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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 February 7, 2005 was
$29.99 per share.
Number of shares of Common Stock outstanding as of February 7, 2005 was
5,590,235.
PARKVALE FINANCIAL CORPORATION
INDEX
Part I. Financial Information Page
----
Item 1.
Consolidated Statements of Financial Condition as of December 31, 2004
and June 30, 2004 3
Consolidated Statements of Operations for the three and six months
ended December 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the six months ended
December 31, 2004 and 2003 5-6
Consolidated Statements of Shareholders' Equity for the six months
December 31, 2004 6
Notes to Unaudited Interim Consolidated Financial Statements 7-9
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 17
Item 4.
Controls and Procedures 17
Part II - Other Information 17
Signatures 18
2
Item 1. PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
DECEMBER 31, June 30,
ASSETS 2004 2004
------------ -----------
(unaudited) (audited)
Cash and noninterest earning deposits $ 26,574 $ 23,814
Federal funds sold 59,000 14,000
----------- -----------
Cash and cash equivalents 85,574 37,814
Interest-earning deposits in other banks 12,889 13,547
Investment securities available for sale (cost of
$26,224 at December 31 and $20,304 at June 30) 26,427 20,372
Investment securities held to maturity (fair value
of $471,294 at December 31 and $475,759 at June 30) 471,354 477,574
Loans, net of allowance of $15,611 at December 31
and $13,808 at June 30 1,241,342 1,015,078
Foreclosed real estate, net 1,280 2,998
Office properties and equipment, net 13,725 10,049
Goodwill 24,647 7,561
Intangible assets and deferred charges 8,754 3,573
Prepaid expenses and other assets 27,661 23,887
----------- -----------
Total Assets $ 1,913,653 $ 1,612,453
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Savings deposits $ 1,536,252 $ 1,281,971
Advances from Federal Home Loan Bank 202,340 171,093
Trust preferred securities 32,200 25,000
Other debt 22,851 19,310
Escrow for taxes and insurance 5,586 6,030
Other liabilities 6,453 4,363
----------- -----------
Total Liabilities 1,805,682 1,507,767
----------- -----------
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 3,567 3,616
Treasury Stock at cost (1,145,659 shares at December 31
and 1,153,806 at June 30) (22,545) (22,687)
Accumulated Other Comprehensive Income 129 43
Retained Earnings 120,085 116,979
----------- -----------
Total Shareholders' Equity 107,971 104,686
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,913,653 $ 1,612,453
=========== ===========
3
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
-------- -------- -------- --------
(Unaudited) (Unaudited)
Interest income:
Loans $ 12,941 $ 14,748 $ 25,975 $ 30,167
Investments 4,264 3,005 8,491 5,553
Federal funds sold 377 214 620 476
-------- -------- -------- --------
Total interest income 17,582 17,967 35,086 36,196
-------- -------- -------- --------
Interest expense:
Savings deposits 7,064 7,776 14,225 16,635
Borrowings 2,486 2,206 4,845 4,419
Trust preferred securities 363 315 702 610
-------- -------- -------- --------
Total interest expense 9,913 10,297 19,772 21,664
-------- -------- -------- --------
Net interest income 7,669 7,670 15,314 14,532
Provision (credit) for loan losses 54 (102) 111 (55)
-------- -------- -------- --------
Net interest income after
provision (credit) for losses 7,615 7,772 15,203 14,587
-------- -------- -------- --------
Noninterest Income:
Service charges on deposit accounts 1,436 1,111 2,690 2,217
Other fees and service charges 169 253 490 555
Gain on sale of assets -- -- 14 406
Miscellaneous 269 354 583 739
-------- -------- -------- --------
Total other income 1,874 1,718 3,777 3,917
-------- -------- -------- --------
Noninterest Expenses:
Compensation and employee benefits 3,053 3,094 6,279 6,139
Office occupancy 980 1,054 1,989 2,111
Marketing 102 102 185 189
FDIC insurance 46 50 93 102
Office supplies, telephone and postage 399 402 754 789
Miscellaneous 956 898 1,920 1,819
-------- -------- -------- --------
Total other expenses 5,536 5,600 11,220 11,149
-------- -------- -------- --------
Income before income taxes 3,953 3,890 7,760 7,355
Income tax expense 1,241 1,187 2,420 2,222
-------- -------- -------- --------
Net income $ 2,712 $ 2,703 $ 5,340 $ 5,133
======== ======== ======== ========
Net income per share:
Basic $ 0.49 $ 0.49 $ 0.96 $ 0.93
Diluted $ 0.48 $ 0.48 $ 0.95 $ 0.91
4
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
SIX MONTHS ENDED
DECEMBER 31,
2004 2003
--------- ---------
(unaudited)
Cash flows from operating activities:
Interest received $ 36,333 $ 40,244
Loan fees received (premiums paid) (194) (1,943)
Other fees and commissions received 3,526 3,238
Interest paid (19,742) (21,687)
Cash paid to suppliers and others (10,278) (10,712)
Income taxes paid (1,470) (2,120)
--------- ---------
Net cash provided by operating activities 8,175 7,020
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale -- 561
Proceeds from maturities of investment securities 159,570 46,657
Purchase of investment securities held to maturity (132,133) (134,694)
Maturity (purchase) of deposits in other banks 659 11,000
Purchase of loans (61,997) (171,870)
Proceeds from sales of loans 1,643 2,240
Principal collected on loans 167,287 357,778
Loans made to customers, net of loans in process (79,105) (74,250)
Payment for acquisition of Advance Financial, net of cash acquired (12,780) --
Other 768 (248)
--------- ---------
Net cash provided by investing activities 43,912 37,174
Cash flows from financing activities:
Net increase in checking and savings accounts 13,094 17,732
Net (decrease) in certificates of deposit (27,515) (66,163)
Proceeds from FHLB advances 10,000 --
Repayment of FHLB advances (97) (7)
Net increase in other borrowings 3,541 2,484
Decrease in borrowers' advances for taxes and insurance (1,047) (2,103)
Cash dividends paid (2,233) (2,000)
Acquisition of treasury stock (70) (472)
--------- ---------
Net cash used in financing activities (4,327) (50,529)
--------- ---------
Net increase (decrease) in cash and cash equivalents 47,760 (6,335)
Cash and cash equivalents at beginning of period 37,814 104,067
--------- ---------
Cash and cash equivalents at end of period $ 85,574 $ 97,732
========= =========
5
Reconciliation of net income to net cash provided by operating activities:
SIX MONTHS ENDED
DECEMBER 31,
2004 2003
--------- ---------
Net income $ 5,340 $ 5,133
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 821 926
Accretion and amortization of loan fees and discounts 745 2,893
Loan fees collected and deferred and (premiums paid) 285 (1,943)
Provision (credit) for loan losses 111 (55)
Gain on sale of assets (14) (406)
(Increase) decrease in accrued interest receivable (1,226) 793
(Increase) in other assets (1,041) (607)
Increase (decrease) in accrued interest payable 3,123 (23)
Increase in other liabilities 31 309
--------- ---------
Total adjustments 2,835 1,887
--------- ---------
Net cash provided by operating activities $ 8,175 $ 7,020
========= =========
Acquisition of Advance Financial Bancorp:
Cash and cash equivalents $ 23,190
Investments 27,881
Loans 252,770
Net other assets and liabilities 6,186
Deposits (268,703)
FHLB Advances and trust preferred securities (28,544)
---------
Cash paid to acquire AFB $ 12,780
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 $88 for the six months ended December 31, 2004 and $172 for
the six months ended December 31, 2003.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except share data)
Accumulated
Additional Other Total
Common Paid-in Treasury Comprehensive Retained Shareholders'
Stock Capital Stock Income Earnings Equity
----------------------------------------------------------------------------------
Balance, June 30, 2004 $6,735 $3,616 $(22,687) $43 $116,979 $104,686
Net income, six months ended
Dec.31, 2004 5,340 5,340
Accumulated other comprehensive
income:
Change in unrealized gain
on securities, net of
deferred tax expense $26 86 86
-------
Comprehensive income 5,426
Treasury stock purchased (70) (70)
Dividends on common stock at
$0.40 per share (2,234) (2,234)
Exercise of stock options (49) 212 163
------------------------------------------------------------------------------
Balance, December 31, 2004 $6,735 $3,567 $(22,545) $129 $120,085 $107,971
==============================================================================
6
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share data)
Statements of Operations
The statements of operations for the three and six months ended December 31,
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 six months ended December 31, 2004 are not
necessarily indicative of the results, which may be expected for fiscal 2005.
The Annual Report on Form 10-K for the year ended June 30, 2004 contains
additional information and should be read in conjunction with this report.
Stock Based Compensation
Pro forma information regarding net income and earnings per share as required by
FAS 123 has been determined as if Parkvale Financial Corporation had accounted
for its stock options using that method. The fair value for these options was
estimated at the date of the grants using a Black-Scholes option pricing model.
In management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. In addition, option valuation
models require input of highly subjective assumptions including the expected
stock price volatility. Because PFC's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. PFC's pro forma
information is as follows:
For the six months ended December 31,
2004 2003
---- ----
Net income before stock options $5,340 $5,133
Compensation expense from stock options, net of tax:
Six months ended December 31 30 115
------ ------
Pro forma net income $5,310 $5,018
====== ======
Basic - proforma $0.95 $0.91
Basic - as reported $0.96 $0.93
Diluted - proforma $0.94 $0.89
Diluted - as reported $0.95 $0.91
In December 2004, the Financial Accounting Standards Board (FASB) issued No.
123R, a revised Statement, Share-Based Payment Amendment of FASB Statements No.
123 and APB No. 95, previously issued on March 31, 2004, that addresses the
accounting for share-based payment transactions in which an enterprise receives
services in exchange for (a) equity instruments of the enterprise (b)
liabilities that are based on the fair value of the enterprise's equity
instruments that may be settled by the issuance of such equity instruments.
Under the FAS 123R, all forms of share-based payments to employees, including
employee stock options, would be treated the same as other forms of compensation
by recognition of the related cost in the income statement. The expense of the
award would generally be
7
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
measured at fair value at the grant date. Current accounting guidance requires
that the expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. The revised
statement eliminates the alternative to use the intrinsic value method of
accounting. This statement requires the use of fair value recognition
principles. PFC is currently evaluating this proposed statement and its effects
on its results of operations.
Loans
Loans are summarized as follows:
DECEMBER 31, June 30,
2004 2004
------------ -----------
Mortgage loans:
Residential:
1-4 Family $ 823,261 $ 723,551
Multifamily 33,809 23,910
Commercial 120,496 82,186
Other 17,956 12,987
----------- -----------
995,522 842,634
Consumer loans 198,306 143,476
Commercial business loans 57,411 38,869
Loans on savings accounts 3,484 2,790
----------- -----------
1,254,723 1,027,769
Less: Loans in process 161 313
Allowance for loan losses 15,611 13,808
Unamortized discount (premiums) and deferred loan fees (2,391) (1,430)
----------- -----------
Loans, net $ 1,241,342 $ 1,015,078
=========== ===========
The following summarizes the activity in the allowance for loan losses for the
six months ended December 31:
2004 2003
-------- --------
Beginning balance $ 13,808 $ 15,013
Allowance for loan losses from Advance acquisition 1,897 --
Provision (credit) for losses - mortgage loans 41 (237)
Provision for losses - consumer loans (8) 149
Provision for losses - commercial loans 78 33
Loans recovered 5 251
Loans charged off (210) (601)
-------- --------
Ending balance $ 15,611 $ 14,608
======== ========
Included in the $198,306 of consumer loans are $262 of unsecured credit card
loans that are classified as available-for-sale. At December 31, 2004, the
market value of these loans is approximately $262.
Comprehensive Income
Sources of comprehensive income not included in net income are limited to
unrealized gains and losses on certain investments in equity securities. For the
six months ended December 31, 2004 and 2003, total comprehensive income amounted
to $5,426 and $4,816, respectively.
8
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three and six months ended December 31:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Numerator for basic and diluted earnings per share:
Net income (in 000's) $ 2,712 $ 2,703 $ 5,340 $ 5,133
Denominator:
Weighted average shares
for basic earnings per share 5,581,626 5,551,742 5,580,861 5,544,776
Effect of dilutive employee stock options 74,493 81,189 68,594 85,267
---------- ---------- ---------- ----------
Weighted average shares for
dilutive earnings per share 5,656,120 5,632,931 5,649,455 5,630,043
========== ========== ========== ==========
Net income per share:
Basic $ 0.49 $ 0.49 $ 0.96 $ 0.93
========== ========== ========== ==========
Diluted $ 0.48 $ 0.48 $ 0.95 $ 0.91
========== ========== ========== ==========
Acquisition (Dollar amounts in thousands)
On December 31, 2004, Parkvale completed the acquisition of 100% of the voting
equity interest of Advance Financial Bancorp ("AFB" or "Advance"). The
acquisition of loans and deposits complements Parkvale's existing portfolio and
expanded the branch network into a new area just west of the existing footprint
in southwestern Pennsylvania. Advance Financial Savings Bank operated seven
branch office locations in Belmont and Jefferson Counties in Ohio and Brooke
County, West Virginia, which are now operated as Parkvale Bank offices. The
acquisition was accounted for as a purchase business combination and its
operations will be included in the consolidated statement of operations
effective January 1, 2005. All shareholders of Advance received $26 per share or
an aggregate $35,970. Payments to former option holders and transaction costs
increased the total consideration paid to $38,700. The fair value of assets
acquired included $51,071 of investments and cash, $252,770 of loans with
$268,703 of deposits assumed. Core deposit intangibles valued at $5,400
represent an estimated 5.0% of core deposit accounts and the premium's expected
amortization period is 10 years. The resulting goodwill of $17,087 is not
subject to periodic amortization. Goodwill and amortizing core deposit
intangibles of $16,831 are not deductible for federal income tax purposes. The
AFB amounts are estimated and are subject to revision prior to June 30, 2005
upon receipt of more refined data concerning market information concerning the
acquired portfolios.
New Accounting Pronouncements
In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF
Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (EITF 03-1). The quantitative and qualitative
disclosure provisions of EITF 03-1 were effective for years ending after
December 15, 2003 and were included in the Corporation's fiscal 2004 Form 10-K.
In March 2004, the EITF issued a Consensus on EITF 03-1 requiring that the
provisions of EITF 03-1 be applied for reporting periods beginning after June
15, 2004 to investments accounted for under SFAS No. 115 and 124. On September
30, 2004, the FASB delayed the effective date for the measurement and
recognition guidance contained in paragraphs 10-20 of EITF 03-1. EITF 03-1
establishes a three-step approach for determining whether an investment is
considered impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. PFC is in the process of determining the
impact that this EITF may have on its financial statements.
9
Item 2.
PARKVALE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for Parkvale Financial
Corporation. The Corporation's consolidated financial condition and results of
operations consist almost entirely of Parkvale Bank's financial condition and
results of operations. Current performance does not guarantee, and may not be
indicative of similar performance in the future. These are unaudited financial
statements and, as such, are subject to year-end audit review.
In addition to historical information, this Form 10-Q may contain
forward-looking statements. We have made forward-looking statements in this
document, and in documents that we incorporate by reference, that are subject to
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Corporation
and its subsidiaries. When we use words such as believe, expect, anticipate, or
similar expressions, we are making forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document and in the documents that we incorporate by
reference, could affect the future financial results of the Corporation and its
subsidiaries and could cause those results to differ materially from those
expressed in our forward-looking statements contained or incorporated by
reference in this document. These factors include the following: operating,
legal and regulatory risks; economic, political and competitive forces affecting
our businesses; and the risk that our analyses of these risks and forces could
be incorrect and/or that the strategies developed to address them could be
unsuccessful.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Corporation and its subsidiaries
conform to accounting principles generally accepted in the United States of
America (US GAAP) and general practices within the financial services industry.
All significant inter-company transactions are eliminated in consolidation and
certain reclassifications are made when necessary to conform with the previous
year's financial statements to the current year's presentation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities as of the
dates of the balance sheets and revenues and expenditures for the periods
presented. Therefore, actual results could differ significantly from those
estimates. Accounting policies involving significant judgments and assumptions
by management, which have or could have a material impact on the carrying value
of certain assets or comprehensive income, are considered critical accounting
policies. The Corporation recognizes the following as critical accounting
policies: Allowance for Loan Loss, Carrying Value of Investment Securities,
Valuation of Foreclosed Real Estate and Carrying Value of Goodwill and Other
Intangible Assets.
The Corporation's critical accounting policies and judgments disclosures are
contained in the June 30, 2004 Parkvale Financial Corporation's Annual Report
printed in September 2004. Management believes that there have been no material
changes since June 30, 2004. The Corporation has not substantively changed its
application of the foregoing policies, and there have been no material changes
in assumptions or estimation techniques used as compared to prior periods except
for the estimates used to value the December 31, 2004 acquisition of AFB.
10
(Dollar amounts in thousands, except per share data)
BALANCE SHEET DATA:
DECEMBER 31,
2004 2003
------ ------
Total assets $1,913,653 $1,597,195
Loans, net 1,241,342 1,128,358
Interest-earning deposits and federal funds sold 71,889 78,576
Total investments 497,781 316,839
Savings deposits 1,536,252 1,283,328
FHLB advances 202,340 161,100
Shareholders' equity 107,971 102,134
Book value per share $19.32 $18.32
Statistical Profile:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, (1) DECEMBER 31, (1)
2004 2003 2004 2003
------ ------ ------ ------
Average yield earned on all
interest-earning assets 4.55% 4.68% 4.53% 4.69%
Average rate paid on all
interest-bearing liabilities 2.66% 2.76% 2.65% 2.88%
Average interest rate spread 1.89% 1.92% 1.88% 1.81%
Net yield on average
interest-earning assets 1.98% 2.00% 1.98% 1.88%
Other expenses to average assets 1.38% 1.40% 1.39% 1.38%
Taxes to pre-tax income 31.39% 30.51% 31.19% 30.21%
Return on average assets 0.67% 0.67% 0.66% 0.64%
Return on average equity 10.09% 10.64% 10.00% 10.18%
Average equity to average total assets 6.68% 6.34% 6.63% 6.25%
Dividends per share $0.20 $0.18 $0.40 $0.36
AT DECEMBER 31,
2004 2003
------ -----
One year gap to total assets 0.44% 5.83%
Intangibles to total equity 30.94% 11.12%
Capital to assets ratio 5.64% 6.39%
Ratio of nonperforming assets to total assets 0.38% 0.48%
Number of full-service offices 46 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:
(Dollar amounts in 000's) DECEMBER 31, 2004 June 30, 2004
----------------- -------------
Delinquent single-family mortgage loans $3,394 $2,610
Delinquent other loans 2,241 2,205
------ ------
Total of nonperforming loans $5,635 $4,815
Total of impaired loans 272 140
Real estate owned, net 1,280 2,998
------ ------
Total $7,187 $7,953
====== ======
Nonperforming and impaired loans and real estate owned represent 0.38% and 0.49%
of total assets at the respective balance sheet dates. Included in the above
nonperforming chart are $1.3 million of nonperforming and impaired loans and
$133,000 of real estate owned from the Advance acquisition completed on December
31, 2004.
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 $166,000 at December 31, 2004 and $152,000 at
June 30, 2004. Parkvale provides an allowance for the loss of accrued but
uncollected interest on mortgage, consumer and commercial business loans that
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 $272,000 of
loans classified as impaired at December 31, 2004 and $140,000 at June 30, 2004.
The average recorded investment in impaired loans is $35,000 at December 31,
2004. The amount of interest income that was not been recognized was $18,000 for
the December 31, 2004 quarter. Impaired assets include $1.3 million of
foreclosed real estate as of December 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 net book value of foreclosed real estate
primarily consists of 1-4 family single-family dwellings with $335,000 of vacant
land at December 31, 2004.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses was $15.6 million at December 31, 2004, $13.8
million at June 30, 2004 and $14.6 million at December 31, 2003 or 1.24%, 1.34%
and 1.28% of gross loans at December 31, 2004, June 30, 2004 and December 31,
2003. The increase in the allowance at December 31, 2004 includes $1.9 million
related to the AFB acquisition. 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.
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
12
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.
LIQUIDITY AND CAPITAL RESOURCES:
Federal funds sold increased $45 million or 321.4% from June 30, 2004 to
December 31, 2004. Investment securities held to maturity decreased $6.2 million
or 1.3% and loans increased $226.3 million or 22.3% from June 30, 2004 to
December 31, 2004. Deposits increased $254.3 million or 19.8% from June 30, 2004
to December 31, 2004. Escrow for taxes and insurance decreased by $444,000 or
7.4% as a result of the remittance of property taxes to the various taxing
districts during the last half of the calendar year. Parkvale Bank's FHLB
advance available maximum borrowing capacity is $753.2 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 $108.0 million or 5.6% of total assets at December 31,
2004. A stock repurchase program, extended in June 2004, permits the purchase of
3.9% of outstanding stock or 218,400 shares during fiscal 2005 at prevailing
prices in open-market transactions. Through December 31, 2004, 2,650 shares were
purchased at an average price of $26.55 per share, representing 1.2% of the
currently authorized program. The Bank is required to maintain Tier I (Core)
capital equal to at least 4% of the institution's adjusted total assets, and
Tier II (Supplementary) risk-based capital equal to at least 8% of the
risk-weighted assets. At December 31, 2004, Parkvale was in compliance with all
applicable regulatory requirements, with Tier I and Tier II ratios of 6.68% and
10.99%, respectively.
The regulatory capital ratios for Parkvale Bank at December 31, 2004 are
calculated as follows:
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
----------- ----------- -----------
Equity Capital (1) $ 138,882 $ 138,882 $ 138,882
Less non-allowable intangible assets (33,402) (33,402) (33,402)
Less unrealized securities gains (118) (118) (118)
Plus permitted valuation allowances (2) -- -- 13,555
Plus allowable unrealized holding gains (3) -- -- 84
----------- ----------- -----------
Total regulatory capital 105,362 105,362 119,001
Minimum required capital 63,056 43,240 86,632
----------- ----------- -----------
Excess regulatory capital $ 42,306 $ 62,046 $ 32,369
Adjusted total assets $ 1,576,394 $ 1,082,906 $ 1,082,906
Regulatory capital as a percentage 6.68% 9.73% 10.99%
Minimum capital required as a percentage 4.00% 4.00% 8.00%
----------- ----------- -----------
Excess regulatory capital as a percentage 2.68% 5.73% 2.99%
=========== =========== ===========
Well capitalized requirement 5.00% 6.00% 10.00%
=========== =========== ===========
(1) Represents equity capital of the consolidated Bank as reported to the
Pennsylvania Department of Banking and FDIC on Form 041 for the quarter
ended December 31, 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
DECEMBER 31, 2004 AND 2003
For the three months ended December 31, 2004, Parkvale reported net income of
$2.712 million or $0.48 per diluted share, compared to net income of $2.703
million or $0.48 per diluted share for the quarter ended December 31, 2003. The
$9,000 increase in net income for the December 2004 quarter is attributable to
an increase in other income of $156,000 and a reduction in noninterest expense
of $64,000. In addition, the current quarter reflects a provision for loan
losses of $54,000 versus a net recovery of $102,000 in the 2003 quarter. Return
on average equity was 10.09% for the December 2004 quarter, compared to 10.64%
for the December 2003 quarter.
INTEREST INCOME:
Parkvale had interest income of $17.6 million during the three months ended
December 31, 2004 versus $18.0 million during the comparable period in 2003. The
$385,000 decrease is the result of a 13 basis point decrease in the average
yield from 4.68% in 2003 to 4.55% in 2004 offset with a $11.6 million or 0.8%
increase in the average balance of interest-earning assets. Interest income from
loans decreased $1.8 million or 12.3% resulting from a decrease in the average
outstanding loan balances of $150.2 million or 13.0% offset with a 4 basis point
increase in the average yield from 5.09% in 2003 to 5.13% in 2004. Investment
interest income increased by $1.3 million or 41.9% due to an increase of $171.7
million or 59.1% in the average balance and offset by a 45 basis point decrease
in the average yield from 4.14% in 2003 to 3.69% in 2004. Interest income earned
on federal funds sold increased $163,000 or 76.2% from the 2003 quarter due to a
100 basis point increase in the average yield from 1.01% in 2003 to 2.01% in
2004. This decrease was offset by a decrease in the average balance of $9.9
million or 11.6%. The weighted average yield on all interest earning assets was
4.52% at December 31, 2004 and 4.64% at December 31, 2003.
INTEREST EXPENSE:
Interest expense decreased $384,000 or 3.7% from the 2003 to the 2004 quarter.
The decrease was due to a 10 basis point decrease in the average rate paid on
deposits and borrowings from 2.76% in 2003 to 2.66% in 2004 and by a decrease in
the average deposits and borrowings of $778,000. At December 31, 2004, the
average rate payable on liabilities was 2.20% for deposits, 4.76% for
borrowings, 6.15% for trust preferred securities and 2.61% for combined deposits
and borrowings.
PROVISION FOR LOAN LOSSES:
The provision for loan losses is an amount added to the allowance against which
loan losses are charged. Parkvale's provision for loan losses increased by
$156,000 from the 2003 to the 2004 quarter. The credit provision for loan loss
in the December 2003 quarter includes the recovery of a previously charged off
loan of $235,000. A commercial real estate loan partially charged off in fiscal
2003 was paid in full during December 2003. Aggregate valuation allowances were
1.24% and 1.34% of gross loans at December 31, 2004 and June 30, 2004,
respectively.
Nonperforming loans and real estate owned were $7.2 million, $8.0 million and
$7.7 million at December 31, 2004, June 30, 2004 and December 31, 2003,
representing 0.38%, 0.49% and 0.48% of total assets at the respective balance
sheet dates. Total loan loss reserves at December 31, 2004 were $15.6 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
14
allowance for loan losses. Management believes the allowance for loan losses is
adequate to cover the amount of probable loan losses incurred.
OTHER INCOME:
Total other income increased by $156,000 or 9.1% in 2004 due to a $325,000
increase of fee income derived from deposit accounts partially offset by
decreases in income earned on Bank Owned Life Insurance, fee income derived from
loans, and from investment service fee income on nondeposit investment products
offered directly to customers through an operating division, Parkvale Financial
Services.
OTHER EXPENSE:
Total other expense decreased by $64,000 or 1.1% for the three months ended
December 31, 2004. This decrease is due principally to decreases in compensation
and office occupancy of $41,000 and $74,000, or 1.3% and 7.0%, respectively and
offset by an increase in miscellaneous expense of $58,000, or 6.46% primarily
due to an increase of data processing expense related to enhancements to
products and services. Office occupancy has decreased due to the sale of under
utilized buildings. Annualized noninterest expense as a percentage of average
assets was 1.38% for the quarter ended December 31, 2004 as compared to 1.40%
for the quarter ended December 31, 2003.
RESULTS OF OPERATIONS - COMPARISON OF SIX MONTHS ENDED
DECEMBER 31, 2004 AND 2003
For the six month period ended December 31, 2004, net income was $5.3 million or
$0.95 per diluted share compared to net income of $5.1 million or $0.91 per
diluted share for the six month period ended December 31, 2003. The $207,000
increase in net income for the December 2004 six months reflects a $782,000
increase in net interest income partially offset by a $140,000 decrease in
non-interest income and a $71,000 increase in non-interest expense. Net interest
income for the six months ended December 31, 2004 increased to $15.3 million
from $14.5 million for the six months ended December 31, 2003. Return on average
equity was 10.00% for the six months ended December 2004, compared to 10.18% for
the six months ended December 2003.
INTEREST INCOME:
Parkvale had interest income of $35.1 million during the six months ended
December 31, 2004 versus $36.2 million during the comparable period in 2003. The
decrease of $1.1 million is attributable a 16 basis point decrease in the
average yield from 4.69% in 2003 to 4.53% in 2004, offset by an increase in the
average interest-earning asset portfolio of $2.9 million or 0.2%. Interest
income from loans decreased $4.2 million or 13.9% due to a decrease in the
average loan balance of $178.7 million or 15.0% offset by a 7 basis point
increase in the average yield from 5.07% in 2003 to 5.14% in 2004. Income from
investments increased by $2.9 million or 52.9% from 2003 due to an increase in
the average investment balance of $204.0 million or 78.4%, offset by a 61 basis
point decrease in the average yield from 4.27% in 2003 to 3.66% in 2004.
Interest income earned on federal funds sold increased $144,000 or 30.3% from
the prior six months ended December 2003. This was due to a 73 basis point
increase in the average yield from 1.02% in 2003 to 1.75% in 2004 and offset by
a decrease of the average federal fund balance of $22.4 million or 24.1%.
INTEREST EXPENSE:
Interest expense decreased by $1.9 million or 8.7% from the 2003 six month
period to the 2004 six month period. The decrease was due to a 23 basis point
decrease in the average rate paid from 2.88% in 2003 to 2.65% in 2004, coupled
with a decrease in the average deposits and borrowings of $11.8 million.
15
PROVISION FOR LOAN LOSSES:
Provision for loan losses increased by $166,000 or 301.7% from the six month
period ended December 31, 2003 to December 31, 2004. The provision for loan loss
in the 2003 period includes the recovery of a previous charge off of $235,000 in
December 2003. Aggregate valuation allowances were 1.24% of gross loans at
December 31, 2004, 1.34% of gross loans at June 30, 2004 and 1.28% of gross
loans at December 31, 2003. Total loan loss reserves at December 31, 2004 were
$15.6 million.
OTHER INCOME:
Other income decreased by $140,000 or 3.6% for the six months ended December 31,
2004 from the six months ended December 31, 2003 due primarily to a decrease of
$392,000 or 96.6 % from gain on sale of assets. Gain on sale of assets during
the six months ended December 31, 2004 was $14,000 versus $406,000 during the
comparable period in 2003. Other income, absent this prior period gain,
increased $252,000 or 7.2 due to a $473,000 increase on service fees on all
types of deposit products and offset by a $65,000 decrease in fee income derived
from loans and from investment service fee income on nondeposit investment
products offered directly to customers through an operating division, Parkvale
Financial Services and a lower return on bank owned life insurance.
OTHER EXPENSE:
Other expenses increased by $71,000 for the six month period ended December 31,
2004 from the comparable period in 2003. This increase is due principally to
increases in compensation of $140,000, or 2.3% and offset by a decrease in
office occupancy expense of $122,000 or 5.8%. Compensation has increased over
the prior year due mainly to merit increases. Office occupancy has decreased as
compared to the prior period due to the sale of under utilized buildings.
Annualized noninterest expenses as a percentage of average assets were 1.39% for
the six months ended December 31, 2004 as compared to 1.38% for the six months
ended December 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 that 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.
16
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are
presented at June 30, 2004 in item 7a of Parkvale Financial
Corporation's Form 10-K, filed with the SEC on September 13, 2004.
Management believes that there have been no material changes in
Parkvale's market risk since June 30, 2004.
Item 4. Controls and Procedures
Disclosure controls and procedures are monitored and supervised by the
Registrant's management, including the CEO and CFO, to the
effectiveness of the design and operation of the Registrant's
disclosure controls and procedures. The Registrant's management,
including the CEO and CFO, concluded that the Registrant's disclosure
controls and procedures were effective as of December 31, 2004. There
have been no significant changes in the Registrant's internal controls
or in other factors that could significantly affect internal controls
subsequent to December 31, 2004.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Unregistered Sales of Equity 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
(a) Any information required to be disclosed in a Form 8-K during the period
covered by this report was disclosed as required.
(b) There were no material changes in the procedures by which stockholders may
recommend nominees to the Board of Directors during the quarter ended
December 31, 2004.
Item 6. 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 and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (as furnished as
Exhibit 32.1)
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: February 8, 2005 By: /s/ Robert J. McCarthy, Jr.
---------------- ----------------------------
Robert J. McCarthy, Jr.
President and
Chief Executive Officer
DATE: February 8, 2005 By: /s/ Timothy G. Rubritz
---------------- -----------------------------
Timothy G. Rubritz
Vice President, Treasurer and
Chief Financial Officer
18