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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 MARCH 31, 2004
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 April 29, 2004 was
$26.87 per share.
Number of shares of Common Stock outstanding as of April 29, 2004 was 5,612,401.
PARKVALE FINANCIAL CORPORATION
INDEX
Part I. Financial Information Page
- ------------------------------------------------------------------------------
Item 1.
Consolidated Statements of Financial Condition as of March 31, 2004
and June 30, 2003 3
Consolidated Statements of Operations for the three and nine months
ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 2004 and 2003 5-6
Consolidated Statements of Shareholders' Equity for the nine months
ended March 31, 2004 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 18
2
Item 1.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
MARCH 31, June 30,
ASSETS 2004 2003
-------------------------------
(unaudited) (audited)
Cash and noninterest earning deposits $ 24,029 $ 32,067
Federal funds sold 147,000 72,000
Interest-earning deposits in other banks 14,905 17,576
Investment securities available for sale (cost of
$19,960 at March 31 and $19,185 at June 30) 19,889 19,743
Investment securities held to maturity (fair value
of $304,030 at March 31 and $215,587 at June 30) 299,605 210,827
Loans, net of allowance of $14,577 at March 31
and $15,013 at June 30 1,055,905 1,241,779
Foreclosed real estate, net 2,967 2,695
Office properties and equipment, net 10,426 11,196
Intangible assets and deferred charges 11,244 11,572
Prepaid expenses and other assets 22,648 23,348
-------------------------------
Total Assets $ 1,608,618 $ 1,642,803
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Savings deposits $ 1,284,120 $ 1,331,760
Advances from Federal Home Loan Bank 171,096 161,107
Trust preferred securities 25,000 25,000
Other debt 13,598 13,050
Escrow for taxes and insurance 4,423 7,144
Other liabilities 5,973 5,268
-------------------------------
Total Liabilities 1,504,210 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 3,648 4,132
Treasury Stock at cost (1,122,493 shares at March
and 1,186,663 at June) (21,799) (22,951)
Accumulated Other Comprehensive Income (45) 355
Retained Earnings 115,869 111,203
-------------------------------
Total Shareholders' Equity 104,408 99,474
-------------------------------
Total Liabilities and Shareholders' Equity $ 1,608,618 $ 1,642,803
===============================
3
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
---------------------------------------------------------
(Unaudited) (Unaudited)
Interest income:
Loans $ 13,934 $ 17,657 $ 44,101 $ 55,872
Investments 3,250 2,942 8,803 8,799
Federal funds sold 304 317 780 1,337
---------------------------------------------------------
Total interest income 17,488 20,916 53,684 66,008
---------------------------------------------------------
Interest expense:
Savings deposits 7,471 10,378 24,106 34,401
Borrowings 2,204 2,033 6,623 6,166
Trust preferred securities 309 312 919 1,000
---------------------------------------------------------
Total interest expense 9,984 12,723 31,648 41,567
---------------------------------------------------------
Net interest income 7,504 8,193 22,036 24,441
Provision (credit) for loan losses 23 116 (32) 238
---------------------------------------------------------
Net interest income after
provision (credit) for losses 7,481 8,077 22,068 24,203
---------------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 1,049 1,021 3,266 3,317
Other fees and service charges 265 375 820 1,017
Gain on sale of assets 203 -- 609 --
Miscellaneous 359 331 1,098 864
-------- -------- -------- --------
Total noninterest income 1,876 1,727 5,793 5,198
---------------------------------------------------------
Noninterest Expenses:
Compensation and employee benefits 3,065 3,284 9,204 9,713
Office occupancy 1,075 1,098 3,186 3,105
Marketing 75 68 264 380
FDIC insurance 49 56 151 171
Office supplies, telephone and postage 399 403 1,188 1,232
Miscellaneous 890 978 2,709 2,884
---------------------------------------------------------
Total noninterest expenses 5,553 5,887 16,702 17,485
---------------------------------------------------------
Income before income taxes 3,804 3,917 11,159 11,916
Income tax expense 1,148 1,214 3,370 3,846
---------------------------------------------------------
Net income $ 2,656 $ 2,703 $ 7,789 $ 8,070
=========================================================
Net income per share:
Basic $ 0.47 $ 0.49 $ 1.40 $ 1.45
Diluted $ 0.47 $ 0.48 $ 1.38 $ 1.43
4
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
NINE MONTHS ENDED
MARCH 31,
2004 2003
---------------------------
(unaudited)
Cash flows from operating activities:
Interest received $ 59,607 $ 70,203
Loan premiums paid, net of fees received (2,527) (1,062)
Other fees and commissions received 4,774 5,198
Interest paid (31,651) (41,518)
Cash paid to suppliers and others (16,205) (15,978)
Income taxes (paid) refunded (2,130) 250
---------------------------
Net cash provided by operating activities 11,868 17,093
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale 1,075 --
Proceeds from maturities of investments 166,939 150,987
Purchase of investment securities held to maturity (258,477) (217,917)
Investment in (maturity) of deposits in other banks 2,671 (1,797)
Purchase of loans (171,870) (433,975)
Proceeds from sales of loans 2,485 2,672
Principal collected on loans 479,477 584,261
Loans made to customers, net of loans in process (124,262) (144,393)
Other (255) (1,654)
---------------------------
Net cash provided by (used in) investing activities 97,783 (61,816)
Cash flows from financing activities:
Net increase in checking and savings accounts 26,291 24,987
Net decrease in certificates of deposit (73,931) (48,513)
Proceeds from FHLB advances 10,000 25,000
Repayment of FHLB advances (11) (5,010)
Net increase (decrease) in other borrowings 547 (4,422)
Decrease in borrowers' advances for taxes and insurance (2,721) (2,057)
Cash dividends paid (3,123) (3,029)
Allocation of treasury stock to retirement plans 731 685
Acquisition of treasury stock (472) (4,231)
---------------------------
Net cash used in financing activities (42,689) (16,590)
---------------------------
Net increase (decrease) in cash and cash equivalents 66,962 (61,313)
Cash and cash equivalents at beginning of period 104,067 144,050
---------------------------
Cash and cash equivalents at end of period $ 171,029 $ 82,737
===========================
5
NINE MONTHS ENDED
MARCH 31,
2004 2003
-------------------------
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 7,789 $ 8,070
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,376 1,303
Accretion and amortization of loan fees, discounts and premiums 3,850 2,363
Loan fees collected and deferred (2,527) (1,062)
Provision (credit) for loan losses (32) 238
Gain on sale of assets (609) --
Decrease in accrued interest receivable 1,590 1,387
(Decrease) increase in other assets (891) 3,419
(Increase) decrease in accrued interest payable (2) 50
Decrease in other liabilities 1,323 1,325
-------------------------
Total adjustments 4,078 9,023
-------------------------
Net cash provided by operating activities $ 11,868 $ 17,093
=========================
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 $677,000 for the nine months ended March 31, 2004 and $1.2
million for the nine months ended March 31, 2003.
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, nine months
ended March 31, 2004 7,789 7,789
Other Comprehensive income, net
of tax Unrealized Gains on
securities of $26 net of
reclassification adjustment
for gains included in net
income of $426 (400) (400)
--------
Total comprehensive income 7,389
Treasury stock purchased (472) (472)
Dividends on common stock
at $0.56 per share (3,123) (3,123)
Treasury stock contributed
to benefit plans 731 731
Exercise of stock options (484) 893 409
------------------------------------------------------------------------------
Balance, March 31, 2004 $6,735 $3,648 ($21,799) ($45) $115,869 $104,408
==============================================================================
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 nine months ended March 31, 2004
and 2003 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 nine months ended March 31, 2004 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 nine months
ended March 31,
2004 2003
---------------------
Net income before stock options $7,789 $8,070
Compensation expense from stock options, net of tax:
Nine months ended March 31 122 142
---------------------
Pro forma net income $7,667 $7,928
=====================
Pro forma income per share:
Basic $ 1.38 $ 1.42
Diluted $ 1.36 $ 1.40
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
nine months ended March 31, 2004 and 2003, total comprehensive income amounted
to $7,389 and $8,167, 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 nine months ended March 31:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
-------------------------------------------------------------
Numerator for basic and diluted
earnings per share:
Net income $ 2,656 $ 2,703 $ 7,789 $ 8,070
Denominator:
Weighted average shares
for basic earnings per share 5,594,881 5,556,871 5,561,478 5,580,418
Effect of dilutive employee stock options 75,197 71,555 81,910 81,534
-------------------------------------------------------------
Weighted average shares for
dilutive earnings per share 5,670,078 5,628,426 5,643,388 5,661,952
========== ===========================================
Net income per share:
Basic $ 0.47 $ 0.49 $ 1.40 $ 1.45
=============================================================
Diluted $ 0.47 $ 0.48 $ 1.38 $ 1.43
=============================================================
Loans
Loans are summarized as follows:
MARCH 31, June 30,
2004 2003
---------------------------------
Mortgage loans:
Residential:
1-4 Family $ 688,611 $ 932,535
Multifamily 92,023 19,477
Commercial 84,368 59,796
Other 13,149 36,581
--------------------------------
878,151 1,048,389
Consumer loans 146,163 152,458
Commercial business loans 40,622 47,983
Loans on savings accounts 2,683 2,974
--------------------------------
1,067,619 1,251,804
Less: Loans in process 488 117
Allowance for loan losses 14,577 15,013
Unamortized discount (premiums) and deferred loan fees (3,351) (5,105)
-------------------------------
Loans, net $1,055,905 $ 1,241,779
================================
Included in the $146.2 million of consumer loans are $2.6 million of unsecured
credit card loans that are classified as held-for-sale. At March 31, 2004, the
market value of these loans is approximately $3.2 million.
8
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes the activity in the allowance for loan losses for the
nine months ended March 31:
2004 2003
-----------------------------
Beginning balance $15,013 $15,492
Provision (credit) for losses - mortgage loans (225) 91
Provision for losses - consumer loans 160 89
Provision for losses - commercial loans 33 58
Loans recovered 268 100
Loans charged off (672) (791)
-----------------------------
Ending balance $14,577 $15,039
=============================
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
March 31, 2004.
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:
MARCH 31,
2004 2003
- ------------------------------------------------------------------------------------------
Total assets $1,608,618 $1,625,203
Loans, net 1,055,905 1,213,953
Interest-earning deposits and federal funds sold 161,905 74,270
Total investments 319,494 271,780
Savings deposits 1,284,120 1,325,813
FHLB advances 171,096 151,111
Other borrowings 13,598 12,454
Shareholders' equity 104,408 99,092
Book value per share $ 18.60 $ 17.81
Statistical Profile:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, (1) MARCH 31, (1)
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
Average yield earned on all
interest-earning assets 4.51% 5.37% 4.63% 5.63%
Average rate paid on all
interest-bearing liabilities 2.69% 3.36% 2.82% 3.65%
Average interest rate spread 1.82% 2.01% 1.81% 1.98%
Net yield on average
interest-earning assets 1.94% 2.10% 1.90% 2.08%
Other expenses to average assets 1.39% 1.45% 1.38% 1.43%
Return on average assets 0.66% 0.67% 0.65% 0.66%
Return on average equity 10.21% 11.05% 10.19% 11.14%
Average equity to average total assets 6.49% 6.03% 6.33% 5.95%
Dividend per share $0.20 $0.18 $0.56 $0.54
AT MARCH 31,
2004 2003
- -----------------------------------------------------------------------------------------
One year gap to total assets 9.07% (0.81%)
Intangibles to total equity 10.77% 11.79%
Capital to assets ratio 6.49% 6.10%
Ratio of nonperforming assets to total assets 0.45% 0.49%
Number of full-service offices 39 39
(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 March 31, 2004 versus year-end June 30, 2003.
MARCH 31, 2004 June 30, 2003
-------------- -------------
(Dollars in 000's)
Delinquent single-family mortgage loans $ 1,946 $ 3,786
Delinquent other loans 1,455 2,379
------- -------
Total of nonperforming loans $ 3,401 $ 6,165
Total of impaired loans 888 1,119
Real estate owned, net 2,967 2,695
------- -------
Total $ 7,256 $ 9,979
======= =======
Nonperforming and impaired loans and real estate owned represent 0.45% and 0.61%
of total assets at the respective balance sheet dates. Delinquent single-family
mortgage loans at March 31, 2004 consisted of 30 single family owner occupied
homes. As of March 31, 2004, $1.0 million or 53.0% of the nonaccrual mortgage
loans totaling $1.9 million were purchased from others. The $1.0 million of the
delinquent loans purchased from others are comprised of 7 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 $156,000 at March 31, 2004 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 $888,000 of
loans classified as impaired at March 31, 2004 and $1.1 million at June 30,
2003. The average recorded investment in impaired loans was $401,000 for the
March 2004 quarter. The amount of interest income that has not been recognized
was $21,000 at March 31, 2004. Impaired assets include $3.0 million of
foreclosed real estate as of March 31, 2004. 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 March 31, 2004 related to a vacant office building, which is subject
to an agreement of sale with expected proceeds to exceed the net book value.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses was $14.6 million at March 31, 2004, $15.0 million
at June 30, 2003 and $15.0 million at March 31, 2003 or 1.37%, 1.20% and 1.23%
of gross loans at March 31, 2004, June 30, 2003 and March 31, 2003. The adequacy
of the allowance for loan loss is determined by management through evaluation of
the loss probable on individual nonperforming, delinquent and high dollar loans,
economic and business trends, growth and composition of the loan portfolio and
historical loss experience, as well as other relevant factors.
12
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 increased $75.0 million or 104.2%to $147 million at March 31,
2004 from $72.0 million at June 30, 2003. Increased liquidity has been
accumulated to have funds available for expected loan demand and investment
opportunities at higher rates. Investment securities held to maturity increased
$88.8 million or 42.1% while loans decreased $185.9 million or 15.0% from June
30, 2003 to March 31, 2004. Deposits decreased $47.6 million or 3.6% from June
30, 2003 to March 31, 2004. Escrow for taxes and insurance decreased by $2.7
million or 38.1% as a result of the remittance of property taxes to the various
taxing districts. Parkvale Bank's FHLB advance available maximum borrowing
capacity is $777.0 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 $104.4 million or 6.5% of total assets at March 31,
2004. 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 March 31, 2004, 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 March 31, 2004, Parkvale was in compliance with all applicable
regulatory requirements, with Tier I and Tier II ratios of 7.41% and 13.88%,
respectively.
The regulatory capital ratios for Parkvale Bank at March 31, 2004 are calculated
as follows:
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
-----------------------------------------------------
Equity Capital (1) $ 129,322 $ 129,322 $ 129,322
Less non-allowable intangible assets (11,244) (11,244) (11,244)
Less unrealized securities gains (32) (32) (32)
Plus permitted valuation allowances (2) -- -- 11,715
-----------------------------------------------------
Total regulatory capital 118,046 118,046 129,761
Minimum required capital 63,738 37,398 74,797
-----------------------------------------------------
Excess regulatory capital $ 54,308 $ 80,648 $ 54,964
Adjusted total assets $ 1,593,453 $ 934,957 $ 934,957
Regulatory capital as a percentage 7.41% 12.63% 13.88%
Minimum capital required as a percentage 4.00% 4.00% 8.00%
-----------------------------------------------------
Excess regulatory capital as a percentage 3.41% 8.63% 5.88%
=====================================================
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 March 31, 2004.
(2) Limited to 1.25% of risk adjusted total assets.
(3) Limited to 45% of pretax net unrealized holding gains.
13
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 MARCH 31, 2004 AND 2003
For the three months ended March 31, 2004, net income was $2.7 million or $0.47
per diluted share compared to net income of $2.7 million or $0.48 per diluted
share for the quarter ended March 31, 2003. The $47,000 decrease in net income
for the March 2004 quarter reflects a decrease in net interest income, offset by
a gain on sale of investments and a decrease in non-interest expense. Net
interest income decreased to $7.5 million from $8.2 million for the prior
period. The March 2004 quarter reflects a gain on the sale of investments of
$203,000 (pre-tax). Non-interest expenses were lower by $334,000 or 5.7% as a
result of consolidating systems and administrative functions during 2003. Return
on average equity was 10.21% for the March 2004 quarter compared to 11.05% for
the March 2003 quarter.
INTEREST INCOME:
Parkvale had interest income of $17.5 million during the three months ended
March 31, 2004 versus $20.9 million during the comparable period in 2003. The
$3.4 million decrease is the result of an 86 basis point decrease in the average
yield from 5.37% in 2003 to 4.51% in 2004 coupled with a $6.4 million or 0.4%
decrease in the average balance of interest-earning assets. Interest income from
loans decreased $3.7 million or 21.1% resulting from an 89 basis point decrease
in the average yield from 5.90% in 2003 to 5.01% in 2004 coupled with a decrease
in the average outstanding loan balances of $85.2 million or 7.1%. The decrease
in the average yield reflects the adverse impact of loan repayments of $797
million in fiscal 2003 plus the additional $479 million in payments during the
nine months ended March 2004. New loans granted and purchased during the past 18
months have been at substantially lower rates reflective of lower market rates.
Investment interest income increased by $308,000 or 10.5% due to an increase of
$59.2 million or 22.9% in the average balance and offset by a 46 basis point
decrease in the average yield from 4.56% in 2003 to 4.10% in 2004. Interest
income earned on federal funds sold decreased $13,000 or 4.1% from the 2003
quarter due to a 24 basis point decrease in the average yield from 1.25% in 2003
to 1.00% in 2004. This decrease was offset by an increase in the average balance
of $19.6 million or 19.3%. The weighted average yield on all interest earning
assets was 4.40% at March 31, 2004 and 5.52% at March 31, 2003.
INTEREST EXPENSE:
Interest expense decreased $2.7 million or 21.5% from the 2004 to the 2003
quarter. The decrease was due to a 68 basis point decrease in the average rate
paid on deposits and borrowings from 3.37% in 2003 to 2.69% in 2004 and by a
decrease in the average deposits and borrowings of $24.8 million. At March 31,
2004, the average rate payable on liabilities was 2.29% for deposits, 4.92% for
borrowings, 4.71% for trust preferred securities and 2.66% for combined deposits
and borrowings.
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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
$93,000 from the 2003 to the 2004 quarter. Aggregate valuation allowances were
1.37% and 1.20% of gross loans at March 31, 2004 and June 30, 2003,
respectively.
Nonperforming loans and real estate owned were $7.3 million, $10.0 million and
$8.0 million at March 31, 2004, June 30, 2003 and March 31, 2003, representing
0.45%, 0.61% and 0.49% of total assets at the respective balance sheet dates.
Total loan loss reserves at March 31, 2004 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:
Other income increased by $149,000 or 8.6% for the quarter ended March 31, 2004
from the quarter ended March 31, 2003 due to a gain on sale of assets of
$203,000. Other income, absent this gain, decreased $54,000 or 3.1% due to a
$110,000 decrease on fees derived from deposit and loan products partially
offset by income earned on Bank Owned Life Insurance.
OTHER EXPENSE:
Total other expense decreased by $334,000 or 5.7% for the three months ended
March 31, 2004 compared to the March 2003 quarter. This decrease is due
principally to decreases related to the consolidation of processing functions
resulting in fewer employees and systems requiring support. Annualized
noninterest expense as a percentage of average assets were 1.39% for the quarter
ended March 31, 2004 as compared to 1.45% for the quarter ended March 31, 2003.
RESULTS OF OPERATIONS - COMPARISON OF NINE MONTHS ENDED MARCH 31, 2004 AND 2003
Net income for the nine months ended March 31, 2004 was $7.8 million or $1.38
per diluted share, compared to net income of $8.1 million or $1.43 per diluted
share for the nine months ended March 31, 2003. The $281,000 decrease in net
income for the March 2004 nine months reflects a decrease in net interest
income, offset by a gain on sale of investments and a decrease in non-interest
expense. Net interest income for the nine months ended March 31, 2004 decreased
to $22.0 million from $24.4 million for the nine months ended March 31, 2003.
The nine months ended March 31, 2004 reflects a gain on the sale of investments
of $609,000 (pre-tax). Return on average equity was 10.19% for the nine months
ended March 2004 compared to 11.14% for nine months ended March 2003.
INTEREST INCOME:
Parkvale had interest income of $53.7 million during the nine months ended March
31, 2004 versus $66.0 million during the comparable period in 2003. The decrease
of $12.3 million is attributable to a decrease in the average interest-earning
asset portfolio of $18.1 million or 1.2%, coupled by a 100 basis point decrease
in the average yield from 5.63% in 2003 to 4.63% in 2004. Interest income from
loans decreased $11.8 million or 21.1% due to a 116 basis point decrease in the
average yield from 6.21% in 2003 to 5.05% in 2004 and by a decrease in the
average loan balance of $36.0 million or 3.0%. Income from investments increased
by $4,000 or 0.1% from 2003 due to an increase in the average investment balance
of $33.8 million or 13.8%, offset by a 58 basis point decrease in the average
yield from 4.78% in 2003 to 4.20% in 2004. Interest income earned on federal
funds sold decreased $557,000 or 41.7% from the prior nine months ended December
2003. This was due to a 49 basis point decrease in the average yield from 1.50%
in 2003 to 1.01% in 2004 and by a decrease of the average federal fund balance
of $15.9 million or 13.5%.
15
INTEREST EXPENSE:
Interest expense decreased by $9.9 million or 23.9% from the 2003 nine month
period to the 2004 nine month period. The decrease was due to an 83 basis point
decrease in the average rate paid from 3.65% in 2003 to 2.82% in 2004, coupled
with a decrease in the average deposits and borrowings of $22.8 million.
PROVISION FOR LOAN LOSSES:
Provision for loan losses decreased by $270,000 or 113.5% from the nine month
period ended March 31, 2002 to March 31, 2004. The provision for loan loss
includes the recovery of a previous charge off 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 1.37% of gross loans at March
31, 2004, 1.20% of gross loans at June 30, 2003 and 1.23% of gross loans at
March 31, 2003. Total loan loss reserves at March 31, 2004 were $14.6 million.
OTHER INCOME:
Other income increased by $595,000 or 11.5% for the nine months ended March 31,
2004 from the nine months ended March 31, 2003 due primarily to a gain on sale
of assets of $609,000. Other income, absent this gain, decreased $14,000 or 0.3%
due to decreases on service fees on all types of deposit and loan products
partially offset by income earned on Bank Owned Life Insurance.
OTHER EXPENSE:
Other expenses decreased by $783,000 for the nine month period ended March 31,
2004 from the comparable period in 2003. This decrease is due principally to
decreases in compensation, marketing and miscellaneous expenses. Compensation
and miscellaneous expenses have decreased over the prior year due mainly to a
decrease in full-time equivalents due to consolidation of processing functions.
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 nine months ended March 31, 2004 as
compared to 1.43% for the nine months ended March 31, 2003.
IMPACT OF INFLATION AND CHANGING PRICES:
The financial statements and related data presented herein have been prepared in
accordance with 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
16
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 March 31,
2004. There have been no significant changes in Registrant's internal controls
or in other factors that could significantly affect internal controls subsequent
to March 31, 2004.
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
(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 April 21, 2004 for an earnings release dated April
15, 2004.
17
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: April 30, 2004 By: /s/ Robert J. McCarthy, Jr.
-------------- ----------------------------
Robert J. McCarthy, Jr.
President and
Chief Executive Officer
DATE: April 30, 2004 By: /s/ Timothy G. Rubritz
-------------- -----------------------------
Timothy G. Rubritz
Vice President, Treasurer and
Chief Financial Officer
18