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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31 2003
COMMISSION FILE NO: 0-17411
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, Pennsylvania 15146
----------------------------------------------------------
(Address of principal executive offices; zip code)
Registrant's telephone number, including area code: (412) 373-7200
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
------------------------------
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The closing sales price of the Registrant's Common Stock on February 9, 2004 was
$29.70 per share.
Number of shares of Common Stock outstanding as of February 9, 2004 was
5,584,843.
PARKVALE FINANCIAL CORPORATION
INDEX
Part I. Financial Information Page
- ------------------------------- ----
Item 1.
- -------
Consolidated Statements of Financial Condition as of December 31, 2003
and June 30, 2003 3
Consolidated Statements of Operations for the three and six months ended
December 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the six months ended
December 31, 2003 and 2002 5-6
Consolidated Statements of Shareholders' Equity for the six months
December 31, 2003 6
Notes to Unaudited Interim Consolidated Financial Statements 7-10
Item 2.
- -------
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-17
Item 3.
- -------
Quantitative and Qualitative Disclosures about Market Risk 17
Item 4.
- -------
Controls and Procedures 17
Part II - Other Information 17-18
Signatures 19
2
Item 1.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
DECEMBER 31, June 30,
ASSETS 2003 2003
----------- -----------
(unaudited) (audited)
Cash and noninterest earning deposits $ 25,732 $ 32,067
Federal funds sold 72,000 72,000
Interest-earning deposits in other banks 6,576 17,576
Investment securities available for sale (cost of
$19,624 at December 31 and $19,185 at June 30) 19,685 19,743
Investment securities held to maturity (fair value
of $301,320 at December 31 and $215,587 at June 30) 297,154 210,827
Loans, net of allowance of $14,608 at December 31
and $15,013 at June 30 1,128,358 1,241,779
Foreclosed real estate, net 2,438 2,695
Office properties and equipment, net 10,737 11,196
Intangible assets and deferred charges 11,353 11,572
Prepaid expenses and other assets 23,162 23,348
----------- -----------
Total Assets $ 1,597,195 $ 1,642,803
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Savings deposits $ 1,283,328 $ 1,331,760
Advances from Federal Home Loan Bank 161,100 161,107
Trust preferred securities 25,000 25,000
Other debt 15,534 13,050
Escrow for taxes and insurance 5,041 7,144
Other liabilities 5,058 5,268
----------- -----------
Total Liabilities 1,495,061 1,543,329
----------- -----------
SHAREHOLDERS' EQUITY
Preferred Stock ($1.00 par value; 5,000,000
shares authorized; 0 shares issued) -- --
Common Stock ($1.00 par value; 10,000,000 shares
authorized; 6,734,894 shares issued) 6,735 6,735
Additional Paid in Capital 3,667 4,132
Treasury Stock at cost (1,159,512 shares at December
and 1,186,663 at June) (22,642) (22,951)
Accumulated Other Comprehensive Income 38 355
Retained Earnings 114,336 111,203
----------- -----------
Total Shareholders' Equity 102,134 99,474
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,597,195 $ 1,642,803
=========== ===========
3
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
-------- ------- -------- -------
Interest income: (Unaudited) (Unaudited)
Loans $ 14,748 $18,470 $ 30,167 $38,215
Investments 3,005 2,915 5,553 5,857
Federal funds sold 214 513 476 1,020
-------- ------- -------- -------
Total interest income 17,967 21,898 36,196 45,092
-------- ------- -------- -------
Interest expense:
Savings deposits 7,776 11,701 16,635 24,023
Borrowings 2,206 2,096 4,419 4,120
Trust preferred securities 315 339 610 701
-------- ------- -------- -------
Total interest expense 10,297 14,136 21,664 28,844
-------- ------- -------- -------
Net interest income 7,670 7,762 14,532 16,248
Provision (credit) for loan losses (102) 74 (55) 122
-------- ------- -------- -------
Net interest income after
provision (credit) for losses 7,772 7,688 14,587 16,126
-------- ------- -------- -------
Noninterest Income:
Service charges on deposit accounts 1,111 1,183 2,217 2,296
Other fees and service charges 253 311 555 642
Gain on sale of assets -- -- 406 --
Miscellaneous 354 249 739 533
-------- ------- -------- -------
Total other income 1,718 1,743 3,917 3,471
-------- ------- -------- -------
Noninterest Expenses:
Compensation and employee benefits 3,094 3,162 6,139 6,429
Office occupancy 1,054 1,033 2,111 2,007
Marketing 102 161 189 312
FDIC insurance 50 57 102 115
Office supplies, telephone and postage 402 419 789 829
Miscellaneous 898 970 1,819 1,906
-------- ------- -------- -------
Total other expenses 5,600 5,802 11,149 11,598
-------- ------- -------- -------
Income before income taxes 3,890 3,629 7,355 7,999
Income tax expense 1,187 1,124 2,222 2,632
-------- ------- -------- -------
Net income $ 2,703 $ 2,505 $ 5,133 $ 5,367
======== ======= ======== =======
Net income per share:
Basic $ 0.49 $ 0.45 $ 0.93 $ 0.96
Diluted $ 0.48 $ 0.45 $ 0.91 $ 0.95
4
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
SIX MONTHS ENDED
DECEMBER 31,
2003 2002
--------- --------
Cash flows from operating activities: (unaudited)
Interest received $ 40,244 $ 47,312
Loan fees received (premiums paid) (1,943) (686)
Other fees and commissions received 3,238 3,472
Interest paid (21,687) (28,847)
Cash paid to suppliers and others (10,712) (11,063)
Income taxes paid (2,120) (1,029)
--------- --------
Net cash provided by operating activities 7,020 11,217
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale 561 --
Proceeds from maturities of investment 46,657 96,388
Purchase of investment securities held to maturity (134,694) (137,141)
Maturity (purchase) of deposits in other banks 11,000 (4,661)
Purchase of loans (171,870) (303,635)
Proceeds from sales of loans 2,240 1,506
Principal collected on loans 357,778 381,961
Loans made to customers, net of loans in process (74,250) (95,294)
Other (248) (245)
--------- --------
Net cash provided by (used in) investing activities 37,174 (61,121)
Cash flows from financing activities:
Net increase in checking and savings accounts 17,732 7,097
Net (decrease) in certificates of deposit (66,163) (30,072)
Proceeds from FHLB advances - 20,000
Repayment of FHLB advances (7) (5,007)
Net increase (decrease) in other borrowings 2,484 (4,460)
Decrease in borrowers' advances for taxes and insurance (2,103) (1,843)
Cash dividends paid (2,000) (2,004)
Acquisition of treasury stock (472) (3,915)
--------- --------
Net cash used in financing activities (50,529) (20,204)
--------- --------
Net decrease in cash and cash equivalents (6,335) (70,108)
Cash and cash equivalents at beginning of period 104,067 144,050
--------- --------
Cash and cash equivalents at end of period $ 97,732 $ 73,942
========= ========
5
Reconciliation of net income to net cash provided SIX MONTHS ENDED
by operating activities: DECEMBER 31,
2003 2002
------- --------
Net income $ 5,133 $ 5,367
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 926 861
Accretion and amortization of loan fees and discounts 2,893 1,566
Loan fees collected and deferred (1,943) (686)
Provision (credit) for loan losses (55) 122
Gain on sale of assets (406) --
Decrease in accrued interest receivable 793 381
(Decrease) increase in other assets (607) 3,049
(Increase) in accrued interest payable (23) (3)
Increase in other liabilities 309 560
------- --------
Total adjustments 1,887 5,850
------- --------
Net cash provided by operating activities $ 7,020 $ 11,217
======= ========
For purposes of reporting cash flows, cash and cash equivalents include cash and
noninterest earning deposits, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods. Loans transferred to foreclosed
assets aggregated $172 for the six months ended December 31, 2003 and $770 for
the six months ended December 31, 2002.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
(unaudited)
Accumulated
Additional Other Total
Common Paid-in Treasury Comprehensive Retained Shareholders'
Stock Capital Stock Income Earnings Equity
------ ---------- -------- ------------- -------- -------------
Balance, June 30, 2003 $6,735 $4,132 ($22,951) $355 $111,203 $99,474
Net income, six months
ended December 31, 2003 5,133 5,133
Other Comprehensive income, net
of tax Unrealized Gains on
securities of $33 net of
reclassification adjustment
for gains included in net
income of $284 (317) (317)
--------
Total comprehensive income 4,816
Treasury stock purchased (472) (472)
Dividends on common stock at
$0.36 per share (2,000) (2,000)
Exercise of stock options (465) 781 316
------ ------ -------- ---- -------- --------
Balance, December 31, 2003 $6,735 $3,667 ($22,642) $ 38 $114,336 $102,134
====== ====== ======== ==== ======== ========
6
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share data)
Statements of Operations
The statements of operations for the three and six months ended December 31,
2003 and 2002 are unaudited, but in the opinion of management, reflect all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the results of operations for those periods. The results of
operations for the three and six months ended December 31, 2003 are not
necessarily indicative of the results which may be expected for fiscal 2004. The
Annual Report on Form 10-K for the year ended June 30, 2003 contains additional
information and should be read in conjunction with this report.
Stock Based Compensation
Pro forma information regarding net income and earnings per share as required by
FAS 123, has been determined as if Parkvale Financial Corporation had accounted
for its stock options using that method. The fair value for these options was
estimated at the date of the grants using a Black-Scholes option pricing model.
In management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. In addition, option valuation
models require input of highly subjective assumptions including the expected
stock price volatility. Because PFC's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. PFC's pro forma
information is as follows:
For the six months
ended December 31,
2003 2002
------ ------
Net income before stock options $5,133 $5,367
Compensation expense from stock options, net of tax:
Six months ended December 31 115 56
------ ------
Pro forma net income $5,018 $5,311
====== ======
Pro forma income per share:
Basic $ 0.91 $ 0.95
Diluted $ 0.89 $ 0.94
Comprehensive Income
Sources of comprehensive income not included in net income are limited to
unrealized gains and losses on certain investments in equity securities. For the
six months ended December 31, 2003 and 2002, total comprehensive income amounted
to $4,816 and $5,382, respectively.
7
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three and six months ended December 31:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Numerator for basic and diluted
earnings per share:
Net income $ 2,703 $ 2,505 $ 5,133 $ 5,367
Denominator:
Weighted average shares
for basic earnings per share 5,551,742 5,545,111 5,544,776 5,592,191
Effect of dilutive employee stock options 81,189 79,259 85,267 86,523
---------- ---------- ---------- ----------
Weighted average shares for
dilutive earnings per share 5,632,931 5,624,370 5,630,043 5,678,714
========== ========== ========== ==========
Net income per share:
Basic $ 0.49 $ 0.45 $ 0.93 $ 0.96
========== ========== ========== ==========
Diluted $ 0.48 $ 0.45 $ 0.91 $ 0.95
========== ========== ========== ==========
Loans
Loans are summarized as follows:
DECEMBER 31, June 30,
2003 2003
------------ -----------
Mortgage loans:
Residential:
1-4 Family $ 828,822 $ 932,535
Multifamily 20,952 19,477
Commercial 83,631 59,796
Other 13,398 36,581
----------- -----------
946,803 1,048,389
Consumer loans 147,629 152,458
Commercial business loans 42,023 47,983
Loans on savings accounts 2,679 2,974
----------- -----------
1,139,134 1,251,804
Less: Loans in process 273 117
Allowance for loan losses 14,608 15,013
Unamortized discount (premiums) and deferred loan fees (4,105) (5,105)
----------- -----------
Loans, net $ 1,128,358 $ 1,241,779
=========== ===========
8
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes the activity in the allowance for loan losses for the
six months ended December 31:
2003 2002
-------- --------
Beginning balance $ 15,013 $ 15,492
Provision (credit) for losses - mortgage loans (237) 12
Provision for losses - consumer loans 149 63
Provision for losses - commercial loans 33 47
Loans recovered 251 74
Loans charged off (601) (529)
-------- --------
Ending balance $ 14,608 $ 15,159
======== ========
New Accounting Pronouncements
Statement of Financial Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends Statement of Financial
Standard No. 123 to provide alternative method's of transition to Statement No.
123's fair value method of accounting for stock-based compensation. Statement
No. 148 also amends the disclosure provisions of Statement 123 and APB Opinion
No. 28, Interim Financial Reporting, to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. Parkvale has
complied with the disclosure required under this statement within the Notes of
this Form 10-Q.
Statement of Financial Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities
addressed under FAS 133, Accounting for Derivative Instruments and Hedging
Activities. This accounting guidance amends FAS 133 for decisions made by the
FASB as part of the Derivatives Implementations Group process and also amends
FAS 133 to clarify the definition of a derivative. FAS 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. Management has evaluated the
impact of this statement and has determined that there is no material effect on
Parkvale's financial position or results of operations.
Statement of Financial Standards No. 150, Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity, which
establishes standards for how an issuer is to classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments that would
previously have been classified as equity as liabilities (or as assets in some
circumstances). Specifically, FAS 150 requires that financial instruments issued
in the form of shares that are mandatorily redeemable; financial instruments
that embody an obligation to repurchase the issuer's equity shares or are
indexed to such an obligation; or financial instruments that embody an
unconditional obligation or a conditional obligation that can be settled in
certain ways be classified as liabilities. This statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective July 1, 2003. Management has evaluated the impact of this statement
and has determined that there is no material effect on Parkvale's financial
position or results of operation.
9
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements of
Guarantees, Including Indirect Guarantees of Indebtedness of Others, which
expands on the accounting guidance of FAS 5, 57 and 107 and incorporates without
change the provisions of FAS Interpretation 34, which is being superseded. Each
guarantee meeting the characteristics described in FIN 45 is to be recognized
and initially measured at fair value, which will be a change from current
practice for most entities. In addition, guarantors will be required to make
significant new disclosures, even if the likelihood of the guarantor making
payments under the guarantee is remote, which represents another change from
current general practice. FIN 45 disclosure requirements were effective in
December 2002. Management has evaluated the impact of this interpretation and
has determined that there is no material effect on Parkvale's financial position
or results of operation.
Interpretation No. 46, Consolidation of Variable Interest Entities ("VIE's"), an
interpretation of Accounting Research bulletin No. 51, Consolidated Financial
Statements, to improve financial reporting of special purpose and other
entities. In accordance with FIN 46, business enterprises that represent the
primary beneficiary of another entity by retaining a controlling financial
interest in that entity's assets, liabilities and results of operating
activities must consolidate the entity in its financial statements. Prior to the
issuance of FIN 46, consolidation generally occurred when an entity controlled
another entity through voting interests. Certain VIEs that are qualifying
special purpose entities subject to the reporting requirements for FAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities will not be required to be consolidated under the provisions of FIN
46. The consolidation provisions of FIN 46 apply to VIEs entered into after
January 31, 2003, and for preexisting VIEs on July 1, 2003. Management has
evaluated the impact of this interpretation and has determined that there is no
material effect on Parkvale's financial position or results of operation at
December 31, 2003.
10
Item 2.
PARKVALE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
Balance Sheet Data: DECEMBER 31,
2003 2002
---------- ----------
Total assets $1,597,195 $1,618,796
Loans, net 1,128,358 1,220,721
Interest-earning deposits and federal funds sold 78,576 70,134
Total investments 316,839 264,039
Savings deposits 1,283,328 1,326,364
FHLB advances 161,100 146,114
Shareholders' equity 102,134 96,928
Book value per share $18.32 $17.47
Statistical Profile:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31,(1) DECEMBER 31,(1)
2003 2002 2003 2002
------ ------ ------ ------
Average yield earned on all
interest-earning assets 4.68% 5.58% 4.69% 5.75%
Average rate paid on all
interest-bearing liabilities 2.76% 3.69% 2.88% 3.78%
Average interest rate spread 1.92% 1.89% 1.81% 1.97%
Net yield on average
interest-earning assets 2.00% 1.98% 1.88% 2.07%
Other expenses to average assets 1.40% 1.43% 1.38% 1.43%
Taxes to pre-tax income 30.51% 30.97% 30.21% 32.90%
Return on average assets 0.67% 0.62% 0.64% 0.66%
Return on average equity 10.64% 10.46% 10.18% 11.18%
Average equity to average total assets 6.34% 5.89% 6.25% 5.90%
Dividend per share $0.18 $0.18 $0.36 $0.36
AT DECEMBER 31,
2003 2002
------ -------
One year gap to total assets 5.83% -5.90%
Intangibles to total equity 11.12% 12.17%
Capital to assets ratio 6.39% 5.99%
Ratio of nonperforming assets to total assets 0.48% 0.42%
Number of full-service offices 39 38
(1) The applicable income and expense figures have been annualized in
calculating the percentages.
11
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE:
Nonperforming and impaired loans and foreclosed real estate (REO) consisted of
the following at December 31, 2003 versus year-end June 30, 2003.
DECEMBER 31, 2003 June 30, 2003
----------------- -------------
(Dollars in 000's)
Delinquent single-family mortgage loans $3,105 $3,786
Delinquent other loans 1,972 2,379
------ ------
Total of nonperforming loans $5,077 $6,165
Total of impaired loans 142 1,119
Real estate owned, net 2,438 2,695
------ ------
Total $7,657 $9,979
====== ======
Nonperforming and impaired loans and real estate owned represent 0.48% and 0.61%
of total assets at the respective balance sheet dates. Delinquent single-family
mortgage loans at December 31, 2003 consisted of 32 single family owner occupied
homes. As of December 31, 2003, $2.0 million or 65.4% of the nonaccrual mortgage
loans totaling $3.1 million were purchased from others. The $2.0 million of the
delinquent loans purchased by others are comprised of 9 loans which management
believes are well collateralized.
Loans are placed on nonaccrual status when, in management's judgment, the
probability of collection of principal and 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, uncollected interest income is not included in earnings for nonaccrual
loans. The amount of interest income on nonaccrual loans that had not been
recognized in interest income was $211,000 at December 31, 2003 and $248,000 at
June 30, 2003. 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.
Nonaccrual, substandard and doubtful commercial and other real estate loans are
assessed for impairment. Loans are considered impaired when the fair value is
insufficient as compared to the contractual amount due. Parkvale excludes
single-family loans, credit card 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 a $142,000 loan
classified as impaired at December 31, 2003 and $1.1 million at June 30, 2003.
The average recorded investment in impaired loans is $701,000 for the December
2003 quarter. The amount of interest income that has not been recognized was
$16,000 at December 31, 2003. Impaired assets include $2.4 million of foreclosed
real estate as of December 31, 2003. Foreclosed real estate properties are
recorded at the lower of the carrying amount or fair value of the property less
the cost to sell. The majority of the net book value of foreclosed real estate
at December 31, 2003 related to a vacant office building, which is under going
renovation and rehabilitation.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses was $14.6 million at December 31, 2003, $15.0
million at June 30, 2003 and $15.2 million at December 31, 2002 or 1.28%, 1.20%
and 1.23% of gross loans at December 31, 2003, June 30, 2003 and December 31,
2002. The adequacy of the allowance for loan loss is determined by management
through evaluation of the loss probable on individual nonperforming, delinquent
and high
12
dollar loans, economic and business trends, growth and composition of the loan
portfolio and historical loss experience, as well as other relevant factors.
The allowance for loan losses is continually monitored by management to identify
potential portfolio risks and detect potential credit deterioration in the early
stages. Management then establishes reserves based upon its evaluation of the
inherent risks in the loan portfolio. Changes to the levels of reserves are made
quarterly based upon perceived changes in risk. Management believes the
allowance for loan losses is adequate to absorb loan losses incurred.
LIQUIDITY AND CAPITAL RESOURCES:
Federal funds sold remained at $72.0 million at June 30, 2003 and at December
31, 2003. Investment securities held to maturity increased $86.3 million or
41.0% and loans decreased $113.4 million or 9.1% from June 30, 2003 to December
31, 2003. Deposits decreased $48.4 million or 3.6% from June 30, 2003 to
December 31, 2003. Escrow for taxes and insurance decreased by $2.1 million or
29.4% as a result of the remittance of property taxes to the various taxing
districts during the quarter. Parkvale Bank's FHLB advance available maximum
borrowing capacity is $747.0 million. If Parkvale were to experience a deposit
decrease in excess of the available cash resources and cash equivalents,
available FHLB borrowing capacity could be utilized to fund a rapid decrease in
deposits.
Shareholders' equity was $102.1 million or 6.4% of total assets at December 31,
2003. A stock repurchase program approved in June 2003 permits the purchase of
5% of outstanding stock or 276,500 shares during fiscal 2004 at prevailing
prices in open-market transactions. Through December 31, 2003, 20,000 shares
were purchased at an average price of $23.61 per share, representing 7.23% of
the authorized program. The Bank is required to maintain Tier I (Core) capital
equal to at least 4% of the institution's adjusted total assets, and Tier II
(Supplementary) risk-based capital equal to at least 8% of the risk-weighted
assets. At December 31, 2003, Parkvale was in compliance with all applicable
regulatory requirements, with Tier I and Tier II ratios of 7.27% and 13.28%,
respectively.
The regulatory capital ratios for Parkvale Bank at December 31, 2003 are
calculated as follows:
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
----------- ---------- ----------
Equity Capital (1) $ 127,349 $ 127,349 $ 127,349
Less non-allowable intangible assets (11,353) (11,353) (11,353)
Less unrealized securities gains (28) (28) (28)
Plus permitted valuation allowances (2) -- -- 12,074
Plus allowable unrealized holding gains (3) -- -- 20
----------- --------- ---------
Total regulatory capital 115,968 115,968 128,062
Minimum required capital 63,843 38,560 77,120
----------- --------- ---------
Excess regulatory capital $ 52,125 $ 77,408 $ 50,942
Adjusted total assets $ 1,596,068 $ 963,997 $ 963,997
13
Regulatory capital as a percentage 7.27% 12.03% 13.28%
Minimum capital required as a percentage 4.00% 4.00% 8.00%
----------- --------- ---------
Excess regulatory capital as a percentage 3.27% 8.03% 5.28%
=========== ========= =========
Well capitalized requirement 5.00% 6.00% 10.00%
=========== ========= =========
- -----------
(1) Represents equity capital of the consolidated Bank as reported to the
Pennsylvania Department of Banking and FDIC on Form 041 for the quarter
ended December 31, 2003.
(2) Limited to 1.25% of risk adjusted total assets.
(3) Limited to 45% of pretax net unrealized holding gains.
Management is not aware of any trends, events, uncertainties or current
recommendations by any regulatory authority that will have (if implemented), or
that are reasonably likely to have, material effects on Parkvale's liquidity,
capital resources or operations.
RESULTS OF OPERATIONS - COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2003 AND
2002
For the three months ended December 31, 2003, Parkvale reported net income of
$2.7 million or $0.48 per diluted share, compared to net income of $2.5 million
or $0.45 per diluted share for the quarter ended December 31, 2002. The $198,000
increase in net income for the December 2003 quarter is attributable to a
reduction in noninterest expense of $202,000 and the recovery of previously
charged off loans of $235,000. Return on average equity was 10.64% for the
December 2003 quarter compared to 10.46% for the December 2002 quarter.
INTEREST INCOME:
Parkvale had interest income of $18.0 million during the three months ended
December 31, 2003 versus $21.9 million during the comparable period in 2002. The
$3.9 million decrease is the result of a 90 basis point decrease in the average
yield from 5.58% in 2002 to 4.68% in 2003 coupled with a $36.0 million or 2.3%
decrease in the average balance of interest-earning assets. Interest income from
loans decreased $3.7 million or 20.2% resulting from a 114 basis point decrease
in the average yield from 6.23% in 2002 to 5.09% in 2003 coupled with a decrease
in the average outstanding loan balances of $26.8 million or 2.3%. The decrease
in the average yield reflects the adverse impact of loan repayments of $797
million in fiscal 2003 plus the additional $358 million in payments during the
six months ended December 2003. New loans granted and purchased during the past
15 months have been at substantially lower rates reflective of lower market
rates. Investment interest income increased by $90,000 or 3.1% due to an
increase of $45.4 million or 18.5% in the average balance and offset by a 62
basis point decrease in the average yield from 4.76% in 2002 to 4.14% in 2003.
Interest income earned on federal funds sold decreased $299,000 or 58.3% from
the 2002 quarter due to a 46 basis point decrease in the average yield from
1.47% in 2002 to 1.01% in 2003. This decrease was coupled by a decrease in the
average balance of $54.6 million or 39.1%. The weighted average yield on all
interest earning assets was 4.64% at December 31, 2003 and 5.74% at December 31,
2002.
INTEREST EXPENSE:
Interest expense decreased $3.8 million or 27.2% from the 2003 to the 2002
quarter. The decrease was due to a 93 basis point decrease in the average rate
paid on deposits and borrowings from 3.69% in 2002 to 2.76% in 2003 and by a
decrease in the average deposits and borrowings of $38.3 million. During the
quarter, previously offered certificate of deposit promotions matured totaling
$35 million at an average rate of 6.34%. The average rates paid on deposits and
borrowings during the December 2003 quarter
14
reflects a 40 basis point decrease from the 3.20% average rate paid during the
June 2003 quarter. At December 31, 2003, the average rate payable on liabilities
was 2.34% for deposits, 4.92% for borrowings, 4.77% for trust preferred
securities and 2.69% for combined deposits and borrowings.
PROVISION FOR LOAN LOSSES:
The provision for loan losses is an amount added to the allowance against which
loan losses are charged. Parkvale's provision for loan losses decreased by
$176,000 from the 2002 to the 2003 quarter. The credit provision for loan loss
includes the recovery of a previously charged off loan of $235,000. A commercial
real estate loan partially charged off in fiscal 2003 was paid in full during
December 2003. Aggregate valuation allowances were 1.28% and 1.20% of gross
loans at December 31, 2003 and June 30, 2003, respectively.
Nonperforming loans and real estate owned were $7.7 million, $10.0 million and
$6.9 million at December 31, 2003, June 30, 2003 and December 31, 2002,
representing 0.48%, 0.61% and 0.42% of total assets at the respective balance
sheet dates. Total loan loss reserves at December 31, 2003 were $14.6 million.
Management considers loan loss reserves sufficient when compared to the value of
underlying collateral. Collateral is considered and evaluated when establishing
provision for loan losses and the sufficiency of the allowance for loan losses.
Management believes the allowance for loan losses is adequate to cover the
amount of probable loan losses incurred.
OTHER INCOME:
Total other income decreased by $25,000 or 1.4% in 2003 due mainly due to lower
fee income derived from deposit accounts related to reduced interchange income
on debit card transactions, partially offset by income earned on Bank Owned Life
Insurance.
OTHER EXPENSE:
Total other expense decreased by $202,000 or 3.5% for the three months ended
December 31, 2003. This decrease is due principally to decreases in compensation
and marketing of $68,000 and $59,000, or 2.2% and 36.7%, respectively.
Compensation has decreased over the prior year due mainly to a decrease in
full-time equivalents due to consolidation of processing functions and reduced
profitability. Marketing has decreased as compared to the prior quarter due to a
decrease in approved marketing expenditures. Annualized noninterest expense as a
percentage of average assets were 1.40% for the quarter ended December 31, 2003
as compared to 1.43% for the quarter ended December 31, 2002.
RESULTS OF OPERATIONS - COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2003 AND
2002
For the six month period ended December 31, 2003, net income was $5.1 million or
$0.91 per diluted share compared to net income of $5.4 million or $0.95 per
diluted share for the six month period ended December 31, 2002. The $234,000
decrease in net income for the December 2003 six months reflects a $1.7 million
decrease in net interest income partially offset by a $406,000 gain on sale of
investment securities and a $449,000 decrease in non-interest expense. Net
interest income for the six months ended December 31, 2003 decreased to $14.5
million from $16.2 million for the six months ended December 31, 2002. Return on
average equity was 10.18% for the six months ended December 2003.
INTEREST INCOME:
Parkvale had interest income of $36.2 million during the six months ended
December 31, 2003 versus
15
$45.1 million during the comparable period in 2002. The decrease of $8.9 million
is attributable to a decrease in the average interest-earning asset portfolio of
$24.0 million or 1.5%, coupled by a 107 basis point decrease in the average
yield from 5.76% in 2002 to 4.69% in 2003. Interest income from loans decreased
$8.0 million or 21.1% due to an 129 basis point decrease in the average yield
from 6.36% in 2002 to 5.07% in 2003 and by a decrease in the average loan
balance of $11.4 million or 1.0%. Income from investments decreased by $304,000
or 5.2% from 2002 due to a 63 basis point decrease in the average yield from
4.90% in 2002 to 4.27% in 2003, offset by an increase in the average investment
balance of $21.1 million or 8.8%. Interest income earned on federal funds sold
decreased $544,000 or 53.3% from the prior six months ended December 2002. This
was due to a 59 basis point decrease in the average yield from 1.61% in 2002 to
1.02% in 2003 and by a decrease of the average federal fund balance of $33.7
million or 26.6%.
INTEREST EXPENSE:
Interest expense decreased by $7.2 million or 24.9% from the 2002 six month
period to the 2003 six month period. The decrease was due to an 90 basis point
decrease in the average rate paid from 3.78% in 2002 to 2.88% in 2003, coupled
with a decrease in the average deposits and borrowings of $21.9 million.
PROVISION FOR LOAN LOSSES:
Provision for loan losses decreased by $177,000 or 145.1% from the six month
period ended December 31, 2002 to December 31, 2003. The provision for loan loss
includes the recovery of a previous charge off of $235,000. Aggregate valuation
allowances were 1.28% of gross loans at December 31, 2003, 1.20% of gross loans
at June 30, 2003 and 1.23% of gross loans at December 31, 2002. Total loan loss
reserves at December 31, 2003 were $14.6 million.
OTHER INCOME:
Other income increased by $446,000 or 12.9% for the six months ended December
31, 2003 from the six months ended December 31, 2002 due primarily to a gain on
sale of assets of $406,000. Other income, absent this prior period gain,
increased $40,000 or 1.2% due to a $166,000 decrease on service fees on all
types of deposit and loan products and offset by a $206,000 increase from
investment service fee income on nondeposit investment products offered directly
to customers through an operating division, Parkvale Financial Services.
OTHER EXPENSE:
Other expenses decreased by $449,000 for the six month period ended December 31,
2003 from the comparable period in 2002. This decrease is due principally to
decreases in compensation and marketing of $290,000 and $123,000, or 4.5% and
39.4%, respectively. Compensation has decreased over the prior year due mainly
to a decrease in full-time equivalents due to consolidation of processing
functions and reduced profitability. Marketing has decreased as compared to the
prior period due to a decrease in approved marketing expenditures. Annualized
noninterest expenses as a percentage of average assets were 1.38% for the six
months ended December 31, 2003 as compared to 1.43% for the six months ended
December 31, 2002.
IMPACT OF INFLATION AND CHANGING PRICES:
The financial statements and related data presented herein have been prepared in
accordance with
16
generally accepted accounting principles in the United States, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services as measured by the consumer price
index.
FORWARD LOOKING STATEMENTS:
The statements in this Form 10-Q which are not historical fact are forward
looking statements. Forward looking information should not be construed as
guarantees of future performance. Actual results may differ from expectations
contained in such forward looking information as a result of factors including
but not limited to the interest rate environment, economic policy or conditions,
federal and state banking and tax regulations and competitive factors in the
marketplace. Each of these factors could affect estimates, assumptions,
uncertainties and risks considered in the development of forward looking
information and could cause actual results to differ materially from
management's expectations regarding future performance.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are
presented at June 30, 2003 in item 7a of Parkvale Financial
Corporation's Form 10-K/A, filed with the SEC on September 26, 2003.
Management believes that there have been no material changes in
Parkvale's market risk since June 30, 2003.
Item 4. Controls and Procedures
Disclosure controls and procedures are monitored and supervised by the
Registrant's management, including the CEO and CFO, to the
effectiveness of the design and operation of the Registrant's
disclosure controls and procedures. The Registrant's management,
including the CEO and CFO, concluded that the Registrant's disclosure
controls and procedures were effective as of December 31, 2003. There
have been no significant changes in Registrant's internal controls or
in other factors that could significantly affect internal controls
subsequent to December 31, 2003.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities and Use of Proceeds None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
17
(a) Exhibits
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. (as furnished as Exhibit 31.1)
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. (as furnished as Exhibit 31.2)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (as furnished as Exhibit 32.1)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (as furnished as Exhibit 32.2)
(b) Reports on Form 8-K
A Form 8-K was filed January 13, 2004 for resignation of Ernst &
Young, LLP as independent accountant dated January 6, 2004.
A Form 8-K was filed January 23, 2004 for an earnings release dated
January 22, 2004.
A Form 8-K was filed February 12, 2004 to announce Parente Randolph,
LLC, Pittsburgh, Pennsylvania as the independent accountants for
fiscal 2004 dated February 5, 2004.
18
SIGNATURES
Pursuant to the requirements 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: February 17, 2004 By: /s/ Robert J. McCarthy, Jr.
--------------------- ---------------------------------
Robert J. McCarthy, Jr.
President and
Chief Executive Officer
DATE: February 17, 2004 By: /s/ Timothy G. Rubritz
--------------------- ---------------------------------
Timothy G. Rubritz
Vice President, Treasurer and
Chief Financial Officer
19