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Exhibit 13
PARKVALE FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA AT JUNE 30: 1998 1997 1996 1995 1994
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Total assets $1,095,373 $991,239 $919,242 $896,422 $873,786
Loans 832,758 710,868 625,452 524,545 494,994
Investment securities 113,992 149,580 204,886 233,436 272,866
Savings deposits 949,452 881,244 807,087 794,445 778,555
FHLB advances and other debt 45,091 20,196 26,911 24,604 24,397
Shareholders' equity 84,060 75,183 69,765 61,064 55,565
Book value per share 16.25 14.83 13.80 12.20 10.60
OPERATING DATA FOR THE YEAR ENDED JUNE 30: 1998 1997 1996 1995 1994
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Total interest income $ 74,020 $ 68,380 $ 66,117 $ 61,026 $ 59,404
Total interest expense 44,190 40,352 39,631 35,431 35,399
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Net interest income 29,830 28,028 26,486 25,595 24,005
Provision for loan losses 255 399 686 1,094 1,829
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Net interest income after provision for
loan losses 29,575 27,629 25,800 24,501 22,176
Other income 4,709 2,174 3,058 2,024 2,320
Other expense 16,781 18,808 14,240 13,821 12,991
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Income before taxes 17,503 10,995 14,618 12,704 11,505
Income tax expense 6,385 4,021 5,000 4,633 4,277
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Net income $ 11,118 $ 6,974 $ 9,618 $ 8,071 $ 7,228
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Net income per diluted share $2.10 $1.33 $1.84 $1.51 $1.33
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OTHER SELECTED DATA (STATISTICAL PROFILE):
YEAR ENDED JUNE 30, 1998 1997 1996 1995 1994
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Average yield earned on all
interest-earning assets 7.37% 7.38% 7.45% 7.17% 6.89%
Average rate paid on interest-bearing
liabilities 4.72 4.67 4.79 4.46 4.34
Average interest rate spread 2.65 2.71 2.66 2.71 2.55
Net yield on average interest-earning
assets 2.97 3.03 2.98 3.01 2.78
Other expenses to average assets 1.63 1.98 1.57 1.59 1.47
Other expenses to average assets* 1.42 1.45 1.57 1.59 1.47
Efficiency ratio 48.59 62.27 48.20 50.04 49.35
Efficiency ratio* 45.17 45.60 49.83 50.04 49.35
Return on average assets 1.08 0.73 1.06 0.93 0.82
Return on average assets* 1.08 1.07 0.98 0.93 0.82
Dividend payout ratio 26.67 31.36 18.19 17.74 16.07
Return on average equity 14.59 10.15 15.13 13.89 13.69
Return on average equity* 14.59 14.70 13.99 13.89 13.69
Average equity to average total assets 7.38 7.23 7.01 6.87 5.98
AT JUNE 30, 1998 1997 1996 1995 1994
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One year gap to total assets 0.07% -4.44% 0.24% 6.03% 1.65%
Intangibles to total equity 0.46 0.74 0.40 0.71 1.07
Shareholders' equity to assets ratio 7.67 7.58 7.59 6.81 6.36
Ratio of classified assets to total
assets 0.46 0.30 0.22 0.35 0.33
Nonperforming assets $ 4,728 $ 2,654 $ 1,248 $ 2,127 $ 1,163
Allowance for loan losses as a % of gross
loans 1.55% 1.95% 2.17% 2.41% 2.33%
Number of full-service offices 29 29 28 28 27
* Excludes the effect of litigation expense and gain on sale of assets in fiscal
1998, the one-time FDIC special assessment in fiscal 1997 and the gain on sale
of assets 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's average interest-earning assets climbed to $1 billion for the year
ended June 30, 1998, up $78 million over fiscal year 1997. This milestone was
achieved through an increased loan portfolio funded primarily by elevated
deposit levels and investment maturities. Average loan and average deposit
balances rose $108 million and $65 million, respectively in fiscal year 1998.
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
Parkvale's asset and liability management ("ALM") is driven by our ability to
manage interest rate risk ("IRR"). IRR is the exposure of current and future
earnings and capital to fluctuating 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. One of Parkvale's ALM goals is to
minimize this exposure.
IRR is measured and analyzed using static interest rate sensitivity gap
indicators, net interest income simulation 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 -4.44% as of June 30,
1997 to 0.07% as of June 30, 1998, and the five-year gap ratio has shifted from
- -0.43% as of June 30, 1997 to 0.86% as of June 30, 1998.
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
1999 assuming an immediate shift in current interest rates would result in the
following percentage changes over fiscal 1998 net interest income: +100 bp,
+8.7%; +200 bp, +6.6%; -100 bp, +6.3%; -200 bp, -1.4%. This compares to
projected net interest income for fiscal 1998 made at June 30, 1997 over fiscal
1997 actual net interest income of: +100 bp, +5.7%; +200 bp, +2.3%; -100 bp,
+5.2%; -200 bp, -0.8%. The fluctuation in projected net interest income between
fiscal 1998 and 1997 is reflective of the change in asset mix during fiscal 1998
as discussed in the Financial Condition section.
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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 18.8% for
the quarter ended June 30, 1998. During fiscal 1998, 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
1998, 1997 and 1996, 84.9%, 88.0% and 77.4%, respectively, of mortgage loans
originated or purchased were adjustable-rate loans. Parkvale has continually
emphasized the origination and purchase of ARM loans. ARMs totaled $487.4
million or 66.5% of total mortgage loans at June 30, 1998 versus $402.3 million
or 63.8% of total mortgage loans at June 30, 1997. To supplement local mortgage
originations, Parkvale purchased loans aggregating $183.0 million, $104.4
million and $104.9 million in fiscal 1998, 1997 and 1996, respectively, from
mortgage bankers and other financial institutions. The loan packages purchased
were predominately 3/1 and 5/1 ARMs. Of the 1998 purchases, $180 million or
98.4% were ARMs. The practice of purchasing loans in the secondary market is
expected to continue in fiscal 1999 when liquidity exceeds targeted levels. At
June 30, 1998, Parkvale had commitments to originate mortgage loans totaling
$8.7 million, commercial loans of $1.5 million and to purchase adjustable
residential loans totaling $21.9 million. Construction loans in process at June
30, 1998 were $7.7 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, 1998 and 1997, consumer loans were $106.3 and
$90.3 million which represented a 17.6% and an 18.5% increase over the balances
at June 30, 1997 and 1996, respectively. The fiscal 1998 consumer portfolio
growth is primarily related to consumer demand for fixed rate shorter term
second mortgage loans with average maturities of five years.
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, 1998, Parkvale had
$43.4 million or 4.0% 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.
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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, 1998:
<3 MONTHS 4-12 MONTHS 1-5 YEARS 5+ YEARS TOTAL
--------- ----------- --------- -------- -----
(DOLLARS IN THOUSANDS)
Interest-sensitive assets:
ARM and other variable rate loans.... $ 89,633 $ 89,693 $338,424 $ 25,776 $ 543,526
Other fixed rate loans, net (1)...... 7,610 22,603 109,347 163,086 302,646
Variable rate mortgage-backed
securities........................ 13,668 2,003 -- -- 15,671
Fixed rate mortgage-backed securities
(1)............................... 987 2,414 18,361 5,239 27,001
Investments and Federal funds sold... 145,375 5,725 21,860 8,195 181,155
Equities, primarily FHLB and FHLMC... -- -- 7,228 7,564 14,792
-------- -------- -------- -------- ----------
Total interest-sensitive assets........ $257,273 $122,438 $495,220 $209,860 $1,084,791
======== ======== ======== ======== ==========
Ratio of interest-sensitive assets to
total assets......................... 23.5% 11.2% 45.2% 19.2% 99.0%
==== ==== ==== ==== ====
Interest-sensitive liabilities:
Passbook deposits and club accounts
(2)............................... $ 6,729 $ 23,704 $ 80,751 $ 35,909 $ 147,093
Checking accounts (3)................ 17,891 17,891 35,782 17,889 89,453
Money market deposit accounts........ -- 21,448 21,447 -- 42,895
Certificates of deposit.............. 91,898 195,124 318,665 59,488 665,175
FHLB advances and other borrowings... 4,223 -- 30,000 10,868 45,091
-------- -------- -------- -------- ----------
Total interest-sensitive liabilities... $120,741 $258,167 $486,645 $124,154 $ 989,707
======== ======== ======== ======== ==========
Ratio of interest-sensitive liabilities
to total liabilities and equity...... 11.0% 23.6% 44.4% 11.3% 90.4%
===== ==== ==== ==== ====
Ratio of interest-sensitive assets to
interest-sensitive liabilities....... 213.1% 47.4% 101.8% 169.0% 109.6%
===== ==== ===== ===== =====
Periodic Gap to total assets........... 12.46% (12.39%) 0.78% 7.82% 8.68%
===== ====== ==== ==== ====
Cumulative Gap to total assets......... 12.46% 0.07% 0.86% 8.68%
===== ==== ==== ====
(1) Includes total repayments and prepayments at an assumed rate of 12% per
annum for fixed-rate mortgage loans and mortgage-backed securities, with the
amounts for other loans based on the estimated remaining loan maturity by
loan type.
(2) Assumes passbook deposits are withdrawn at the rate of 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 favorable liquidity allows investment
decisions to be made with the funding source as 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 39.8% at June 30, 1998 and 32.9% at June 30, 1997.
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,
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geographic concentrations, loans or investments of a single type, multiple loans
to a single borrower, loans made to a single type of industry and loans of an
imprudent size relative to the 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, 1998.
RESULTS OF OPERATIONS
Net income for the year ended June 30, 1998 was $11.1 million or $2.10 per
diluted share representing a 9.6% increase in net income from normal operations
of $10.1 million or $1.94 per diluted share for the year ended June 30, 1997.
The fiscal 1997 net income from normal operations of $10.1 million excludes the
adverse effect of the one-time Savings Association Insurance Fund ("SAIF")
assessment of $5 million.
The key component of the favorable operating results is the $1.8 million or 6.4%
increase in net interest income over fiscal year 1997. 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.
INTEREST INCOME
Interest income from loans increased by $7.5 million or 14.5% in fiscal 1998.
Average loans outstanding increased $108.3 million or 16.88%, primarily due to
loan package purchases amounting to $183.0 million during fiscal 1998. Interest
income increased despite a decrease in the average loan yield which was 8.01% in
fiscal 1997 and fell to 7.85% in fiscal 1998. This is reflective of lower
interest rates sustained throughout the majority of fiscal 1998 and the large
quantity of ARM loans within the portfolio. Interest income on loans increased
by $4.8 million or 10.3% from fiscal 1996 to 1997. The average yield on loans
decreased from 8.23% in fiscal 1996 to 8.01% in fiscal 1997, and the average
outstanding loan balance increased $75.4 million or 13.3% between fiscal 1996
and 1997.
Interest income on mortgage-backed securities decreased by $1.8 million or 31.7%
in fiscal 1998. The average yield on mortgage-backed securities increased 16
basis points from 6.72% in fiscal 1997 to 6.88% in fiscal 1998; however, the
average balance decreased $27.5 million from fiscal 1997 to 1998. The decline in
the average balance outstanding is due to deploying mortgage-backed security
maturities into higher yielding loans. Similarly, interest income on
mortgage-backed securities decreased $1.2 million or 18.0% in fiscal 1997 from
fiscal 1996 attributable to a $19.8 million decrease in the average outstanding
balance which was offset slightly by an 11 basis point increase in the average
yield from 6.61% in fiscal 1996 to 6.72% in fiscal 1997.
Interest income on investments decreased $608,000 or 11.5% in fiscal 1998. This
is the result of a $9 million decrease in the average balance. The average yield
on investments decreased to 5.94% in fiscal 1998 from 6.00% in fiscal 1997 due
to the overall flat interest rate environment. Interest income on investments
decreased by $1.8 million or 25.5% from fiscal 1996 to 1997. This is a result of
a $30.6 million decrease in the average balance.
Interest income from federal funds sold increased $554,000 from fiscal 1997 to
1998. The increase was attributable to an increase in the average federal funds
sold balance from $113.3 million in fiscal 1997 to $119.9 million in fiscal
1998. In addition, the average yield increased from 5.41% in fiscal 1997 to
5.57% in fiscal 1998. The average balance of federal funds sold increased $13.9
million or 14.0% between fiscal 1996 and 1997, and interest income increased
$495,000 or 8.8% between the two years. The average yield decreased from
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5.67% in fiscal 1996 to 5.41% in fiscal 1997. These average yields reflect the
changes in the target federal funds interest rate from a high of 6.00% at the
beginning of fiscal 1996 to a low of 5.25% at the end of fiscal 1996 before
increasing to 5.50% by the end of fiscal 1997. The target federal funds interest
rate remained at 5.50% throughout fiscal 1998.
INTEREST EXPENSE
Interest expense on deposits increased $3.5 million or 9.1% between fiscal 1997
and 1998. The average deposit balance increased $65.2 million or 7.7% in fiscal
1998, compounded slightly by an increase in the average cost from 4.64% in
fiscal 1997 to 4.70% in 1998. The fiscal 1998 deposit increases are attributable
to the variety of certificate of deposit promotional specials. These specials
ranged in terms from 15 to 36 months with rates ranging from 6.00% to 6.25%.
Interest expense on deposits increased by $1.1 million or 2.9% between fiscal
1996 and 1997. The average deposit balance also increased by $42.7 million
between the two fiscal years, offset somewhat by a decrease in the average cost
from 4.75% in fiscal 1996 to 4.64% in fiscal 1997. The 1997 balance increase was
attributable to the success of a "55 plus" checking program and attractive rates
offered on certificate of deposit specials.
Interest expense on borrowed money increased by $290,000 or 23.9% in fiscal
1998, due to new borrowings with the Federal Home Loan Bank ("FHLB") totaling
$30 million at a relatively low average rate of 5.78% during fiscal 1998. The
overall average cost of borrowings decreased from 6.20% in fiscal 1997 to 5.54%
in fiscal 1998. This is attributable to the maturity of a high cost FHLB advance
during the first quarter of fiscal 1998 and the new borrowings. In fiscal 1997,
interest expense on borrowed money decreased by $373,000 or 23.5% due to a $6.1
million decrease in the average balance.
Net interest income increased $1.8 million or 6.4% from fiscal 1997 to 1998. The
average interest rate spread decreased to 2.65% in fiscal 1998 from 2.71% in
fiscal 1997, while the average net earning assets increased $5.5 million. In
fiscal 1997, net interest income increased $1.5 million or 5.8%. The average
interest rate spread increased from 2.66% in fiscal 1996 to 2.71% in 1997,
average net earning assets increased $2.3 million between the two years.
At June 30, 1998, the weighted average yield on loans and investments was 7.35%.
The average rate payable on liabilities was 4.65% for deposits, 5.65% for
borrowings and 4.69% for combined deposits and borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses is an amount added to the allowance against which
loan losses are charged. The adequacy of the allowance for loan losses is
determined by management through evaluation of the loss potential on individual
nonperforming, delinquent and high dollar loans. Such loans are considered
impaired when the market value or discounted cash flows of property
collateralizing delinquent and nonperforming 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 $144,000 or 36.1% compared to fiscal year 1997. 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, 1998.
Nonperforming assets, which are defined as nonaccrual loans and real estate
owned, were $4.7 million, $2.7 million and $1.2 million at June 30, 1998, 1997
and 1996, respectively, representing 0.43%, 0.27% and 0.14% of total assets at
the end of each respective year. Of the nonperforming assets at June 30, 1998,
$2.4 million was real estate owned and $2.3 million represented nonaccrual
loans. The increase in nonperforming assets is primarily commercial real estate
related to 200 Meyran Associates, discussed in other expense. During fiscal
1998, the allowance for loan losses reflects a $1.0 million charge to reduce
this foreclosed real estate to estimated fair value.
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In addition, loans totaling $333,000 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 1.55% of gross loans as of June 30, 1998,
compared to 1.95% as of June 30, 1997. 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 increased $2.5 million or 117% in fiscal 1998 compared to fiscal
1997. This increase is primarily due to the nonrecurring gain of $2.1 million
which relates to the sale of FHLMC stock. There were no gains or losses on sale
of assets in fiscal 1997. Without the fiscal 1998 nonrecurring gain, other
income would have increased $388,000 or 17.8% between fiscal 1997 and 1998. In
fiscal 1996, a nonrecurring gain of $969,000 was recognized which related to the
sale of real estate.
Service charges on deposit accounts increased by $151,000 or 12.0% in fiscal
1998, mainly due to increased services for all types of deposits and the
increase in average balances over fiscal 1997. Other service charges and fees
increased by $101,000 or 15.9% in fiscal 1998. This increase is due to $135,000
of ATM surcharges Parkvale began assessing to non-Parkvale customers beginning
in January 1998. Service charges on deposit accounts increased by $194,000 or
18.2% and other service charges and fees increased by $90,000 or 16.5% between
fiscal 1997 and 1996.
Miscellaneous income increased $135,000 or 48.4% in fiscal 1998 due to
investment fee income which was $271,000 in fiscal 1998 and $137,000 in fiscal
1997. During fiscal 1997, investment fee income was generated 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; however, 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
Parkvale Savings Bank (the "Bank"), Parkvale Financial Services. Parkvale
expects continued growth in this area.
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OTHER EXPENSE
Compensation and employee benefits increased by $555,000 or 7.7% during fiscal
1998 and by $345,000 or 5.0% during fiscal 1997 over the respective prior
periods. Compensation expense increased $409,000 or 7.0% in fiscal 1998 and
increased $279,000 or 4.8% in fiscal 1997. These increases represent normal
merit pay increases and increased staffing related to new offices and products.
ESOP contribution expense increased $66,000 in fiscal 1998 and decreased $47,000
in fiscal 1997 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.
Office occupancy expense increased $28,000 or 1.3% in fiscal 1998 and $126,000
or 6.2% in fiscal 1997 over the respective prior periods. The increase in fiscal
1997 was due to the opening of a new branch during November 1996.
Marketing expenses increased by $62,000 or 16.3% in fiscal 1998 and by $39,000
or 11.4% in fiscal 1997. The fiscal 1998 increase is due to the various savings
deposit and home equity credit promotions. The fiscal 1997 increase is primarily
due to branch promotions relative to new branches.
The Bank is insured by the FDIC through the SAIF. FDIC insurance expense was
$555,000 in fiscal 1998, $734,000 in fiscal 1997 and $1.8 million in fiscal
1996. The Bank paid annual insurance premiums of 23 basis points on insured
deposits throughout fiscal 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. During fiscal 1998, the FDIC insurance
premium averaged 6.29 basis points. For fiscal 1999, the FDIC insurance premium
was reduced to 6.22 basis points as of July 1, 1998.
Miscellaneous expenses increased by $2.5 million or 105.6% due to a nonrecurring
charge for the settlement of litigation between 200 Meyran Associates (a limited
partnership) and the Bank. In June 1993, lawsuits were instituted in the Court
of Common Pleas of Allegheny County, Pennsylvania, against the Bank by the
owners of an office building which was sold in 1984. On March 26, 1998, Parkvale
agreed in principle 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. Without the litigation costs during fiscal 1998, miscellaneous expenses
would have increased by $345,000 or 14.6% for the year ended June 30, 1998. The
miscellaneous expense increases are the result of continual growth. The main
components impacted are data processing expense increased by $153,000 or 17.9%,
legal expense increased by $120,000 or 58.3% without the legal expense
associated with the litigation and loan expense increased by $34,000 or 14.8%.
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INCOME TAXES
Federal and state income tax expense increased by $2.4 million or 58.8% due to
the lower pretax income reported in fiscal 1997. As discussed in Note H, the
effective tax rate for fiscal 1998, 1997 and 1996 varied from the normal
statutory federal tax provisions primarily due to tax-exempt interest and the
Pennsylvania Mutual Thrift Institutions Tax.
IMPACT OF YEAR 2000
The year 2000 ("Y2K") issue primarily results from computer programs recognizing
a two-digit date field rather than four digits to define the year. Computer
software or hardware that is date sensitive may recognize "00" as the year 1900
instead of the year 2000 which may cause system failure, miscalculations and
other temporary disruptions of operations.
The data processing committee has been assigned the task of managing Y2K
compliance. This committee is chaired by the Vice President of Data Processing,
who reports directly to the President and Chief Executive Officer. The
committee's main focus is to resolve the problems associated with the Y2K issue
in five phases: awareness, assessment, renovation, testing and implementation.
The plan developed by the data processing committee is based upon recommended
guidelines provided by the Bank's primary regulator. The assessment stage
entailed assessing the magnitude of the issues and identification of hardware,
software, networks, automated teller machines, processing platforms, and
customer, vendor interdependencies and budget allocations associated with Y2K.
During the renovation and testing phases, the Bank's primary data processing
provider, DataOne Financial Systems, announced plans in July 1998 to discontinue
business in mid 1999. Such service provider had represented to Parkvale that all
appropriate programming changes would be completed and testing would be
performed before the end of 1998. However, given the pending change of
providers, the Bank is not participating in tests with the current primary
service provider. As a result, the Bank has implemented its contingency plan and
is currently evaluating data processing alternatives including proposals from
major service bureau providers. Three providers are under active consideration
and the Bank is in the due diligence phase of evaluating the proposals and
intends to make a decision during the December 1998 quarter. The new processing
arrangements are expected to provide the Bank with additional systems
capabilities to increase efficiencies as a full-service bank and will modernize
certain systems with state of the art technology. The Bank will ensure
compliance with Y2K before signing a contract. The Bank expects to capitalize
the majority of the system related costs related to the change in service
providers. These costs are not expected to exceed $600,000 which are to be
amortized over a useful life of five to ten years. The increase in the annual
overall expense for data services is not expected to exceed $200,000, which
should permit the servicing of growth anticipated with deposit customers.
An ongoing assessment of business risk includes an assessment of other third
party vendors' readiness for Y2K processing. Management has identified all third
party vendors and communicated with vendors regarding the status of their Y2K
compliance. Management is coordinating with third party vendors to perform
testing where appropriate. If outside vendors are not Y2K compliant, alternative
vendors will be contracted. Additionally, this assessment includes review of the
Federal Reserve Fedline System. This system's hardware and software are
scheduled for testing during October 1998. Upon conversion to a new primary
service provider, the Bank will evaluate the necessity for Y2K testing with
integrated systems.
The Bank is monitoring loan and deposit customers for Y2K compliance. Commercial
loan customers that are not Y2K compliant may become a repayment risk. The
lending department has distributed information regarding Y2K compliance to
commercial loan borrowers. The Bank's initial assessment of commercial loan
customers indicates an immaterial impact on Parkvale's statement of operations.
Continued evaluation of this risk will be performed by the Bank's management.
Parkvale's plans to complete Y2K compliance are based upon management's best
estimates. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from these plans due to unforeseen
circumstances.
12
10
CAPITAL RESOURCES
Shareholders' equity increased $8.9 million or 11.8% during the year ended June
30, 1998 compared to June 30, 1997. Earnings retention is the main source of
Parkvale's equity growth. Net income was $11.1 million while dividends declared
were $2.9 million resulting in 25.9% of net income paid to shareholders (equal
to $.56 per share) for fiscal year ended June 30, 1998. Parkvale's fifth
consecutive 5-for-4 stock split was paid in October 1997. During fiscal 1998,
the cash dividends increased 34.6%. The book value of Parkvale's common stock
increased 9.6% to $16.25 at June 30, 1998 from $14.83 at June 30, 1997 as a
result of these increases in shareholders' equity.
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 7.6% capital level as of June 30, 1998. 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 except as noted above, concerning
Y2K, that will have, or that are reasonably likely to have, material effects on
Parkvale's liquidity, capital resources or operations.
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.
13
11
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
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, 1998 and 1997, and
the related consolidated statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998 in conformity with generally accepted accounting principles.
Pittsburgh, Pennsylvania /S/ ERNST & YOUNG LLP
July 23, 1998
14
12
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
----------------------
ASSETS 1998 1997
- ------------------------------------------------------------------------------------
Cash and noninterest-earning deposits $ 9,628 $ 12,104
Federal funds sold 124,900 107,832
Interest-earning deposits in other banks 475 219
Investment securities available for sale (cost of $8,060 in
1998 and $7,223 in 1997) (Note B) 14,793 13,546
Investment securities held to maturity (fair value of
$100,047 in 1998 and $136,834 in 1997) (Note B) 99,199 136,034
Loans, net of allowance of $13,223 in 1998 and $14,266 in
1997 (Note C) 832,758 710,868
Foreclosed real estate, net of allowance of $15 in 1998 and
$0 in 1997 (Note D) 2,362 165
Office properties and equipment, net (Note D) 2,377 2,125
Intangible assets and deferred charges 389 553
Prepaid expenses and other assets (Note L) 8,492 7,793
- ------------------------------------------------------------------------------------
Total assets $1,095,373 $991,239
- ------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
- ------------------------------------------------------------------------------------
Savings deposits (Note E) $ 949,452 $881,244
Advances from Federal Home Loan Bank and other debt (Note F) 45,091 20,196
Advance payments from borrowers for taxes and insurance 9,610 10,104
Other liabilities (Note L) 7,160 4,512
- ------------------------------------------------------------------------------------
Total liabilities 1,011,313 916,056
- ------------------------------------------------------------------------------------
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;
1998--5,388,084 shares issued, 1997--4,310,679 shares
issued) 5,388 4,311
Additional paid-in capital 6,652 8,034
Treasury stock at cost--215,447 shares in 1998 and 319,421
shares in 1997 (3,051) (3,676)
Employee stock ownership plan debt (276) (330)
Unrealized gains on securities available for sale 4,276 4,015
Retained earnings 71,071 62,829
- ------------------------------------------------------------------------------------
Total shareholders' equity 84,060 75,183
- ------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,095,373 $991,239
- ------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
15
13
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
-----------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $58,844 $51,388 $46,585
Mortgage-backed securities 3,795 5,557 6,775
Investments 4,702 5,310 7,127
Federal funds sold 6,679 6,125 5,630
- -------------------------------------------------------------------------------------------
Total interest income 74,020 68,380 66,117
- -------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings deposits (Note E) 42,686 39,138 38,044
Borrowings 1,504 1,214 1,587
- -------------------------------------------------------------------------------------------
Total interest expense 44,190 40,352 39,631
- -------------------------------------------------------------------------------------------
Net interest income 29,830 28,028 26,486
Provision for loan losses (Note C) 255 399 686
- -------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 29,575 27,629 25,800
- -------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,409 1,258 1,064
Other service charges and fees 738 637 547
Gain on sale of assets (Note J) 2,148 -- 969
Miscellaneous 414 279 478
- -------------------------------------------------------------------------------------------
Total other income 4,709 2,174 3,058
- -------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and employee benefits 7,798 7,243 6,899
Office occupancy 2,177 2,148 2,022
Marketing 442 380 341
FDIC insurance 555 734 1,816
FDIC special assessment -- 5,035 --
Office supplies, telephone, and postage 952 906 841
Miscellaneous 4,857 2,362 2,321
- -------------------------------------------------------------------------------------------
Total other expenses 16,781 18,808 14,240
- -------------------------------------------------------------------------------------------
Income before income taxes 17,503 10,995 14,618
Income tax expense (Note H) 6,385 4,021 5,000
- -------------------------------------------------------------------------------------------
NET INCOME $11,118 $ 6,974 $ 9,618
- -------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
Basic $ 2.17 $ 1.38 $ 1.92
Diluted $ 2.10 $ 1.33 $ 1.84
- -------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
16
14
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED JUNE 30,
-----------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Interest received $ 73,776 $ 68,745 $ 65,694
Loan fees received 294 328 364
Other fees and commissions received 2,366 2,012 1,965
Interest paid (44,079) (40,391) (39,640)
Cash paid to suppliers and employees (13,819) (18,911) (13,562)
Income taxes paid (6,912) (4,218) (4,784)
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,626 7,565 10,037
Cash flows from investing activities:
Proceeds from sales of investment securities available for
sale 2,193 -- 48
Proceeds from maturities of investments 71,967 73,399 151,871
Purchase of investment securities available for sale (882) (419) (968)
Purchase of investment securities held to maturity (61,506) (15,102) (121,338)
Maturity of deposits in other banks (256) (46) 21
Purchase of loans (182,973) (104,428) (104,940)
Proceeds from sales of loans 2,653 1,758 2,479
Principal collected on loans and mortgage-backed
securities 275,844 144,239 149,608
Loans made to customers, net of loans in process (193,192) (127,403) (148,057)
Proceeds from branch deposit acquisition -- 11,084 --
Capital expenditures (576) (448) (114)
- ------------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (86,728) (17,366) (71,390)
Cash flows from financing activities:
Net increase in checking and savings accounts 10,264 2,115 3,407
Net increase in certificates of deposit 57,944 60,496 9,236
Proceeds from FHLB advances 30,000 -- 96
Repayment of FHLB advances (5,011) (5,011) (10)
Net (decrease) in other borrowings (94) (1,704) 2,220
Net (decrease) in borrowers advances for tax and insurance (494) (724) (1,304)
Dividends paid (2,636) (2,007) (1,592)
Allocation of treasury stock to retirement plans 395 450 178
Payment for treasury stock (674) (1,340) --
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 89,694 52,275 12,231
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 14,592 42,474 (49,122)
Cash and cash equivalents at beginning of year 119,936 77,462 126,584
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 134,528 $ 119,936 $ 77,462
- ------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 11,118 $ 6,974 $ 9,618
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 491 513 528
Accretion and amortization of fees and discounts (593) (174) (442)
Loan fees collected and deferred 294 328 364
Provision for loan losses 255 399 686
Gain on sale of assets (2,148) -- (969)
Decrease (increase) in accrued interest receivable (222) 199 (369)
Decrease (increase) in other assets (571) 301 (90)
Increase (decrease) in accrued interest payable 111 (39) (9)
Decrease (increase) in deferred income tax asset 67 (197) 276
Increase (decrease) in other liabilities 2,824 (739) 444
- ------------------------------------------------------------------------------------------------
Total adjustments 508 591 419
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 11,626 $ 7,565 $ 10,037
- ------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
17
15
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, 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 $.333 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 $.416 per
share (2,113) (2,113)
- ------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 4,311 8,034 (3,676) (330) 4,015 62,829 75,183
- ------------------------------------------------------------------------------------------------------------------
1998 NET INCOME 11,118 11,118
PRINCIPAL PAYMENTS ON ESOP DEBT 276 276
TRANSFER TO REFLECT 5-FOR-4
SPLIT 1,077 (1,077) 0
TREASURY STOCK PURCHASED (674) (674)
TREASURY STOCK CONTRIBUTED TO
BENEFIT PLAN 37 27 64
ADDITIONAL BORROWINGS BY ESOP (222) (222)
CHANGE IN UNREALIZED GAINS, NET
OF INCOME TAXES OF $150 261 261
EXERCISE OF STOCK OPTIONS (342) 1,272 930
CASH DIVIDENDS DECLARED ON
COMMON STOCK AT $.56 PER SHARE (2,876) (2,876)
- ------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $5,388 $ 6,652 $(3,051) $(276) $4,276 $71,071 $84,060
- ------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
18
16
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. In July 1998, the Bank adopted the use of the name Parkvale Bank
for advertising and signage purposes.
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 $4.7 million, 3% of the
next $43.1 million of checking deposits and 10% of total checking deposits over
$47.8 million. These required reserves, net of allowable credits, amounted to
$1.7 million at June 30, 1998.
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. 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.
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.
19
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 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 recorded at the lower of the carrying amount 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, 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 transferred to foreclosed real estate during
fiscal 1998, 1997 and 1996 were $3.2 million, $311,000 and $1.2 million,
respectively. The foreclosures in 1998 were mainly due to a deed in lieu of the
foreclosure on office buildings previously owned by 200 Meyran Associates. The
1996 foreclosures included a $902,000 residential apartment complex.
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.
20
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Earnings per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 128, Earnings per Share. Statement 128 replaced
the previously reported primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of employee stock options.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods have
been presented, and where necessary, restated to conform to the Statement 128
requirements. The following table sets forth the computation of basic and
diluted earnings per share for the three years ended June 30:
1998 1997 1996
---- ---- ----
Numerator for basic and diluted earnings per share:
Net income (in 000's) $11,118 $6,974 $9,618
Denominator:
Weighted average shares for basic earnings per
share 5,121,604 5,059,260 5,022,113
Effect of dilutive employee stock options 172,360 178,885 204,412
--------- --------- ---------
Weighted average shares for dilutive earnings per
share 5,293,964 5,238,145 5,226,525
========= ========= =========
Net income per share:
Basic $2.17 $1.38 $1.92
Diluted $2.10 $1.33 $1.84
On September 16, 1997, the Board of Directors declared a 5-for-4 stock split on
Parkvale's common stock. The additional shares were paid on October 14, 1997 to
stockholders of record at the close of business on September 30, 1997. This
increased the outstanding shares by 1,077,405. 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 1996, 1995, 1994 and 1993.
Stock Options
In October 1995, the FASB issued FAS 123, Accounting for Stock-Based
Compensation, which was effective for fiscal years beginning after December 15,
1995. FAS 123 defines a fair value-based method of accounting for stock-based
employee compensation plans. Under the fair value-based method, compensation
cost is measured at the grant date based upon the value of the award and is
recognized over the service period. The standard encourages all entities to
adopt this method of accounting for all employee stock compensation plans.
However, it also allows an entity to continue to measure compensation costs for
its plans as prescribed in APB Opinion No. 25 ("APB 25"), Accounting for Stock
Issued to Employees. As Parkvale elected to continue using the accounting in APB
25, pro forma disclosures of net income and earnings per share made for options
granted as if the fair value method of accounting, as defined by FAS 123 had
been applied. See Note I.
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 1997,
permitting up to 5% of outstanding stock to be repurchased through June 1998,
has been completed. As of June 30, 1998, PFC repurchased 21,275 shares of the
235,125 eligible shares available at the inception of the 1997/1998 program.
These shares were repurchased at an average cost of $31.66 per share and they
represent 0.4% of the outstanding stock at the inception of the program. A stock
repurchase program which commenced in July 1998 permits the acquisition of up to
258,000 shares or 5% of outstanding stock through June 30, 1999.
21
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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.
Effect of New Accounting Standards
The FASB has 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 effective for fiscal years beginning after December 15, 1997, and will be
adopted by Parkvale for the year ended June 30, 1999. The impact of adoption is
not expected to materially affect Parkvale's financial position or results of
operations.
The FASB has issued FAS 131, Disclosures About Segments of an Enterprise and
Related Information, which establishes standards for reporting information about
operating segments in annual financial reports. FAS 131 supersedes FAS 14,
Financial Reporting for Segments of a Business Enterprise. This standard is
effective for fiscal years beginning after December 15, 1997, and will be
adopted by Parkvale for the year ended June 30, 1999. The impact of adoption is
not expected to materially affect Parkvale's financial position or results of
operations.
The FASB has issued FAS 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. The standard is effective for fiscal years
beginning after June 15, 1999, and will be adopted by Parkvale for the year
ended June 30, 2000. The impact of adoption is not expected to materially affect
Parkvale's financial position or results of operations.
22
20
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:
1998 1997
---------------------------------------------- -----------------------------------------------
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
(123,496 shares in 1998;
169,696 shares in
1997)......................... $ 121 $5,691 $ -- $ 5,812 $ 166 $5,773 $ -- $ 5,939
FHLB of Pittsburgh stock........ 7,228 -- -- 7,228 6,346 -- -- 6,346
Equity securities--other........ 711 1,042 -- 1,753 711 550 -- 1,261
-------- ------ ---- -------- -------- ------ ---- --------
Total equity
investments
available for
sale..................... $ 8,060 $6,733 $ -- $ 14,793 $ 7,223 $6,323 $ -- $ 13,546
-------- ------ ---- -------- -------- ------ ---- --------
Held to maturity:
U.S. Government and agency
obligations due:
Within 1 year................... $ 7,994 $ 28 $ -- $ 8,022 $ 9,971 $ 11 $ -- $ 9,982
Within 5 years.................. 24,000 -- 92 23,908 41,979 45 309 41,715
-------- ------ ---- -------- -------- ------ ---- --------
Total U.S. Government and
agency obligations....... 31,994 28 92 31,930 51,950 56 309 51,697
Municipal obligations:
Within 1 year................... 575 1 -- 576 -- -- -- --
Within 5 years.................. 6,055 66 -- 6,121 -- -- -- --
-------- ------ ---- -------- -------- ------ ---- --------
Total municipal
obligations.............. 6,630 67 -- 6,697 -- -- -- --
Corporate debt:
Within 1 year................... 17,148 16 2 17,162 7,017 14 -- 7,031
Within 5 years.................. -- -- -- -- 10,126 47 4 10,169
-------- ------ ---- -------- -------- ------ ---- --------
Total corporate debt....... 17,148 16 2 17,162 17,143 61 4 17,200
-------- ------ ---- -------- -------- ------ ---- --------
Total U.S. Government and agency
obligations, municipal obligations
and corporate debt................ 55,772 111 94 55,789 69,093 117 313 68,897
-------- ------ ---- -------- -------- ------ ---- --------
Mortgage-backed securities at June 30:
FHLMC............................... 26,476 666 5 27,137 45,644 914 68 46,490
FNMA................................ 3,639 62 -- 3,701 6,284 127 1 6,410
GNMA................................ 704 41 -- 745 1,187 54 -- 1,241
Collateralized mortgage obligations
("CMOs").......................... 11,305 125 58 11,372 12,336 89 119 12,306
Other participation certificates.... 1,303 -- -- 1,303 1,490 -- -- 1,490
-------- ------ ---- -------- -------- ------ ---- --------
Total mortgage-backed
securities............... 43,427 894 63 44,258 66,941 1,184 188 67,937
-------- ------ ---- -------- -------- ------ ---- --------
Total investments classified as held
to maturity....................... $ 99,199 $1,005 $157 $100,047 $136,034 $1,301 $501 $136,834
-------- ------ ---- -------- -------- ------ ---- --------
Total investment
portfolio................ $107,259 $7,738 $157 $114,840 $143,257 $7,624 $501 $150,380
======== ====== ==== ======== ======== ====== ==== ========
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 $16,994 of the total mortgage-backed
portfolio consists of balloon securities which have stated maturities within
three years. The CMOs at June 30, 1998 consist of $11,226 of adjustable rate
securities and $79 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.
- --------------------------------------------------------------------------------
23
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE C--LOANS
Loans at June 30 are summarized as follows:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Mortgage loans:
Residential:
1-4 Family................................ $683,504 $586,735 $517,082 $423,439 $403,492
Multifamily............................... 13,024 16,825 17,375 22,894 22,735
Commercial................................... 24,869 17,724 19,516 18,435 18,113
Other........................................ 12,085 9,329 2,387 3,196 1,931
-------- -------- -------- -------- --------
733,482 630,613 556,360 467,964 446,271
Consumer loans................................. 106,266 90,305 76,224 69,197 61,805
Commercial business loans...................... 11,592 8,332 8,925 4,542 6,135
Loans on savings accounts...................... 2,665 3,076 3,285 3,253 3,206
-------- -------- -------- -------- --------
Gross loans.................................. 854,005 732,326 644,794 544,956 517,417
Less:
Loans in process............................. 7,652 6,393 4,386 4,816 7,506
Allowance for loan losses.................... 13,223 14,266 13,990 13,136 12,056
Unamortized discount and deferred loan
fees...................................... 372 799 966 2,459 2,861
-------- -------- -------- -------- --------
$832,758 $710,868 $625,452 $524,545 $494,994
======== ======== ======== ======== ========
The following summary sets forth the activity in the allowance for loan losses
for the years ended June 30:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Beginning balance.................................. $14,266 $13,990 $13,136 $12,056 $10,283
Provision for losses--mortgage loans............... 150 29 440 972 1,668
Provision for losses--consumer loans............... 105 370 246 122 111
Provision for losses--commercial business loans.... -- -- -- -- 50
Loans recovered.................................... 108 116 329 95 157
Loans charged off.................................. (1,406) (239) (161) (109) (213)
------- ------- ------- ------- -------
Ending balance..................................... $13,223 $14,266 $13,990 $13,136 $12,056
======= ======= ======= ======= =======
Loans charged off and recovered are as follows:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Loans recovered:
Commercial.................................. $ -- $ -- $ -- $ -- $ --
Consumer.................................... 55 56 70 47 9
Mortgage.................................... 53 60 259 48 148
------- ------- ------- ------- -------
Total recoveries.............................. 108 116 329 95 157
------- ------- ------- ------- -------
Loans charged off:
Consumer.................................... (391) (227) (125) (39) (45)
Mortgage.................................... (1,015) (12) (36) (70) (168)
------- ------- ------- ------- -------
Total charge-offs............................. (1,406) (239) (161) (109) (213)
------- ------- ------- ------- -------
Net recoveries (charge-offs).................. $(1,298) $ (123) $ 168 $ (14) $ (56)
======= ======= ======= ======= =======
The allowance for loan losses at June 30 consisted of:
Mortgage loans.............................. $11,660 $12,645 $12,579 $11,915 $10,923
Consumer loans.............................. 1,347 1,405 1,194 1,004 916
Commercial business loans................... 216 216 217 217 217
Ratio of net charge-offs to average loans.......... 0.17% 0.02% 0.00% 0.00% 0.01%
24
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
At June 30, 1998, Parkvale was committed under various agreements to originate
fixed and adjustable rate mortgage loans aggregating $3,555 and $4,163,
respectively, at rates ranging from 6.86% to 7.46% for fixed rate and 5.44% to
7.00% for adjustable rate loans, and had $59,554 of unused consumer lines of
credit and $4,908 in unused commercial lines of credit. The Bank is committed to
purchase $21,862 of adjustable loans at 6.74%. In addition, Parkvale was
committed to originate mortgage loans aggregating $550 at rates ranging from
6.50% to 6.75% under bond programs secured by the City of Pittsburgh. Parkvale
was also committed to originate commercial loans totaling $1,500 at June 30,
1998. Available but unused consumer and commercial credit card lines amounted to
$9,520 and $193, respectively, at June 30, 1998.
At June 30, Parkvale serviced loans for the benefit of others as follows:
1998--$5,817, 1997--$8,006 and 1996--$13,001.
At June 30, 1998, 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 47 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--38.7%; greater
Washington, D.C. area--9.5%; and Ohio--9.0%. The ability of debtors to honor
these contracts depends largely on economic conditions affecting the Pittsburgh,
greater Washington D.C. and Columbus metropolitan areas, with repayment risk
dependent on the cash flow of the individual debtors. Substantially all mortgage
loans are secured by real property with a loan amount of generally no more than
80% of the appraised value at the time of origination. Loans in excess of 80% of
appraised value require private mortgage insurance.
At June 30, the amount of interest income of nonaccrual loans that had not been
recognized in interest income was $181 for 1998 and $285 for 1997. The Bank had
$836 and $859 of impaired loans as of June 30, 1998 and 1997, respectively, and
recorded $125 and $104 of reserves related to these loans as of June 30, 1998
and 1997, 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 $1,787 during fiscal 1998 and
$975 during fiscal 1997.
- --------------------------------------------------------------------------------
NOTE D--OFFICE PROPERTIES AND EQUIPMENT AND FORECLOSED REAL ESTATE
Office properties and equipment at June 30 are summarized by major
classification as follows:
1998 1997 1996
---- ---- ----
Land................................................... $ 318 $ 318 $ 318
Office buildings and leasehold improvements............ 3,969 3,779 3,489
Furniture, fixtures and equipment...................... 3,649 3,294 3,145
------ ------ ------
7,936 7,391 6,952
Less accumulated depreciation and amortization......... 5,559 5,266 4,947
------ ------ ------
Office properties and equipment, net................... $2,377 $2,125 $2,005
====== ====== ======
Depreciation expense................................... $ 326 $ 328 $ 370
====== ====== ======
A summary of foreclosed real estate at June 30 is as follows:
1998 1997 1996
---- ---- ----
Real estate acquired through foreclosure............... $2,377 $ 165 $ 259
Allowance for losses................................... (15) 0 (19)
------ ------ ------
$2,362 $ 165 $ 240
====== ====== ======
The balance of foreclosed real estate consists primarily of commercial property.
25
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Changes in the allowance for losses on foreclosed real estate for the years
ended June 30 were as follows:
1998 1997 1996
---- ---- ----
Beginning balance...................................... $ 0 $ 19 $ $0
Provision for losses................................... 15 0 19
Less charges to allowance.............................. 0 (19) 0
------ ------ ------
$ 15 $ 0 $ 19
====== ====== ======
- --------------------------------------------------------------------------------
NOTE E--SAVINGS DEPOSITS
The following schedule sets forth interest expense for the years ended June 30
by type of savings deposit:
1998 1997 1996
---- ---- ----
Checking and money market accounts.................. $ 2,197 $ 2,152 $ 2,154
Passbook accounts................................... 3,432 3,574 3,630
Certificates........................................ 37,057 33,412 32,260
------- ------- -------
$42,686 $39,138 $38,044
======= ======= =======
A summary of savings deposits at June 30 is as follows:
1998 1997
---------------- ----------------
AMOUNT % AMOUNT %
------ - ------ -
Savings:
Checking accounts.............................. $ 75,165 7.9 $ 64,394 7.3
Checking accounts--noninterest-bearing......... 19,728 2.1 17,307 1.9
Money market accounts.......................... 42,895 4.5 44,804 5.1
Passbook accounts.............................. 138,110 14.5 139,089 15.8
-------- ----- -------- -----
275,898 29.0 265,594 30.1
Certificates of deposit.......................... 665,175 70.1 608,031 69.0
-------- ----- -------- -----
941,073 99.1 873,625 99.1
Accrued interest................................. 8,379 0.9 7,619 0.9
-------- ----- -------- -----
$949,452 100.0 $881,244 100.0
======== ===== ======== =====
The aggregate amount of time deposits over $100 was $51,339 and $41,354 at June
30, 1998 and 1997, respectively.
At June 30, the scheduled maturities of certificate accounts were as follows:
MATURITY PERIOD 1998 1997
- --------------- ---- ----
1-12 months................................................ $287,022 $317,345
13-24 months............................................... 165,149 99,943
25-36 months............................................... 107,636 69,026
37-48 months............................................... 36,353 37,855
49-60 months............................................... 9,527 26,848
Thereafter................................................. 59,488 57,014
-------- --------
$665,175 $608,031
======== ========
- --------------------------------------------------------------------------------
26
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE F--ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER DEBT
The advances from the FHLB at June 30 consisted of the following:
1998 1997
------------------- -------------------
INTEREST INTEREST
BALANCE RATE % BALANCE RATE %
------- ------ ------- ------
Due within one year......................................... $ -- $ 5,000 7.98%
Due within five years....................................... 20,000 5.82-6.82 10,000 6.24-6.82
Due within ten years........................................ 20,000 5.48-5.76 --
Due within twenty years..................................... 671 3.00-6.27 682 3.00-6.27
------- -------
$40,671 $15,682
======= =======
Weighted average interest rate at end of period............. 5.93% 6.88%
========= =========
The FHLB advances are secured by Parkvale's FHLB stock and mortgage-backed
securities and are subject to substantial prepayment penalties. Parkvale has a
$50 million line of credit with the FHLB. To date, Parkvale has not borrowed on
this 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 $4,420 and $4,514 at June 30, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
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, 1998, that Parkvale meets all capital
adequacy requirements to which it is subject.
As of June 30, 1998, 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, 1998:
TOTAL CAPITAL TO RISK WEIGHTED ASSETS.......... $86,018 14.23% $48,371 8.00% $60,463 10.00%
TIER I CAPITAL TO RISK WEIGHTED ASSETS......... 78,394 12.97% 24,185 4.00% 36,278 6.00%
TIER I CAPITAL TO AVERAGE ASSETS............... 78,394 7.59% 41,294 4.00% 51,617 5.00%
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%
- --------------------------------------------------------------------------------
27
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE H--INCOME TAXES
Income tax expense (credits) for the years ended June 30 are comprised of:
1998 1997 1996
---- ---- ----
Federal:
Current............................................ $5,269 $3,835 $3,923
Deferred........................................... 67 (506) 276
State................................................ 1,049 692 801
------ ------ ------
$6,385 $4,021 $5,000
====== ====== ======
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:
1998 1997
---- ----
Deferred tax assets:
Book bad debt reserves.................................... $4,384 $4,735
Deferred loan fees........................................ 298 365
Purchase accounting adjustments........................... 88 97
Fixed assets.............................................. 70 50
Deferred compensation..................................... 169 188
------ ------
Total deferred tax assets.............................. 5,009 5,435
------ ------
Deferred tax liabilities:
Tax bad debt reserves..................................... 1,055 1,407
Unrealized gains on securities available for sale......... 2,458 2,308
Other, net................................................ 251 258
------ ------
Total deferred tax liabilities......................... 3,764 3,973
------ ------
Net deferred tax assets................................ $1,245 $1,462
====== ======
No valuation allowance was required at June 30, 1998 or 1997.
Parkvale's effective tax rate differs from the expected federal income tax rate
for the years ended June 30 as follows:
1998 1997 1996
-------------- -------------- --------------
Expected federal statutory income tax
provision/rate............................ $5,951 34.0% $3,738 34.0% $4,970 34.0%
Tax-exempt interest......................... (67) -0.4% (118) -1.1% (197) -1.3%
State income taxes, net of federal
benefit................................... 692 4.0% 457 4.2% 529 3.6%
Other....................................... (191) -1.1% (56) -0.5% (302) -2.1%
------ ----- ------ ----- ------ -----
Effective total income tax provision........ $6,385 36.5% $4,021 36.6% $5,000 34.2%
====== ===== ====== ===== ====== =====
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 payment of taxes of
$690 annually over a six year period from 1997 to 2002, which are disclosed as
"tax bad debt reserves" as a deferred tax liability.
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.
- --------------------------------------------------------------------------------
28
26
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 $181, $177 and $172 in fiscal years 1998,
1997 and 1996, 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 $373 in fiscal 1998, $287 in fiscal 1997 and $336 in fiscal 1996 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, 1998, the ESOP owned 431,597 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 152,588 shares of authorized but unissued Common Stock
of Parkvale was reserved for future issuance. As of June 30, 1998, 76,280 option
shares have been granted under this plan. Additionally, the 1993 Key Employee
Stock Compensation Program was adopted in October 1993. An aggregate of 369,262
shares of authorized but unissued Common Stock of Parkvale were reserved for
future issuance. As of June 30, 1998, 170,883 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, 1998, all option shares are
exercisable. The following table presents option share data related to the Stock
Option Plans for the years indicated, adjusted for the 1997 and prior stock
splits:
EXERCISE PRICE PER SHARE $2.622 $3.563 $12.452 $12.902 $12.063 $17.04 $19.90 $20.40 $29.00 Total
------ ------ ------- ------- ------- ------ ------ ------ ------ -----
Share balances
at June 30,
1995.......................... 131,224 144,959 15,258 97,656 15,258 404,355
Granted....................... 15,258 15,258
Exercised..................... (42,041) (6,958) (48,999)
------- ------- ------ ------ ------ ------ ------ ------- ------ -------
June 30,
1996.......................... 89,183 138,001 15,258 97,656 15,258 15,258 370,614
Granted....................... 15,258 103,750 119,008
Exercised..................... (49,878) (14,999) (8,544) (73,421)
------- ------- ------ ------ ------ ------ ------ ------- ------ -------
June 30,
1997.......................... 39,305 123,002 15,258 89,112 15,258 15,258 15,258 103,750 416,201
Granted....................... 15,255 15,255
Exercised..................... (39,305) (78,758) (4,882) (11,338) (134,283)
Forfeitures................... (3,438) (3,438)
------- ------- ------ ------ ------ ------ ------ ------- ------ -------
June 30,
1998.......................... -- 44,244 15,258 84,230 15,258 15,258 15,258 88,974 15,255 293,735
Pro forma information regarding net income and earnings per share as required by
FAS 123 has been determined as if PFC 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 5.99%, dividend yield is 1.8%, volatility
29
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
factor of the expected market price of PFC's common stock of 0.133 and an
expected life of the options of nine 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. Because PFC'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,
---------------------------
1998 1997 1996
---- ---- ----
Net income before stock options........................... $11,118 $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 --
Fiscal year ended June 30, 1998 grant................... 83 -- --
------- ------ ------
Pro forma net income...................................... $11,035 $6,733 $9,567
======= ====== ======
Pro forma earnings per share:
Basic................................................... $ 2.15 $ 1.33 $ 1.90
Diluted................................................. $ 2.08 $ 1.29 $ 1.83
- --------------------------------------------------------------------------------
NOTE J--GAIN ON SALE OF ASSETS
The $2,148 gain recognized in fiscal 1998 was related to the sale of 46,200
shares of Federal Home Loan Mortgage Corporation stock in the March 1998 and
June 1998 quarterly reporting periods. The $969 gain recognized in fiscal 1996
was related to the payoff of a multifamily loan with a previously deferred gain.
- --------------------------------------------------------------------------------
NOTE K--LEASES
Parkvale's rent expense for leased real properties amounted to approximately
$1,079 in 1998, $1,036 in fiscal 1997 and $992 in 1996. At June 30, 1998,
Parkvale was obligated under 20 noncancellable operating leases, which expire
through 2014. The minimum rental commitments for the fiscal years subsequent to
June 30, 1998 are as follows: 1999--$989, 2000--$596, 2001--$498, 2002--$347,
2003--$284 and later years--$1,315.
- --------------------------------------------------------------------------------
NOTE L--SELECTED BALANCE SHEET INFORMATION
Selected balance sheet data at June 30 are summarized as follows:
1998 1997
---- ----
Prepaid expenses and other
assets:
Accrued interest on loans... $5,316 $5,038
Reserve for uncollected
interest................. (181) (284)
Accrued interest on
investments.............. 1,006 1,138
Other prepaids.............. 1,106 439
Net deferred tax asset...... 1,245 1,462
------ ------
$8,492 $7,793
====== ======
1998 1997
---- ----
Other liabilities:
Accounts payable and accrued
expenses................. $4,877 $1,729
Negative goodwill........... 545 669
Other liabilities........... 1,081 863
Federal and state income
taxes payable............ 657 1,251
------ ------
$7,160 $4,512
====== ======
30
28
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. 97 DEC. 97 MAR. 98 JUNE 98 JUNE 98
------- ------- ------- ------- -------
Total interest income............................. $18,213 $18,406 $18,539 $18,862 $74,020
Total interest expense............................ 10,837 10,992 11,079 11,282 44,190
------- ------- ------- ------- -------
Net interest income............................... 7,376 7,414 7,460 7,580 29,830
Provision for loan losses......................... 93 64 51 47 255
------- ------- ------- ------- -------
Total interest income after provision for
losses.......................................... 7,283 7,350 7,409 7,533 29,575
Other income...................................... 581 634 2,647 847 4,709
Other expense..................................... 3,589 3,648 5,663 3,881 16,781
------- ------- ------- ------- -------
Income before income taxes........................ 4,275 4,336 4,393 4,499 17,503
Income tax expense................................ 1,579 1,604 1,582 1,620 6,385
------- ------- ------- ------- -------
Net income........................................ $ 2,696 $ 2,732 $ 2,811 $ 2,879 $11,118
======= ======= ======= ======= =======
Net income per share:
Basic........................................... $ 0.53 $ 0.53 $ 0.55 $ 0.56 $ 2.17
Diluted......................................... $ 0.51 $ 0.52 $ 0.53 $ 0.54 $ 2.10
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
Total other expense............................... 3,530 3,214 3,437 3,592 13,773
------- ------- ------- ------- -------
Income before income taxes........................ (1,252) 4,127 4,021 4,099 10,995
Income tax expense (benefit)...................... (464) 1,528 1,467 1,490 4,021
------- ------- ------- ------- -------
Net income........................................ $ (788) $ 2,599 $ 2,554 $ 2,609 $ 6,974
======= ======= ======= ======= =======
Net income per share:
Basic........................................... $ (0.16) $ 0.51 $ 0.51 $ 0.52 $ 1.38
Diluted......................................... $ (0.16) $ 0.50 $ 0.48 $ 0.50 $ 1.33*
- --------------------------------------------------------------------------------------------------------------------
* Year-to-date amount includes the antidilutive 179,274 incremental shares
calculated in accordance with FAS 128 as of September 30, 1996.
31
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE N--PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The condensed balance sheets and statements of income and cash flows for
Parkvale Financial Corporation as of June 30, 1998 and 1997 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
1998 1997
Assets:
Investment in PSB............ $82,526 $74,424
Cash......................... 1,002 370
Other equity investments..... 1,542 1,106
Other assets................. 124 --
------- -------
Total assets.............. $85,194 $75,900
======= =======
Liabilities and Shareholders'
Equity:
Accounts payable............. $ 52 $ 43
Deferred taxes............... 306 147
Dividends payable............ 776 527
Shareholders' equity......... 84,060 75,183
------- -------
Total liabilities and
shareholders' equity.... $85,194 $75,900
======= =======
STATEMENTS OF INCOME
1998 1997 1996
Dividends from PSB...... $ 3,000 $2,500 $2,000
Other income............ 120 95 82
Operating expenses...... (120) (95) (82)
------- ------ ------
Income before equity in
undistributed earnings
of subsidiary......... 3,000 2,500 2,000
Equity in undistributed
income of PSB......... 8,118 4,474 7,618
------- ------ ------
Net income......... $11,118 $6,974 $9,618
======= ====== ======
STATEMENTS OF CASH FLOWS
1998 1997 1996
Cash flows from operating activities:
Management fee income received........................ $ 120 $ 95 $ 82
Dividends received.................................... 3,000 2,500 2,000
Taxes received from PSB............................... 453 -- --
Cash paid to suppliers................................ (79) (65) (75)
------- ------- -------
Net cash provided by operating activities.......... 3,494 2,530 2,007
------- ------- -------
Cash flows from investing activities:
Equity investments purchased.......................... -- -- (373)
Cash flows from financing activities:
Payment for treasury stock............................ (674) (1,340) --
Allocation of treasury stock to retirement plans...... 395 450 178
Dividends paid to stockholders........................ (2,636) (2,007) (1,592)
Loan to PFC ESOP...................................... (222) (450) (135)
Principal collected on ESOP loan...................... 275 224 130
------- ------- -------
Net cash used in financing activities.............. (2,862) (3,123) (1,419)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.... 632 (593) 215
Cash and cash equivalents at beginning of year.......... 370 963 748
------- ------- -------
Cash and cash equivalents at end of year................ $ 1,002 $ 370 $ 963
======= ======= =======
Reconciliation of net income to net cash provided by
operating activities:
Net income............................................ $11,118 $ 6,974 $ 9,618
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of PSB..................... (8,118) (4,474) (7,618)
Taxes received from PSB......................... 453 -- --
Increase in accrued expenses.................... 41 30 7
------- ------- -------
Net cash provided by operating activities.......... $ 3,494 $ 2,530 $ 2,007
======= ======= =======
- --------------------------------------------------------------------------------
32
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
NOTE O--FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS 107, Disclosure About Fair Value of Financial Instruments, requires the
determination of fair value for certain of the Bank's assets, liabilities and
contingent liabilities. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments:
CASH AND NONINTEREST BEARING DEPOSITS: The carrying amount of cash which
includes noninterest-bearing demand deposits approximates fair value.
FEDERAL FUNDS SOLD: The carrying amount of overnight federal funds approximates
fair value.
INTEREST-EARNING DEPOSITS IN OTHER BANKS: The carrying amount of other
overnight interest-bearing balances approximates fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: The fair values of investment
securities are obtained from the Wall Street Journal, the Interactive Data
Corporation pricing service and various investment brokers for securities not
available from public sources.
LOANS RECEIVABLE: Fair values were estimated by discounting contractual cash
flows using interest rates currently being offered for loans with similar credit
quality adjusted for standard prepayment assumptions.
DEPOSIT LIABILITIES: For checking, savings and money market accounts, fair
value is the amount payable on demand at June 30. The fair values of
fixed-maturity certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on time
deposits of similar remaining maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK: Fair value is determined by discounting
the advances using current rates of advances with comparable maturities as of
the reporting date.
COMMERCIAL INVESTMENT AGREEMENTS: The carrying amount of these overnight
borrowings approximates fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair value for off-balance-sheet instruments
(primarily loan commitments) are estimated using internal valuation models and
are limited to fees charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. Unused consumer and commercial lines of credit are assumed equal to
the outstanding commitment amount due to the variable interest rate attached to
these lines of credit.
1998 1997
--------------------------- -------------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FAIR VALUE VALUE FAIR VALUE VALUE
FINANCIAL ASSETS: ---------- ----- ---------- -----
Cash and noninterest-earning deposits... $ 9,628 $ 9,628 $ 12,104 $ 12,104
Federal funds sold...................... 124,900 124,900 107,832 107,832
Interest-earning deposits in other
banks................................ 475 475 219 219
Investment securities................... 70,582 70,565 82,443 82,639
Mortgage-backed securities.............. 44,258 43,427 67,937 66,941
Loans receivable........................ 866,353 832,758 738,663 710,868
---------- ---------- ---------- --------
$1,116,196 $1,081,753 $1,009,198 $980,603
========== ========== ========== ========
FINANCIAL LIABILITIES:
Checking, savings and money market
accounts............................. $ 275,898 $ 275,898 $ 265,594 $265,594
Savings certificates.................... 669,730 665,175 605,186 608,031
Advances from Federal Home Loan Bank.... 40,691 40,671 15,763 15,682
Commercial investment agreements........ 4,420 4,420 4,514 4,514
---------- ---------- ---------- --------
$ 990,739 $ 986,164 $ 891,057 $893,821
========== ========== ========== ========
Off-balance-sheet instruments............. $ (7) -- $ (2) --
- --------------------------------------------------------------------------------
33
31
CAPITAL STOCK INFORMATION
- ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:00 a.m., Thursday,
October 22, 1998, 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 1997.
HIGH LOW DIVIDENDS
FOR THE QUARTER ENDED ---- --- ---------
---------------------
June 98........................... $33.75 $30.50 $0.15
March 98.......................... 33.25 28.50 0.15
December 97....................... 34.25 26.00 0.13
September 97...................... 33.75 26.75 0.13
June 97........................... $23.20 $20.60 $0.104
March 97.......................... 24.00 19.60 0.104
December 96....................... 21.20 18.08 0.104
September 96...................... 18.88 15.68 0.104
There were 5,164,037 shares of Common Stock outstanding as of August 24, 1998,
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 1998 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
36
32
INFORMATION WITH RESPECT TO NOMINEES FOR DIRECTOR,
DIRECTORS WHOSE TERMS CONTINUE AND EXECUTIVE OFFICERS
ELECTION OF DIRECTORS
Pursuant to the Bylaws of the Corporation and by resolution of the
Corporation's Board of Directors, the Board of Directors currently consists of
six members. The Board of Directors is divided into three classes, and members
of each class are elected for a term of three years and until their successors
are elected and qualified. One class of directors is to be elected annually.
There are no arrangements or understandings between the Corporation and any
person pursuant to which such person has been nominated as a director. No
director or executive officer is related to any other director or executive
officer of either the Corporation or the Bank.
Unless otherwise directed, each proxy executed and returned by a
stockholder will be voted for the election of all the nominees listed below. If
any person named as nominee should be unable or unwilling to stand for election
at the time of the Annual Meeting, the proxies will nominate and vote for the
replacement nominee or nominees recommended by the Board of Directors. At this
time, the Board of Directors knows of no reason why any of the persons listed
below may not be able to serve as a director if elected. A majority of the
shares of Common Stock entitled to vote, present in person or by proxy at the
meeting, will constitute a quorum. The election of directors requires the
affirmative vote of a majority of the votes cast by all stockholders entitled to
vote thereon, whether in person or by proxy. Votes marked as "withhold
authority" on the election of directors are counted toward a quorum and have the
same legal effect as a vote against the election of the nominees.
NOMINEES FOR TERMS EXPIRING IN 2001
PRINCIPAL OCCUPATION DIRECTOR
NAME AGE DURING THE PAST FIVE YEARS SINCE
---- --- -------------------------- -----
Robert J. McCarthy, Jr. 55 Director; President and Chief Executive Officer 1985(1)
of the Bank since December 1, 1984 and of the
Corporation since organization in August 1987;
previously President and Chief Executive
Officer of Metropolitan Federal Savings Bank,
Bethesda, Maryland
Patrick J. Minnock 41 President of Minnock Construction Company, a
leading builder and developer in the western
Pennsylvania area, since 1988; licensed real
estate broker since 1987
Patrick J. Minnock was nominated to replace George W. Newland who is
retiring from the Board as of the Annual Meeting date.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE ABOVE NOMINEES
BE ELECTED AS DIRECTORS.
DIRECTORS WITH TERMS EXPIRING IN 1999
PRINCIPAL OCCUPATION DIRECTOR
NAME AGE DURING THE PAST FIVE YEARS SINCE
---- --- -------------------------- -----
Fred P. Burger, Jr. 71 Director; President of Burger Agency, Inc., a 1981(1)
real estate brokerage firm and insurance
agency, since 1948
Warren R. Wenner 77 Director; retired; previously a sales 1968(1)
representative for The Gage Co., a distributor
of industrial tools and equipment, from 1965 to
1985
5
33
DIRECTORS WITH TERMS EXPIRING IN 2000
PRINCIPAL OCCUPATION DIRECTOR
NAME AGE DURING THE PAST FIVE YEARS SINCE
---- --- -------------------------- -----
Robert D. Pfischner 76 Chairman of the Board; President of E.T. 1968(1)
Lippert Saw Co., a manufacturer of saw blades
for industry and fabricator of armor plate,
since 1973
Andrea F. Fitting, Ph.D. 44 Chief Executive Officer of Fitting Kolbrener Sept. 1,
since 1995 and President of Fitting 1998
Communications, Inc. from 1986 to 1995,
marketing communications firms;
Andrea F. Fitting was appointed by the Board of Directors to complete Paul
A. Mooney's term. Mr. Mooney retired from the Board on August 31, 1998 for
health reasons.
- ---------
(1) Includes terms as a director of the Bank prior to organization of the
Corporation in 1987 and currently serves as a director of the Bank.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Corporation holds regular meetings at least
quarterly. Each member of the Board of Directors of the Corporation also serves
as a director of the Bank. During the year ended June 30, 1998, the Board of
Directors of the Corporation met nine times. No director failed to attend fewer
than 75% of the aggregate number of such meetings and the meetings of the
committees of the Board on which he served. All members of the Board serve on
the Nominating Committee, which met two times during fiscal 1998. The Nominating
Committee will consider nominations made by stockholders if such nominations are
made in accordance with Article IV, Section 3 of the Corporation's Bylaws. The
Board also has other standing committees, each served by the same members of the
Board and in the same capacities as those described below for similar committees
of the Bank's Board. The Executive Committee, which did not meet in fiscal 1998,
has the authority to exercise all of the powers of the Board between Board
meetings. The joint Audit-Finance Committee of the Corporation and the Bank met
four times in fiscal 1998. Directors of the Corporation do not receive any fees
directly from the Corporation for serving as Board and Committee members. The
Board does not have a separate compensation committee as determination of
compensation is a function of the Audit-Finance Committee.
The Board of Directors of the Bank meets regularly each month and may have
additional special meetings. The Board met twelve times during fiscal 1998. The
Bank has standing Executive, Audit-Finance and Site-Building Committees as
described below, in addition to other committees. During fiscal 1998, no
director failed to attend fewer than 75% of the aggregate number of meetings
held during the year by the Board of Directors and by all committees of the
Board on which he served.
The Executive Committee has the authority to exercise all the powers of the
Board of Directors between Board meetings. Membership on the Executive
Committee, which consists of three members of the Board, rotates monthly with
each director, except for Messrs. Pfischner and McCarthy, serving at least one
month each quarter of the year. Mr. Pfischner currently serves as Chairman of
this committee. Mr. McCarthy attends but does not vote at the meetings. The
Executive Committee met one time during fiscal 1998.
The Audit-Finance Committee reviews the Bank's budget, the scope and
results of the audit performed by the Corporation's and the Bank's independent
auditors, the scope and results of the examinations performed by the Office of
Thrift Supervision, the Pennsylvania Department of Banking and the Federal
Deposit Insurance Corporation, the Bank's system of internal control, and
monitors compliance with the Bank's established investment, interest rate risk,
financial futures and options policies. The members of such committee must
consider and act upon (1) all transactions with respect to the investment
portfolio, with the exception of Federal Funds sold, in excess of $25 million,
and (2) all hedging activities over $10 million and up to $25 million. In
addition, the Audit-Finance
6
34
Committee reviews and makes recommendations to the Board concerning compensation
of officers and employees. The members of the Audit-Finance Committee are
appointed annually and consisted of Messrs. Burger, Mooney, Newland and Wenner
during fiscal 1998. Messrs. Pfischner and McCarthy, as ex-officio members,
attend the meetings but do not vote. Mr. Newland currently serves as Chairman of
this committee. The Audit-Finance Committee met four times during fiscal 1998.
The Site-Building Committee inspects, evaluates and recommends to the Board
proposed sites for branch offices and recommends any major repairs and/or
additions to such proposed sites that may be necessary. The members of the
Site-Building Committee are appointed annually and consisted of Messrs. Burger,
Mooney, Newland and Wenner during fiscal 1998. Messrs. Pfischner and McCarthy,
as ex-officio members, attend the meetings but do not vote. Mr. Wenner currently
serves as Chairman of this committee. The Site-Building Committee met three
times during fiscal 1998.
Certain directors also served as trustee/administrators of the
Corporation's benefit plans during fiscal 1998 as follows: 401(k) Plan, Messrs.
McCarthy, Newland and Pfischner; Employee Stock Ownership Plan, Messrs. Mooney,
Newland and Pfischner; and Stock Option Plans, Messrs. Burger, Mooney, Pfischner
and Wenner. To date, the directors serving as trustees/administrators of such
plans have not received any additional compensation for such services.
COMPENSATION OF DIRECTORS
Board members receive a retainer of $1,200 monthly, based on an annualized
retainer of $14,400, and $450 for each meeting attended. Mr. McCarthy does not
receive the annual retainer and meeting fees. Directors, excluding Messrs.
Pfischner and McCarthy, received $200 for each committee meeting attended during
fiscal 1998, except for the chairmen of the Audit-Finance and Site-Building
committees, who received $225 per meeting attended. In addition to the normal
$225 per meeting fee for fulfilling his duties as Chairman of the Site-Building
Committee, Mr. Wenner also receives a minimum of $50 for inspecting and
evaluating a proposed branch site and any major repairs to a branch office or
site. Mr. Wenner made seven inspections/evaluations during fiscal 1998 and
received a total of $400 for performing such services.
On December 16, 1993, the Bank entered into a consulting agreement with Mr.
Pfischner to serve as a consultant to the President-Chief Executive Officer,
Board of Directors and executive staff of the Bank for a term of one year
commencing on January 1, 1994 and continuing from year to year by written
agreement. The agreement was extended by written agreement each year through
1998 under the same terms and conditions for a term of one year. The agreement
provides for a minimum base annual fee of $20,400 payable monthly, which may be
increased in the future. Either party may terminate the agreement by providing
the other party with at least thirty days written notice before the expiration
date of the agreement. Mr. Pfischner had performed consulting services to the
Bank for many years without a written agreement. For services performed during
fiscal 1998, in addition to the regular Board fees Mr. Pfischner received
$35,400 which included a bonus of $15,000 for outstanding services to the Bank.
Under the 1993 Directors' Stock Option Plan, each person who serves as a
non-employee director immediately following the last adjournment of each Annual
Meeting shall be granted as of such date a compensatory stock option to purchase
shares of the Corporation's Common Stock at a price equal to the fair market
value of a share of the Common Stock on that date. On the 1997 Annual Meeting
date, each non-employee director received an option to purchase 3,051 shares.
The fair market value on the October 23, 1997 Annual Meeting date was $29.00 per
share. The Plan was amended during fiscal 1998. The amendment provides that
commencing as of the 1998 Annual Meeting date, 2,000 shares shall be granted to
each non-employee director following the last adjournment of each Annual
Meeting.
Directors may make an irrevocable election prior to the beginning of each
calendar year to defer all or a portion of the annual retainer and meeting fees
into a cash account and/or a PFC stock account. The cash account earns interest
each year at a rate equal to the rate paid on the Bank's highest rated
certificate of deposit on the first business day of each calendar year. The
stock account is credited with the dividends paid on PFC stock during the year.
Prior to the beginning of the year, each participant may elect to purchase PFC
Common Stock with the cash in either account. A third deemed investment
7
35
option earns the performance rate of any of the selected mutual funds offered by
CIGNA to participants of the Bank's 401(k) Plan. At the end of each quarter, the
account is credited with gains (or debited for losses) in accordance with the
mutual fund experience reports provided by CIGNA. Participants may receive
payments from their accounts on a designated date after January 1, 1998, on the
attainment of an age after 65 or at termination of Board service in cash, in
either a lump sum or annual installments, or receive the Common Stock.
EXECUTIVE MANAGEMENT
The following table sets forth certain information with respect to
executive officers of the Corporation and the Bank who are not directors of the
Corporation. There are no arrangements or understandings between the Corporation
or the Bank and any person pursuant to which such person has been appointed an
executive officer. No executive officer is related to any other executive
officer or director of the Corporation or the Bank by blood, marriage or
adoption. Officers of the Corporation and the Bank are appointed annually by the
respective Boards of Directors for one-year terms.
PRINCIPAL OCCUPATION DURING
NAME AGE THE PAST FIVE YEARS
---- --- -------------------
Timothy G. Rubritz 44 Vice President-Treasurer of the Corporation since its
organization in August 1987; Senior Vice President-Treasurer
of the Bank since December 1989; Vice President-Treasurer
from January 1986 to December 1989; joined the Bank in June
1985 as audit director; with Coopers & Lybrand from 1976 to
1985, including a general practice manager at such firm from
1982 to 1985.
Bruce C. Gilleylen 52 Vice President of the Corporation since October 1995; Senior
Vice President and Chief Lending Officer of the Bank since
December 1989; Vice President from March 1986 to December
1989; joined the Bank in January 1986; with Equibank from
1982 to 1985, including a Senior Vice President thereof from
1984 to 1985.
Steven A. Friedman 48 Vice President of the Corporation since October 1995; Senior
Vice President of the Bank since December 1990;
Audit-Compliance Officer of the Corporation and the Bank;
Vice President from September 1986 to December 1990; joined
the Bank in July 1986; with the Federal Home Loan Bank of
Pittsburgh for six years serving as Vice
President-Supervision, Assistant Vice President and
Supervisory Analyst.
William J. Burt 53 Senior Vice President since joining the Bank in March 1998;
in charge of Retail Banking; with National City Bank,
formerly Integra Bank, as Area President from April 1995 to
September 1997 and with Integra Financial Corporation as
Senior Vice President, Bank Operations from 1989 to March
1995.
Gail Bieri Anwyll 46 Vice President of the Bank since December 1992 in charge of
Human Resources Department and Marketing, and Assistant
Corporate Secretary since July 1990; Senior Assistant Vice
President from December 1991 to December 1992; Assistant
Vice President from December 1989 to December 1991; joined
the Bank in August 1989 as Director of Human Resources; with
Lyman Savings & Loan Association from 1976 to August 1989,
serving as Executive Vice President from 1987 to August
1989.
8
36
PRINCIPAL OCCUPATION DURING
NAME AGE THE PAST FIVE YEARS
---- --- -------------------
Nancy E. Kelly 49 Vice President of the Bank since December 1996; in charge of
branch operations since May 1997; Senior Assistant Vice
President from December 1991 to December 1996; Assistant
Vice President from December 1990 to December 1991. Joined
the Bank in December 1989.
Charles M. Murslack 44 Vice President of the Bank since December 1991; Assistant
Vice President from June 1988 to December 1991; responsible
for data processing systems; joined the Bank in January
1988; with Mellon Bank from 1975 to January 1988.
Thomas R. Ondek 39 Vice President of the Bank since December 1989 in charge of
Savings/Checking Department; Assistant Vice President from
December 1986 to December 1989; branch manager from April to
December 1985; joined the Bank in May 1984.
Robert A. Stephens 43 Vice President of the Bank in charge of Mortgage Department
since December 1989; Assistant Vice President from November
1984 to December 1989; joined the Bank in August 1981 as a
loan officer.
9
37
EXECUTIVE COMPENSATION
SUMMARY
The following table sets forth a summary of certain information concerning
the compensation awarded or paid for services rendered in all capacities during
the last three fiscal years to the Chief Executive Officer and other executive
officers of the Corporation and the Bank ("Named Executive Officers") whose
total compensation during the last fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------ ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY(1) BONUS OPTION AWARDS COMPENSATION(2)(3)
--------------------------- ----------- --------- ----- ------------- ------------------
Robert J. McCarthy, Jr. 1998 $271,000 $225,000 0 $86,911
President and Chief Executive 1997 262,000 200,000 0 87,787
Officer 1996 256,000 200,000 0 83,491
Bruce C. Gilleylen 1998 125,400 50,000 0 33,930
Vice President of the 1997 122,400 46,000 0 37,747
Corporation, Senior Vice 1996 119,400 44,000 0 36,050
President and Chief Lending
Officer of the Bank
Timothy G. Rubritz 1998 123,000 48,000 0 33,177
Vice President-Treasurer of 1997 120,600 45,000 0 37,507
the Corporation and Senior 1996 118,800 44,000 0 36,026
Vice President-Treasurer of
the Bank
Steven A. Friedman 1998 92,400 42,000 0 24,959
Vice President of the 1997 89,400 38,000 0 27,430
Corporation, Senior Vice 1996 86,400 35,000 0 25,730
President of the Bank and
Audit-Compliance Officer of
the Corporation and the Bank
- ---------
(1) Salary includes amounts deferred at the election of the executive officer
through the Bank's 401(k) Plan and Executive Deferred Compensation Plan
("EDCP").
(2) Includes the Bank's contributions to the 401(k) Plan and EDCP during fiscal
1998 on behalf of Mr. McCarthy ($20,120), Mr. Gilleylen ($7,793), Mr.
Rubritz ($7,554), and Mr. Friedman ($5,334).
(3) Includes the value of the Common Stock allocated to the ESOP and SEBP Trust
accounts of Messrs. McCarthy ($66,791), Gilleylen ($26,136), Rubritz
($25,623), and the ESOP account of Mr. Friedman ($19,625), based upon the
closing price of $34.25 per share on the allocation date, December 31, 1997.
The column "Other Annual Compensation" has been omitted because there is no
compensation required to be reported in such column. The aggregate amount of
perquisites and other personal benefits provided to each Named Executive Officer
did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus
of such officer.
13
38
PARKVALE FINANCIAL CORPORATION
------------------------------
PROXY STATEMENT
------------------------------
ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is being furnished to holders of common stock, par
value $1.00 per share ("Common Stock"), of Parkvale Financial Corporation (the
"Corporation" or "PFC"), the holding company of Parkvale Savings Bank (the
"Bank"), in connection with the solicitation of proxies on behalf of the Board
of Directors, for use at the Annual Meeting of Stockholders to be held at the
Pittsburgh Athletic Association, 4215 Fifth Avenue, Pittsburgh, Pennsylvania, on
Thursday, October 22, 1998, at 10:00 a.m., Eastern Time, and at any adjournment
thereof for the purposes set forth in the Notice of Annual Meeting. This Proxy
Statement is being first sent to stockholders on or about September 14, 1998.
The proxies solicited hereby, if properly signed and returned to the
Corporation, will be voted in accordance with the instructions contained therein
if they are not revoked prior to their use. IF NO CONTRARY INSTRUCTIONS ARE
GIVEN, EACH PROXY RECEIVED WILL BE VOTED FOR THE SLATE OF DIRECTORS DESCRIBED
HEREIN, FOR RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
CORPORATION'S INDEPENDENT AUDITORS, AGAINST THE TWO STOCKHOLDER PROPOSALS
DESCRIBED IN THIS PROXY STATEMENT, AND UPON THE TRANSACTION OF SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, IN ACCORDANCE WITH THE BEST
JUDGMENT OF THE PERSONS APPOINTED AS PROXIES.
Any stockholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Corporation
written notice thereof (Erna A. Golota, Secretary, Parkvale Financial
Corporation, 4220 William Penn Highway, Monroeville, Pennsylvania 15146), (ii)
submitting a duly executed proxy bearing a later date, or (iii) appearing at the
Annual Meeting and giving the Secretary notice of his or her intention to vote
in person. Proxies solicited hereby may be exercised only at the Annual Meeting
and any adjournment thereof and will not be used for any other meeting.
VOTING SECURITIES AND BENEFICIAL OWNERSHIP THEREOF
Only stockholders of record at the close of business on August 24, 1998
(the "Voting Record Date") will be entitled to vote at the Annual Meeting. On
the Voting Record Date, there were 5,164,037 shares of common stock, par value
$1.00 per share, of the Corporation issued and outstanding ("Common Stock"), and
the Corporation had no other class of equity securities outstanding. Each share
of Common Stock is entitled to one vote on each proposal at the Annual Meeting,
with no cumulative voting for the election of directors permitted.
The following table sets forth, as of the Voting Record Date, certain
information as to the Common Stock beneficially owned by (i) persons or entities
known to the Corporation to be the beneficial owners of 5% or more of the
Corporation's Common Stock, (ii) directors of the Corporation, (iii) nominees
for director who are not currently serving as a director, (iv) executive
officers of the Corporation who are not directors but who are named in the
Summary Compensation Table, and (v) all directors, director nominees and
executive officers as a group. The information shown is based upon filings
pursuant to the
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Securities Exchange Act of 1934, as amended ("Exchange Act"), and/or information
furnished by the individuals or entities.
NUMBER OF SHARES
BENEFICIALLY OWNED AS PERCENT OF
NAME OF BENEFICIAL OWNER OF AUGUST 24, 1998(1) COMMON STOCK
------------------------ --------------------- ------------
Parkvale Financial Corporation 427,584 (2) 8.28%
Employee Stock Ownership Plan
4220 William Penn Highway
Monroeville, PA 15146
Beck, Mack & Oliver LLC 377,131 (3) 7.30
330 Madison Avenue
New York, NY 10017
Dimensional Fund Advisors Inc. 309,263 (4) 5.99
1299 Ocean Avenue
Santa Monica, CA 90401
DIRECTORS:
Fred P. Burger, Jr. 111,046 (5)(6) 2.14
Andrea F. Fitting 0 0
Robert J. McCarthy, Jr. 268,901 (5)(7)(8) 5.15
George W. Newland 81,590 (5)(9) 1.58
Robert D. Pfischner 110,323 (5)(10) 2.12
Warren R. Wenner 38,265 (5)(11) 0.74
DIRECTOR NOMINEE:
Patrick J. Minnock 0 0
EXECUTIVE OFFICERS
WHO ARE NOT DIRECTORS:
Bruce C. Gilleylen 74,079 (5)(7)(12) 1.43
Timothy G. Rubritz 79,942 (5)(7)(13) 1.54
Steven A. Friedman 63,489 (5)(7)(14) 1.23
DIRECTORS, NOMINEES AND EXECUTIVE
OFFICERS AS A GROUP
(18 persons) 977,858 (5)(7) 18.06
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(1) Under applicable regulations, shares are deemed to be beneficially owned by
a person if he or she directly or indirectly has or shares the power to
vote or dispose of the shares, whether or not he or she has any economic
interest in the shares. Unless otherwise indicated, the named beneficial
owner has sole voting and dispositive power with respect to the shares.
(2) Messrs. Pfischner and Newland, directors of the Corporation, are the
trustees of the Employee Stock Ownership Plan ("ESOP"). To date, 418,485
shares of the 427,584 shares have been allocated to the participants of the
ESOP.
(3) Beck, Mack & Oliver LLC is an investment adviser registered under the
Investment Advisers Act of 1940 and the 377,131 shares are owned by
investment advisory clients of the firm. No one of these clients owns more
than 5% of said shares.
(4) Dimensional Fund Advisors Inc. is an investment adviser registered under
the Investment Advisers Act of 1940 and the 309,263 shares are held in
portfolios of certain affiliated entities. Dimensional disclaims beneficial
ownership of all such shares.
(5) Includes shares that may be acquired within 60 days through exercise of
stock options as follows: Mr. Burger, 15,255 shares; Mr. McCarthy, 58,652
shares; Mr. Newland, 15,255 shares; Mr. Pfischner,
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39,669 shares; Mr. Wenner, 15,255 shares; Mr. Gilleylen, 17,265 shares; Mr.
Rubritz, 20,472 shares; Mr. Friedman, 17,265 shares; and all directors,
director nominees and executive officers as a group, 251,420 shares. Shares
of Common Stock which are subject to stock options are deemed to be
outstanding for the purpose of computing the percentage of outstanding
Common Stock owned by the individual or group but are not deemed
outstanding for the purpose of computing the percentage of Common Stock
owned by any other person or group. Exclusive of shares which may be
acquired upon the exercise of stock options, directors, director nominees
and executive officers of the Corporation as a group beneficially owned
764,222 shares or 14.80% of the issued and outstanding Common Stock.
(6) Includes 25,377 shares held under Mr. Burger's deferred fee agreement with
the Bank.
(7) Includes shares allocated to such person or group under the ESOP as
follows: Mr. McCarthy, 35,627 shares; Mr. Gilleylen, 21,996 shares; Mr.
Rubritz, 21,981 shares; Mr. Friedman, 14,877 shares; and all officers as a
group, 149,995 shares. Also includes shares allocated under the
Supplemental Executive Benefit Plan ("SEBP") as follows: Mr. McCarthy,
7,887 shares; Mr. Gilleylen, 200 shares; Mr. Rubritz, 178 shares; and all
officers as a group, 8,265 shares. (See Audit-Finance Committee Report On
Executive Compensation.) Shares are deemed to be beneficially owned by such
individuals or group as a result of their ability to direct the ESOP and
SEBP trustees' voting of such shares allocated to their respective
accounts.
(8) Includes 104,507 shares held jointly by Mr. McCarthy and his wife, 18,306
shares held by Mr. McCarthy as custodian for his children, and 43,922
shares held under deferred fee and compensation agreements with the Bank.
Mr. McCarthy's address is 4220 William Penn Highway, Monroeville, PA 15146.
(9) Does not include shares held under the ESOP, of which Mr. Newland was a
trustee during the year.
(10) Includes 21,453 shares held jointly by Mr. Pfischner and his wife, 1,220
shares held by his wife and 16,516 shares held under a deferred fee
agreement with the Bank. Does not include shares held under the ESOP, of
which Mr. Pfischner is a trustee.
(11) Includes 15,947 shares held jointly by Mr. Wenner and his wife and 7,063
shares held under a deferred fee agreement with the Bank.
(12) Includes 31,566 shares held jointly by Mr. Gilleylen and his wife.
(13) Includes 26,305 shares held jointly by Mr. Rubritz and his wife and 4,806
shares held by Mr. Rubritz as custodian for his children.
(14) Includes 21,521 shares held jointly by Mr. Friedman and his wife, 316
shares held by his wife and 2,928 shares held by Mr. Friedman as custodian
for his children.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires that directors and officers of
the Corporation and the Bank file reports of ownership and changes in ownership
of the Common Stock with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. Directors and officers are required to
furnish the Corporation with copies of all Section 16(a) forms they file. Based
solely upon review of copies of Forms 3, 4 and 5 received by the Corporation's
compliance administrator, the Corporation believes that all filing requirements
applicable to its directors and officers were complied with during fiscal 1998.
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LONG-TERM INCENTIVE PLANS--AWARDS IN THE LAST FISCAL YEAR
A long-term incentive plan has not been instituted for either the
Corporation or the Bank.
EMPLOYMENT AGREEMENTS
The Bank entered into a five-year employment agreement with Mr. McCarthy in
April 1987 and the Corporation became a party to the agreement upon consummation
of the reorganization of the Bank into the holding company form of organization
in January 1989. The initial term of the agreement was extended automatically
for an additional year on each anniversary date of the agreement. Effective
January 1, 1997, a new five-year employment agreement was entered into by the
parties to reflect the holding company formation, the Bank's charter conversion
to a savings bank and change in regulators, and changes in applicable law and
regulatory policies since 1987. The agreement provides for a minimum annual
salary of $262,000, which may be increased from time to time in such amounts as
may determined by the Boards of Directors of the Corporation and the Bank. In
addition, Mr. McCarthy may receive bonus payments as determined by the Boards of
Directors. Prior to the first anniversary of the effective date and each annual
anniversary thereafter, the Boards of Directors shall consider all relevant
factors, including Mr. McCarthy's performance, and if appropriate approve a
one-year extension of the remaining term of the agreement. The term of Mr.
McCarthy's agreement will be extended each year if the Boards of Directors of
the Bank and the Corporation ("Parkvale") approve the extension, unless Mr.
McCarthy provides at least 30 days written notice not to extend the agreement
beyond its remaining term. The agreement is terminable by Parkvale for cause at
any time.
The agreement with Mr. McCarthy provides for severance payments and other
benefits in the event Parkvale terminates his employment without cause or Mr.
McCarthy resigns for "good reason," as defined in the agreement. Good reason
includes among other things a "change in control" of Parkvale, which is defined
to include any of the following: (1) any change in control required to be
reported pursuant to Item 6(e) of Schedule 14A promulgated under the Exchange
Act; (2) the acquisition of beneficial ownership by any person (as defined in
Sections 13(d) and 14(d) of the Exchange Act) of 10% or more of the combined
voting power of the Corporation's then outstanding securities; or (3) within any
period during the term of the agreement, a change in the majority of the Board
of Directors for any reason without the written consent of Mr. McCarthy. In such
event, Parkvale will give severance payments to Mr. McCarthy equal to 2.99 times
his average annual base salary, bonus and other incentive compensation for the
preceding three years, plus the continuation or payment of certain fringe
benefits other than stock benefit plans. Under Mr. McCarthy's employment
agreement, Mr. McCarthy could receive payments and benefits that constitute a
parachute payment. Parachute payments generally are payments in excess of three
times the base amount, which is defined to mean the recipient's average annual
compensation from the employer includible in the recipient's gross income during
the most recent five taxable years ending before the date on which a change in
control of the employer occurred. Recipients of parachute payments are subject
to a 20% excise tax on the amount by which such payments exceed the base amount,
in addition to regular income taxes, and payments in excess of the base amount
are not deductible by the employer as compensation expense for federal income
tax purposes. In such event, Parkvale has agreed to pay the 20% excess tax that
would otherwise be owed by Mr. McCarthy and such additional amounts as may be
necessary to reimburse Mr. McCarthy for the federal, state and local income
taxes and excise taxes on such amounts.
The agreement also precludes Mr. McCarthy from owning (excluding the
ownership of 1% or less of the stock of a public corporation), managing,
operating and controlling, being employed by or participating in or being in any
way connected with any other business covered by federal deposit insurance which
is located in the Pennsylvania counties of Allegheny, Armstrong, Butler, Beaver,
Washington and Westmoreland. Such restriction shall continue throughout Mr.
McCarthy's employment with Parkvale.
The employment agreement with Mr. McCarthy, to the extent it increases the
cost of any acquisition of control of the Corporation, could be deemed to have
an anti-takeover effect. As a result, the agreement may discourage takeover
attempts which (1) are deemed by certain stockholders to be in
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