UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2006
0-17411
(COMMISSION FILE NUMBER)
PARKVALE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1556590
(State of incorporation) (I.R.S. Employer
Identification Number)
4220 William Penn Highway, Monroeville, PA 15146
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (412) 373-7200
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($1.00 par value)
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act- None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Exchange Act Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or section 15(d) of the Act Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of December 31, 2005, the last business day of the Registrant's second
quarter, the aggregate market value of the voting stock held by nonaffiliates of
the Registrant, computed by reference to the reported closing sale price of
$28.20 per share on such date was $124,250,554. Excluded from this computation
are 685,723 shares held by all directors and executive officers as a group and
585,407 shares held by the Employee Stock Ownership Plan.
Number of shares of Common Stock outstanding as of August 31, 2006: 5,677,178
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for Fiscal Year ended June 30, 2006. With the
exception of those portions which are incorporated by reference in this Form
10-K Annual Report, the 2006 Annual Report to Shareholders is not deemed to be
filed as part of this report. Part II
Proxy Statement for Annual Meeting of Shareholders dated September 18, 2006. The
definitive proxy statement will be filed with the Commission on or before
September 18, 2006. Part III
PART I.
ITEM 1. BUSINESS
INTRODUCTION
Parkvale Financial Corporation ("PFC") is a unitary savings and loan holding
company incorporated under the laws of the Commonwealth of Pennsylvania. Its
main operating subsidiary is Parkvale Savings Bank (the "Bank"), which is a
Pennsylvania chartered permanent reserve fund stock savings bank headquartered
in Monroeville, Pennsylvania. PFC and its subsidiaries are collectively referred
to herein as "Parkvale". Parkvale is also involved in lending in the greater
Washington, D.C. and Columbus, Ohio areas through its wholly owned subsidiary,
Parkvale Mortgage Corporation ("PMC"). The primary assets of PFC consist of the
stock of Parkvale, equity securities and cash. See Note O of Notes to the
Consolidated Financial Statements in the 2006 Annual Report to Shareholders
filed as Exhibit 13 hereto ("2006 Annual Report") for additional details
regarding PFC.
THE BANK
GENERAL
The Bank conducts business in the greater Tri-State area through 47 full-service
offices with 40 offices in Allegheny, Beaver, Butler, Fayette, Washington and
Westmoreland Counties of Pennsylvania, two branches in West Virginia and five
branches in Ohio. With total assets of $1.9 billion at June 30, 2006, Parkvale
was the seventh largest financial institution headquartered in the Pittsburgh
metropolitan area and eleventh largest financial institution with a significant
presence in Western Pennsylvania.
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. In addition to the loans described above, these services
include various types of deposit and checking accounts, including commercial
checking accounts and automated teller machines ("ATMs") as part of the Star
network.
Parkvale derives its income primarily from interest charged on loans and
interest on investments, and, to a lesser extent, service charges and fees.
Parkvale's principal expenses are interest on deposits and borrowings and
operating expenses. Funds for lending activities are provided principally by
deposits, loan repayments, Federal Home Loan Bank ("FHLB") advances and other
borrowings, and earnings provided by operations.
Lower housing demand in Parkvale's primary lending areas, relative to its
deposit growth, has spurred the Bank to purchase residential mortgage loans from
other financial institutions in the secondary market. This purchase strategy
also achieves geographic asset diversification. Parkvale purchases adjustable
rate residential mortgage loans subject to its normal underwriting standards.
Parkvale purchased loans aggregating $139.5 million and $126.9 million in fiscal
2006 and 2005, respectively. These represent 60.7% and 68.2% of total mortgage
loan originations and purchases for the fiscal year 2006 and 2005, respectively.
In addition, Parkvale operated loan production offices through its subsidiary,
PMC with offices in Fairfax, Virginia and Columbus, Ohio. During fiscal 2006,
PMC originated a total of $15.7 million or 6.8% of total mortgage loan
originations and
2
purchases for inclusion in Parkvale's loan portfolio. See "Lending Activities"
and "Sources of Funds."
Total nonperforming assets, comprised of nonaccrual loans and foreclosed real
estate, decreased from $8.8 million at June 30, 2005 to $4.6 million at June 30,
2006. The $4.2 million decrease in fiscal 2006 is primarily due to fewer
nonperforming loans at June 30, 2006. See "Lending Activities - Nonperforming
Loans and Foreclosed Real Estate".
The exposure from interest rate risk ("IRR") is the impact on Parkvale's current
and future earnings and capital from movements in interest rates. To properly
manage its historical liability sensitive position and mitigate the financial
impact of IRR, Parkvale's management has implemented an asset and liability
management plan to increase the interest rate sensitivity of its assets and
extend the average maturity of its liabilities. As part of this program,
Parkvale has, among other things (1) promoted the origination and purchase of
adjustable rate mortgage ("ARM") loans, (2) maintained a high level of
liquidity, (3) emphasized the origination of short-term and/or variable rate
consumer loans and (4) attempted to extend the average maturity of its deposits
through the promotion of certificate accounts with terms of one year or more.
For additional discussion of asset and liability management, see the Asset and
Liability Management section of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 2006 Annual Report.
Interest rate sensitivity gap analysis provides one indicator of potential IRR
by comparing interest-earning assets and interest-bearing liabilities maturing
or repricing at similar intervals. The interest rate sensitvity gap equals the
difference between interest-earning assets and interest-bearing liabilities, and
the gap ratio equals the gap divided by total assets. The one-year gap ratio was
- -3.52 % of total assets at June 30, 2006 compared to 3.77% of total assets at
June 30, 2005. The cumulative five-year gap ratio was 19.25% at June 30, 2005
and 16.54% at June 30, 2006. A key component of the asset and liability
management program is that ARM loans represented approximately 72.2% of the
Bank's real estate loan portfolio at June 30, 2006 compared to 72.9% and 79.5%
at June 30, 2005 and 2004, respectively. Deposits with terms in excess of one
year or more decreased $131.8 million from $945.6 million at June 30, 2005 to
$813.8 million at June 30, 2006.
The Bank was originally chartered in 1943 as Park Savings and Loan Association
and was renamed as a result of its merger with Millvale Savings and Loan
Association in 1968. The Bank converted to a stock savings association in 1987
and to a state chartered savings bank in 1993. The charter conversion resulted
in the replacement of the Office of Thrift Supervision ("OTS") by the Federal
Deposit Insurance Corporation ("FDIC") as the Bank's primary federal regulator.
The Pennsylvania Department of Banking ("Department") is the Bank's primary
state regulator. As a Pennsylvania-chartered savings bank, deposits continue to
be insured by the FDIC and the Bank retains its membership in the FHLB of
Pittsburgh. The savings bank continues to conduct business in a manner
substantially identical to the conduct of its business as a savings association.
The OTS retains jurisdiction over Parkvale Financial Corporation due to its
status as a unitary savings and loan holding company. The Bank is further
subject to regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") governing reserves to be maintained against deposits
and certain other matters.
Parkvale's main office is located at 4220 William Penn Highway, Monroeville, PA
15146, and its telephone number is (412) 373-7200.
3
THE BANKING INDUSTRY
The earnings of Parkvale are affected by the competitive, economic and
regulatory environment in which the savings industry operates. Consolidation, a
fundamental trend in the financial services industry, confronts the banking
industry with the challenge to survive and prosper in a dynamic market. Strong
alliances are likely as banks move to trim costs, expand geographically and
consolidate market strengths by diversifying the financial products offered.
The industry continues its consolidation efforts with an operating focus on
improving profitability, reallocation of capital and expense management. The
traditional banks' share of the overall loan market has been reduced
significantly. Corporate lending has abated since public companies found raising
funds on Wall Street is faster and cheaper via commercial paper and medium term
notes. At the same time, retail customers are increasingly abandoning
traditional commercial and local banks in favor of nonbank financial
institutions. Instead of buying a CD or opening a passbook savings account,
consumers increasingly place their savings and retirement funds with investment
management firms. Mutual fund total assets have increased substantially to
exceed total FDIC insured deposits. Banks in today's market are faced with
substantial competition from an array of outside financial service providers,
including brokerage firms, insurance companies and mutual fund companies.
A challenge for the financial services industry is to deliver financial products
at competitive prices. This translates to spreading costs of services over a
greater number of customers and has spurred banks to adopt technological
capabilities so that customers may do all their banking without ever having to
walk into a branch, consequently reducing operating costs. Parkvale expects a
tiering of institutions with several large national and regional firms offering
a plethora of products and services on the one hand and a sizeable number of
community institutions and niche players on the other.
The Federal Open Market Committee of the Federal Reserve Board outlook in June
2006 suggests that economic growth is moderating from its strong pace earlier
this year, reflecting a gradual cooling of the housing market and the lagged
effects of increases in interest rates and energy prices. This outlook was
reaffirmed when the Federal Funds rate was held at 5.25% at the August 2006
meeting signaling a possible end to the tightening cycle.
Although the moderation in the growth of aggregate demand should help to limit
inflation pressures over time, the Committee judges that some inflation risks
remain. The extent and timing of any additional rate changes that may be needed
to address these risks will depend on the evolution of the outlook for both
inflation and economic growth, as implied by incoming information.
Parkvale will continue to be affected by these and other market and economic
conditions, such as inflation and factors affecting the markets for debt and
equity securities, as well as legislative, regulatory, accounting and tax
changes which are beyond its control. Parkvale has positioned its liquidity
level to remain flexible to the high volatility of the financial markets. For
additional discussion of asset/liability management, see the Asset and Liability
Management section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 2006 Annual Report.
4
BUSINESS
LENDING ACTIVITIES
LOAN ACTIVITY AND PORTFOLIO COMPOSITION
The following table shows Parkvale's loan origination, purchase and sale
activity on a consolidated basis during the years ended June 30.
2006 2005 2004
---------- ---------- ----------
Total loans receivable at beginning of year $1,198,070 $1,015,078 $1,241,779
Real estate loan originations:
Residential:
Single family (1) 54,725 39,973 59,503
Multifamily 1,473 4,791 5,465
Construction - Single family 7,533 2,048 5,570
Commercial 18,812 6,760 11,639
---------- ---------- ----------
Total real estate loan originations 82,543 53,572 82,177
Consumer loan originations 52,222 80,871 75,999
Commercial loan originations 12,266 8,137 6,269
---------- ---------- ----------
Total loan originations 147,031 142,580 164,445
Loans acquired through acquisition (2) -- 253,450 --
Purchase of loans 139,531 126,877 227,146
---------- ---------- ----------
Total loan originations and purchases 286,562 522,907 391,591
Principal loan repayments 67,012 102,575 110,357
Mortgage loan payoffs 182,350 221,982 489,850
Sales of whole loans 5,184 2,441 5,394
---------- ---------- ----------
Net (decrease) increase in loans 32,016 195,909 (214,010)
---------- ---------- ----------
Total loans receivable at end of year 1,230,086 1,210,987 1,027,769
Less: Loans in process 142 418 313
Allowance for loan losses 14,907 15,188 13,808
Unamortized (premiums) discounts (2,291) (2,689) (1,430)
---------- ---------- ----------
Net loans receivable at end of year $1,217,328 $1,198,070 $1,015,078
========== ========== ==========
- ----------
(1) Includes $15.7 million, $18.5 million and $27.1 million of loans originated
by PMC during fiscal 2006, 2005 and 2004, respectively.
(2) On December 31, 2004, Parkvale acquired Advance Financial Bancorp ("AFB").
At June 30, 2006, Parkvale's net loan portfolio amounted to $1.2 billion,
representing 65.5% of Parkvale's total assets at that date. Parkvale has
traditionally concentrated its lending activities on conventional first mortgage
loans secured by residential property. Conventional loans are not insured by the
Federal Housing Administration ("FHA") or guaranteed by the Department of
Veteran's Affairs ("VA").
5
The following table sets forth the composition of the Bank's loan portfolio by
type of loan at June 30.
2006 2005 2004
------------------ ------------------ ------------------
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
(Dollars in Thousands)
Real estate loans:
Residential:
Single family (1) $ 832,710 68.4 $ 807,088 67.4 $ 722,649 71.2
Multifamily (2) 28,911 2.4 29,920 2.5 23,910 2.4
FHA/VA 552 0.1 665 0.1 902 0.1
Commercial 108,977 8.9 109,146 9.1 82,186 8.1
Other (3) 20,834 1.7 22,448 1.9 12,987 1.3
---------- ----- ---------- ----- ---------- -----
Total real estate loans 991,984 81.5 969,267 81.0 842,634 83.0
Consumer loans (4) 182,506 15.0 187,807 15.7 143,476 14.1
Deposit loans 5,721 0.5 5,611 0.4 2,790 0.3
Commercial loans 49,875 4.1 48,302 4.0 38,869 3.8
---------- ----- ---------- ----- ---------- -----
Total loans receivable 1,230,086 101.1 1,210,987 101.1 1,027,769 101.3
Less:
Loans in process 142 0.0 418 0.0 313 0.0
Allowance for losses 14,907 1.2 15,188 1.2 13,808 1.4
Unamortized (premiums)/discounts (2,291) (0.1) (2,689) (0.1) (1,430) (0.1)
---------- ----- ---------- ----- ---------- -----
Net loans receivable $1,217,328 100.0% $1,198,070 100.0% $1,015,078 100.0%
========== ===== ========== ===== ========== =====
2003 2002
------------------ ------------------
Amount % Amount %
---------- ----- ---------- -----
Real estate loans:
Residential:
Single family (1) $ 931,724 75.0 $ 893,578 73.4
Multifamily (2) 19,477 1.5 18,140 1.5
FHA/VA 811 0.1 1,752 0.1
Commercial 59,796 4.8 59,136 4.9
Other (3) 36,581 3.0 35,108 2.9
---------- ----- ---------- -----
Total real estate loans 1,048,389 84.4 1,007,714 82.8
Consumer loans (4) 152,458 12.3 167,956 13.8
Deposit loans 2,974 0.2 3,224 0.2
Commercial loans 47,983 3.9 53,055 4.4
---------- ----- ---------- -----
Total loans receivable 1,251,804 100.8 1,231,949 101.2
Less:
Loans in process 117 0.0 205 0.0
Allowance for losses 15,013 1.2 15,492 1.3
Unamortized (premiums)/discounts (5,105) (0.4) (1,387) (0.1)
---------- ----- ---------- -----
Net loans receivable $1,241,779 100.0% $1,217,639 100.0%
========== ===== ========== =====
- ----------
(1) Includes first mortgages secured by one to four unit residences.
(2) Includes short-term construction loans to developers.
(3) Loans for purchase and development of land.
(4) Primarily includes home equity loans, home equity and personal lines of
credit, student loans, personal loans, deposit loans, charge cards, home
improvement loans and automobile loans.
6
The following table sets forth the percentage of gross loans receivable in each
category to total loans at June 30.
2006 2005 2004 2003 2002
----- ----- ----- ----- -----
Single Family loans 67.7% 66.7% 70.4% 74.5% 72.7%
Commercial Real Estate & Multi Family loans 12.9 13.3 11.6 9.3 9.1
Consumer loans 15.3 16.0 14.2 12.4 13.9
Commercial loans 4.1 4.0 3.8 3.8 4.3
----- ----- ----- ----- -----
Total Loans 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
CONTRACTUAL MATURITIES OF LOANS
The following table presents information regarding loan contractual maturities
as of June 30, 2006 by loan categories during the periods indicated. Mortgage
loans with adjustable interest rates are shown in the year in which they are
contractually due rather than in the year in which they reprice. The amounts
shown for each period do not take into account loan prepayments and normal
amortization of the Bank's loan portfolio.
Amounts Due in Real Estate Commercial
Years Ending June 30, Loans (1) Loans
- --------------------- ----------- ---------------
(In Thousands)
2007 $ 11,556 $29,459
2008 - 2011 30,821 13,198
2012 and thereafter 949,517 7,218
-------- -------
Gross loans receivable (2) $991,894 $49,875
======== =======
- ----------
(1) Includes all residential and commercial real estate loans, and loans for
the purchase and development of land.
(2) Variable rate and ARM loans represent approximately 66.1% of gross loans
receivable at June 30, 2006. Of the $980.3 million of real estate loans
maturing after June 30, 2007, $286.2 million are fixed rate loans and
$694.1 million are adjustable rate loans. Of the $20.4 million of
commercial loans maturing after June 30, 2007, $18.0 million are fixed rate
loans and $2.4 million are adjustable rate loans. Real estate and
commercial loans maturing after June 30, 2007 aggregate $1,000.7 million of
which $304.2 million are fixed rate loans and $696.5 million are adjustable
rate loans.
The average life of mortgage loans has been substantially less than the average
contractual terms of such loans because of loan prepayments and, to a lesser
extent, because of enforcement of due-on-sale clauses, which enable Parkvale to
declare a loan immediately due and payable in the event that the borrower sells
or otherwise disposes of the real property. The average life of mortgage loans
tends to increase, however, when market rates on new mortgages substantially
exceed rates on existing mortgages and, conversely, decrease when rates on new
mortgages are substantially below rates on existing mortgages. During fiscal
2006, 2005 and fiscal 2004, many borrowers refinanced their mortgage loans in
order to take advantage of the lowest market rates in forty years.
ORIGINATION, PURCHASE AND SALE OF LOANS
7
As a Pennsylvania-chartered, federally insured savings bank, the Bank has the
ability to originate or purchase real estate loans secured by properties located
throughout the United States. At June 30, 2006, the majority of loans in
Parkvale's portfolio are secured by real estate located in its primary market
area, which consists of the greater Pittsburgh metropolitan and tri state area.
However, 47.2% and 46.4% of Parkvale's total mortgage loan portfolio at June 30,
2006 and 2005, respectively, represent loans serviced by others, the majority of
which are secured by properties located outside of Pennsylvania, including, in
order of loan concentration: Ohio, Virginia, and West Virginia. Loan purchases
of $139.5 million amounted to 60.7% of Parkvale's total origination and
purchases for fiscal 2006 as compared to loan purchases of $126.9 million, or
68.2% of total originations in fiscal 2005. See further discussion below.
Parkvale originates new loans primarily within its primary market area or
through the PMC office in Columbus, Ohio and, until June 2006, an office in
Fairfax, Virginia. In addition, Parkvale purchases loan participations and whole
loans from other institutions in the secondary market.
All of Parkvale's mortgage lending is subject to its written underwriting
standards and to loan origination procedures approved by the Board of Directors.
Decisions on loan applications are made on a number of factors including, but
not limited to, property valuations by independent appraisers, credit history
and cash flow available to service debt. The Loan Committee of Parkvale consists
of senior officers and is authorized to approve all loans up to $600,000. At
least three senior officers must be present to hold a meeting of the Loan
Committee. The Board of Directors must approve loans exceeding $600,000.
Additionally, loan requests exceeding $300,000 in which the total borrower loan
relationship exceeds $1.2 million must be approved by the Board of Directors.
Under policies adopted by Parkvale's Board of Directors, Parkvale limits the
loan-to-value ratio to 80% on newly originated residential mortgage loans, or up
to 95% with private mortgage insurance. Depending upon the amount of private
mortgage insurance obtained by the borrower, Parkvale's loan exposure may be
reduced to as low as 65% of the value of the property. Commercial real estate
loans generally do not exceed 80% of the value of the secured property. In
addition, it is Parkvale's policy to obtain title insurance policies insuring
that Parkvale has a valid first lien on mortgaged real estate.
ORIGINATIONS BY PARKVALE. Historically, mortgage loans have been originated by
Parkvale primarily through referrals from real estate brokers, builders and
direct customers, as well as through refinancings for existing customers.
Consumer and commercial loan originations are made by Parkvale within its
primary market area. Total loan originations for the fiscal years ending June
30, 2006, 2005 and 2004 were $147.0 million, $142.6 million and $164.4 million,
respectively. See the chart on page 5 for detailed activity for the past 3
fiscal years. The reduced levels of certain lending categories during fiscal
2005, specifically single family mortgages and commercial mortgages relate to
the Bank's decision to not offer lower long term fixed rates due to the
perceived interest rate risk associated with relatively low fixed rates.
LOAN PURCHASES. The asset/liability strategy of investing in ARM loans provides
flexibility in a volatile interest rate environment. Parkvale loan purchases
were $139.5 million in fiscal 2006 compared to $126.9 million in fiscal 2005.
The increased level of purchases was reflective of the yields available on ARM
loans compared to agency securities. In fiscal 2006, all of the purchased loans
were ARM loans. Typically, Parkvale purchases loans to supplement the portfolio
during periods of loan origination shortfalls and takes advantage of market
opportunities when yields on whole loans are greater than similarly securitized
loans. Loan purchases are higher when prepayment
8
speeds increase on existing portfolios. All loan purchases are subject to
Parkvale's underwriting standards and are purchased from reputable mortgage
banking institutions.
RESIDENTIAL REAL ESTATE LOANS
Parkvale offers ARMs with amortization periods of up to 40 years. The monthly
payment amounts on all Parkvale residential mortgage ARMs are reset at each
interest rate adjustment period without affecting the maturity of the ARM.
Interest rate adjustments generally occur on either a one, three or five year
basis and allow a maximum change of 2% to 3% per adjustment period, with a 6% or
7% maximum rate increase over the life of the loan. ARMs comprised approximately
78.2%, 86.7% and 89.7% of total mortgage loan originations and purchases in
fiscal 2006, 2005 and 2004, respectively. At June 30, 2006, ARMs represented
72.2% of Parkvale's total residential loan portfolio. ARM loans generally do not
adjust as rapidly as Parkvale's cost of funds. Parkvale has been emphasizing the
origination of adjustable-rate versus long-term fixed-rate residential mortgages
for its portfolio as part of the asset and liability plan to increase the rate
sensitivity of its assets. Loans included in the loan portfolio that are
interest only for the initial years of the loan aggregated $184.2 million at
June 30, 2006. The interest only loans have demonstrated strong repayment
capabilities to date.
COMMERCIAL REAL ESTATE LOANS
The balance of commercial real estate mortgages was $109.1 million at June 30,
2005 versus $109.0 million at June 30, 2006. Commercial loans offer more
attractive yields than residential real estate loans, but are conservatively
underwritten and well secured, as are residential loans. Also, these loans are
made in the Greater Pittsburgh area, which traditionally has not experienced the
dramatic real estate price fluctuations that have occurred in certain other
geographic areas.
CONSUMER LOANS
Parkvale offers a full complement of consumer loans, including home equity
loans, home equity and personal lines of credit, student loans, personal loans,
home improvement loans and automobile loans. Total consumer loans outstanding at
June 30, 2006 decreased by $5.3 million to $182.5 million from $187.8 million at
June 30, 2005. Parkvale offers home equity lines of credit at up to 120% of
collateral value at a competitive introductory rate. Of an aggregate $61.4
million in outstanding lines of credit at June 30, 2006, $54.8 million have a
loan to value ratio of up to 75%, $100,000 have a loan to value ratio ranging
from 76% to 80%, $4.7 million have a loan to value ratio ranging from 81% to
100% and $1.8 million have a loan to value ratio ranging from 101 to 120%. These
loans generally have shorter terms and greater interest rate sensitivity and
margins than residential real estate loans.
Home equity lines are revolving and range from $5,000 to $250,000. The amount of
the available line of credit is determined by the borrower's ability to pay,
their credit history and the amount of collateral equity. Personal and overdraft
lines of credit are generally unsecured and are extended for $500 to $50,000.
Line of credit interest rates are variable and are priced at a margin above
Parkvale's prime rate.
Parkvale offers student loans through its community-banking network. Parkvale
receives a guaranteed rate on such loans indexed to the 91-day United States
Treasury bill rate and generally sells the loans to the Student Loan Marketing
Association in order to avoid costly servicing expenses.
9
Parkvale's deposit loans are made on a demand basis for up to 100% of the
balance of the account securing the loan. The interest rate on deposit loans
equals the rate on the underlying account plus a minimum of 100 basis points.
Parkvale no longer originates loans through PV Financial Service, Inc. (PVFS).
PVFS's portfolio balance was $1.8 million at June 30, 2006 and $2.3 million at
June 30, 2005. This portfolio is collateralized by single-family residential
properties. PVFS has not generated additional loans during the last three fiscal
years. In May 2002, the Bank instituted risk based pricing procedures for home
equity loans that were previously originated by PVFS.
COMMERCIAL LOANS
Parkvale's commercial loans are primarily of a short-term nature and are
extended to small businesses and professionals located within the communities
served by Parkvale. Generally, the purpose of the loan dictates the basis for
its repayment. Both secured and unsecured commercial loans are offered by
Parkvale. In originating commercial loans, the borrower's historical and
projected ability to service the proposed debt is of primary importance.
Interest rates are generally variable and indexed to Parkvale's prime rate.
Fixed-rate commercial loans are extended based upon Parkvale's ability to match
available funding sources to loan maturities. Parkvale generally requires
personal guarantees on its commercial loans. Commercial loans were $49.9 million
and $48.3 million at June 30, 2006 and 2005, respectively.
LOAN SERVICING AND LOAN FEES
Interest rates and fees charged by Parkvale on mortgage loans are primarily
determined by funding costs and competitive rates offered in its market area.
Mortgage loan rates reflect factors such as general interest rate levels, the
availability of money and loan demand.
After originating fixed rate mortgage loans, Parkvale has the ability to sell
its loans in the secondary mortgage market, primarily to Freddie Mac. Parkvale
generally retains the right to service loans sold or securitized in order to
generate additional servicing fee income. The amount of loans serviced by
Parkvale for others was $66.1 million at June 30, 2006 and was $71.3 million at
June 30, 2005. During fiscal 2003, the Bank entered into an agreement with
Freddie Mac, in which the Bank sold $12.2 million of 1-4 family mortgages and
retained the servicing for such loans. During fiscal 2006, 2005 and 2004, there
were few sales. Prior to fiscal 2003, there had been no mortgage loan
securitizations or sale transactions in the last five fiscal years, with the
exception of certain loans made in conjunction with various state and local bond
programs designed to assist first time and/or low income home buyers. Parkvale
may or may not be the service provider of these loans depending on the terms of
the specific program.
In addition to interest earned on loans and income from servicing of loans,
Parkvale generally receives fees in connection with loan commitments and
originations, loan modifications, late payments, changes of property ownership
and for miscellaneous services related to its loans. Income from these
activities varies with the volume and type of loans originated. The fees
received by Parkvale in connection with the origination of conventional mortgage
loans on single-family properties vary depending on the loan terms selected by
the borrower.
Parkvale defers loan origination and commitment fees and certain direct loan
origination costs over the contractual life of a loan as an adjustment of yield.
Indirect loan origination costs are charged to expense as incurred. Deferred
loan origination fees were $370,000, $665,000 and $727,000 at June
10
30, 2006, 2005 and 2004, respectively. The balances primarily reflect the fees
deferred related to the commercial real estate and commercial loan portfolio.
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE
See Management's Discussion and Analysis in the 2006 Annual Report for
information regarding Parkvale's nonaccrual loans and foreclosed real estate.
A loan is considered delinquent when a borrower fails to make contractual
payments on the loan. If the delinquency exceeds 90 days, Parkvale generally
institutes legal action to remedy the default. In the case of real estate loans,
this includes foreclosure action. If a foreclosure action is instituted and the
loan is not reinstated, paid in full or refinanced, the property is sold at a
judicial sale at which, in most instances, Parkvale is the buyer. The acquired
property then becomes "foreclosed real estate" until it is sold. In the case of
consumer and commercial business loans, the measures to remedy defaults include
the repossession of the collateral, if any, and initiation of proceedings to
collect and/or liquidate the collateral and/or act against guarantees related to
the loans.
Loans are placed on nonaccrual status when, in management's judgment, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on nonaccrual status, previously accrued
but unpaid interest is deducted from interest income. As a result, no
uncollected interest income is included in earnings for loans on nonaccrual
status. Parkvale provides an allowance for the loss of accrued but uncollected
interest on mortgage, consumer and commercial business loans, which are 90 days
or more contractually past due.
Nonaccrual, substandard and doubtful commercial and other real estate loans are
assessed for impairment. Loans are considered impaired when the fair value of
collateral is insufficient compared to the contractual amount due. Parkvale
excludes single-family loans and installment consumer loans in the determination
of impaired loans consistent with the exception under paragraph 6 of SFAS 114 of
loans measured for impairment. Parkvale Bank had $130,000 of loans classified as
impaired at June 30, 2006 and a $1,000 loan classified as impaired at June 30,
2005. The average recorded investment in impaired loans was $71,000, $216,000
and $160,000 in fiscal 2006, 2005 and 2004, respectively. The amount of interest
income that has not been recognized was $135,000 for fiscal 2006. Impaired
assets include $976,000 of foreclosed real estate as of June 30, 2006.
Foreclosed real estate properties are recorded at the lower of the carrying
amount or fair value of the property less the cost to sell.
Assets classified as substandard/nonaccrual or foreclosed real estate in excess
of $400,000 at June 30, 2006 consist of one commercial mortgage made to a single
borrower aggregating $714,000. Management believes that the fair value of the
collateral for the above mentioned loan exceeds book value at June 30, 2006.
11
ALLOWANCE FOR LOAN LOSSES
The following table sets forth the activity in the allowance for loan losses for
the years ended June 30:
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
(In Thousands)
Beginning balance $15,188 $13,808 $15,013 $15,492 $13,428
Allowances from acquisitions -- 1,897 -- -- 1,994
Provision for (recovery of) loan losses 736 229 (106) 308 205
Loans recovered:
Consumer 8 6 122 39 34
Commercial 25 23 6 1 --
Mortgage 106 47 235 69 110
------- ------- ------- ------- -------
Total recoveries 139 76 363 109 144
------- ------- ------- ------- -------
Loans charged-off:
Consumer (178) (203) (301) (241) (148)
Commercial (755) (423) (779) (253) (19)
Mortgage (223) (196) (382) (402) (112)
------- ------- ------- ------- -------
Total charge-offs (1,156) (822) (1,462) (896) (279)
------- ------- ------- ------- -------
Net charge-offs (1,017) (746) (1099) (787) (135)
------- ------- ------- ------- -------
Ending balance $14,907 $15,188 $13,808 $15,013 $15,492
------- ------- ------- ------- -------
Percentage of net charge-offs to average
loans outstanding 0.08% 0.07% 0.10% 0.07% 0.01%
During fiscal 2004, a $732,000 commercial loan was charged off due to a
commercial borrower ceasing operations and liquidating its assets within a
60-day period. Creditors with preferred claims exceeded available assets. The
Bank does not expect any recovery. The first step in determining the allowance
for loan losses is recognizing a specific allowance on individual impaired
loans. Nonaccrual, substandard and doubtful commercial and other non-residential
real estate loans are considered for impairment. 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. Based on this evaluation, specific loss reserves are established on
impaired loans when necessary.
The allowance for loan loss was $14.9 million at June 30, 2006 and $15.2 million
at June 30, 2005 or 1.21% and 1.25% of gross loans at June 30, 2006 and 2005,
respectively. The adequacy of the allowance for loan loss is determined by
management through evaluation of the loss potential on individual nonperforming,
delinquent and high dollar loans, economic and business trends, growth and
composition of the loan portfolio and historical loss experience, as well as
other relevant factors.
The adequacy of allowance for loan loss is continually monitored by management
with an emphasis on identifying potential portfolio risks to detect potential
credit deterioration in the early stages, including trends and risks in the
market place and loan types. Management, in conjunction with the Loan Review
Committee, establishes reserves based upon its evaluation of the inherent risks
in the loan portfolio. Management believes the allowance for loan loss is
adequate to absorb probable loan losses.
INVESTMENT ACTIVITIES
12
Investment decisions are made by authorized officers including the Chief
Executive Officer or the Chief Financial Officer in accordance with policies
established by Parkvale's Board of Directors.
Parkvale's investment portfolio consisted of the following securities at June 30
for the years indicated.
(In Thousands) 2006 2005 2004
-------- -------- --------
U.S. Government and agency obligations 323,151 360,376 337,656
Municipal obligations 4,872 5,188 5,661
Corporate debt 31,112 51,128 84,692
Mortgage-backed securities 38,131 43,388 49,565
Equity securities (at market value) 27,917 25,022 20,372
-------- -------- --------
Total investment portfolio $425,183 $485,102 $497,946
======== ======== ========
During fiscal 2005, available funds were invested in shorter term US government
securities compared to the emphasis on investments in corporate debt and
purchasing single-family loans in prior years.
As part of its investment strategy, Parkvale also invests in mortgage-backed
securities, the majority of which are guaranteed by Freddie Mac, Fannie Mae or
the Government National Mortgage Association ("GNMA"). GNMA securities are
guaranteed as to principal and interest by the full faith and credit of the
United States Treasury, while Freddie Mac and Fannie Mae securities are
guaranteed by their respective agencies. At June 30, 2006, Parkvale had $38.1
million, or 2.1% of total assets invested in mortgage-backed securities, as
compared to 2.3% and 3.1% at June 30, 2005 and 2004, respectively. At June 30,
2006, the mortgage-backed securities included Freddie Mac ($9.0 million); GNMA
($2.3 million); Fannie Mae ($19.7 million) and collateralized mortgage
obligations, including REMIC's ($7.1 million).
The following table shows mortgage-backed security activity during the years
ended June 30.
(In Thousands) 2006 2005 2004
-------- -------- --------
Mortgage-backed securities at beginning of year $ 43,388 $ 49,565 $ 40,430
Purchases 5,168 -- 22,387
AFB Acquisition -- 14,715 --
Principal repayments (10,425) (14,415) (13,252)
Sales -- (6,477) --
-------- -------- --------
Mortgage-backed securities at end of year $ 38,131 $ 43,388 $ 49,565
======== ======== ========
The following table indicates the respective maturities and weighted average
yields of securities as of June 30, 2006 (in Thousands):
Carrying
Balance %
-------- ----
U.S. Treasury and U.S. Government agencies:
Maturing within one year $ 72,759 3.35
Maturing within five years 199,340 4.37
Maturing within ten years 51,052 3.89
States of the U.S. and political subdivisions:
Maturing within five years 2,911 4.88
Maturing within ten years 926 4.32
Maturing after ten years 1,035 4.71
13
Other corporate debt:
Maturing within one year 9,496 4.76
Maturing within five years 5,024 5.33
Maturing after ten years 16,592 7.65
Equity securities 27,917 3.96
Mortgage-backed securities 38,131 4.20
-------- ----
Total $425,183 3.73%
======== ====
HEDGING ACTIVITIES
The objective of Parkvale's financial futures policy is to reduce interest rate
risk by authorizing an asset and liability-hedging program. The futures policy
permits Parkvale's President to hedge up to $10 million of assets and
liabilities. Hedges over $10 million and up to $25 million require the approval
of the Audit-Finance Committee of the Board of Directors, and hedges over $25
million require the approval of the Board of Directors. The objective of
Parkvale's financial options policy is to reduce interest rate risk in the
investment portfolio through the use of financial options. The options policy
permits the use of options on United States Treasury bills, notes, bonds and
bond futures and on mortgage-backed securities. The options policy generally
limits the use of puts and calls to $5.0 million per type of option. Parkvale's
President and Senior Vice President - Treasurer are authorized to conduct
options activities, which are monitored by the Audit-Finance Committee of the
Board of Directors.
Derivative instruments are various instruments used to construct a transaction
that is derived from and reflects the underlying value of assets, other
instruments or various indices. The primary purpose of derivatives, which
include such items as forward contracts, interest rate swap contracts, options
and futures, is to transfer price risk associated with the fluctuations of
financial instrument value. Parkvale has not entered into any forward contracts,
interest rate swap contracts, options or futures in the last three fiscal years.
SOURCES OF FUNDS
GENERAL
Savings accounts and other types of deposits have traditionally been the
principal source of Parkvale's funds for use in lending and for other general
business purposes. In addition to deposits, Parkvale derives funds from loan
repayments and FHLB advances. Borrowings may be used on a short-term basis to
compensate for seasonal or other reductions in deposits or for inflows at less
than projected levels, as well as on a longer term basis to support expanded
lending and investment activities.
DEPOSITS
Parkvale has established a complete program of deposit products designed to
attract both short-term and long-term savings by providing an assortment of
accounts and rates. The deposit products currently offered by Parkvale include
passbook and statement savings accounts, commercial checking accounts,
noninsured sweep accounts, checking accounts, money market accounts,
certificates of deposit ranging in terms from 31 days to ten years, IRA
certificates and jumbo certificates of deposit. In addition, Parkvale is a
member of the Star network with 44 ATMs currently operated by Parkvale.
14
Parkvale is generally competitive in the types of accounts and in the interest
rates it offers on its deposit products, although it generally does not lead the
market with respect to the level of interest rates offered. Parkvale intends to
continue its efforts to attract deposits as a principal source of funds for
supporting its lending activities because the cost of these funds generally is
less than other borrowings. Although market demand generally dictates which
deposit maturities and rates will be accepted by the public, Parkvale intends to
continue to promote longer term deposits to the extent possible in a manner
consistent with its asset and liability management goals.
The following table shows the distribution of Parkvale's deposits by type of
deposit as of June 30.
2006 2005 2004
(Dollars in Thousands) Balance % Balance % Balance %
---------- ---- ---------- ---- ---------- ----
Passbook accounts and
statement savings $ 203,686 14.0% $ 234,421 15.9% $ 201,723 15.7%
Checking and
money market accounts 384,715 26.5% 396,585 26.8% 357,332 27.9%
Certificate accounts 694,748 47.9% 689,141 46.6% 604,796 47.2%
Jumbo certificates 159,352 11.0% 150,591 10.2% 110,147 8.6%
Accrued interest 9,263 0.6% 7,597 0.5% 7,973 0.6%
---------- ---- ---------- ---- ---------- ----
Total savings deposits $1,451,764 100% $1,478,335 100% $1,281,971 100%
========== ==== ========== ==== ========== ====
The following table sets forth information regarding average balances and
average rates paid by type of deposit for the years ending June 30.
2006 2005 2004
(Dollars in Thousands) Balance % Balance % Balance %
---------- ---- ---------- ---- ---------- ----
Passbook accounts $ 214,242 0.55% $ 212,571 0.53% $ 201,946 0.54%
Checking and
money market accounts 388,877 0.89% 418,535 0.67% 359,756 0.63%
Certificate accounts 831,110 3.84% 747,772 3.60% 721,660 3.52%
Accrued interest 10,089 0.00% 8,910 0.00% 8,731 0.00%
---------- ---- ---------- ---- ---------- ----
$1,444,318 2.53% $1,387,788 2.22% $1,292,093 2.43%
========== ==== ========== ==== ========== ====
The wide range of deposit accounts offered has increased Parkvale's ability to
retain funds and allows it to be more competitive in obtaining new funds, but
does not eliminate the threat of disintermediation. During periods of high
interest rates, certificate and money market accounts are more costly than
traditional accounts. In addition, Parkvale has become subject to short-term
fluctuations in deposit flows as customers have become more rate conscious and
inclined to move funds into higher yielding accounts. The ability of Parkvale to
attract and maintain deposits along with the impact on the cost of funds is
significantly affected by competitive market conditions.
The principal methods used by Parkvale to attract deposits include the offering
of a wide range of services and accounts, competitive interest rates, and
convenient office hours and locations. Parkvale utilizes traditional marketing
methods to attract new customers and deposits, including mass media advertising
and direct mail. Parkvale's deposits are obtained primarily from persons who are
residents of Pennsylvania, Ohio and West Virginia. Parkvale neither advertises
for deposits outside of Pennsylvania and the Ohio Valley nor utilizes the
services of deposit brokers. Approximately 2.1% of Parkvale's deposits were held
by nonresidents of the tri-state area at June 30, 2006.
15
The following table sets forth the net deposit flows of Parkvale during the
years ended June 30.
2006 2005 2004
-------- --------- --------
(Dollars in Thousands)
Decrease before interest credit ($56,325) ($95,198) ($73,390)
AFB deposits acquired -- 268,703
Interest credited 29,754 22,859 23,601
-------- --------- --------
Net deposit (decrease) increase ($26,571) $ 196,364 ($49,789)
======== ========= ========
Management carefully monitors the interest rates and terms of its deposit
products in order to maximize Parkvale's interest rate spread and to better
match its interest rate sensitivity. The following table reflects the makeup of
Parkvale's deposit accounts at June 30, 2006, including the scheduled quarterly
maturity of CD accounts.
% of
Amount in Total
000's Deposits Rate
---------- -------- ----
Passbook and club accounts $ 203,686 14.0% 0.65%
Checking and money market accounts 384,715 26.5 1.04
---------- ---- ----
Total non-certificate accounts 588,401 40.5 0.92
CDs maturing in quarter ended:
September 30, 2006 118,286 8.1 3.32
December 31, 2006 144,740 10.0 3.83
March 31, 2007 112,952 7.8 4.25
June 30, 2007 100,635 6.9 4.27
September 30, 2007 55,728 3.8 4.40
December 31, 2007 34,908 2.4 4.14
March 31, 2008 31,773 2.2 4.26
June 30, 2008 29,671 2.0 4.39
September 30, 2008 18,419 1.3 4.83
December 31, 2008 15,433 1.1 4.22
March 31, 2009 23,307 1.6 4.20
June 30, 2009 47,271 3.3 4.88
Thereafter 120,977 8.3 4.83
---------- ---- ----
Total certificate accounts 854,100 58.9 4.18
Accrued interest 9,263 0.6 --
---------- ---- ----
Total deposits $1,451,764 100% 2.82%
========== ==== ====
The following table presents, by various interest rate categories, the
outstanding amount of certificates of deposit at June 30, 2006 which mature
during the years ending June 30:
2007 2008 2009 Thereafter Total
-------- -------- -------- ---------- --------
(In Thousands)
Certificates of deposit:
Under 4.00% $261,922 $ 60,130 $ 39,262 $ 14,816 $376,130
4.00% to 5.99% 188,908 79,508 60,021 97,412 425,849
6.00% to 7.99% 25,783 12,442 5,147 8,749 52,121
-------- -------- -------- -------- --------
Total certificates of deposit $476,613 $152,080 $104,430 $120,977 $854,100
======== ======== ======== ======== ========
16
Maturities of certificates of deposit of $100,000 or more that were outstanding
as of June 30, 2006 are summarized as follows:
(In Thousands)
3 months or less $ 20,673
Over 3 months through 6 months 26,500
Over 6 months through 12 months 34,012
Over 12 months 78,167
--------
Total $159,352
========
BORROWINGS
Parkvale's borrowings from the FHLB of Pittsburgh are collateralized with FHLB
capital stock, deposits with the FHLB of Pittsburgh, investment securities and
loans. See "Regulation - Federal Home Loan Bank System." Borrowings are made
pursuant to several different credit programs, which have varying interest
rates, conversion options and range of maturities. FHLB advances are generally
available to meet seasonal and other withdrawals of savings accounts and to
expand lending and investment activities, as well as to aid the efforts of
members to establish better asset/liability management by extending the
maturities of liabilities.
The following table sets forth information concerning Parkvale's advances from
the FHLB of Pittsburgh for the years ended June 30.
2006 2005 2004
-------- -------- --------
(Dollars in Thousands)
Average balance outstanding $217,084 $190,813 $164,433
Maximum amount outstanding at any
month-end during the period $226,941 $217,141 $171,096
Average interest rate 5.01% 5.13% 5.19%
Balance outstanding at June 30 $221,885 $217,141 $171,093
The increase in the outstanding average balance from $190.8 million in fiscal
2005 to $217.1 million in fiscal 2006 is due to additional advances drawn on the
FHLB during fiscal 2006 and in June 2005. The average increases related to a new
borrowing of $10 million during fiscal 2006 at a rate of 4.67% for an advance
with a stated maturity of 11 years. Advances borrowed in June 2005 aggregated
$20 million with an average rate of 4.37% and an average maturity of 10.5 years.
YIELDS EARNED AND RATES PAID
The results of operations of Parkvale depend substantially on its net interest
income, which is the largest component of Parkvale's net income. Net interest
income is affected by the difference or spread between yields earned by Parkvale
on its loan and investment portfolios and the rates of interest paid by Parkvale
for its deposits and borrowings, as well as the relative amounts of its
interest-earning assets and interest-bearing liabilities.
The following table sets forth certain information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (1) changes in rates (change in rate
17
multiplied by old volume), (2) changes in volume (changes in volume multiplied
by old rate), and (3) changes in rate-volume (change in rate multiplied by the
change in volume).
Year ended June 30
------------------------------------------------------------------------
2006 vs 2005 2005 vs 2004
---------------------------------- -----------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
------ ------ ------ ------- ------- ------ ------- ------
(In Thousands)
Interest Earning Assets
Loans $4,004 $5,388 $338 $ 9,730 $ 2,587 $ (637) $ (30) $1,920
Investments 1,535 (842) (90) 603 (1,355) 7,008 (720) 4,933
Federal Funds Sold 1,526 107 87 1,720 1,438 (365) (447) 626
------ ------ ---- ------- ------- ------ ------- ------
Total 7,065 4,653 335 12,053 2,670 6,006 (1,197) 7,479
------ ------ ---- ------- ------- ------ ------- ------
Interest-bearing Liabilities
Deposits 4,441 1,255 64 5,760 (2,649) 2,321 (183) (511)
FHLB advances and debt (21) 1,665 (17) 1,627 (394) 1.676 (71) 1,211
Trust preferred securities 538 222 65 825 323 176 46 545
------ ------ ---- ------- ------- ------ ------- ------
Total 4,958 3,142 112 8,212 (2,720) 4,173 (208) 1,245
------ ------ ---- ------- ------- ------ ------- ------
Net change in net interest
income (expense) $2,107 $1,511 $223 $ 3,841 $ 5,390 $1,833 $ (989) $6,234
====== ====== ==== ======= ======= ====== ======= ======
SUBSIDIARIES
PFC conducts substantially all of its operations through the Bank, which is a
Pennsylvania chartered permanent reserve fund stock savings bank headquartered
in Monroeville, Pennsylvania.
PFC also has two other subsidiaries. Parkvale Statutory Trust I ("PSTI") and
Advance Statutory Trust I ("ASTI"), which are Connecticut chartered investment
companies. PSTI and ASTI were formed in 2002 with aggregate borrowings of $32.2
million, which was contributed to the Bank in the form of Tier 1 capital.
Pennsylvania law permits a Pennsylvania-chartered, federally insured savings
institution to invest up to 2% of its assets in the capital stock, paid-in
surplus and unsecured obligations of service corporations and an additional 1%
of its assets when the additional funds are utilized for community or inner-city
development or investment. Because Parkvale's subsidiaries are operating
subsidiaries rather than service corporations, this limitation does not apply.
At June 30, 2006, Parkvale had equity investments of less than $1.0 million in
its operating subsidiary corporations.
Parkvale Bank's wholly owned subsidiaries include Parkvale Investment
Corporation ("PIC"), Parkvale Mortgage Corporation ("PMC"), PV Financial
Service, Inc. ("PVFS") and Renaissance Corporation ("Renaissance"). The PIC was
formed in fiscal 2000 as a Delaware investment corporation. PMC was acquired in
1986 and operated two offices originating residential mortgage loans for the
Bank during fiscal 2006. The PMC office in Fairfax, Virginia was closed in
conjunction with expiration of the lease in the first quarter of fiscal 2007
with forwarded phone messages for loans in the Greater Washington, DC market now
handled by Parkvale residential loan officers. For additional information
regarding PMC, see "Lending Activities". PVFS was incorporated in 1972 and from
1997 until 2002, PVFS operated as a subprime lending subsidiary with the intent
of extending consumer loans to individuals who may otherwise not be able to
obtain
18
funds based on their unfavorable or nonexistent credit history. At June 30,
2006, PVFS had net assets of $2.4 million and $1.8 million of loans outstanding.
Renaissance completes collateral evaluations for consumer lending activities for
the Bank. The sole asset of Renaissance at June 30, 2006 is $142,000 in cash.
COMPETITION
Parkvale faces substantial competition both in the attraction of deposits and in
the making of mortgage and other loans in its primary market area. Competition
for the origination of mortgage and other loans principally comes from other
savings institutions, commercial banks, mortgage banking companies, credit
unions and other financial service corporations located in the tri-state area.
Because of the wide diversity and large number of competitors, the exact number
of competitors changes frequently. Parkvale's most direct competition for
deposits has historically come from other savings institutions, commercial banks
and credit unions located in the Southwestern Pennsylvania, Northern West
Virginia and Eastern Ohio. In times of higher interest rates, Parkvale also
encounters significant competition for investors' funds from short-term money
market securities and other corporate and government securities. During a lower
interest rate environment, Parkvale and other depository institutions experience
increased competition from stocks, mutual funds, and other direct investments
offering the potential for higher yields.
Parkvale competes for loans principally through the interest rates and loan fees
it charges on its loan products. In addition, Parkvale believes it offers a high
degree of professionalism and quality in the services it provides borrowers and
their real estate brokers. It competes for deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with inter-branch deposit and withdrawal privileges. Parkvale
believes its offices are strategically located within the tri-state area, which
provides Parkvale with both an opportunity to become an integral part of the
local communities within the region and the means of competing with larger
financial institutions doing business within the tri-state area. In addition,
Parkvale has three offices located in downtown Pittsburgh to provide services to
the business community and suburban customers working and shopping in the City
of Pittsburgh.
MARKET AREA
The Pittsburgh region has been a business leader for generations. The Pittsburgh
Metropolitan Statistical Area (MSA), which includes Allegheny, Armstrong,
Beaver, Butler, Fayette, Washington and Westmoreland counties, is ranked 20th by
population in the United States, according to the 2000 U.S. Census. The region's
economy is primarily dependent on a combination of the manufacturing trade,
services, government, and transportation industries. The economy has experienced
a transition away from the steel and steel-related industries to the service
industries, such as transportation, health care, education and finance. In
addition to containing the corporate headquarters of major industrial and
financial corporations, Pittsburgh is also a major regional health and education
center, and a large number of high technology firms have established operations
in Pittsburgh due to the wide range of support services available. The area
served by Parkvale's Advance Financial division is demographically quite similar
to the Pittsburgh region as the Steubenville, Ohio-Wheeling, West Virginia
region is undergoing a transition from heavy industry to state-of-the-art
manufacturing, information/service-based office operations and advanced
technology/research.
19
EMPLOYEES
As of June 30, 2006, Parkvale and its subsidiaries had 380 full-time equivalent
employees. These employees are not represented by a collective bargaining agent
or union, and Parkvale believes it has satisfactory relations with its
personnel.
REGULATION
GENERAL
Set forth below is a brief description of certain laws and regulations which are
applicable to PFC and the Bank. The description of the laws and regulations
hereunder, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
Following conversion to a Pennsylvania savings bank charter in fiscal 1993, the
Bank is subject to extensive regulation by the FDIC and the Pennsylvania
Department of Banking, and is no longer directly subject to regulation by the
OTS. Nonetheless, several requirements, which were applicable to the Bank as a
Pennsylvania chartered savings association regulated by the OTS, remain
applicable to the Bank as a Pennsylvania chartered savings bank. The FDIC has
adopted a regulation which provides that the same restrictions on activities,
investments in subsidiaries, loans to one borrower, and affiliate transactions
apply to the Bank as if the Bank had not converted to a savings bank charter.
However, the capital requirements applicable to the Bank as a savings bank are
the FDIC's capital maintenance regulations rather than the comparable OTS
regulations.
The Bank files reports with the Pennsylvania Department of Banking and the FDIC
describing its activities and financial condition and is periodically examined
to test compliance with various regulatory requirements. This supervision and
regulation is intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or elsewhere in this
document.
Insurance and Regulatory Structure. The Deposit Insurance Fund ("DIF") is
administered by the FDIC in accordance with deposit reform legislation signed
into law on February 8, 2006. This legislation merged the former Bank Insurance
Fund and the Savings Association Insurance Fund, eliminated any disparities in
bank and thrift risk-based premium assessments, reduced the administrative
burden of maintaining and operating two separate funds and established certain
new insurance coverage limits and a mechanism for possible periodic increases.
The legislation also gives the FDIC greater discretion to identify the relative
risks all institutions present to the deposit insurance fund and set risk-based
premiums. Major provisions in the legislation include:
- Maintaining basic deposit and municipal account insurance coverage at
$100,000 but providing for a new basic insurance coverage for
retirement accounts of $250,000. Insurance coverage for basic deposit
and retirement accounts could be increased for inflation every five
years in $10,000 increments beginning in 2011.
- Providing the FDIC with the ability to set the designated reserve
ratio within a range of between 1.15% and 1.50%, rather than
maintaining 1.25% at all times regardless of prevailing economic
conditions.
20
- Providing a one-time assessment credit of $4.7 billion to banks and
savings associations in existence on December 31, 1996. The
institutions qualifying for the credit may use it to offset future
premiums with certain limitations.
- Requiring the payment of dividends of 100% of the amount that the
insurance fund exceeds 1.5% of the estimated insured deposits and the
payment of 50% of the amount that the insurance fund exceeds 1.35% of
the estimated insured deposits (when the reserve is greater than 1.35%
but no more than 1.5%).
CAPITAL STANDARDS. The Bank is required to maintain Tier I (Core) capital equal
to at least 4% of the institution's adjusted total assets, and total risk-based
capital equal to at least 8.0% of risk-weighted assets. Total capital includes
both Tier I and Tier II (supplementary) capital, with Tier II capital limited to
no more than the amount of Tier I capital. At June 30, 2006, the Bank was in
compliance with all applicable regulatory requirements, with Tier I and total
capital ratios of 6.65% and 12.98%, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required, among other things, the federal banking agencies to revise risk-based
capital standards for insured institutions to ensure that those standards take
adequate account of interest-rate risk ("IRR"), concentration of credit risk,
and the risks of nontraditional activities, as well as to reflect the actual
performance and expected risk of loss on multifamily residential loans. The
FDIC, the Federal Reserve Board ("FRB") and the Office of the Comptroller of the
Currency ("OCC"), collectively, "the agencies", jointly issued a policy
statement on June 26, 1996 providing bankers guidance on sound interest rate
risk management practices. This policy statement augments the action taken by
the agencies in 1995 to implement the portion of FDICIA addressing risk-based
capital standards for interest rate risk. The agencies elected not to pursue a
standardized measure and explicit capital charge for interest rate risk.
Instead, the policy statement encourages banks to use their own internal models
to measure IRR but emphasizes that they must have adequate board and senior
management oversight and a comprehensive process for managing IRR. Parkvale's
management does not anticipate difficulty in meeting the capital requirements in
the future. However, there can be no assurance that this will be the case.
Failure to maintain minimum levels of required capital will result in the
submission to the applicable FDIC Regional Director for review and approval of a
reasonable plan describing the means and timing by which the Bank shall achieve
its minimum Tier I ratio and may result in the imposition by the Pennsylvania
Department of Banking or the FDIC of various operational restrictions, including
limitations as to the rate of interest that may be paid on deposit accounts, the
taking of deposits, the issuance of new accounts, the ability to originate
particular types of loans, and the purchase of loans or the making of specified
other investments. Alternatively, the institution may be placed into
receivership or conservatorship under the FDIC, which would be charged with
managing the institution until it could be sold or liquidated.
INVESTMENT IN SUBSIDIARIES. Investments in and extensions of credit to
subsidiaries not engaged in activities permissible for national banks must
generally be deducted from capital. However, certain exemptions generally apply
where: (1) a subsidiary is engaged in activities impermissible for national
banks solely as an agent for its customers and (2) the subsidiary is engaged
solely in mortgage-banking activities. These provisions have not reduced or
limited Parkvale's business activity or resulted in any deductions to capital.
21
INVESTMENT RULES. The permissible amount of loans to one borrower follows the
national bank standards for all loans made by savings banks. The national bank
standard generally does not permit loans to one borrower to exceed 15% of
unimpaired capital and surplus. Loans in an amount equal to an additional 10% of
unimpaired capital and surplus also may be made to a borrower if the loans are
fully secured by readily marketable securities. Parkvale has historically made
loans with lesser dollar balances than permitted by federal regulations.
Savings banks and subsidiaries may not acquire or retain investments in
corporate debt securities that at the time of acquisition were not rated in one
of the four highest rating categories by at least one nationally recognized
rating organization. Parkvale fully complies with regulations governing
investments in corporate debt securities.
ACQUISITIONS BY BANK HOLDING COMPANIES. Bank holding companies are able to
acquire any savings institution, including healthy as well as troubled
institutions. Current regulations do not impose any geographic restrictions on
such acquisitions, and as a result, a number of savings institutions have been
acquired by bank holding companies.
SAVINGS AND LOAN HOLDING COMPANY JURISDICTION. The Director of the OTS
administers and regulates the activities of registered savings and loan holding
companies and the acquisition of savings banks by any company. Savings and loan
holding companies, such as Parkvale Financial Corporation, are no longer
required to receive regulatory approval prior to incurring debt. Savings banks
which are subsidiaries of a holding company, as well as other savings banks, are
now deemed to be member banks for purposes of Sections 23A and 23B of the
Federal Reserve Act and, as a result, are subject to the transaction with
affiliate rules contained in those sections. Savings and loan holding companies
now may also purchase up to 5% of the stock of unaffiliated savings bank or
savings and loan holding companies without prior regulatory approval.
ENFORCEMENT. The FDIC's enforcement powers extend to all
"institution-affiliated" parties, including shareholders, attorneys, appraisers
and accountants who knowingly or recklessly participate in wrongful action
having or likely to have an adverse effect on an insured institution. Civil
penalties are classified into three levels, with amounts increasing with the
severity of the violation. The first tier provides for civil penalties up to
$5,000 per day for violation of law or regulation. A civil penalty of up to
$25,000 per day may be assessed if there is more than a minimal loss to an
institution or an action that results in a substantial pecuniary gain or other
benefit. Criminal penalties are increased to $1 million per violation, up to $5
million for continuing violations or for the actual amount of gain or loss.
These monetary penalties may be combined with prison sentences of up to five
years.
Regulators can impose enforcement action on an institution that fails to comply
with its regulatory requirements, particularly with respect to the capital
requirements. Possible enforcement actions include the imposition of a capital
plan and termination of deposit insurance. The FDIC also may recommend that the
Department of Banking take enforcement action. If the Department does not take
action, the FDIC would have authority to compel such action under certain
circumstances.
USA PATRIOT ACT
The USA Patriot Act imposes additional obligations on U.S. financial
institutions, including banks and broker-dealer subsidiaries, to implement
policies, procedures and controls that are reasonably designed to detect and
report instances of money laundering and the financing of terrorism. Banks must
have procedures in place to adequately identify new and existing customers and
are required to maintain this information for a set period of time. In
22
addition, provisions of the USA Patriot Act require the federal financial
institution regulatory agencies to consider the effectiveness of a financial
institution's anti-money laundering activities when reviewing bank mergers and
bank holding company acquisitions.
SARBANES-OXLEY ACT OF 2002
The corporate-governance and accounting-oversight bill, also known as the
Sarbanes-Oxley Act of 2002 ("the Act"), became law in July 2002. The bill
created the Public Company Accounting Oversight Board, an independent
auditing-oversight board under the Securities and Exchange Commission ("SEC"),
by which the Bank's holding company, Parkvale Financial Corporation, is
regulated. The bill also increases penalties for corporate wrongdoers, requires
faster and more extensive financial disclosure, and creates avenues of recourse
for aggrieved shareholders. The Act contains separate provisions that require
signed certifications to be made by the chief executive officer and the chief
financial officer of all public companies. The Act provides criminal penalties
of up to $1.0 million and imprisonment of up to 10 years for an officer that
provides a certification knowing it to be untrue.
The Act also addresses functions and responsibilities of audit committees of
public companies. These requirements are as follows:
Responsibilities. Each audit committee is directly responsible for the
appointment, compensation and oversight of the work of the Company's outside
auditors, and the auditors must report directly to the audit committee;
Independence. Each audit committee member must be independent, which under the
Act means that he or she cannot (other than in his or her capacity as a member
of the audit committee, the board or any other board committee) accept any
consulting, advisory or other compensatory fees from the Company or be
affiliated with the Company or any of its subsidiaries;
Whistleblower Procedures. Each audit committee must establish procedures to
receive and respond to any complaints and concerns regarding the Company's
accounting, accounting controls or auditing matters. These procedures would
include enabling the Company's employees to transmit concerns regarding
questionable accounting or auditing matters by confidential, anonymous
submission;
Engagement of Advisors. In recognition of the audit committee's independent
status, each audit committee is authorized to engage independent counsel and
other advisors; and
Payment of Expenses. The Company must provide the appropriate funding, as
determined by the audit committee, for payment of compensation to the auditors
and advisors of the audit committee. In 2002, the SEC published accelerated
filing deadlines for Form 10-K and Form 10-Q. On September 21, 2005, the SEC
made permanent the deadlines for accelerated filers. The guidelines as they
affect Parkvale are as follows:
For Form 10-K, fiscal 2006 and thereafter filing deadline is 75 days or 9/13/06.
For Form 10-Q, quarterly reports filing deadline during fiscal 2007 is 40 days,
i.e. 11/9/06 for the first quarter of 2007 and thereafter.
FEDERAL HOME LOAN BANK SYSTEM
23
The Bank is a member of the FHLB System, which consists of 12 regional FHLBs,
each subject to supervision and regulation by the Federal Housing Finance Board.
The FHLBs provide a central credit facility primarily for member institutions.
The Bank, as a member of the FHLB of Pittsburgh, is required to hold a minimum
amount of FHLB capital stock equal to: 1.) not less than 4.5% and not more than
6% of its outstanding FHLB loans and 2.) at least a certain percentage of its
unused borowing capacity, not to exceed 1.5%. In addition, the FHLB may require,
on a prospective basis, a member to maintain FHLB capital stock in an amount not
to exceed 4% of acquired member assets balances purchased by and on the FHLB's
balance sheet. The FHLB board of directors sets these percentages and they are
subject to change from time to time with the board's approval. Members are not
required to hold FHLB capital stock to support letters of credit and interest
rate exchange agreements with the FHLB. Parkvale had a $15.9 million investment
in stock of the FHLB of Pittsburgh at June 30, 2006 to comply with this
requirement.
Advances from the FHLB of Pittsburgh are secured by a member's shares of stock
in the FHLB of Pittsburgh, certain types of mortgages and other assets. The
maximum amount of credit which the FHLB of Pittsburgh will advance for purposes
other than meeting deposit withdrawals fluctuates from time to time in
accordance with changes in policies of the FHLB of Pittsburgh. Interest rates
charged for advances vary depending upon maturity, the cost of funds to the FHLB
of Pittsburgh and the purpose of the borrowing. At June 30, 2006, the Bank had
$221.9 million of outstanding advances from the FHLB of Pittsburgh.
INTERSTATE ACQUISITIONS
The Commonwealth of Pennsylvania has enacted legislation that permits interstate
acquisitions and branching, subject to specific restrictions, for savings banks
located in Delaware, Kentucky, the District of Columbia, Maryland, New Jersey,
Ohio, Virginia and West Virginia ("the Region") if the state offers reciprocal
rights to savings institutions located in Pennsylvania.
Of the states in the Region, Delaware, Kentucky, Maryland, New Jersey, Ohio and
West Virginia currently have laws that permit savings banks located in
Pennsylvania to branch into such states and/or acquire savings banks located in
such states.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings banks to maintain
noninterest-earning reserves against their transaction accounts (primarily
checking accounts) and certain nonpersonal time deposits. Money market deposit
accounts are subject to the reserve requirement applicable to nonpersonal time
deposits when held by a person other than a natural person. Because required
reserves must be maintained in the form of vault cash or a non-interest bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets. Parkvale satisfies its reserve
requirement with vault cash.
PENNSYLVANIA SAVINGS BANK LAW
The Bank is incorporated under the Pennsylvania Banking Code of 1965, as amended
("Banking Code"), which contains detailed provisions governing the organization,
location of offices, rights and responsibilities of directors, officers,
employees and members, as well as corporate powers, savings and investment
operations and other aspects of the Bank and its affairs. The Banking Code
delegates extensive rulemaking power and administrative discretion to the
Department so that the supervision and regulation of state-chartered banks may
be flexible and readily responsive to changes in economic conditions and in
savings and lending practices.
24
One of the declared purposes of the Banking Code is to provide banks with the
opportunity to be competitive with each other and with other financial
institutions existing under other state, federal and foreign laws.
A Pennsylvania savings bank may locate or change the location of its principal
place of business and establish an office anywhere in the Commonwealth, with the
prior approval of the Department.
The Department generally examines each savings bank at least once every two
years. The Banking Code permits the Department to accept the examinations and
reports of the FDIC in lieu of the Department's examination. The present
practice is for the Department and the FDIC to conduct examinations annually on
an alternating basis. The Department may order any bank to discontinue any
violation of law or unsafe or unsound business practice and may direct any
director, officer, attorney or employee of a bank engaged in an objectionable
activity, after the Department has ordered the activity to be terminated, to
show cause at a hearing before the Department why such person should not be
removed.
TAXATION
FEDERAL TAXATION
For federal income tax purposes, PFC and its subsidiaries file a consolidated
return on a calendar year basis and report their income and expenses on the
accrual basis of accounting. Since 1987, corporations are subject to the
corporate alternative minimum tax to the extent this tax would exceed the
regular tax liability. PFC has not been subject to this tax in the past and does
not anticipate being subject to this tax in future years given its current level
of financial and taxable income. With certain exceptions, no deduction is
allowed for interest expense allocable to the purchase or carrying of tax-exempt
obligations acquired after August 7, 1986.
PFC's income tax returns for calendar 2002, 2003, 2004 and 2005 have been filed
with the IRS and are open to examination. However, PFC has not yet been advised
by the IRS if an examination will be performed. All income tax returns for
calendar 2001 and prior years have been either accepted as filed or settled with
the IRS with such settlements not resulting in a significant charge to income.
STATE TAXATION
For state tax purposes, Parkvale reports its income and expenses on the accrual
basis of accounting and files its tax returns on a calendar year basis. The Bank
is subject to Ohio Franchise taxes, West Virginia Income Taxes and the
Pennsylvania Mutual Thrift Institutions Tax ("MTIT"). The Ohio Franchise tax is
based on assets as of January 1 of each year and is not considered an income
tax. The MTIT is imposed at the rate of 11.5% on net income computed
substantially in accordance with generally accepted accounting principles
("GAAP"). Under the Mutual Thrift Institution Act, Parkvale is not subject to
any state or local taxes except for the Ohio, West Virginia and MTIT taxes
described above and taxes imposed upon real estate and the transfer thereof.
See Note H of Notes to Consolidated Financial Statements for additional
information regarding federal and state taxation.
25
ITEM 1A. RISK FACTORS
Investments in Parkvale's common stock involve risk. The following discussion
highlights risks management believes are material for our company, but does not
necessarily include all risks that Parkvale may face.
THE MARKET PRICE OF PARKVALE COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY IN
RESPONSE TO A NUMBER OF FACTORS, INCLUDING:
- changes in securities analysts' estimates of financial performance
- volatility of stock market prices and volumes
- changes in market valuations of similar companies
- changes in interest rates since net interest income comprises the
majority of our revenue and is significantly influenced by changes in
interest rates
- new products or services offered in the banking and/or financial
services industries
- variations in quarterly or annual operating results
- litigation
- regulatory actions including new laws and regulations and continued
compliance with existing laws and regulation
- changes in accounting policies or procedures as may be required by the
Financial Accounting Standards Board or other regulatory agencies
IF PARKVALE DOES NOT ADJUST TO CHANGES IN THE FINANCIAL SERVICES INDUSTRY, ITS
FINANCIAL PERFORMANCE MAY SUFFER.
Parkvale's ability to maintain its history of favorable financial performance
and return on investment to shareholders will depend in part on its ability to
expand its scope of available financial services to its customers. In addition
to other banks, competitors include security dealers, brokers, mortgage bankers,
investment advisors, and finance and insurance companies. The increasingly
competitive environment is, in part, a result of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial service providers.
FUTURE GOVERNMENTAL REGULATION AND LEGISLATION COULD LIMIT OUR GROWTH.
Parkvale is subject to extensive state and federal regulation, supervision and
legislation that govern nearly every aspect of our operations. Changes to these
laws could affect the ability to deliver or expand services and diminish the
value of our business. See "Regulation" for additional information.
INTEREST RATE VOLATILITY COULD HARM RESULTS OF OPERATION.
Parkvale's results of operations depend to a great extent on the difference
between the interest earned on loans and investment securities, and the interest
paid on deposits and other borrowings. Interest rates are beyond our control,
and they fluctuate in response to general economic conditions and the policies
of various governmental and regulatory agencies, in particular, the Federal
Reserve Board. Changes in monetary policy, including changes in interest rates,
will influence the origination of loans, the purchase of investments, the
generation of deposits and the rates received on loans and investment securities
and paid on deposits and borrowings. Although increases in interest rates would
result in additional interest income from each new loan made or serviced, the
number of new loans is likely to decrease as interest rates rise. Any revenue
reductions from fewer loans and increased interest expense paid in connection
with borrowed funds and deposits may not be offset by the higher income as a
result of increased interest rates.
26
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES.
Parkvale presently conducts its business from its main office building and 46
branch offices located in the tri-state area. Parkvale owns the building and
land for 24 of its offices and leases its remaining 23 offices. Such leases
expire through 2041. PMC leased facilities outside of Pennsylvania for two loan
origination centers. At June 30, 2006, Parkvale's land, building and equipment
had a net book value of $17.6 million.
ITEM 3. LEGAL PROCEEDINGS.
PFC and its subsidiaries, in the normal course of business, are subject to
various pending and threatened lawsuits in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not anticipate
that the ultimate aggregate liability, if any, arising out of such other
lawsuits will have a material adverse effect on PFC's or its subsidiaries'
financial positions or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
(a) The information required herein is incorporated by reference on pages 21
and 46 of PFC's 2006 Annual Report.
No equity securities were sold by PFC during the past three years that were
not registered under the Securities Act of 1933. For information regarding
equity compensation shares, see Item 12 of this Form 10-K.
(b) Not Applicable.
(c) During the year ended June 30, 2006, Parkvale purchased 5,785 shares at an
average price per share of $27.32.
The following table sets forth information with respect to any purchase
made by or on behalf of Parkvale or any "affiliated purchaser," as defined
in section 240.10b-18(a)(3) under the Exchange Act, of shares of Parkvale
common stock during the indicated periods.
Total Number of
Shares Purchased as Maximum Numbers of
Total Number Average Part of Publicly Shares that May Yet Be
of Shares Price Paid Announced Plans Purchased Under the
Period Purchased Per Share or Programs Plans or Programs (1)
- ------ ------------ ---------- ------------------- ----------------------
April 1-30, 2006 -- -- -- 209,965
May 1-31, 2006 -- -- -- 209,965
June 1-30, 2006 -- -- -- --
(1) The repurchase program approved on June 19, 2003 expired on June 30, 2006.
27
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 1 of
PFC's 2006 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages 4 to 13
of PFC's 2006 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages 4 to 13
of PFC's 2006 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 14 to 37
of PFC's 2006 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are designed to ensure that the information
required to be disclosed by us in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms
and are operating in an effective manner.
Management's internal control report on page 36 of PFC's 2006 Annual Report is
incorporated by reference.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein with respect to directors and executive officers
of PFC and Parkvale is incorporated by reference from pages 5 to 12 of the
definitive proxy statement of the Corporation for the 2006 Annual Meeting of
Stockholders, which will be filed on or before September 18, 2006 (the
"definitive proxy statement").
As required by the Sarbanes-Oxley Act of 2002, Parkvale has adopted a code of
ethics that applies to all of its directors, officers (including its chief
executive officer and chief financial officer) and employees and a Senior
Financial Officer Code of Ethics, that applies to its chief executive officer
and chief financial officer. The codes of ethics may be found on our website at
www.parkvale.com.
28
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages 10 to 19
of the definitive proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from pages 2 to 4
of the definitive proxy statement.
The following table provides Equity Compensation Plan information as of June 30,
2006 with respect to shares of Parkvale Common Stock that may be issued under
our existing equity compensation plans, which consists of the 1993 Directors'
Stock Option Plan, the 1993 Key Employee Stock Compensation Program and the 2004
Stock Incentive Plan.
Number of securities
Number of securities Weighted average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation
outstanding options, options, warrants plans (excluding securities
warrants and rights(a) and rights(b) reflected in column(a)(c))
---------------------- ----------------- ---------------------------
Equity compensation plans
approved by security holders 298,023 $21.88 259,000
Equity compensation plans not
approved by security holders -- -- --
------- ------ -------
Total 298,023 $21.88 259,000
======= ====== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from pages 18 to 19
of the definitive proxy statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required herein is incorporated by reference from page 20 of the
definitive proxy statement.
29
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
The following financial statements are incorporated by reference from Item 8
hereof (see Exhibit 13):
Page
--------
Consolidated Statements of Financial Condition at June 30, 2006 and
2005 14
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 2006 15
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 2006 16
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended June 30, 2006 17
Notes to Consolidated Financial Statements 18 to 34
Reports of Independent Registered Public Accounting Firm 35, 37
Management's Report on Internal Control over Financial Reporting 36
(b) The following exhibits are filed as part of this Form 10-K and this list
includes Exhibit Index.
No. Exhibit Page
- --- ------- ----
3(a) Articles of Incorporation *
3(b) Bylaws &
4 Common Stock Certificate *
10(a) 1993 Key Employee Stock Compensation Program x
10(b) 1993 Directors' Stock Option Plan &
10(b1) 2004 Stock Incentive Plan **
10(c) Consulting Agreement with Robert D. Pfischner ~
10(d) Amended and Restated Employment Agreement with Robert J. McCarthy,
Jr. #
10(e) Amended and Restated Change in Control Severance Agreement with
Timothy G. Rubritz #
10(e)1 Amended and Restated Change in Control Severance Agreement
with Gail B. Anwyll #
10(f) Executive Deferred Compensation Plan &
10(g) Supplemental Employee Benefit Plan +
30
13 Excerpts of the 2006 Annual Report to Shareholders filed herewith. Such
Annual Report, except those portions thereof that are expressly
incorporated by reference herein, is furnished for information of the
Securities and Exchange Commission ("the SEC") only and is not deemed to be
"filed" as part of this Form 10-K.
22 Subsidiaries of Registrant Reference is made to Item 1. Business -
Subsidiaries for the required information
23 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
* Incorporated by reference to the Registrant's Form 8-B filed with the SEC
on January 5, 1989.
x Incorporated by reference, as amended, to Form S-8 at File No. 33-98812
filed by the Registrant with the SEC on November 1, 1995.
~ Incorporated by reference to Form 10-K filed by the Registrant with the SEC
on September 28, 1994.
+ Incorporated by reference to Form 10-K filed by the Registrant with the SEC
on September 21, 1995.
# Incorporated by reference to Form 8-K filed by the Registrant with the SEC
on December 21, 2005.
& Incorporated by reference to Form 10-K filed by the Registrant with the SEC
on September 24, 1998.
** Incorporated by reference to the Definitive Proxy Statement filed by the
Registrant with the SEC on September 17, 2004.
(c) There are no other financial statements and financial statement schedules,
which were excluded from the Annual Report to Shareholders, which are
required to be included herein.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PARKVALE FINANCIAL CORPORATION
Date: September 7, 2006 By: /s/ Robert J. McCarthy, Jr.
------------------------------------
Robert J. McCarthy, Jr.
Director, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Robert J. McCarthy, Jr. September 7, 2006
- ------------------------------------- Date
Robert J. McCarthy, Jr.,
Director, President and
Chief Executive Officer
/s/ Timothy G. Rubritz September 7, 2006
- ------------------------------------- Date
Timothy G. Rubritz,
Vice President - Treasurer
(Chief Financial & Accounting
Officer)
/s/ Robert D. Pfischner September 7, 2006
- ------------------------------------- Date
Robert D. Pfischner, Chairman of the
Board
/s/ Fred P. Burger, Jr. September 7, 2006
- ------------------------------------- Date
Fred P. Burger, Jr., Director
/s/ Andrea F. Fitting September 7, 2006
- ------------------------------------- Date
Andrea F. Fitting, Director
/s/ Stephen M. Gagliardi September 7, 2006
- ------------------------------------- Date
Stephen M. Gagliardi, Director
/s/ Patrick J. Minnock September 7, 2006
- ------------------------------------- Date
Patrick J. Minnock, Director
/s/ Harry D. Reagan September 7, 2006
- ------------------------------------- Date
Harry D. Reagan, Director
32