exceed six years. In
addition, Parkvale may invest up to 1% of its total assets in commercial paper
and corporate debt securities that do not meet these rating and maturity
requirements, but which Parkvale has reasonable grounds to believe will be
repaid.
Parkvale's investment portfolio consisted of the following securities at June 30
for the years indicated.
1998 1997 1996
-------- -------- ------
(In Thousands)
Federal funds sold $124,900 $107,832 $66,557
U.S. Government and agency obligations 31,994 51,950 62,936
Municipal Obligations 6,630 -- --
Corporate debt 17,148 17,143 32,086
Mortgage backed securities 43,427 66,941 99,371
Equity securities (at market value) 14,793 13,546 10,493
-------- -------- --------
Total investment portfolio $238,892 $257,412 $271,443
======== ======== ========
As part of its investment strategy, Parkvale invests in mortgage-backed
securities, the majority of which are guaranteed by the Federal Home Loan
Mortgage Corporations ("FHLMC"), the Federal National Mortgage Association
("FNMA") or the Government National Mortgage Association ("GNMA"). GNMA
securities are guaranteed as to principal and interest by the full faith and
credit of the United States Treasury, while FHLMC and FNMA securities are
guaranteed by their respective agencies. At June 30, 1998, Parkvale had $43.4
million, or 4.0% of total assets invested in mortgage-backed securities, as
compared to 6.8% and 10.8% at June 30, 1997 and 1996, respectively. At June 30,
1998, the mortgage-backed securities consisted of FHLMC ($26.5 million); GNMA
($0.7 million); FNMA ($3.6 million); collateralized mortgage obligations,
including REMIC's ($11.3 million) and private participation certificates ($1.3
million).
The following table shows Parkvale's mortgage-backed security activity during
the years ended June 30.
1998 1997 1996
---- ---- ----
(In Thousands)
Mortgage-backed securities at beginning of year $ 66,941 $99,371 $100,881
Purchases -- -- 25,211
Principal repayments (23,515) (32,430) (26,721)
Sales -- -- --
-------- -------- --------
Mortgage-backed securities at end of year $ 43,426 $ 66,941 $ 99,371
======== ======== ========
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HEDGING ACTIVITIES
The objective of Parkvale's financial futures policy is to reduce interest rate
risk by authorizing an asset and liability hedging program. The futures policy
permits Parkvale's President to hedge up to $10 million of assets and
liabilities. Hedges over $10 million and up to $25 million require the approval
of the Audit- Finance Committee of the Board of Directors, and hedges over $25
million require the approval of the Board of Directors. The objective of
Parkvale's financial options policy is to reduce interest rate risk in the
investment portfolio through the use of financial options. The options policy
permits the use of options on United States Treasury bills, notes, bonds and
bond futures and on mortgage-backed securities. The options policy generally
limits the use of puts and calls to $5.0 million per type of option. Parkvale's
President and Senior Vice President - Treasurer are authorized to conduct
options activities, which are monitored by the Audit-Finance Committee of the
Board of Directors. Parkvale has not engaged in any financial future or
financial option activity in the last three fiscal years.
Derivative instruments are various instruments used to construct a transaction
that is derived from and reflects the underlying value of assets, other
instruments or various indices. The primary purpose of derivatives, which
included such items as forward contracts, interest rate swap contracts, options
and futures, is to transfer price risk associated with the fluctuations of
financial instrument value. Parkvale has not entered into any forward contracts,
interest rate swap contracts, options or futures.
SOURCES OF FUNDS
GENERAL
Savings accounts and other types of deposits have traditionally been the
principal source of Parkvale's funds for use in lending and for other general
business purposes. In addition to deposits, Parkvale derives funds from loan
repayments and FHLB advances. Borrowings may be used on a short-term basis to
compensate for seasonal or other reductions in deposits or for inflows at less
than projected levels, as well as on a longer term basis to support expanded
lending and investment activities. Parkvale's ability to maintain high liquidity
levels has allowed investment decisions to be evaluated with the funding source
a secondary issue.
DEPOSITS
Parkvale has established a complete program of deposit products designed to
attract both short-term and long-term savings by providing an assortment of
accounts and rates. The deposit products currently offered by Parkvale include
passbook and statement savings accounts, noninsured sweep accounts, checking
accounts, money market accounts, certificates of deposit ranging in terms from
31 days to ten years, IRA certificates and jumbo certificates of deposit. In
addition, Parkvale is a member of the MAC system with twenty ATMs currently
operated by Parkvale.
Parkvale is generally competitive in the types of accounts and in the interest
rates it offers on its deposit products, although it generally does not lead the
market with respect to the level of interest rates offered. Parkvale intends to
continue its efforts to attract deposits as a principal source of funds for
supporting its lending activities because the cost of these funds generally is
less than other borrowings. Although market demand generally dictates which
deposit maturities and rates will be accepted by the public, Parkvale
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intends to continue to promote longer term deposits to the extent possible in a
manner consistent with its asset and liability management goals. This is
apparent during fiscal 1998, due to the deposit increases that are attributable
to certificate if deposit specials that ranged in terms from 15 to 36 months
with rates ranging from 6.00% to 6.25%.
The following table shows the distribution of Parkvale's deposits by type of
deposit as of June 30.
1998 1997 1996
---------- ---------- -------
Balance % Balance % Balance %
------- ---- ------- ---- ------- -----
(Dollars in Thousands)
Passbook accounts $138,110 14.6% $139,089 15.8% $140,908 17.5%
Checking accounts 94,893 10.0 81,701 9.2 70,446 8.7
Money market accounts 42,895 4.5 44,804 5.1 47,657 5.9
Certificate accounts 613,836 64.7 566,677 64.3 509,694 63.1
Jumbo certificates 51,339 5.3 41,354 4.7 32,218 4.0
Accrued interest 8,379 0.9 7,619 0.9 6,164 0.8
-------- ----- -------- ----- -------- -----
Total Savings Deposits $949,452 100.0% $881,244 100.0% $807,087 100.0%
======== ===== ======== ===== ======== =====
The following table sets forth information regarding average balances and
average rates paid by type of deposit for the years ending June 30.
1998 1997 1996
---------- ---------- ----------
Average Average Average
Balance % Balance % Balance %
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
Passbook accounts $136,315 2.52% $137,184 2.61% $138,647 2.62%
Checking accounts 90,841 1.00 76,366 1.06 65,152 1.08
Money market accounts 44,020 2.94 45,825 2.93 49,159 2.95
Certificate accounts 632,471 5.86 577,691 5.78 542,390 5.95
Accrued interest 7,988 -- 6,637 -- 5,699 --
-------- ---- -------- ----- -------- ----
$911,635 4.68% $843,703 4.64% $801,047 4.75%
======== ===== ======== ===== ======== =====
The wide range of deposit accounts offered has increased Parkvale's ability to
retain funds and allowed it to be more competitive in obtaining new funds, but
does not eliminate the threat of disintermediation. During periods of high
interest rates, certificate and money market accounts have been more costly than
traditional accounts. In addition, Parkvale has become much more subject to
short-term fluctuations in deposit flows as customers have become more rate
conscious and willing to move funds into higher yielding accounts. The ability
of Parkvale to attract and maintain deposits and Parkvale's cost of funds has
been, and will continue to be, significantly affected by market conditions.
The principal methods used by Parkvale to attract deposits include the offering
of a wide range of services and accounts, competitive interest rates, and
convenient office hours and locations. Parkvale utilizes traditional marketing
methods to attract new customers and deposits, including mass media advertising
and direct mail.
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Parkvale's deposits are obtained primarily from persons who are residents of
Pennsylvania. Parkvale neither advertises for deposits outside of Pennsylvania
nor utilizes the services of deposit brokers. An insignificant amount of
Parkvale's deposits were held by nonresidents of Pennsylvania at June 30, 1998.
The following table reflects the makeup of Parkvale's deposit accounts at June
30, 1998, including the scheduled quarterly maturity of CD accounts.
Amount % of Total Average
in 000's Deposits Rates
-------- --------- -------
Passbook and club accounts $138,110 14.55% 2.52%
Checking accounts 94,893 9.99 1.00
Money market accounts 42,895 4.52 2.94
-------- ------ ----
Total non-certificate accounts $275,898 29.06 2.46
-------- ------ ----
Certificate accounts maturing in quarter ending:
September 30, 1998 91,898 13.82 5.02
December 31, 1998 68,672 10.32 5.38
March 31, 1999 81,879 12.31 5.70
June 30, 1999 44,573 6.70 5.68
September 30, 1999 42,808 6.44 5.99
December 31, 1999 37,620 5.66 5.93
March 31, 2000 47,708 7.17 6.01
June 30, 2000 37,013 5.56 6.19
September 30, 2000 58,357 8.77 6.03
December 31, 2000 27,689 4.16 6.01
March 31, 2001 11,298 1.70 5.69
June 30, 2001 10,293 1.55 5.88
Thereafter 105,367 15.84 6.54
-------- ------
Total certificate accounts 665,175 70.06 5.90
-------- ------
Accrued interest 8,379 0.88 0.00
-------- ------
Total deposits $949,452 100.00% 4.64%
======== ======= =====
The following table sets forth the net deposit flows of Parkvale during the
years ended June 30.
1998 1997 1996
---------- ---------- -------
(In Thousands)
Increase (decrease) before interest credited $35,126 $44,550 ($15,624)
Interest credited 33,082 29,607 28,266
------- ------- --------
Net deposit increase $68,208 $74,157 $12,642
======= ======= ========
Management carefully monitors the interest rates and terms of its deposit
products in order to maximize Parkvale's interest rate spread and to better
match its interest rate sensitivity.
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The following table presents, by various interest rate categories, the
outstanding amount of certificates of deposit at June 30, 1998 which mature
during the years ending June 30:
1998 1999 2000 Thereafter Total
---------- ---------- ---------- ---------- -------
(In Thousands)
Certificates of deposit:
Under 6.00% $234,268 $111,647 $53,871 $ 8,890 $408,676
6.00% to 7.99% 50,471 53,383 53,760 96,490 254,104
8.00% to 9.99% 2,375 20 -- -- 2,395
-------- -------- -------- -------- --------
Total certificates of deposits $287,114 $165,050 $107,631 $105,380 $665,175
======== ======== ======== ======== ========
Maturities of certificates of deposit of $100,000 or more that were outstanding
as of June 30, 1998 are summarized as follows:
(In Thousands)
3 months or less $6,458
Over 3 months through 6 months 4,351
Over 6 months through 12 months 7,966
Over 12 months 32,564
------
Total $51,339
=======
BORROWINGS
Parkvale's borrowings from the FHLB of Pittsburgh are collateralized with FHLB
capital stock, deposits with the FHLB of Pittsburgh and certain mortgage-backed
securities. See "Regulation - Federal Home Loan Bank System". Borrowings are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. FHLB advances are generally available to
meet seasonal and other withdrawals of savings accounts and to expand lending
and investment activities, as well as to aid the efforts of members to establish
better asset/liability management by extending the maturities of liabilities.
The following table sets forth information concerning Parkvale's advances from
the FHLB of Pittsburgh for the years ended June 30.
1998 1997 1996
---------- ---------- -------
(In Thousands)
Average balance outstanding $23,176 $15,687 $20,658
Maximum amount outstanding at any month-end
during the period $40,671 $15,692 $20,699
Average interest rate 6.18% 6.87% 7.25%
Balance outstanding at June 30 $40,671 $15,682 $20,693
The increase in the outstanding average balance from $15.7 million in 1997 to
$23.2 million in 1998 is due to additional advances drawn on the FHLB during
fiscal 1998.
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YIELDS EARNED AND RATES PAID
The results of operations of Parkvale depend substantially on its net interest
income, which is the largest component of Parkvale's net income. Net interest
income is affected by the difference or spread between yields earned by Parkvale
on its loan and investment portfolios and the rates of interest paid by Parkvale
for its deposits and borrowings, as well as the relative amounts of its
interest-earning assets and interest-bearing liabilities. Parkvale's operating
results are also affected by levels of noninterest income and expenses.
The following table sets forth the average yields earned on Parkvale's
interest-earning assets and the average rates paid on its interest-bearing
liabilities, the resulting average interest rate spreads, the net yield on
interest-earning assets and the weighted average yields and rates at June 30,
1998.
Year Ended June 30, At June 30,
-----------------------
1998 1997 1996 1998
-------- -------- -------- ------
Average yields on (1):
Loans 7.85% 8.01% 8.23% 7.78%
Mortgage-backed securities 6.88 6.72 6.61 6.98
Investments (2) 5.94 5.97 5.96 5.72
Federal funds sold 5.57 5.41 5.67 5.50
---- ---- ---- ----
All interest-earning assets 7.37 7.38 7.45 7.35
---- ---- ---- ----
Average rates paid on (1):
Savings deposits 4.70 4.64 4.75 4.65
Borrowings 5.54 6.20 6.19 5.65
---- ---- ---- ----
All interest-bearing liabilities 4.72 4.67 4.79 4.69
---- ---- ---- ----
Average interest rate spread 2.65% 2.71% 2.66% 2.66%
===== ===== ===== =====
Net yield on interest-earning assets(3) 2.97% 3.03% 2.98%
===== ===== =====
- ---------------------------------
(1) Average yields and rates are calculated by dividing the interest income or
expense for the period by the average balance for the year. The weighted
averages at June 30, 1998 are based on the weighted average contractual
interest rates. Nonaccrual loans are excluded in the average yield and
balance calculations.
(2) Includes held-to-maturity and available-for-sale investments and
interest-bearing deposits.
(3) Net interest income on a tax equivalent basis divided by average
interest-earning assets.
The following table presents for the periods indicated the average balances of
each category of interest-earning assets and interest-bearing liabilities.
Year Ended June 30,
--------------------------------------------
1998 1997 1996
---- ---- ----
Interest-earning assets: (In Thousands)
Loans $ 749,866 $641,575 $566,134
Mortgage-backed securities 55,157 82,626 102,470
Investments 79,362 88,967 119,573
Federal funds sold 119,947 113,324 99,382
--------- ------- --------
Total interest-earning assets 1,004,332 926,492 887,559
--------- ------- --------
Noninterest-earning assets 28,006 23,530 18,856
--------- ------- --------
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Total assets $1,032,338 $950,022 $906,415
========== ======== ========
Interest-bearing liabilities:
Savings deposits 908,951 843,704 801,048
FHLB advances and other borrowings 27,130 19,579 25,634
---------- -------- --------
Total interest-bearing liabilities 936,081 863,283 826,682
---------- -------- --------
Noninterest-bearing liabilities 20,063 18,009 16,162
---------- -------- --------
Total liabilities 956,144 881,292 842,844
Shareholders' equity 76,194 68,730 63,571
---------- -------- --------
Total liabilities and equity $1,032,338 $950,022 $906,415
========== ======== ========
Net interest-earning assets $ 68,251 $ 63,209 $ 60,877
========== ======== ========
Interest-earning assets as a % of interest-
bearing liabilities 107.3% 107.3% 107.4%
An excess of interest-earning assets over interest-bearing liabilities will
enhance a positive interest rate spread and result in greater net interest
income. Net interest income has been favorably impacted by higher volumes of
loan originations and purchases since fiscal 1996. Parkvale's net yield on
average interest-earning assets was relatively constant at 2.97% in fiscal 1998,
3.03% in fiscal 1997 and 2.98% in fiscal 1996.
The following table sets forth certain information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (1) changes in rates (change in rate multiplied by
old volume), (2) changes in volume (changes in volume multiplied by old rate),
and (3) changes in rate-volume (change in rate multiplied by the change in
volume).
Year Ended June 30,
--------------------------
1998 vs. 1997 1997 vs. 1996
----------------------- -----------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
(In Thousands)
Interest-earning assets:
Loans ($1,027) $ 8,674 ($191) $ 7,456 ($1,245) $6,209 ($161) $ 4,803
Mortgage-backed securities 132 (1,846) (48) (1,762) 113 (1,312) (19) (1,218)
Federal funds sold 181 358 15 554 (258) 791 (38) 495
Investments (27) (573) (8) (608) 12 (1,824) (5) (1,817)
------- ------- ----- ------- ------- ------ ----- -------
Total (741) 6,613 (232) 5,640 (1,378) 3,864 (223) 2,263
------- ----- ------- ------- ------ ----- -------
Interest-bearing liabilities:
Deposits 506 3,027 15 3,548 (881) 2,026 (51) 1,094
FHLB advances and
other borrowings (129) 468 (49) 290 3 (375) (1) (373)
------- ------- ----- ------- ------- ------ ----- -------
Total 377 3,495 (34) 3,838 (878) 1,651 (52) 721
------- ------- ----- ------- ------- ------ ----- -------
Net change in net interest
income (expense) ($1,118) $ 3,118 ($198) $ 1,802 ($ 500) $2,213 ($171) $ 1,542
======= ======= ===== ======= ======= ====== ===== =======
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SUBSIDIARIES
Pennsylvania law permits a Pennsylvania-chartered, federally-insured savings
institution to invest up to 2% of its assets in the capital stock, paid-in
surplus and unsecured obligations of service corporations and an additional 1%
of its assets when the additional funds are utilized for community or inner-city
development or investment. At June 30, 1998, Parkvale was authorized to have an
investment of $32.9 million in the capital stock and other securities in its
service corporation subsidiaries. At June 30, 1998, Parkvale had equity
investments of less than $6.0 million in its subsidiary corporations.
Parkvale's wholly-owned subsidiaries include Parkvale Mortgage Corporation
("PMC"), P.V. Financial Service Inc. ("PVFS") and Renaissance Corporation
("Renaissance"). PMC was acquired in 1986 and currently operates three offices
originating residential mortgage loans for the Bank. For additional information
regarding PMC, see "Lending Activities". PVFS was incorporated in 1972 and on
July 1, 1997, PVFS began operating as a subprime lending subsidiary with the
intent of extending consumer loans to individuals who may otherwise not be able
to obtain funds based on their unfavorable or nonexistent credit history. At
June 30, 1998, PVFS had net assets of $4.9 million. Renaissance completes
collateral evaluations for consumer lending activities for the Bank. The sole
asset of Renaissance at June 30, 1998 is $34,000 in cash.
COMPETITION
Parkvale faces substantial competition both in the attraction of deposits and in
the making of mortgage and other loans in its primary market area. Competition
for the origination of mortgage and other loans principally comes from other
savings institutions, commercial banks, mortgage banking companies, credit
unions and other financial service corporations located in the Pittsburgh
metropolitan area. Because of the wide diversity and large number of
competitors, the exact number of competitors is fluid. Parkvale's most direct
competition for deposits has historically come from other savings institutions,
commercial banks and credit unions located in the Pittsburgh area. In times of
high interest rates, Parkvale also encounters significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. During the low interest rate environment, Parkvale and
other depository institutions have also experienced increased competition from
stocks, mutual funds, and other direct investments offering the potential for
higher yields.
Parkvale competes for loans principally through the interest rates and loan fees
it charges on its loan programs. In addition, Parkvale believes it offers a high
degree of professionalism and quality in the services it provides borrowers and
their real estate brokers. It competes for deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges at each
branch. Parkvale believes that its office locations in various neighborhoods of
Pittsburgh and the surrounding suburbs outside of downtown Pittsburgh provide
Parkvale with both an opportunity to become an integral part of these smaller
communities and the means of competing with larger financial institutions doing
business within the Pittsburgh metropolitan area. In addition, Parkvale has two
offices located in Downtown Pittsburgh to provide services to the business
community and to its suburban customers working and shopping in the city. A
third city office is scheduled to open in October 1998 at Fourth and Wood.
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MARKET AREA
The greater Pittsburgh metropolitan area, which is a heavily populated and
predominately industrialized region, ranks 19th in population of the
metropolitan areas in the country according to the 1990 census. The region's
economy is primarily dependent on a combination of the manufacturing trade,
services, government and transportation industries. The economy has experienced
a transition away from the steel and steel-related industries to the service
industries, such as transportation, health care, education and finance. In
addition to containing the corporate headquarters of major industrial and
financial corporations, Pittsburgh is also a major regional health and education
center, and a large number of high technology firms have located in Pittsburgh
due to the wide range of support services available.
EMPLOYEES
As of June 30, 1998, Parkvale and its subsidiaries had 259 full-time equivalent
employees. These employees are not represented by a collective bargaining agent
or union, and Parkvale believes it has satisfactory relations with its
personnel.
REGULATION
GENERAL
Following conversion to a Pennsylvania savings bank charter in fiscal 1993, the
Bank is subject to extensive regulation by the FDIC and the Department, and is
no longer directly subject to regulation by the OTS. Nonetheless, several
requirements which were applicable to the Bank as a Pennsylvania chartered
savings association regulated by the OTS remain applicable to the Bank as a
Pennsylvania chartered savings bank. The FDIC has adopted a regulation which
provides that the same restrictions on activities, investments in subsidiaries,
loans to one borrower, and affiliate transactions apply to the Bank as if the
Bank had not converted to a savings bank charter. However, the capital
requirements applicable to the Bank as a savings bank are the FDIC's capital
maintenance regulations rather than the comparable OTS regulations.
The Bank files reports with the Pennsylvania Department of Banking and the FDIC
describing its activities and financial condition and is periodically examined
to test compliance with various regulatory requirements. This supervision and
regulation is intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or elsewhere in this
document.
INSURANCE AND REGULATORY STRUCTURE. Pursuant to the provisions of Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), an
insurance fund administered by the FDIC and named the SAIF insures the deposits
of savings associations and certain savings banks. The FDIC fund existing prior
to the enactment of FIRREA is known as the BIF and continues to insure the
deposits of commercial banks and certain savings banks. Although the FDIC
administers both funds, the assets and liabilities are not commingled. In
addition, FIRREA established the OTS. The OTS is headed by a single Director who
is appointed by the President.
CAPITAL STANDARDS. The Bank is required to maintain Tier I (Core) capital equal
to at least 4% of the institution's adjusted total assets, and Tier II
(Supplementary) risk-based capital equal to at least 8.0% of
20
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risk-weighted assets. At June 30, 1998, Parkvale was in compliance with all
applicable regulatory requirements, with Tier I and Tier II ratios of 7.6% and
14.2%, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required, among other things, each federal banking agency to revise its
risk-based capital standards for insured institutions to ensure that those
standards take adequate account of interest-rate risk ("IRR"), concentration of
credit risk, and the risks of nontraditional activities, as well as to reflect
the actual performance and expected risk of loss on multifamily residential
loans. On June 26, 1996, the FDIC, the FRB and the Office of the Comptroller of
the Currency ("OCC"), collectively, "the agencies", jointly issued a policy
statement providing bankers guidance on sound interest rate risk management
practices. This policy statement augments the action taken by the agencies in
August 1995 to implement the portion FDICIA addressing risk-based capital
standards for interest rate risk. It also replaces the proposed policy statement
that the agencies issued for comment in August 1995 regarding a supervisory
framework for measuring and assessing banks' interest rate exposures. The
agencies have elected not to pursue a standardized measure and explicit capital
charge for interest rate risk at this time. This decision reflects concerns
about the burden, accuracy, and complexity of a standardized measure and
recognition that industry techniques for measuring interest rate risk are
continuing to evolve. Rather than dampening incentives to improve risk measures
by adopting a standardized measure at this time, the agencies hope to encourage
these industry efforts. Nonetheless, the agencies will continue to place
significant emphasis on the level of a bank's interest rate risk exposure and
the quality of its risk management process when evaluating a bank's capital
adequacy.
Parkvale's management does not anticipate difficulty in meeting the capital
requirements in the future, however there can be no assurance that this will be
the case. Failure to maintain minimum levels of required capital will result in
the submission to the applicable FDIC Regional Director for review and approval
of a reasonable plan describing the means and timing by which the bank shall
achieve its minimum Tier I ratio and may result in the imposition by the
Pennsylvania Department of Banking or the FDIC of various operational
restrictions, including limitations as to the rate of interest that may be paid
on deposit accounts, the taking of deposits, the issuance of new accounts, the
ability to originate a particular type of loan, and the purchase of loans or the
taking of specified other investments. Alternatively, the institution may be
placed into receivership or conservatorship under the FDIC, which would be
charged with managing the institution until it could be sold or liquidated.
INVESTMENT IN SUBSIDIARIES. Under FIRREA, investments in and extensions of
credit to subsidiaries not engaged in activities permissible for national banks
must generally be deducted from capital. However, certain exemptions generally
apply where: (i) a subsidiary is engaged in activities impermissible for
national banks solely as an agent for its customers and (ii) the subsidiary is
engaged solely in mortgage- banking activities. These provisions have not
reduced or limited Parkvale's business activity.
INVESTMENT RULES. FIRREA also materially affects the permissible investments of
savings banks. Under FIRREA, the permissible amount of loans to one borrower now
follows the national bank standards for all loans made by savings banks, as
compared to the pre-FIRREA rule that applied that standard only to commercial
loans made by federal associations. The national bank standard generally does
not permit loans to one borrower to exceed 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities. While Parkvale has historically made loans with lesser
dollar
21
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balances than was permitted by federal regulations, the loans-to-one borrower
limitation may limit its ability to do business with certain customers.
Savings banks and subsidiaries may not acquire or retain investments in
corporate debt securities that at the time of acquisition were not rated in one
of the four highest rating categories by at least one nationally recognized
rating organization. Parkvale fully complies with regulations governing
investments in corporate debt securities.
ACQUISITIONS BY BANK HOLDING COMPANIES. FIRREA permits bank holding companies to
acquire any savings institution, including healthy as well as troubled
institutions, and prohibits the Board of Governors of the Federal Reserve System
from imposing any tandem restrictions on transactions between the savings
institution and its holding company affiliates (other than those required by
Sections 23A and 23B of the Federal Reserve Act or by other applicable laws).
FIRREA does not impose any geographic restrictions on such acquisitions, and as
a result, a number of savings institutions have been acquired by bank holding
companies.
SAVINGS AND LOAN HOLDING COMPANY JURISDICTION. The Director of the OTS
administers and regulates the activities of registered savings and loan holding
companies and the acquisition of savings banks by any company. Savings and loan
holding companies, such as Parkvale Financial Corporation, are no longer
required to receive regulatory approval prior to incurring debt. Savings banks
which are subsidiaries of a holding company, as well as other savings banks, are
now deemed to be member banks for purposes of Sections 23A and 23B of the
Federal Reserve Act and, as a result, are subject to the transaction with
affiliate rules contained in those sections. Savings and loan holding companies
now may also purchase up to 5% of the stock of unaffiliated savings bank or
savings and loan holding companies without prior regulatory approval.
Cross-marketing restrictions that prohibited an insured institution subsidiary
of a diversified savings and loan holding company from offering or marketing
products or services of an affiliate that are not permissible for bank holding
companies were also removed by FIRREA.
ENFORCEMENT. Other provisions of FIRREA include substantial changes to
enforcement powers available to regulators. FIRREA also expands jurisdiction of
the FDIC's enforcement powers to all "institution-affiliated" parties,
including shareholders, attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action having or likely to have an adverse
effect on an insured institution. Under FIRREA, civil penalties are classified
into three levels, with amounts increasing with the severity of the violation.
The first tier provides for civil penalties up to $5,000 per day for violation
of law or regulation. A civil penalty of up to $25,000 per day may be assessed
if more than a minimal loss to an institution or action that results in a
substantial pecuniary gain or other benefit. Criminal penalties are increased to
$1 million per violation, up to $5 million for continuing violations or for the
actual amount of gain or loss. These monetary penalties may be combined with
prison sentences of up to five years.
FIRREA also provides regulators with far greater flexibility to impose
enforcement action on an institution that fails to comply with its regulatory
requirements, particularly with respect to the capital requirements. Possible
enforcement actions include the imposition of a capital plan and termination of
deposit insurance. The FDIC also may recommend that the Department of Banking
take enforcement action. If action is not taken by the Department, the FDIC
would have authority to compel such action under certain circumstances.
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FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional FHLBs,
each subject to supervision and regulation by the Federal Housing Finance Board.
The FHLBs provide a central credit facility primarily for member institutions.
The Bank, as a member of the FHLB of Pittsburgh, is required to acquire and hold
shares of capital stock in that FHLB in an amount equal to at least 1% of the
aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or 5%
of its advances (borrowings) from the FHLB of Pittsburgh, whichever is greater.
Parkvale had a $7.2 million investment in stock of the FHLB of Pittsburgh at
June 30, 1998, which complied with this requirement.
Advances from the FHLB of Pittsburgh are secured by a member's shares of stock
in the FHLB of Pittsburgh, certain types of mortgages and other assets. The
maximum amount of credit which the FHLB of Pittsburgh will advance for purposes
other than meeting deposit withdrawals fluctuates from time to time in
accordance with changes in policies of the FHLB of Pittsburgh. Interest rates
charged for advances vary depending upon maturity, the cost of funds to the FHLB
of Pittsburgh and the purpose of the borrowing. At June 30, 1998, the Bank had
$40.7 million of outstanding advances from the FHLB of Pittsburgh.
INTERSTATE ACQUISITIONS
The Commonwealth of Pennsylvania has enacted legislation which permits
interstate acquisitions and branching, subject to specific restrictions, for
savings banks located in Delaware, Kentucky, the District of Columbia, Maryland,
New Jersey, Ohio, Virginia and West Virginia ("the Region") if the state offers
reciprocal rights to savings institutions located in Pennsylvania.
Of the states in the Region, Delaware, Kentucky, Maryland, New Jersey, Ohio and
West Virginia currently have laws that permit savings banks located in
Pennsylvania to branch into such states and/or acquire savings banks located in
such states.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings banks to maintain
noninterest-earning reserves against their transaction accounts (primarily
checking accounts) and certain nonpersonal time deposits. Money market deposit
accounts are subject to the reserve requirement applicable to nonpersonal time
deposits when held by a person other than a natural person. Because required
reserves must be maintained in the form of vault cash or a non-interest bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets. Parkvale satisfies the majority of
its reserve requirement with vault cash.
PENNSYLVANIA SAVINGS BANK LAW
The Bank is incorporated under the Pennsylvania Banking Code of 1965, as amended
("Banking Code"), which contains detailed provisions governing the organization,
location of offices, rights and responsibilities of directors, officers,
employees and members, as well as corporate powers, savings and investment
operations and other aspects of the Bank and its affairs. The Banking Code
delegates
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extensive rulemaking power and administrative discretion to the Department so
that the supervision and regulation of state-chartered banks may be flexible and
readily responsive to changes in economic conditions and in savings and lending
practices.
One of the declared purposes of the Banking Code is to provide banks with the
opportunity to be competitive with each other and with other financial
institutions existing under other state, federal and foreign laws.
A Pennsylvania savings bank may locate or change the location of its principal
place of business and establish an office anywhere in the Commonwealth, with the
prior approval of the Department.
The Department generally examines each savings bank at least once every two
years. The Banking Code permits the Department to accept the examinations and
reports of the FDIC in lieu of the Department's examination. The present
practice is for the Department and the FDIC to conduct examinations annually on
an alternating basis. The Department may order any bank to discontinue any
violation of law or unsafe or unsound business practice and may direct any
director, officer, attorney or employee of a bank engaged in an objectionable
activity, after the Department has ordered the activity to be terminated, to
show cause at a hearing before the Department why such person should not be
removed.
TAXATION
FEDERAL TAXATION
For federal income tax purposes, PFC and its subsidiaries file a consolidated
return on a calendar year basis and report their income and expenses on the
accrual basis of accounting.
Since 1987, corporations are subject to the corporate alternative minimum tax to
the extent this tax would exceed the regular tax liability. Parkvale has not
been subject to this tax in the past and does not anticipate being subject to
this tax in future years given its current level of financial and taxable
income.
With certain exceptions, no deduction is allowed for interest expense allocable
to the purchase or carrying of tax exempt obligations acquired after August 7,
1986.
Parkvale's income tax returns for calendar 1997, 1996 and 1995 have been filed
with the IRS and are open to examination. However, Parkvale has not yet been
advised by the IRS if such an examination will be performed. All income tax
returns for calendar 1994 and prior years have been either accepted as filed or
settled with the IRS with such settlements not resulting in a significant charge
to income.
STATE TAXATION
For state tax purposes, Parkvale reports its income and expenses on the accrual
basis of accounting and files its tax returns on a calendar year basis. Parkvale
is subject to the Pennsylvania Mutual Thrift Institutions Tax ("MTIT"). This tax
is imposed at the rate of 11.5% on net income computed substantially in
accordance with Generally Accepted Accounting Principles ("GAAP"). Under the
Mutual Thrift Institution Act, Parkvale is not subject to any state or local
taxes except for the MTIT described above and taxes imposed upon real estate and
the transfer thereof.
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See Note H of Notes to Consolidated Financial Statements for additional
information regarding federal and state taxation.
ITEM 2. PROPERTIES
- ------- ----------
Parkvale presently conducts its business from its main office and 28 branch
offices located in the Pittsburgh metropolitan area. Parkvale owns the building
and land for 14 of its offices and leases its remaining 15 offices. Such leases
expire through 2014. PMC leases facilities outside of Pennsylvania for three
loan origination centers. At June 30, 1998, Parkvale's land, building and
equipment had a net book value of $2.4 million.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
Neither PFC nor any of its subsidiaries is involved in any pending legal
proceedings other than routine insignificant litigation occurring in the
ordinary course of business, except as follows: In June 1993, lawsuits were
instituted in the Court of Common Pleas of Allegheny County, Pennsylvania,
against Parkvale, by the owners of the former Parkvale headquarters building
which was sold in 1984. On March 26, 1998, Parkvale agreed to settle the dispute
and end the litigation with the limited partnership. The settlement involved
$1.9 million in cash payments and related legal expenses of $250,000. Prior to
this settlement, Parkvale purchased the first mortgage loan on this building
from another bank. As of June 30, 1998, Parkvale took possession of the
property, which is classified as Foreclosed Real Estate.
PFC and its subsidiaries, in the normal course of business, are subject to
various other pending and threatened lawsuits in which claims for monetary
damages are asserted. Management, after consultation with legal counsel, does
not anticipate that the ultimate aggregate liability, if any, arising out of
such other lawsuits will have a material adverse effect on PFC's nor its
subsidiaries' financial positions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
Not applicable.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS
- ------- ---------------------------------------------------------------
MATTERS.
--------
The information required herein is incorporated by reference from page 36 of the
PFC's 1998 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The information required herein is incorporated by reference from page 4 of
PFC's 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ----------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
The information required herein is incorporated by reference from pages 5 to 13
of PFC's 1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The information required herein is incorporated by reference from pages 14 to 33
of PFC's 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ----------------------------------------------------------------
FINANCIAL DISCLOSURES.
----------------------
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
The information required herein with respect to directors and executive officers
of PFC and Parkvale is incorporated by reference from pages 5 to 9 of the
definitive proxy statement of the Corporation for the 1998 Annual Meeting of
Stockholders, which was filed on September 14, 1998 (the "definitive proxy
statement").
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
The information required herein is incorporated by reference from page 13 of the
definitive proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- ---------------------------------------------------------------
The information required herein is incorporated by reference from pages 2 to 4
of the definitive proxy statement.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
The information required herein is incorporated by reference from page 15 of the
definitive proxy statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- -------- ----------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT
-------------------------------------------
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Page
----
Report of Independent Auditors...............................................................14
Consolidated Statements of Financial Condition at June 30, 1998 and 1997.....................15
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 1998...................................................16
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 1998...................................................17
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended June 30, 1998...................................................18
Notes to Consolidated Financial Statements.............................................19 to 33
(2) The following exhibits are filed as part of this Form 10-K and
this list includes Exhibit Index.
No. Exhibits Page
- ------------ -------
3(a) Articles of Incorporation......................................*
3(b) Bylaws.........................................................C
10(a) Common Stock Certificate.......................................*
10(b) 1987 Stock Option Plan.........................................@
10(c) 1993 Key Employee Stock Compensation Program...................x
10(d) 1993 Directors' Stock Option Plan..............................D
10(e) Consulting Agreement with Robert D. Pfischner..................~
10(f) Employment Agreement with Robert J. McCarthy, Jr...............#
10(g) Employee Stock Ownership Plan..................................E
10(h) Executive Deferred Compensation Plan...........................F
10(i) Supplemental Employee Benefit Plan.............................+
13 Excerpts of the 1998 Annual Report to Shareholders filed herewith.
Such Annual Report, except those portions thereof that are
expressly incorporated by reference herein, is furnished
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for information of the Securities and Exchange Commission only and
is not deemed to be "filed" as part of this Form 10-K.
22 Subsidiaries of Registrant.................................... 20
Reference is made to Item 1. Business - Subsidiaries for the
required information
23 Consent of Independent Auditors.................................I
* Incorporated by reference to the Registrant's Form 8-B filed with
the Commission on January 5, 1989.
@ Incorporated by reference, as amended, to Form S-8 at File No.
33-26173 filed by the Registrant with the Commission on
November 1, 1995.
x Incorporated by reference, as amended, to Form S-8 at File No.
33-98812 filed by the Registrant with the Commission on November
1, 1995.
~ Incorporated by reference to Form 10-K filed by the Registrant
with the Commission on September 28, 1994.
+ Incorporated by reference to Form 10-K filed by the Registrant
with the Commission on September 21, 1995.
# Incorporated by reference to Form 10-K filed by the Registrant
with the Commission on September 19, 1997.
(b) REPORTS ON FORM 8-K
--- -------------------
There were no reports on Form 8-K filed during the 1998 fiscal
year or prior to the filing of this Form 10-K.
(c) See (a) (2) above for all exhibits filed herewith and the Exhibit
Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report to
Shareholders which are required to be included herein.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PARKVALE FINANCIAL CORPORATION
Date: September 22, 1998 By: /S/ ROBERT J. MCCARTHY, JR.
---------------------------
Robert J. McCarthy, Jr.
Director, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/S/ ROBERT J. MCCARTHY, JR. September 22, 1998
- -------------------------- ------------------
Robert J. McCarthy, Jr., Date
Director, President and
Chief Executive Officer
/S/ TIMOTHY G. RUBRITZ September 22, 1998
- ---------------------- ------------------
Timothy G. Rubritz, Date
Vice President - Treasurer
(Chief Financial & Accounting Officer)
/S/ ROBERT D. PFISCHNER September 22, 1998
- ----------------------- ------------------
Robert D. Pfischner, Chairman of the Board Date
/S/ FRED P. BURGER, JR. September 22, 1998
- ---------------------- ------------------
Fred P. Burger, Jr., Director Date
/S/ ANDREA F. FITTING September 22, 1998
- --------------------- ------------------
Andrea F. Fitting, Director Date
/S/ GEORGE W. NEWLAND September 22, 1998
- --------------------- ------------------
George W. Newland, Director Date
/S/ WARREN R. WENNER September 22, 1998
- -------------------- ------------------
Warren R. Wenner, Director Date
29