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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, 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
The closing sales price of the Registrant's Common Stock on April 22, 2003 was
$22.53 per share.
Number of shares of Common Stock outstanding as of April 22, 2003 was 5,562,977.
PARKVALE FINANCIAL CORPORATION
INDEX
Part I. Financial Information Page
- -------------------------------------------------------------------------------
Item 1.
Consolidated Statements of Financial Condition as of March 31, 2003 and
June 30, 2002 3
Consolidated Statements of Operations for the Three and Nine
Months ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the Nine Months ended
March 31, 2003 and 2002 5-6
Consolidated Statement of Shareholders' Equity as of March 31, 2003 6
Notes to Unaudited Interim Consolidated Financial Statements 7-9
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-16
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 16
Item 4.
Controls and Procedures 16
Part II. Other Information 16
Signatures and Certifications 17-20
Item 1.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
MARCH 31, JUNE 30,
ASSETS 2003 2002
--------------------------------
(unaudited)
Cash and noninterest earning deposits $ 27,737 $ 25,050
Federal funds sold 55,000 119,000
Interest-earning deposits in other banks 19,270 17,473
Investment securities available for sale (cost of
$20,318 at March 31 and $11,780 at June 30) 20,820 13,080
Investment securities held to maturity (fair value
of $254,130 at March 31 and $201,098 at June 30) 250,960 199,860
Loans, net of allowance of $15,039 at March 31
and $15,492 at June 30 1,213,953 1,217,639
Foreclosed real estate, net 3,545 1,717
Office properties and equipment, net 10,761 10,080
Intangible assets and deferred charges 11,682 11,787
Prepaid expenses and other assets 11,475 16,506
--------------------------------
Total Assets $1,625,203 $1,632,192
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Savings deposits $1,325,813 $1,349,339
Advances from Federal Home Loan Bank 151,111 131,121
Trust preferred securities 25,000 25,000
Other debt 12,454 16,875
Escrow for taxes and insurance 5,824 7,882
Other liabilities 5,909 4,571
--------------------------------
Total Liabilities 1,526,111 1,534,788
--------------------------------
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 4,229 4,293
Treasury Stock at cost (1,171,917 shares in March
and 1,034,483 in June) (22,537) (19,128)
Accumulated Other Comprehensive Income 923 826
Retained Earnings 109,742 104,678
--------------------------------
Total Shareholders' Equity 99,092 97,404
--------------------------------
Total Liabilities and Shareholders' Equity $1,625,203 $1,632,192
================================
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,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
Interest income:
Loans $17,657 $19,386 $55,872 $59,396
Investments 2,942 2,773 8,799 7,562
Federal funds sold 317 638 1,337 2,149
-----------------------------------------------------------
Total interest income 20,916 22,797 66,008 69,107
-----------------------------------------------------------
Interest expense:
Savings deposits 10,378 12,850 34,401 39,979
Borrowings 2,345 1,657 7,166 4,955
-----------------------------------------------------------
Total interest expense 12,723 14,507 41,567 44,934
-----------------------------------------------------------
Net interest income 8,193 8,290 24,441 24,173
Provision for loan losses 116 53 238 161
-----------------------------------------------------------
Net interest income after
provision for losses 8,077 8,237 24,203 24,012
-----------------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 1,021 926 3,317 2,658
Other fees and service charges 375 249 1,017 760
Gain on sale of assets -- 4,034 -- 5,251
Miscellaneous 331 291 864 1,025
-------- ------- ------- -------
Total other income 1,727 5,500 5,198 9,694
-----------------------------------------------------------
Noninterest Expenses:
Compensation and employee benefits 3,284 3,006 9,713 8,354
Office occupancy 1,098 946 3,105 2,595
Marketing 68 119 380 380
FDIC insurance 56 58 171 164
Office supplies, telephone and postage 403 407 1,232 1,028
Writedown of real estate owned -- 3,100 -- 3,100
Miscellaneous 978 1,370 2,884 2,835
-----------------------------------------------------------
Total other expenses 5,887 9,006 17,485 18,456
-----------------------------------------------------------
Income before income taxes 3,917 4,731 11,916 15,250
Income tax expense 1,214 1,615 3,846 5,263
-----------------------------------------------------------
Net income $2,703 $3,116 $8,070 $9,987
===========================================================
Net income per share:
Basic $0.49 $0.55 $1.45 $1.76
Diluted $0.48 $0.54 $1.43 $1.74
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
NINE MONTHS ENDED
MARCH 31,
2003 2002
-----------------------------
Cash flows from operating activities: (Unaudited)
Interest received $ 70,203 $ 69,082
Loan premiums paid, net of fees received (1,062) (624)
Other fees and commissions received 5,198 4,314
Interest paid (41,518) (44,956)
Cash paid to suppliers and others (15,978) (17,347)
Income taxes refunded (paid) 250 (5,950)
-----------------------------
Net cash provided by operating activities 17,093 4,519
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale -- 14,302
Proceeds from maturities of investments 150,987 23,835
Purchase of investment securities held to maturity (217,917) (67,077)
Maturity of deposits in other banks (1,797) (6,153)
Purchase of loans (433,975) (240,671)
Proceeds from sales of loans 2,672 2,464
Principal collected on loans 584,261 440,350
Loans made to customers, net of loans in process (144,393) (153,528)
Payment for acquisition of Second National Bank, net -- (18,818)
Other (1,654) (868)
-----------------------------
Net cash used in by investing activities (61,816) (6,164)
Cash flows from financing activities:
Net increase in checking and savings accounts 24,987 46,694
Net decrease in certificates of deposit (48,513) (26,077)
Proceeds from FHLB advances 25,000 --
Repayment of FHLB advances (5,010) (5,007)
Proceeds from trust preferred securities -- 25,000
Net (decrease) increase in other borrowings (4,422) (4,354)
Decrease in borrowers' advances for taxes and insurance (2,057) (98)
Cash dividends paid (3,029) (3,060)
Allocation of treasury stock to retirement plans 685 712
Acquisition of treasury stock (4,231) (169)
-----------------------------
Net cash (used in) provided by financing activities (16,590) 33,641
-----------------------------
Net (decrease) increase in cash and cash equivalents (61,313) 31,996
Cash and cash equivalents at beginning of period 144,050 115,208
-----------------------------
Cash and cash equivalents at end of period $ 82,737 $ 147,204
=============================
Reconciliation of net income to net cash provided NINE MONTHS ENDED
by operating activities: MARCH 31,
2003 2002
-----------------------------
Net income $ 8,070 $ 9,986
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,303 764
Accretion and amortization of loan fees, discounts and premiums 2,363 853
Loan fees collected and deferred (1,062) (624)
Provision for loan losses 238 161
Writedowns and expenses related to REO -- 3,100
Gain on sale of assets -- (5,251)
Decrease (increase) in accrued interest receivable 1,387 (479)
Increase (decrease) in other assets 3,419 (3,120)
Decrease (increase) in accrued interest payable 50 (22)
Decrease (increase) in other liabilities 1,325 (849)
-----------------------------
Total adjustments 9,023 (5,467)
-----------------------------
Net cash provided by operating activities $17,093 $4,519
=============================
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 $1.2 million for the nine months ended March 31, 2003 and
$829,000 for the nine months ended March 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, 2002 $6,735 $4,293 $(19,128) $826 $104,678 $97,404
Net income, nine months
ended March 31, 2003 8,070 8,070
Net unrealized security gains on
available-for-sale securities 97 97
--------
Comprehensive Income 8,167
Treasury stock purchased (4,231) (4,231)
Dividends on common stock at
$0.54 per share (3,006) (3,006)
Treasury stock contributed to
retirement plans 685 685
Exercise of stock options (64) 137 73
--------------------------------------------------------------------------------
Balance, March 31, 2003 $6,735 $4,229 $(22,537) $923 $109,742 $99,092
================================================================================
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share data)
1. Statements of Operations
The statements of operations for the three and nine months ended March 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 nine months ended March 31, 2003 are not
necessarily indicative of the results which may be expected for fiscal 2003. The
Annual Report on Form 10-K for the year ended June 30, 2002 contains additional
information and should be read in conjunction with this report.
2. 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,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted
earnings per share:
Net income $2,703 $3,116 $8,070 $9,987
Denominator:
Weighted average shares
for basic earnings per share 5,556,871 5,688,000 5,580,418 5,674,174
Effect of dilutive employee stock options 71,555 80,630 81,534 80,430
-------------------------------------------------------------
Weighted average shares for
dilutive earnings per share 5,628,426 5,768,630 5,661,952 5,755,603
=============================================================
Net income per share:
Basic $0.49 $0.55 $1.45 $1.76
=============================================================
Diluted $0.48 $0.54 $1.43 $1.74
=============================================================
3. Loans
Loans are summarized as follows:
MARCH 31, JUNE 30,
2003 2002
----------------------------------
Mortgage loans:
Residential:
1-4 Family $ 902,537 $ 895,330
Multifamily 20,106 18,140
Commercial 61,156 59,136
Other 34,408 35,108
--------------------------------
1,018,207 1,007,714
Consumer loans 152,752 167,956
Commercial business loans 51,995 53,055
Loans on savings accounts 3,057 3,224
--------------------------------
1,226,011 1,231,949
Less: Loans in process 47 205
Allowance for loan losses 15,039 15,492
Unamortized discount (premiums) and deferred loan fees (3,028) (1,387)
--------------------------------
Loans, net $1,213,953 $ 1,217,639
================================
The following summarizes the activity in the allowance for loan losses for the
nine months ended March 31:
2003 2002
-----------------------------
Beginning balance $15,492 $13,428
Provision for losses - mortgage loans 91 1
Provision for losses - consumer loans 89 126
Provision for losses - commercial loans 58 34
Loss reserves acquired through merger -- 1,994
Loans recovered 100 111
Loans charged off (791) (202)
-----------------------------
Ending balance $15,039 $15,492
=============================
Included in the $909.8 million of 1-4 family residential mortgage loans,
$407,000 are classified as held-for-sale. At March 31, 2003, the market value of
these loans is $415,000.
The increase of loan charge offs in the current period primarily consists of
commercial lease loans that are not currently originating and previously
classified commercial and consumer loans.
4. Investments
Parkvale's investment portfolio consisted of the following securities at March
31 and June 30.
MARCH 31, JUNE 30,
2003 2002
-------------------------
U.S. Government and agency obligations $ 85,575 $ 52,032
Municipal Obligations 9,152 10,440
Corporate debt 147,770 121,453
Mortgage backed securities 8,463 15,935
Equity securities (at market value) 20,820 13,080
-----------------------
Total investment portfolio $271,780 $212,940
=========================
5. 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, 2003 and 2002, total comprehensive income amounted
to $8,167 and $6,612, respectively.
6. 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. Parkvale's pro forma
information is as follows:
FOR THE NINE MONTHS
ENDED MARCH 31,
2003 2002
------------------------
Net income before stock options $8,070 $9,987
Compensation expense from stock options, net of tax:
Nine months ended March 31, 2002 grants -- 28
Nine months ended March 31, 2003 grants 142 --
-------------------------
Pro forma net income $7,928 $9,959
========================
Pro forma income per share:
Basic $1.42 $1.76
Diluted $1.40 $1.73
7. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which establishes financial
accounting and reporting for costs associated with exit or disposal activities.
This statement is effective for disposal activities initiated after December 31,
2002. As of March 31, 2003, Parkvale has not initiated any such activity since
December 31, 2002.
Statement of Financial Accounting Standards No. 147, Acquisition of Certain
Financial Instruments, which clarifies FASB 142 that, if certain conditions are
met, an acquisition of less-than-whole financial institutions should be
accounted for as a business combination. As a result of statement 147, entities
are required to reclassify and restate both the goodwill and amortization
expense as of the date FASB 142 was adopted. This statement was effective
October 1, 2002. 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. 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. While this
Statement does not amend Statement No. 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions of
Statement No. 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for that compensation using the
fair value method of Statement No. 123 or the intrinsic method of Opinion 25.
This statement's amendment of the disclosure requirement's of Opinion 28 is
effective for financial reports containing condensed consolidated interim
periods beginning after December 15, 2002. Parkvale has complied with the
disclosure required under this statement in Note 6 of this Form 10-Q.
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,
2003 2002
- -----------------------------------------------------------------------------------------------------------
Total assets $1,625,203 $1,617,887
Loans, net 1,213,953 1,187,252
Interest-earning deposits and federal funds sold 74,270 146,504
Total investments 271,780 226,815
Savings deposits 1,325,813 1,357,925
FHLB advances 151,111 111,124
Other borrowings 12,454 10,464
Shareholders' equity 99,092 99,192
Book value per share $17.81 $17.41
Statistical Profile:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, (1) MARCH 31, (1)
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
Average yield earned on all
interest-earning assets 5.37% 6.15% 5.63% 6.56%
Average rate paid on all
interest-bearing liabilities 3.36% 4.08% 3.65% 4.50%
Average interest rate spread 2.01% 2.07% 1.98% 2.06%
Net yield on average
interest-earning assets 2.10% 2.24% 2.08% 2.29%
Other expenses to average assets 1.45% 2.35% 1.43% 1.70%
Return on average assets 0.67% 0.81% 0.66% 0.92%
Return on average equity 11.05% 12.98% 11.14% 14.15%
Average equity to average total assets 6.03% 6.27% 5.95% 6.51%
Dividend per share $0.18 $0.18 $0.54 $0.54
AT MARCH 31,
2003 2002
- ----------------------------------------------------------------------------------------
One year gap to total assets (0.81%) (5.53%)
Intangibles to total equity 11.79% 11.50%
Capital to assets ratio 6.10% 6.13%
Ratio of nonperforming assets to total assets 0.49% 0.48%
Number of full-service offices 39 38
(1) The applicable income and expense figures have been annualized in
calculating the percentages.
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE:
Nonperforming, impaired loans and foreclosed real estate (REO) consisted of the
following at March 31, 2003 versus year-end June 30, 2002.
MARCH 31, 2003 JUNE 30, 2002
-------------- -------------
(Dollars in 000's)
Delinquent single-family mortgage loans $3,558 $2,373
Delinquent other loans 912 598
------ ------
Total of nonperforming loans $4,470 $2,971
Total of impaired loans 19 498
Real estate owned, net 3,545 1,717
------ ------
Total $8,034 $5,186
====== ======
Nonperforming and impaired loans and real estate owned represent 0.49% and 0.32%
of total assets at the respective balance sheet dates. Delinquent single-family
mortgage loans at March 31, 2003 consisted of 33 single family owner occupied
homes. As of March 31, 2003, $2.1 million or 58.1% of the nonaccrual mortgage
loans totaling $3.6 million were purchased from others. The $2.1 million of the
delinquent loans purchased from others is comprised of 8 loans. Loans purchased
from others comprise 57% of the gross mortgage loan portfolio. Management
believes all non-accrual mortgage loans are well collateralized.
Loans are placed on nonaccrual status when, in management's judgment, the
probability of collection of principle and interest is deemed to be insufficient
to warrant further accrual or if payments are more than 90 days past due. 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 $166,000 at
March 31, 2003 and $191,000 at June 30, 2002. Parkvale provides an allowance for
the loss of all 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 two loans
totalling $19,000 classified as impaired at March 31, 2003 and $498,000 at June
30, 2002. The average recorded investment in impaired loans is $447,000 for the
nine months ended March 31, 2003. The $498,000 impaired loan at June 30, 2002
was foreclosed upon in December 2002. The amount of interest income that has not
been recognized was $45,000 at foreclosure. Foreclosed real estate properties
are recorded at the lower of the carrying amount or fair value of the property
less the cost to sell. Periodically, management assesses the need for a
valuation allowance or a writedown to account for declines in fair value.
Foreclosed real estate includes $2.5 million related to a 1998 foreclosure on a
vacant building. A $6.5 million writedown was established for this property
during fiscal 2002 as estimated costs to remediate and renovate the building
were higher than originally estimated. As deemed necessary, management will
continue to assess the need for a valuation allowance on this property. The
process will be influenced by factors such as future additional capitalized
costs required, current real estate market and general economic conditions.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses was $15.0 million at March 31, 2003 and $15.5
million at June 30, 2002 and at March 31, 2002 or 1.23%, 1.26% and 1.29% of
gross loans at March 31, 2003, June 30, 2002 and March 31, 2002. The allowance
for loan losses is continually monitored by management to identify potential
portfolio risks and detect potential credit deterioration in the early stages.
The adequacy of the allowance for loan loss is determined by management through
evaluation of the loss potential on individual nonperforming, delinquent and
high dollar loans, economic and business trends, growth and composition of the
loan portfolio and historical loss experience, as well as other relevant
factors. Management believes the allowance for loan losses is adequate to absorb
probable loan losses.
LIQUIDITY AND CAPITAL RESOURCES:
Federal funds sold decreased $64 million or 53.8% from June 30, 2002 to March
31, 2003 due mainly to funds being invested in higher-yielding loans and
investment securities. Investment securities held to maturity increased $51.1
million or 25.6% from June 30, 2002 to March 31, 2003. Savings deposits
decreased by $23.5 million or 1.7%. Advances from FHLB increased $20.0 million
or 15.2%. Parkvale Bank's FHLB remaining advance available borrowing capacity is
$870.6 million. If Parkvale were to experience a rapid decrease in deposits in
excess of the available cash resources invested in cash and cash equivalents,
this available FHLB borrowing capacity could be utilized to fund a rapid
decrease in deposits.
Shareholders' equity was $99.1 million or 6.1% of total assets at March 31,
2003. A stock repurchase program approved in June 2002 permits the purchase of
5% of outstanding stock or 285,000 shares during fiscal 2003 at prevailing
prices in open-market transactions. Through March 31, 2003, 173,185 shares were
purchased at an average price of $24.31 per share, representing 3.04% 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, 2003, Parkvale was in compliance with all applicable
regulatory requirements, with Tier I and Tier II ratios of 6.85% and 12.05%,
respectively.
The regulatory capital ratios for Parkvale Bank at March 31, 2003 are calculated
as follows:
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
---------------------------------------------
Equity Capital (1) $ 122,277 $ 122,277 $ 122,277
Less non-allowable intangible assets (11,682) (11,682) (11,682)
Less unrealized securities gains (318) (318) (318)
Plus permitted valuation allowances (2) -- -- 12,821
Plus allowable unrealized holding gains (3) -- -- 225
---------------------------------------------
Total regulatory capital 110,277 110,277 123,323
Minimum required capital 64,401 40,950 81,899
---------------------------------------------
Excess regulatory capital $ 45,876 $ 69,327 $ 41,424
Adjusted total assets $1,610,015 $1,023,739 $1,023,739
Regulatory capital as a percentage 6.85% 10.77% 12.05%
Minimum capital required as a percentage 4.00% 4.00% 8.00%
---------------------------------------------
Excess regulatory capital as a percentage 2.85% 6.77% 4.05%
=============================================
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, 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 MARCH 31, 2003 AND 2002
For the three months ended March 31, 2003, Parkvale reported net income of $2.7
million or $0.48 per diluted share compared to net income of $3.1 million or
$0.54 per diluted share for the quarter ended March 31, 2002. The quarter ended
March 31, 2002 net income reflects security gains of $4.0 million and $3.5
million of non-interest expenses related to merger costs and a writedown in the
carrying value of foreclosed real estate. Net income for the quarter ended March
31, 2002 without these items would have been $2.8 million or $0.48 per share.
The $67,000 decrease to net income is attributable to higher non-interest
expenses of $381,000 and lower net interest income of $97,000, which were offset
by increased non-interest income of $261,000. The decrease in net interest
income is due to the accumulative effect of the lower interest rates triggered
by the Federal Reserve Board's twelve rate reductions during the past
twenty-seven months. This unprecedented number of rate reductions has resulted
in assets repricing at a faster pace than deposit accounts.
INTEREST INCOME:
Parkvale had interest income of $20.9 million during the three months ended
March 31, 2003 versus $22.8 million during the comparable period in 2002. This
decrease of $1.9 million is the result of a 78 basis point decrease in the
average yield from 6.15% in 2002 to 5.37% in 2003 offset by a $73.8 million or
5.0% increase in the average balance of interest-earning assets. Interest income
from loans decreased $1.7 million or 8.9% resulting from an 89 basis point
decrease in the average yield from 6.79% in 2002 to 5.90% in 2003 offset by a
$55.8 million or 4.9% increase in the average outstanding loans.
Investment securities interest income increased by $169,000 or 6.1% from the
2002 quarter due to an increase of $62.0 million or 31.6% in the average balance
as the average yield decreased from 5.65% in 2002 to 4.52% in 2003. Interest
income earned on federal funds sold decreased $321,000 or 50.3% from the 2002
quarter due to a 50 basis point drop in the average yield from 1.75% in 2002 to
1.25% in 2003 coupled with a decrease in the average balance of $44.0 million or
30.2%. At March 31, 2003, the weighted average yield on all interest earning
assets was 5.52% compared to 5.74% at December 31, 2002 and 6.27% at March 31,
2002.
INTEREST EXPENSE:
Interest expense decreased by $1.8 million or 12.3% from the 2002 to the 2003
quarter. The overall cost of funds decreased by 72 basis points from 4.08% in
2002 to 3.36% in 2003, conversely, the average deposit and borrowings balance
increased by $88.3 million, or 6.2%. Deposit expense decreased $2.5 million due
to an 82 basis point decrease in the average cost of deposits from 3.95% to
3.13% from the 2002 quarter to the 2003 quarter, offset by a $24.7 million or
1.9% increase in the average balance from the 2003 to the 2002 quarter.
Borrowing expense increased $688,000 or 41.5% due to a $63.6 million increase in
the average borrowings from the quarter ended March 2002 to the quarter ended
March 2003 primarily due to new FHLB advances totalling $50 million with rates
ranging from 4.125% to 5.62%. At March 31, 2003, the weighted average interest
rate payable on liabilities was 3.03% for deposits, 5.06% for borrowings, 4.96%
for trust preferred securities and 3.28% for combined deposits, borrowings and
trust preferred securities.
PROVISION FOR LOAN LOSSES:
Parkvale's provision for loan losses increased by $63,000 from the 2002 quarter
to the 2003 quarter. Aggregate valuation allowances were 1.23% and 1.26% of
gross loans at March 31, 2003 and June 30, 2002, respectively. Total loan loss
reserves at March 31, 2003 were $15.0 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.
OTHER INCOME:
Total other income decreased by $3.8 million or 68.6% at March 31, 2003 due to a
prior period gain on the sale of assets of $4.0 million. Other income absent
this gain in the prior period increased $261,000 or 17.8% due to an increase on
service fees on all types of deposit and loan products.
OTHER EXPENSE:
Total other expenses decreased $3.1 million or 34.6% due mainly to a prior
period one-time merger related cost of $400,000 in connection with the January
31, 2002 acquisition of SNB and to a $3.1 million write-down in the carrying
value of foreclosed real estate. Absent these items, other expense increased
$381,000 or 6.9%. Compensation and employee benefits increased by $278,000 or
9.2%, office occupancy expense increased $152,000, or 16.1% primarily due to the
addition of a new branch office, mitigated by a decrease in marketing expense of
$51,000 or 42.9%. The operations for the quarter ended March 31, 2002 only
contained two months of expenses relating to the operations of the Masontown
division, which was acquired via merger with Second National Bank on January 31,
2002.
INCOME TAXES:
The effective tax rate of 31.0% for the March 2003 quarter was lowered from
34.1% for the fiscal 2002 period due to the benefits of tax-exempt investment
income and the deduction made under Section 404(k) of dividends paid to vested
ESOP participants. The overall tax rate for the remaining quarter of fiscal 2003
is expected to be 31%.
RESULTS OF OPERATIONS - COMPARISON OF NINE MONTHS ENDED MARCH 31, 2003 AND 2002
Net income for the nine months ended March 31, 2003 was $8.1 million or $1.43
per diluted share, compared to net income of $10.0 million or $1.74 per diluted
share for the nine months ended March 31, 2002. The $1.9 million decrease in net
income is primarily attributable to the unusual activity of the prior nine-month
period ended March 31, 2002, which included $5.3 million of security gains and
$3.5 million of non-interest expense. Absent these items, net income, net of
income tax decreased $839,000. The decrease to net income is attributable to
higher non-interest expenses of $2.5 million, which were offset by increased net
interest income of $268,000 and increased non-interest income of $755,000. Net
interest income increased to $24.4 million from $24.2 million for the nine
months ended March 31, 2002. Return on average equity was 11.14% for the nine
months ended March 2003 compared to 14.15% for nine months ended March 2002.
INTEREST INCOME:
Parkvale had interest income of $66.0 million during the nine months ended March
31, 2003 and $69.1 million during the comparable period in 2002. This $3.1
million or 4.5% decrease is attributable to a 93 basis point decrease in the
average yield from 6.56% in 2002 to 5.63% in 2003 slightly offset by an increase
in the average interest-earning asset portfolio of $158.6 million or 11.3%.
Interest income from loans decreased $3.5 million or 5.9% as an 86 basis point
decrease in the average yield from 7.07% in 2002 to 6.21% in 2003 offset an
increase in average loans of $78.6 million or 7.0%.
Interest income from investments increased by $1.2 million or 16.4% from 2002
due to an $81.4 million or 49.6% increase in the average balance partially
offset by a 136 basis point decrease in the average yield from 6.14% in 2002 to
4.78% in 2003. Federal funds sold income decreased by $812,000 or 37.8%. The
average federal funds sold balance decreased by $1.4 million or 1.2% with an 89
basis point decrease in the average yield from 2.39% in 2002 to 1.50% in 2003.
INTEREST EXPENSE:
Interest expense decreased by $3.4 million from the 2003 nine month period from
the 2002 nine month period due to an 85 basis point decrease in the average rate
paid on deposits and borrowings from 4.50% in 2002 to 3.65% in 2003 and offset
with a $189.3 million or 14.2% increase in the balance of average deposits and
borrowings. Deposit expense decreased $5.6 million or 13.9% due to a 96 basis
point decrease in the average rate paid from 4.39% in 2002 to 3.43% in 2003,
offset by a $123.8 million increase in the average balance. Borrowing expense
increased $2.2 million due to a $29.8 million increase in the average balance or
65.5%, offset by a 40 basis point decrease in the average rate paid from 5.61%
in 2002 to 5.21% in 2003. The average balance increase is primarily due to FHLB
advances and the trust preferred security proceeds of $25 million received in
March 2002, with the current effective cost below 5.0%.
PROVISION FOR LOAN LOSSES:
Parkvale's provision for loan losses increased by $77,000 from 2003 to the 2002
period. Aggregate valuation allowances were 1.23% and 1.26% of gross loans at
March 31, 2003 and June 30, 2002, respectively. Total loan loss reserves at
March 31, 2003 were $15.0 million.
OTHER INCOME:
Total other income decreased by $4.5 million or 46.4% at March 31, 2003 due
primarily to a prior period gain on sale of assets from the available for sale
portfolio of $5.3 million. Other income absent this gain increased $755,000 or
17.0% due to an increase on service fees on all types of deposit and loan
products.
OTHER EXPENSE:
Total other expenses decreased $971,000 or 5.3% due mainly to a prior period
one-time merger related cost of $400,000 in connection with the January 31, 2002
acquisition of SNB and to a $3.1 million write-down in the carrying value of
foreclosed real estate. Other expense absent these charges increased $2.5
million or 16.9%. Compensation and benefits increased by $1.4 million or 16.3%
due to additional employees gained through the SNB acquisition. Additionally,
office occupancy expense increased $510,000, or 19.7% and office supplies,
telephone, and postage increased $204,000, or 19.8% due to the addition of the
five SNB branch offices plus the addition of a new office location.
IMPACT OF INFLATION AND CHANGING PRICES:
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than 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, 2002 in item 7a of Parkvale Financial Corporation's Form
10-K, filed with the SEC on September 17, 2002. Management believes that there
have been no material changes in Parkvale's market risk since June 30, 2002.
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,
2003. 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, 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
(a) Exhibits None
(b) Reports on Form 8-K None
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 24, 2003 By: /s/ Robert J. McCarthy, Jr.
-------------- ----------------------------
Robert J. McCarthy, Jr.
President and
Chief Executive Officer
DATE: April 24, 2003 By: /s/ Timothy G. Rubritz
-------------- -----------------------------
Timothy G. Rubritz
Vice President, Treasurer and
Chief Financial Officer
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert J. McCarthy, Jr., President and Chief Executive Officer of Parkvale
Financial Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parkvale Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 24, 2003 /s/ Robert J. McCarthy, Jr.
- -------------------- -------------------------------
Robert J. McCarthy, Jr.
President and Chief Executive Officer
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy G. Rubritz, Vice President-Treasurer and Chief Financial Officer of
Parkvale Financial Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Parkvale Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 24, 2003 /s/ Timothy G. Rubritz
-------------- ---------------------------------
Timothy G. Rubritz
Vice President-Treasurer and Chief
Financial Officer
CERTIFICATION PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
The undersigned executive officers of the registrant hereby certify
that this Form 10-Q fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and that the information contained herein fairly
presents, in all material respects, the financial condition and results of
operations of the registrant.
Parkvale Financial Corporation
Dated: April 24, 2003
--------------
By: /s/ Robert J. McCarthy, Jr.
----------------------------
Robert J. McCarthy, Jr.
Director, President and
Chief Executive Officer
By: /s/ Timothy G. Rubritz
----------------------------
Timothy G. Rubritz
Vice President-Treasurer and
Chief Financial Officer