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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2000
Commission file no 0-17411
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PARKVALE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1556590
- --------------------------------------- ----------------------
(State of incorporation) (I.R.S. Employer
Identification Number)
4220 William Penn Highway
Monroeville, PA 15146
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code:(412)373-7200
Securities registered pursuant to Section 12(b) of the Act - None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $(1.00 par value)
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
As of September 19, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant, computed by reference to the reported closing
sale price of $17.50 per share on such date was $78,682,975. Excluded from this
computation are 654,401 shares held by all directors and executive officers as a
group and 538,456 shares held by the Employee Stock Ownership Plan.
Number of shares of Common Stock outstanding as of September 19, 2000: 5,689,027
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for Fiscal Year ended June 30, 2000. With the
exception of those portions which are incorporated by reference in this Form
10-K Annual Report, the 2000 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, 2000. The
definitive proxy statement was filed with the Commission on September 15, 2000.
Part III
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PART I.
ITEM 1. BUSINESS
INTRODUCTION
Parkvale Financial Corporation ("PFC") is a unitary savings and loan holding
company incorporated under the laws of the Commonwealth of Pennsylvania. Its
subsidiary, Parkvale Savings Bank ("Parkvale" or "the Bank"), is a Pennsylvania
chartered permanent reserve fund stock savings bank headquartered in
Monroeville, Pennsylvania. Parkvale is also involved in lending in the greater
Washington, D.C.; Columbus and Cincinnati, 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 N of
Notes to the Consolidated Financial Statements in the 2000 Annual Report to
Shareholders filed as Exhibit 13 hereto ("2000 Annual Report") for additional
details regarding PFC.
THE BANK
GENERAL
The Bank conducts business in the greater Pittsburgh metropolitan area through
31 full-service offices in Allegheny, Beaver, Butler, Washington and
Westmoreland Counties. With total assets of $1.3 billion at June 30, 2000,
Parkvale was the fifth largest financial institution headquartered in the
Pittsburgh metropolitan area and twelfth 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, mortgage-backed
securities, consumer loans, commercial loans, and investment securities.
Parkvale focuses on providing a wide range of consumer and commercial services
to individuals, partnerships and corporations in the greater Pittsburgh
metropolitan area, which comprises its primary market area. In addition to the
loans described above, these services include various types of deposit and
checking accounts, including commercial checking accounts and automated teller
machines ("ATMs") as part of the Money Access Center ("MAC") System.
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. 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 $85.5 million and $243.1 million in fiscal 2000 and 1999,
respectively. These represent 47.9% and 64.3% of total mortgage loan
originations and purchases for the fiscal year 2000 and 1999, respectively. In
addition, Parkvale operates loan production offices through its subsidiary, PMC
with offices in Fairfax, Virginia; Columbus and Cincinnati, Ohio. During fiscal
2000, PMC originated a total of $44.8 million or 25.1%
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of total mortgage loan originations and purchases for inclusion in Parkvale's
loan portfolio. See "Lending Activities" and "Sources of Funds."
Total nonperforming assets, comprised of nonaccrual loans and foreclosed real
estate, increased from $3.3 million at June 30, 1999 to $3.8 million at June 30,
2000. The $500,000 increase in fiscal 2000 related primarily to foreclosed real
estate activity. See "Lending Activities- Nonperforming Loans and Foreclosed
Real Estate".
The exposure from interest rate risk ("IRR") is the impact on Parkvale's current
and future earnings and capital from movements in interest rates. To properly
manage its historically liability sensitive position and mitigate the financial
impact of IRR, Parkvale's management has implemented an asset and liability
management plan to increase the interest rate sensitivity of its assets and
extend the average maturity of its liabilities. As part of this program,
Parkvale has, among other things (1) promoted the origination and purchase of
adjustable rate mortgage ("ARM") loans, (2) maintained a high level of
liquidity, (3) deployed excess liquidity, (4) emphasized the origination of
short-term and/or variable rate consumer loans and (5) attempted to extend the
average maturity of its deposits through the promotion of certificate accounts
with terms of one year or more. For additional discussion of asset and liability
management, see the Asset and Liability Management section of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
2000 Annual Report.
Interest rate sensitivity gap analysis provides one indicator of potential IRR
by comparing interest-earning assets and interest-bearing liabilities maturing
or repricing at similar intervals. More recently from a gap perspective, the
excess of interest-bearing liabilities over interest-earning assets which
reprice or mature in one year or less was -2.76% of total assets at June 30,
2000 compared to -5.10% of total assets at June 30, 1999. The cumulative five
year gap ratio was 8.44% at June 30, 1999 and 2.96% at June 30, 2000. Key
components of the asset and liability management program are as follows: ARM
loans represented approximately 69.3% of the Bank's real estate loan portfolio
at June 30, 2000 compared to 69.7% and 66.5% at June 30, 1999 and 1998,
respectively. Deposits with terms in excess of one year or more increased $91.6
million from $581.9 million at June 30, 1999 to $673.5 million at June 30, 2000.
Parkvale was originally chartered in 1943 as Park Savings and Loan Association
and was renamed as a result of its merger with Millvale Savings and Loan
Association in 1968. Parkvale converted to a state chartered savings bank in
1993. Such charter conversion resulted in the replacement of the Office of
Thrift Supervision ("OTS") by the Federal Deposit Insurance Corporation ("FDIC")
and the Pennsylvania Department of Banking ("Department") as the Bank's primary
regulators. As a Pennsylvania-chartered savings bank, deposits continue to be
insured by the FDIC and Parkvale retains its membership in the FHLB of
Pittsburgh. The savings bank continues to conduct business in a manner
substantially identical to the conduct of its business as a savings association.
The OTS retains jurisdiction over Parkvale Financial Corporation due to its
status as a unitary savings and loan holding company. Parkvale is further
subject to regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") governing reserves to be maintained against deposits
and certain other matters.
Parkvale's main office is located at 4220 William Penn Highway, Monroeville, PA
15146, and its telephone number is (412) 373-7200.
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THE SAVINGS INDUSTRY
The earnings of Parkvale are affected by the competitive, economic and
regulatory environment in which the savings industry operates. Consolidation, a
fundamental trend in the financial services industry, confronts the banking
industry with the challenge to survive and prosper in a dynamic market. Strong
alliances are likely as banks move to trim costs, expand geographically and
consolidate market strengths by diversifying the financial products offered.
The industry continues its consolidation efforts with an operating focus on
improving profitability, reallocation of capital and expense management. The
traditional banks' share of the overall loan market has been reduced
significantly. Corporate lending has abated since public companies found raising
funds on Wall Street is faster and cheaper via commercial paper and medium term
notes. At the same time, retail customers are increasingly abandoning
traditional commercial and local banks in favor of nonbank financial
institutions. Instead of buying a CD or opening a passbook savings account,
consumers increasingly place their savings and retirement funds with investment
management firms. Mutual fund total assets have increased substantially
throughout the 1990's to exceed total FDIC insured deposits. Banks in today's
market are faced with substantial competition from an array of outside financial
service providers, including brokerage firms, insurance companies and mutual
fund companies. These nonbanking entities continue to take lending and deposit
market share away from the banking industry without the regulatory burdens, FDIC
insurance premiums, assessments and other associated costs imposed upon banks
and savings institutions.
The challenge is the delivery of financial products at competitive prices. This
translates to the spreading of costs of services over a greater number of
customers and has spurred banks to adopt technological skills so that customers
will ultimately do all their banking without ever having to walk into a branch,
consequently, reducing operating costs.
Parkvale does not foresee the dissolution of the community banking sector.
Parkvale expects a tiering of institutions with several large national and
regional firms on the one hand and a sizeable number of community institutions
and niche players on the other.
Parkvale's economic outlook is characterized by continuing moderate economic
growth and low inflation. On June 30, 1999, the Federal Reserve increased the
federal funds target rate by 25 basis points. This trend continued as rates
increased 150 basis points throughout fiscal 2000. The target federal funds rate
increased with four 25 basis point increases in August 1999, November 1999,
February 2000 and March 2000 and then with a 50 basis point increase in May
2000. These rate changes, which were anticipated, resulted in increases in both
loan and deposit interest rates being offered in fiscal 2000.
Parkvale will continue to be affected by these and other market and economic
conditions, such as inflation and factors affecting the markets for debt and
equity securities, as well as legislative, regulatory, accounting and tax
changes which are beyond its control. Parkvale has positioned its liquidity
level to remain flexible to the high volatility of the financial market. For
additional discussion of asset/liability management, see the Asset and Liability
Management section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 2000 Annual Report.
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BUSINESS
LENDING ACTIVITIES
LOAN ACTIVITY AND PORTFOLIO COMPOSITION
The following table shows Parkvale's loan origination, purchase and sale
activity on a consolidated basis during the years ended June 30.
2000 1999 1998
(In Thousands)
TOTAL LOANS RECEIVABLE AT BEGINNING OF YEAR 1,009,405 $ 846,400 $724,721
---------- ---------- --------
Real estate loan originations:
Residential:
Single family (1) ....................... 71,375 85,003 76,717
Multifamily ............................. 3,854 9,302 1,530
Construction -Single family ............... 3,480 7,015 6,325
Commercial ................................ 14,186 33,487 12,076
---------- ---------- --------
TOTAL REAL ESTATE LOAN ORIGINATIONS ......... 92,895 134,807 96,648
Consumer loan originations .................. 27,358 95,613 84,660
Commercial loan originations ................ 13,413 17,403 11,904
---------- ---------- --------
TOTAL LOAN ORIGINATIONS ..................... 133,666 247,823 193,212
Purchase of loans ........................... 85,541 243,121 182,974
---------- ---------- --------
TOTAL LOAN ORIGINATIONS AND PURCHASES ....... 219,207 490,944 376,186
Principal loan repayments ................... 49,444 105,876 101,850
Mortgage loan payoffs ....................... 128,961 220,664 150,004
Sales of whole loans ........................ 1,422 1,399 2,653
---------- ---------- --------
Net increase in loans .................... 39,380 163,005 121,679
---------- ---------- --------
TOTAL LOANS RECEIVABLE- END OF YEAR ......... 1,048,785 1,009,405 846,400
Less: Loans in process ..................... 15 230 47
Allowance for loan losses ......... 13,368 13,253 13,223
Unamortized discounts & loan fees.. 1,033 251 372
---------- ---------- --------
NET LOANS RECEIVABLE AT END OF YEAR ......... $1,034,369 $ 995,671 $832,758
========== ========== ========
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(1) Includes $44.9 million, $42.6 million and $54.9 million of loans originated
by PMC during fiscal 2000, 1999 and 1998, respectively.
At June 30, 2000, Parkvale's net loan portfolio amounted to $1.0 billion,
representing 82.7% 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"). Conventional loans secured by single family and
multifamily residential properties amounted to $813.1 million or 78.6% of the
net loan portfolio at June 30, 2000, and loans secured by commercial properties
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represented $54.5 million or 5.3% of the net loan portfolio. FHA/VA loans
accounted for $2.7 million or 0.3% of the net loan portfolio at June 30, 2000.
Total consumer loans were $131.5 million or 12.7% of the net loan portfolio at
June 30, 2000. Commercial loans represented 3.3% of the net loan portfolio at
that date.
The following table sets forth the composition of the Bank's loan portfolio by
type of loan at June 30.
2000 1999 1998
Amount % Amount % Amount %
---------- ----- ---------- ----- -------- -----
(Dollars in Thousands)
Real estate loans:
Residential:
Single family (1) $ 793,625 76.7 779,346 78.3 677,011 81.3
Multifamily (2) 19,482 1.9 16,920 1.7 13,024 1.6
FHA/VA 2,719 0.3 4,913 0.5 6,329 0.8
Commercial 54,459 5.3 43,862 4.4 23,508 2.8
Other (3) 10,387 1.0 8,591 0.9 6,005 0.7
---------- ----- ---------- ----- -------- -----
Total real estate loans 880,672 85.2 853,632 85.8 725,877 87.2
Consumer loans (4) 131,500 12.7 129,452 13.0 106,266 12.8
Deposit loans 2,325 0.2 2,749 0.3 2,665 0.3
Commercial loans 34,288 3.3 23,572 2.4 11,592 1.4
---------- ----- ---------- ----- -------- -----
Total loans receivable 1,048,785 101.4 1,009,405 101.5 846,400 101.7
Less:
Loans in process 15 0.0 230 0.1 47 0.1
Allowance for losses 13,368 1.3 13,253 1.3 13,223 1.5
Unamortized premiums
and discounts 1,033 0.1 251 0.1 372 0.1
---------- ----- ---------- ----- -------- -----
Net loans receivable $1,034,369 100% $ 995,671 100% $832,758 100%
========== ===== ========== ===== ======== =====
1997 1996
Amount % Amount %
-------- ----- -------- -----
(Dollars in Thousands)
Real estate loans:
Residential:
Single family (1) 581,021 81.7 505,634 80.8
Multifamily (2) 16,825 2.4 17,375 2.8
FHA/VA 3,945 0.6 9,516 1.5
Commercial 17,720 2.5 19,495 3.1
Other (3) 4,787 0.7 395 0.1
-------- ----- -------- -----
Total real estate loans 624,298 87.9 552,415 88.3
Consumer loans (4) 90,305 12.7 76,224 12.2
Deposit loans 3,076 0.4 3,285 0.5
Commercial loans 8,332 1.2 8,925 1.4
-------- ----- -------- -----
Total loans receivable 726,011 102.2 640,849 102.4
Less:
Loans in process 78 0.1 441 0.1
Allowance for losses 14,266 2.0 13,990 2.2
Unamortized premiums and discounts 799 0.1 966 0.1
-------- ----- -------- -----
Net loans receivable $710,868 100% $625,452 100%
======== ===== ======== =====
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(1) Includes first mortgages secured by one to four unit residences.
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(2) Includes short-term construction loans to developers.
(3) Loans for purchase and development of land.
(4) Primarily includes home equity loans, home equity and personal lines of
credit, student loans, personal loans, deposit loans, charge cards, home
improvement loans and automobile loans.
The following table sets forth the percentage of loans in each category to total
loans at June 30.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Real estate loans 84.0% 84.7% 85.9% 86.1% 86.3%
Consumer loans 12.8 13.0 12.7 12.8 12.3
Commercial loans 3.2 2.3 1.4 1.1 1.4
----- ----- ----- ----- -----
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
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)
2001 $261,798 $12,411
2001 - 2005 390,116 12,329
2006 and thereafter 228,758 9,548
-------- -------
Gross loans receivable (2) $880,672 $34,288
======== =======
- ---------------------
(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 63.7% of gross loans
receivable at June 30, 2000. Of the $640.8 million principal amount of
loans maturing after June 30, 2001, loans with an aggregate principal
amount of $475.1 million have fixed interest rates and loans with an
aggregate principal amount of $165.6 million have variable or adjustable
interest rates.
The average life of mortgage loans has been substantially less than the average
contractual terms of such loans because of loan prepayments and, to a lesser
extent, because of enforcement of due-on-sale clauses, which enable Parkvale to
declare a loan immediately due and payable in the event that the borrower sells
or otherwise disposes of the real property. The average life of mortgage loans
tends to increase, however, when market rates on new mortgages substantially
exceed rates on existing mortgages and, conversely, decrease when rates on new
mortgages are substantially below rates on existing mortgages. During early
fiscal 2000 and 1999, borrowers were refinancing their mortgage loans in order
to take advantage of the lower market rates, as was the case in the early
1990's.
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ORIGINATION, PURCHASE AND SALE OF LOANS
As a Pennsylvania-chartered, federally-insured savings bank, Parkvale has the
ability to originate or purchase real estate loans secured by properties located
throughout the United States. At June 30, 2000, 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 area. However, 48.2%
and 50.9% of Parkvale's total mortgage loan portfolio at June 30, 2000 and 1999,
respectively, represent loans serviced by others, the majority of which are
secured by properties located outside of Pennsylvania, including, in order of
loan concentration: Colorado, Michigan, Illinois, and Washington. The decrease
in loans secured by out-of- state properties is due to the loan purchases of
$85.5 million, which amounted to 47.9% of Parkvale's total origination and
purchases for fiscal 2000 as compared to loan purchases of $243.1 million, or
64.3% of total originations in fiscal 1999 . See further discussion below.
Currently, new loans are originated by Parkvale primarily within its primary
market area or through the PMC offices. In addition, Parkvale purchases loan
participations and whole loans from other institutions.
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 $500,000. At
least three senior officers must be present to hold a meeting of the Loan
Committee. Loans exceeding $500,000 must be approved by the Board of Directors.
Under policies adopted by Parkvale's Board of Directors, Parkvale limits the
loan-to-value ratio to 80% on newly originated residential mortgage loans, or up
to 95% with private mortgage insurance. Depending upon the amount of private
mortgage insurance obtained by the borrower, Parkvale's loan exposure may be
reduced to as low as 65% of the value of the property. Commercial real estate
loans generally do not exceed 80% of the value of the secured property. In
addition, it is Parkvale's policy to obtain title insurance policies insuring
that Parkvale has a valid first lien on mortgaged real estate.
ORIGINATIONS BY PARKVALE. Historically, mortgage loans have been originated by
Parkvale primarily through referrals from real estate brokers, builders and
direct customers, as well as through refinancings for existing customers.
Consumer and commercial loan originations are made by Parkvale within its
primary market area. Total loan originations for the fiscal years ending June
30, 2000, 1999 and 1998 were $92.9 million, $134.8 million and $193.2 million,
respectively. Increasing rates throughout fiscal 2000 have slowed housing and
refinancing demand as well as commercial and consumer loan demand. Originations
were relatively lower in fiscal 2000 as compared to fiscal 1999 due to a
decrease in mortgage demand.
LOAN PURCHASES. The asset/liability strategy of owning ARM loans to remain
flexible in a volatile interest rate environment was evident during fiscal 2000
as Parkvale decreased loan purchases to $85.5 million from $243.1 million in
fiscal 1999. In fiscal 2000, substantially, 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 speeds increase on existing
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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 30 years. The monthly
payment amounts on all Parkvale residential mortgage ARMs are reset at each
interest rate adjustment period without affecting the maturity of the ARM.
Interest rate adjustments generally occur on either a one, three or five year
basis and allow a maximum change of 2% to 3% per adjustment period, with a 6% or
7% maximum rate increase over the life of the loan. ARMs comprised approximately
78.7%, 83.6% and 84.9% of total mortgage loan originations and purchases in
fiscal 2000, 1999 and 1998, respectively. At June 30, 2000, 69.3% of Parkvale's
total residential loan portfolio was represented by ARMs. ARM loans generally do
not adjust as rapidly as Parkvale's cost of funds. Parkvale has been emphasizing
the origination of adjustable-rate versus long-term fixed-rate residential
mortgages for its portfolio as part of the asset and liability plan to increase
the rate sensitivity of its assets.
COMMERCIAL REAL ESTATE LOANS
The balance of commercial real estate mortgages increased from $43.9 million at
June 30, 1999 to $54.5 million at June 30, 2000. During fiscal 1998, management
decided to gradually increase Parkvale's exposure to the local commercial real
estate loan market. These 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 Pittsburgh area, which
traditionally has not experienced the dramatic real estate price increases and
decreases which 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,
deposit loans, home improvement loans, charge card, automobile and sub-prime
loans. Total consumer loans outstanding at June 30, 2000 increased by 1.5% to
$131.5 million from $129.5 million at June 30, 1999. Parkvale has been granting
home equity lines of credit at up to 120% of collateral value at competitive
introductory rates. Of an aggregate $38.3 million in outstanding lines of credit
at June 30, 2000, $13.7 million have a loan to value ratio greater than 100% and
$24.5 million have a loan to value ratio ranging from 81% to 100%. These loans
have shorter maturities and greater interest rate sensitivity and margins than
residential real estate loans.
Home equity lines are revolving and range from $5,000 to $250,000. The amount of
the available line of credit is determined by the borrower's ability to pay,
their credit history and the amount of collateral equity. Personal and overdraft
lines of credit are generally unsecured and are extended for $500 to $50,000.
Line of credit interest rates are variable and are priced at a margin above
Parkvale's prime rate.
Parkvale offers student loans through its community banking network. Parkvale
receives a guaranteed rate on such loans indexed to the 91-day United States
Treasury bill rate and generally sells the loans to the Student Loan Marketing
Association when the student graduates or leaves school in order to avoid costly
servicing expenses.
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Parkvale's deposit loans are made on a demand basis for up to 90% of the balance
of the account securing the loan. The interest rate on deposit loans equals the
rate on the underlying account plus a minimum of 200 basis points.
Parkvale offers Visa and Visa Gold cards through the Independent Bankers
Association of America. There are no annual fees charged on Visa accounts.
Credit card balances outstanding totalled $3.4 million, $4.2 million and $5.6
million at June 30, 2000, 1999 and 1998, respectively. The balance decreased in
fiscal 1999 primarily due to higher interest rates charged on outstanding
balances, which increased from 13.75% in 1999 and 15.50% in 2000.
Parkvale offers subprime loans through a subsidiary, PV Financial Service, Inc.
The portfolio balance was $9.8 million at June 30, 2000 and $9.2 million at June
30, 1999. This portfolio has generated $4.2 million of secured loans during
fiscal 2000 and $5.4 million during fiscal 1999.
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 $34.3 million
and $23.6 million at June 30, 2000 and 1999, respectively. The increased loans
in fiscal 2000 were the result of additional resources dedicated toward small
business lending in the greater Pittsburgh area.
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 decreased from $3.9 million at June 30, 1999 to $3.4 million
at June 30, 2000. There have been no mortgage loan securitizations or sale
transactions since fiscal 1991, with the exception of certain loans made in
conjunction with various state and local bond programs designed to assist first
time and/or low income home buyers. Parkvale may or may not be the servicer of
these loans depending on the terms of the specific program.
In addition to interest earned on loans and income from servicing of loans,
Parkvale generally receives fees in connection with loan commitments and
originations, loan modifications, late payments, changes of property ownership
and for miscellaneous services related to its loans. Income from these
activities varies with the volume and type of loans originated. The fees
received by Parkvale in connection with
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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.
Net deferred loan origination fees were $1.3 million, $300,000 and $400,000 at
June 30, 2000, 1999 and 1998, respectively. The increased balance in fiscal 2000
reflects the fees deferred related to the higher level of commercial real estate
and commercial loans with deferred fees.
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE
The following summary sets forth the activity in the allowance for loan losses
for the years ended June 30:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Beginning balance $13,253 $13,223 $14,266 $13,990 $13,136
Provision for losses--mortgage loans 81 155 150 29 440
Provision for losses--consumer loans 155 41 105 370 246
Loans recovered 136 119 108 116 329
Loans charged off (257) (285) (1,406) (239) (161)
------- ------- ------- ------- -------
Ending balance $13,368 $13,253 $13,223 $14,266 $13,990
======= ======= ======= ======= =======
Loans charged off and recovered are as follows:
Loans recovered: Consumer $ 31 $ 119 $ 55 $ 56 $ 70
Mortgage 105 -- 53 60 259
------- ------- ------- ------- -------
Total recoveries 136 119 108 116 329
Loans charged-off: Consumer (239) (285) (391) (227) (125)
Commercial (13) -- -- -- --
Mortgage (5) -- (1,015) (12) (36)
------- ------- ------- ------- -------
Total charge-offs (257) (285) (1,406) (239) (161)
------- ------- ------- ------- -------
Net recoveries (charge-offs) $ (121) $ (166) $(1,298) $ (123) $ 168
======= ======= ======= ======= =======
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 which are on
nonaccrual status. Parkvale provides an allowance for the loss of accrued but
uncollected interest on mortgage, consumer and commercial business loans which
are more than 90 days contractually past due.
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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 real estate loans are considered impaired.
Impaired loans are generally evaluated based on the present value of the
expected future cash flows discounted at the loan's effective interest rate, at
the loan's observable market price or at the fair value of the collateral if the
loan is collateral dependent. Based on this evaluation, specific loss reserves
are established on impaired loans when necessary.
A general allowance is recognized for loan losses in the remainder of the loan
portfolio based on known and inherent risk characteristics in the portfolio,
past loss experience, prevailing market conditions and other factors, including
regulatory guidance. Because evaluating potential losses involves a high degree
of management judgement, a margin is included for the imprecision inherent in
making these estimates. Loan loss reserves, including general valuation
allowances, were 1.27%, 1.30% and 1.55% of gross loans at June 30, 2000, 1999
and 1998 respectively. The adequacy of these reserves in relation to trends in
the loan portfolio will continue to be monitored by management.
The following table presents the allocation of Parkvale's loan loss reserves as
of June 30.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
General allowances:
Residential mortgage $ 1,970 $ 1,861 1,618 1,393 1,237
Commercial & multifamily mortgages 1,789 2,200 1,318 1,191 1,101
Consumer 2,115 2,095 1,768 1,378 1,168
Commercial 1,541 957 658 597 429
Unallocated allowance 5,669 5,658 7,532 9,366 9,844
------- ------- ------- ------- -------
Total general 13,084 12,771 12,894 13,925 13,779
Specific allowances:
Residential mortgage 56 25 25 107 65
Consumer 228 457 304 234 146
------- ------- ------- ------- -------
Total specific 284 482 329 341 211
Total allowance $13,368 $13,253 $13,223 $14,266 $13,990
======= ======= ======= ======= =======
The following table sets forth information regarding Parkvale's nonaccrual loans
and foreclosed real estate at June 30.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Nonaccrual Loans:
Mortgage $2,098 $1,982 $2,366 $2,489 $1,008
Commercial 244 78 -- -- --
------ ------ ------ ------ ------
Total nonaccrual loans $2,342 $2,160 $2,366 $2,489 $1,008
====== ====== ====== ====== ======
Total nonaccrual loans
as a percent of total loans 0.22% 0.21% 0.27% 0.34% 0.16%
Total foreclosed real estate, net $1,442 $1,106 $2,362 $ 165 $ 240
Total amount of nonaccrual
loans and foreclosed real estate $3,784 $3,266 $4,728 $2,654 $1,248
Total nonaccrual loans and
foreclosed real estate as a
percent of total assets 0.30% 0.27% 0.43% 0.27% 0.14%
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The amount of additional interest income that would have been included in
interest income for the years ended June 30, 2000, 1999 and 1998 if the
nonaccrual loans had been current in accordance with their original terms was
$150,000, $102,000 and $181,000, respectively.
Assets classified as substandard/nonaccrual or foreclosed real estate in excess
of $250,000, net of reserves, at June 30, 2000 consist of one commercial
property. Parkvale has foreclosed real estate due to a 1998 foreclosure on
office buildings previously owned by 200 Meyran Associates. The office building
remaining in foreclosed real estate at June 30, 2000 is in the process of
renovations to permit marketing of the property during fiscal 2001. No other
nonperforming asset exceeded $250,000 at June 30, 2000.
As of June 30, 2000, $1.1 million or 45.0% of the nonaccrual mortgage loans
totaling $2.3 million were purchased from others, which were secured by 11
single family properties.
INVESTMENT ACTIVITIES
Investment decisions are made by authorized officers including the Chief
Executive Officer or the Chief Financial Officer of Parkvale in accordance with
policies established by Parkvale's Board of Directors.
Parkvale's investment portfolio consisted of the following securities at June 30
for the years indicated.
2000 1999 1998
-------- -------- --------
(In Thousands)
Federal funds sold $ 55,600 $64,042 $124,900
U.S. Government and agency obligations 18,610 18,610 31,994
Municipal Obligations 5,385 6,055 6,630
Corporate debt 57,718 41,746 17,148
Mortgage backed securities 19,850 26,407 43,427
Equity securities (at market value) 20,044 22,313 14,793
-------- -------- --------
Total investment portfolio $177,207 $179,173 $238,892
======== ======== ========
As part of its investment strategy, Parkvale 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, 2000, Parkvale had $19.8
million, or 1.6% of total assets invested in mortgage-backed securities, as
compared to 2.2% and 4.0% at June 30, 1999 and 1998, respectively. At June 30,
2000, the mortgage-backed securities consisted of Freddie Mac $(6.2 million);
GNMA $(2.1 million); Fannie Mae $(1.5 million); collateralized mortgage
obligations, including REMIC's $(9.3 million) and private participation
certificates $(791,000).
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The following table shows Parkvale's mortgage-backed security activity during
the years ended June 30.
2000 1999 1998
------- -------- --------
(In Thousands)
Mortgage-backed securities at beginning of year $26,407 $ 43,426 $ 66,941
Purchases 1,678 -- 3,072
Principal repayments (8,235) (17,019) (26,587)
Sales -- -- --
------- -------- --------
Mortgage-backed securities at end of year $19,850 $ 26,407 $ 43,426
======= ======== ========
The following table indicates the respective maturities and weighted average
yields of securities as of June 30, 2000 (in Thousands):
Carrying Balance %
---------------- ----
U.S. Treasury and U.S. Government agencies:
Maturing within one year $ 3,000 5.56
Maturing within five years 11,000 5.96
Maturing within ten years 4,610 6.45
States of the U.S. and political subdivisions:
Maturing within one year 700 6.17
Maturing within five years 3,110 6.46
Maturing within ten years 1,575 6.81
Other Corporate debt:
Maturing within one year 27,601 6.37
Maturing within five years 22,554 7.10
Maturing within ten years 7,563 8.62
Equity securities 20,044 5.40
Mortgage-backed securities 19,850 7.70
-------- ----
Total $121,607 6.65
======== ====
HEDGING ACTIVITIES
The objective of Parkvale's financial futures policy is to reduce interest rate
risk by authorizing an asset and liability hedging program. The futures policy
permits Parkvale's President to hedge up to $10 million of assets and
liabilities. Hedges over $10 million and up to $25 million require the approval
of the Audit-Finance Committee of the Board of Directors, and hedges over $25
million require the approval of the Board of Directors. The objective of
Parkvale's financial options policy is to reduce interest rate risk in the
investment portfolio through the use of financial options. The options policy
permits the use of options on United States Treasury bills, notes, bonds and
bond futures and on mortgage-backed securities. The options policy generally
limits the use of puts and calls to $5.0 million per type of option. Parkvale's
President and Senior Vice President - Treasurer are authorized to conduct
options activities, which are monitored by the Audit-Finance Committee of the
Board of Directors. Parkvale has not engaged in any financial future or
financial option activity in the last three fiscal years.
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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.
SOURCES OF FUNDS
GENERAL
Savings accounts and other types of deposits have traditionally been the
principal source of Parkvale's funds for use in lending and for other general
business purposes. In addition to deposits, Parkvale derives funds from loan
repayments and FHLB advances. Borrowings may be used on a short-term basis to
compensate for seasonal or other reductions in deposits or for inflows at less
than projected levels, as well as on a longer term basis to support expanded
lending and investment activities. Parkvale's ability to maintain high liquidity
levels has allowed investment decisions to be evaluated with the funding source
as a secondary issue.
DEPOSITS
Parkvale has established a complete program of deposit products designed to
attract both short-term and long-term savings by providing an assortment of
accounts and rates. The deposit products currently offered by Parkvale include
passbook and statement savings accounts, noninsured sweep accounts, checking
accounts, money market accounts, certificates of deposit ranging in terms from
31 days to ten years, IRA certificates and jumbo certificates of deposit. In
addition, Parkvale is a member of the MAC system with twenty-seven ATMs
currently operated by Parkvale.
Parkvale is generally competitive in the types of accounts and in the interest
rates it offers on its deposit products, although it generally does not lead the
market with respect to the level of interest rates offered. Parkvale intends to
continue its efforts to attract deposits as a principal source of funds for
supporting its lending activities because the cost of these funds generally is
less than other borrowings. Although market demand generally dictates which
deposit maturities and rates will be accepted by the public, Parkvale intends to
continue to promote longer term deposits to the extent possible in a manner
consistent with its asset and liability management goals. This is apparent
during fiscal 2000, due to the deposit increases that are attributable to
certificate of deposit specials that ranged in terms from 18 to 36 months with
rates ranging from 6.00% to 7.50%.
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16
The following table shows the distribution of Parkvale's deposits by type of
deposit as of June 30.
2000 1999 1998
---------- ---------- ----------
Balance % Balance % Balance %
---------- ----- ---------- ----- -------- -----
(Dollars in Thousands)
Passbook accounts $ 137,579 12.7% $ 141,381 13.6% $138,110 14.6%
Checking and
money market accounts 170,585 15.8 158,420 15.3 137,988 14.5
Certificate accounts 686,468 63.6 664,139 65.0 613,836 64.7
Jumbo certificates 75,022 6.9 63,661 5.2 51,339 5.3
Accrued interest 10,442 1.0 9,815 0.9 8,379 0.9
---------- ----- ---------- ----- -------- -----
Total Savings Deposits $1,080,096 100.0% $1,037,416 100.0% $949,452 100.0%
========== ===== ========== ===== ======== =====
The following table sets forth information regarding average balances and
average rates paid by type of deposit for the years ending June 30.
2000 1999 1998
----------- ----------- -----------
Average Average Average
Balance % Balance % Balance %
---------- ---- -------- ---- -------- ----
(Dollars in Thousands)
Passbook accounts $ 137,828 2.11% $137,549 2.21% $136,315 2.52%
Checking and
money market accounts 164,781 1.12 151,056 1.21 134,861 1.59
Certificate accounts 744,286 5.60 697,315 5.70 632,471 5.86
Accrued interest 9,580 -- 8,690 -- 7,988 --
---------- ---- -------- ---- -------- ----
$1,056,475 4.39% $994,610 4.68% $911,635 4.64%
========== ==== ======== ==== ======== ====
The wide range of deposit accounts offered has increased Parkvale's ability to
retain funds and allowed it to be more competitive in obtaining new funds, but
does not eliminate the threat of disintermediation. During periods of high
interest rates, certificate and money market accounts have been more costly than
traditional accounts. In addition, Parkvale has become much more subject to
short-term fluctuations in deposit flows as customers have become more rate
conscious and willing to move funds into higher yielding accounts. The ability
of Parkvale to attract and maintain deposits and Parkvale's cost of funds has
been, and will continue to be, significantly affected by market conditions.
The principal methods used by Parkvale to attract deposits include the offering
of a wide range of services and accounts, competitive interest rates, and
convenient office hours and locations. Parkvale utilizes traditional marketing
methods to attract new customers and deposits, including mass media advertising
and direct mail.
Parkvale's deposits are obtained primarily from persons who are residents of
Pennsylvania. Parkvale neither advertises for deposits outside of Pennsylvania
nor utilizes the services of deposit brokers. An insignificant amount of
Parkvale's deposits were held by nonresidents of Pennsylvania at June 30, 2000.
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The following table sets forth the net deposit flows of Parkvale during the
years ended June 30.
2000 1999 1998
------- ------- -------
(In Thousands)
Increase before interest credited $ 9,314 $54,286 $35,126
Interest credited 33,366 33,678 33,082
------- ------- -------
Net deposit increase $42,680 $87,964 $68,208
======= ======= =======
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, 2000, including the scheduled quarterly
maturity of CD accounts.
Amount % of Total Average
in 000's Deposits Rates
-------- ---------- -------
Passbook and club accounts $ 137,579 12.70% 2.11%
Checking and money market accounts 170,585 15.80 1.12
---------- ------ ----
Total non-certificate accounts 308,164 28.50 1.54
Certificate accounts maturing in quarter ending:
September 30, 2000 145,827 13.50 5.30
December 31, 2000 98,242 9.10 5.33
March 31, 2001 33,433 3.10 5.37
June 30, 2001 66,854 6.19 5.63
September 30, 2001 32,418 3.00 5.75
December 31, 2001 55,582 5.15 6.17
March 31, 2002 36,273 3.36 6.40
June 30, 2002 58,356 5.40 6.61
September 30, 2002 19,301 1.79 6.19
December 31, 2002 51,427 4.76 6.81
March 31, 2003 35,473 3.28 6.90
June 30, 2003 19,516 1.80 7.02
Thereafter 108,788 10.07 6.49
---------- ------
Total certificate accounts 761,490 70.50 5.98
---------- ------
Accrued interest 10,442 1.00 0.00
---------- ------
Total deposits $1,080,096 100.00% 4.72%
========== ====== ====
The following table presents, by various interest rate categories, the
outstanding amount of certificates of deposit at June 30, 2000 which mature
during the years ending June 30:
2001 2002 2003 Thereafter Total
-------- -------- -------- ---------- --------
Certificates of deposit: (In Thousands)
Under 6.00% $262,873 $ 46,405 $ 8,201 $ 16,265 $333,744
6.00% to 7.99% 81,349 136,223 117,516 92,658 427,746
8.00% to 9.99% -- -- -- -- --
-------- -------- -------- -------- --------
Total certificates of deposits $344,222 $182,628 $125,717 $108,923 $761,490
======== ======== ======== ======== ========
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Maturities of certificates of deposit of $100,000 or more that were outstanding
as of June 30, 2000 are summarized as follows:
(In Thousands)
3 months or less $10,600
Over 3 months through 6 months 7,846
Over 6 months through 12 months 8,578
Over 12 months 47,998
-------
Total $75,022
=======
BORROWINGS
Parkvale's borrowings from the FHLB of Pittsburgh are collateralized with FHLB
capital stock, deposits with the FHLB of Pittsburgh and investment securities.
See "Regulation - Federal Home Loan Bank System". Borrowings are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. FHLB advances are generally available to meet seasonal
and other withdrawals of savings accounts and to expand lending and investment
activities, as well as to aid the efforts of members to establish better
asset/liability management by extending the maturities of liabilities.
The following table sets forth information concerning Parkvale's advances from
the FHLB of Pittsburgh for the years ended June 30.
2000 1999 1998
------- ------- -------
(Dollars in Thousands)
Average balance outstanding $58,152 $57,748 $23,176
Maximum amount outstanding at any month-end
during the period $65,647 $60,667 $40,671
Average interest rate 5.67% 5.71% 6.18%
Balance outstanding at June 30 $65,647 $60,659 $40,671
The increase in the outstanding average balance from $57.7 million in 1999 to
$58.2 million in 2000 is due to additional advances drawn on the FHLB during
both years. The increases related to new borrowings made at the during the last
quarter fiscal 2000 at relatively low rates ranging from 6.71% to 6.75% for
advances with a stated maturity of 15 years, with conversion options after seven
years. Such borrowings were used to fund either loan purchases or loan
originations.
YIELDS EARNED AND RATES PAID
The results of operations of Parkvale depend substantially on its net interest
income, which is the largest component of Parkvale's net income. Net interest
income is affected by the difference or spread between yields earned by Parkvale
on its loan and investment portfolios and the rates of interest paid by Parkvale
for its deposits and borrowings, as well as the relative amounts of its
interest-earning assets and interest- bearing liabilities. Parkvale's operating
results are also affected by noninterest income and expenses.
The following table sets forth certain information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (1) changes in rates (change in rate multiplied by
old volume), (2) changes in volume (changes in volume multiplied by old rate),
and (3) changes in rate-volume (change in rate multiplied by the change in
volume).
18
19
Year Ended June 30,
---------------------------------
2000 vs. 1999 1999 vs. 1998
----------------- ------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
(In Thousands)
Interest-earning assets:
Loans $(1,014) $ 6,787 $(129) $ 5,644 $(3,074) $13,508 $ (669) $ 9,765
Federal funds sold 577 (2,752) (311) (2,486) (504) (1,136) 90 (1,550)
Investments 371 1,340 90 1,801 (498) (2,167) 141 (2,524)
------- ------- ----- ------- ------- ------- ------ -------
Total (66) 5,375 (350) 4,959 (4,076) 10,205 (438) 5,691
------- ------- ----- ------- ------- ------- ------ -------
Interest-bearing liabilities:
Deposits (1,094) 2,784 (73) 1,617 (1,818) 4,026 2,105
FHLB advances and debt (59) 105 -- 46 62 1,745 70 1,877
------- ------- ----- ------- ------- ------- ------ -------
Total (1,153) 2,889 (73) 1,663 (1,756) 5,771 (33) 3,982
------- ------- ----- ------- ------- ------- ------ -------
Net change in net interest
income (expense) $ 1,087 $ 2,486 $(277) $ 3,296 $(2,320) $ 4,434 $ (405) $ 1,709
======= ======= ===== ======= ======= ======= ====== =======
SUBSIDIARIES
Pennsylvania law permits a Pennsylvania-chartered, federally-insured savings
institution to invest up to 2% of its assets in the capital stock, paid-in
surplus and unsecured obligations of service corporations and an additional 1%
of its assets when the additional funds are utilized for community or inner-city
development or investment. Because Parkvale's subsidiaries are operating
subsidiaries rather than service corporations, this limitation does not apply.
At June 30, 2000, Parkvale had equity investments of less than $1.0 million in
its operating subsidiary corporations.
Parkvale's wholly-owned subsidiaries include Parkvale Investment Corporation
("PIC"), Parkvale Mortgage Corporation ("PMC"), P.V. Financial Service Inc.
("PVFS") and Renaissance Corporation ("Renaissance"). PIC was formed in fiscal
2000 as a Delaware Investment Corporation. PMC was acquired in 1986 and
currently operates three offices originating residential mortgage loans for the
Bank. For additional information regarding PMC, see "Lending Activities". PVFS
was incorporated in 1972 and on July 1, 1997, PVFS began operating as a subprime
lending subsidiary with the intent of extending consumer loans to individuals
who may otherwise not be able to obtain funds based on their unfavorable or
nonexistent credit history. At June 30, 2000, PVFS had net assets of $50,000 and
$9.8 million of loans outstanding. Renaissance completes collateral evaluations
for consumer lending activities for the Bank. The sole asset of Renaissance at
June 30, 2000 is $67,000 in cash.
COMPETITION
Parkvale faces substantial competition both in the attraction of deposits and in
the making of mortgage and other loans in its primary market area. Competition
for the origination of mortgage and other loans principally comes from other
savings institutions, commercial banks, mortgage banking companies, credit
unions and other financial service corporations located in the Pittsburgh
metropolitan area. Because of the wide diversity and large number of
competitors, the exact number of competitors is fluid. Parkvale's most direct
competition for deposits has historically come from other savings institutions,
commercial banks and credit unions located in the Pittsburgh area. In times of
high interest rates, Parkvale also encounters significant competition for
investors' funds from short-term money market securities and other
19
20
corporate and government securities. During the low interest rate environment,
Parkvale and other depository institutions have also experienced increased
competition from stocks, mutual funds, and other direct investments offering the
potential for higher yields.
Parkvale competes for loans principally through the interest rates and loan fees
it charges on its loan programs. In addition, Parkvale believes it offers a high
degree of professionalism and quality in the services it provides borrowers and
their real estate brokers. It competes for deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges at each
branch. Parkvale believes that its office locations in various neighborhoods of
Pittsburgh and the surrounding suburbs outside of downtown Pittsburgh provide
Parkvale with both an opportunity to become an integral part of these smaller
communities and the means of competing with larger financial institutions doing
business within the Pittsburgh metropolitan area. In addition, Parkvale has
three offices located in downtown Pittsburgh to provide services to the business
community and to its suburban customers working and shopping in the city.
MARKET AREA
The greater Pittsburgh metropolitan area, which is a heavily populated and
predominately industrialized region, ranks 19th in population of the
metropolitan areas in the country according to the 1990 census. The region's
economy is primarily dependent on a combination of the manufacturing trade,
services, government and transportation industries. The economy has experienced
a transition away from the steel and steel-related industries to the service
industries, such as transportation, health care, education and finance. In
addition to containing the corporate headquarters of major industrial and
financial corporations, Pittsburgh is also a major regional health and education
center, and a large number of high technology firms have established operations
in Pittsburgh due to the wide range of support services available.
EMPLOYEES
As of June 30, 2000, Parkvale and its subsidiaries had 296 full-time equivalent
employees. These employees are not represented by a collective bargaining agent
or union, and Parkvale believes it has satisfactory relations with its
personnel.
REGULATION
GENERAL
Following conversion to a Pennsylvania savings bank charter in fiscal 1993, the
Bank is subject to extensive regulation by the FDIC and the Department, and is
no longer directly subject to regulation by the OTS. Nonetheless, several
requirements which were applicable to the Bank as a Pennsylvania chartered
savings association regulated by the OTS remain applicable to the Bank as a
Pennsylvania chartered savings bank. The FDIC has adopted a regulation which
provides that the same restrictions on activities, investments in subsidiaries,
loans to one borrower, and affiliate transactions apply to the Bank as if the
Bank had not converted to a savings bank charter. However, the capital
requirements applicable to the Bank as a savings bank are the FDIC's capital
maintenance regulations rather than the comparable OTS regulations.
20
21
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. An insurance fund administered by the FDIC
and named the SAIF insures the deposits of savings associations and certain
savings banks. The FDIC fund known as the BIF insures the deposits of commercial
banks and certain savings banks. Although the FDIC administers both funds, the
assets and liabilities are not commingled.
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, 2000, Parkvale was in
compliance with all applicable regulatory requirements, with Tier I and total
capital ratios of 6.7% and 10.2%, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required, among other things, each federal banking agency to revise its
risk-based capital standards for insured institutions to ensure that those
standards take adequate account of interest-rate risk ("IRR"), concentration of
credit risk, and the risks of nontraditional activities, as well as to reflect
the actual performance and expected risk of loss on multifamily residential
loans. On June 26, 1996, the FDIC, the FRB and the Office of the Comptroller of
the Currency ("OCC"), collectively, "the agencies", jointly issued a policy
statement providing bankers guidance on sound interest rate risk management
practices. This policy statement augments the action taken by the agencies in
August 1995 to implement the portion of FDICIA addressing risk-based capital
standards for interest rate risk. It also replaced the proposed policy statement
that the agencies issued for comment in August 1995 regarding a supervisory
framework for measuring and assessing banks' interest rate exposures. The
agencies elected not to pursue a standardized measure and explicit capital
charge for interest rate risk at this time. 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 a particular type of loan, and the purchase of loans or the
taking of specified other investments. Alternatively, the institution may be
placed into receivership or conservatorship under the FDIC, which would be
charged with managing the institution until it could be sold or liquidated.
INVESTMENT IN SUBSIDIARIES. Investments in and extensions of credit to
subsidiaries not engaged in activities permissible for national banks must
generally be deducted from capital. However, certain exemptions generally apply
where: (i) a subsidiary is engaged in activities impermissible for national
21
22
banks solely as an agent for its customers and (ii) the subsidiary is engaged
solely in mortgage-banking activities. These provisions have not reduced or
limited Parkvale's business activity.
INVESTMENT RULES. 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 more than a minimal loss to an institution or
action that results in a substantial pecuniary gain or other benefit. Criminal
penalties are increased to $1 million per violation, up to $5 million for
continuing violations or for the actual amount of gain or loss. These monetary
penalties may be combined with prison sentences of up to five years.
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 action is not taken by the
Department, the FDIC would have authority to compel such action under certain
circumstances.
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FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional FHLBs,
each subject to supervision and regulation by the Federal Housing Finance Board.
The FHLBs provide a central credit facility primarily for member institutions.
The Bank, as a member of the FHLB of Pittsburgh, is required to acquire and hold
shares of capital stock in that FHLB in an amount equal to at least 1% of the
aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or 5%
of its advances (borrowings) from the FHLB of Pittsburgh, whichever is greater.
Parkvale had a $9.4 million investment in stock of the FHLB of Pittsburgh at
June 30, 2000 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, 2000, the Bank had
$65.6 million of outstanding advances from the FHLB of Pittsburgh.
INTERSTATE ACQUISITIONS
The Commonwealth of Pennsylvania has enacted legislation which permits
interstate acquisitions and branching, subject to specific restrictions, for
savings banks located in Delaware, Kentucky, the District of Columbia, Maryland,
New Jersey, Ohio, Virginia and West Virginia ("the Region") if the state offers
reciprocal rights to savings institutions located in Pennsylvania.
Of the states in the Region, Delaware, Kentucky, Maryland, New Jersey, Ohio and
West Virginia currently have laws that permit savings banks located in
Pennsylvania to branch into such states and/or acquire savings banks located in
such states.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings banks to maintain
noninterest-earning reserves against their transaction accounts (primarily
checking accounts) and certain nonpersonal time deposits. Money market deposit
accounts are subject to the reserve requirement applicable to nonpersonal time
deposits when held by a person other than a natural person. Because required
reserves must be maintained in the form of vault cash or a non-interest bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets. Parkvale satisfies the majority of
its reserve requirement with vault cash.
PENNSYLVANIA SAVINGS BANK LAW
The Bank is incorporated under the Pennsylvania Banking Code of 1965, as amended
("Banking Code"), which contains detailed provisions governing the organization,
location of offices, rights and responsibilities of directors, officers,
employees and members, as well as corporate powers, savings and investment
operations and other aspects of the Bank and its affairs. The Banking Code
delegates
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extensive rulemaking power and administrative discretion to the Department so
that the supervision and regulation of state-chartered banks may be flexible and
readily responsive to changes in economic conditions and in savings and lending
practices.
One of the declared purposes of the Banking Code is to provide banks with the
opportunity to be competitive with each other and with other financial
institutions existing under other state, federal and foreign laws.
A Pennsylvania savings bank may locate or change the location of its principal
place of business and establish an office anywhere in the Commonwealth, with the
prior approval of the Department.
The Department generally examines each savings bank at least once every two
years. The Banking Code permits the Department to accept the examinations and
reports of the FDIC in lieu of the Department's examination. The present
practice is for the Department and the FDIC to conduct examinations annually on
an alternating basis. The Department may order any bank to discontinue any
violation of law or unsafe or unsound business practice and may direct any
director, officer, attorney or employee of a bank engaged in an objectionable
activity, after the Department has ordered the activity to be terminated, to
show cause at a hearing before the Department why such person should not be
removed.
TAXATION
FEDERAL TAXATION
For federal income tax purposes, PFC and its subsidiaries file a consolidated
return on a calendar year basis and report their income and expenses on the
accrual basis of accounting. Since 1987, corporations are subject to the
corporate alternative minimum tax to the extent this tax would exceed the
regular tax liability. 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 1999 has been filed with the IRS and is
open to examination. However, PFC has not yet been advised by the IRS if such an
examination will be performed. All income tax returns for calendar 1998 and
prior years have been either accepted as filed or settled with the IRS with such
settlements not resulting in a significant charge to income.
STATE TAXATION
For state tax purposes, Parkvale reports its income and expenses on the accrual
basis of accounting and files its tax returns on a calendar year basis. Parkvale
is subject to the Pennsylvania Mutual Thrift Institutions Tax ("MTIT"). This tax
is imposed at the rate of 11.5% on net income computed substantially in
accordance with Generally Accepted Accounting Principles ("GAAP"). Under the
Mutual Thrift Institution Act, Parkvale is not subject to any state or local
taxes except for the MTIT described above and taxes imposed upon real estate and
the transfer thereof.
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See Note H of Notes to Consolidated Financial Statements for additional
information regarding federal and state taxation.
ITEM 2. PROPERTIES
Parkvale presently conducts its business from its main office and 31 branch
offices located in the Pittsburgh metropolitan area. Parkvale owns the building
and land for 14 of its offices and leases its remaining 17 offices. Such leases
expire through 2014. PMC leases facilities outside of Pennsylvania for three
loan origination centers. At June 30, 2000, Parkvale's land, building and
equipment had a net book value of $6.5 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 nor its subsidiaries'
financial positions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS MATTERS.
The information required herein is incorporated by reference from page 32 of the
PFC's 2000 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 4 of
PFC's 2000 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required herein is incorporated by reference from pages 5 to 12
of PFC's 2000 Annual Report.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages 5 to 12
of PFC's 2000 Annual Report.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages 13 to 31
of PFC's 2000 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein with respect to directors and executive officers
of PFC and Parkvale is incorporated by reference from pages 4 to 9 of the
definitive proxy statement of the Corporation for the 2000 Annual Meeting of
Stockholders, which was filed on September 15, 2000 (the "definitive proxy
statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages 9 to 14
of the definitive proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages 2 to 4
of the definitive proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page 15 to 16
of the definitive proxy statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Page
----
Report of Independent Auditors...............................................................31
Consolidated Statements of Financial Condition at June 30, 2000 and 1999.....................13
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27
Consolidated Statements of Operations for each of the three years
in the period ended June 30, 2000...................................................14
Consolidated Statements of Cash Flows for each of the three years
in the period ended June 30, 2000...................................................15
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended June 30, 2000...................................................16
Notes to Consolidated Financial Statements.............................................17 to 30
(2) The following exhibits are filed as part of this Form 10-K and this
list includes Exhibit Index.
No. Exhibits Page
- ------------ ----
3(a) Articles of Incorporation.............................................................*
3(b) Bylaws................................................................................&
10(a) Common Stock Certificate..............................................................*
10(b) 1987 Stock Option Plan................................................................@
10(c) 1993 Key Employee Stock Compensation Program..........................................x
10(d) 1993 Directors' Stock Option Plan.....................................................&
10(e) Consulting Agreement with Robert D. Pfischner.........................................~
10(f) Employment Agreement with Robert J. McCarthy, Jr......................................#
10(f)1 Change in Control Serverence Agreement with Bruce C. Gilleylen....................D1-D8
10(f)2 Change in Control Serverence Agreement with Timothy G. Rubritz....................E1-E8
10(g) Employee Stock Ownership Plan.........................................................&
10(h) Executive Deferred Compensation Plan..................................................&
10(i) Supplemental Employee Benefit Plan....................................................+
13 Excerpts of the 2000 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.......................................................... 19
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Reference is made to Item 1. Business - Subsidiaries for the required information
23 Consent of Independent Auditors.....................................................C-1
27 Financial Data Schedule
* Incorporated by reference to the Registrant's Form 8-B filed with the
SEC on January 5, 1989.
@ Incorporated by reference, as amended, to Form S-8 at File No. 33-26173 filed by
the Registrant with the SEC on November 1, 1995.
x Incorporated by reference, as amended, to Form S-8 at File No. 33-98812 filed by
the Registrant with the 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 10-K filed by the Registrant
with the SEC on September 19, 1997.
& Incorporated by reference to Form 10-K filed by the Registrant
with the SEC on September 24, 1998.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the 2000 fiscal
year or prior to the filing of this Form 10-K.
(c) See (a) (2) above for all exhibits filed herewith and the Exhibit
Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report to
Shareholders which are required to be included herein.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PARKVALE FINANCIAL CORPORATION
Date: September 21, 2000 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 21, 2000
- ------------------------------------------ ------------------
Robert J. McCarthy, Jr., Date
Director, President and
Chief Executive Officer
/s/ Timothy G. Rubritz September 21, 2000
- ------------------------------------------ ------------------
Timothy G. Rubritz, Date
Vice President - Treasurer
(Chief Financial & Accounting Officer)
/s/ Robert D. Pfischner September 21, 2000
- ------------------------------------------ ------------------
Robert D. Pfischner, Chairman of the Board Date
/s/ Fred P. Burger, Jr. September 21, 2000
- ------------------------------------------ ------------------
Fred P. Burger, Jr., Director Date
/s/ Andrea F. Fitting September 21, 2000
- ------------------------------------------ ------------------
Andrea F. Fitting, Director Date
/s/ Patrick J. Minnock September 21, 2000
- ------------------------------------------ ------------------
Patrick J. Minnock, Director Date
/s/ Warren R. Wenner September 21, 2000
- ------------------------------------------ ------------------
Warren R. Wenner, Director Date
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