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UNITED STATES
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, 2005
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
Indicate by check mark whether the registrant (1) has filed all reports required
be filed 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 May 4, 2005 was
$28.05 per share.
Number of shares of Common Stock outstanding as of May 4, 2005 was 5,619,983.
PARKVALE FINANCIAL CORPORATION
INDEX
Page
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Part I. Financial Information
Item 1.
Consolidated Statements of Financial Condition as of March 31, 2005
and June 30, 2004 3
Consolidated Statements of Operations for the three and nine months ended
March 31, 2005 and 2004 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 2005 and 2004 5-6
Consolidated Statements of Shareholders' Equity for the nine months ended
March 31, 2005 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 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)
MARCH 31, June 30,
2005 2004
------------ ------------
(unaudited) (audited)
ASSETS
Cash and noninterest earning deposits $ 26,430 $ 23,814
Federal funds sold 80,000 14,000
------------ ------------
Cash and cash equivalents 106,430 37,814
Interest-earning deposits in other banks 214 13,547
Investment securities available for sale (cost of
$20,277 at March 31 and $20,304 at June 30) 20,572 20,372
Investment securities held to maturity (fair value
of $481,987 at March 31 and $475,759 at June 30) 485,156 477,574
Loans, net of allowance of $15,517 at March 31
and $13,808 at June 30 1,205,102 1,015,078
Foreclosed real estate, net 1,645 2,998
Office properties and equipment, net 13,411 10,049
Goodwill 24,457 7,561
Intangible assets 7,726 3,573
Prepaid expenses and other assets 26,834 23,887
------------ ------------
Total Assets $ 1,891,547 $ 1,612,453
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Savings deposits $ 1,512,416 $ 1,281,971
Advances from Federal Home Loan Bank 202,241 171,093
Trust preferred securities 32,200 25,000
Other debt 22,236 19,310
Escrow for taxes and insurance 5,787 6,030
Other liabilities 5,812 4,363
------------ ------------
Total Liabilities 1,780,692 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 3,558 3,616
Treasury Stock at cost (1,114,911 shares at March 31
and 1,153,806 at June 30) (21,702) (22,687)
Accumulated Other Comprehensive Income 188 43
Retained Earnings 122,076 116,979
------------ ------------
Total Shareholders' Equity 110,855 104,686
------------ ------------
Total Liabilities and Shareholders' Equity $ 1,891,547 $ 1,612,453
============ ============
3
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Interest income:
Loans $ 16,163 $ 13,934 $ 42,138 $ 44,101
Investments 4,426 3,250 12,917 8,803
Federal funds sold 450 304 1,070 780
---------- ---------- ---------- ----------
Total interest income 21,039 17,488 56,125 53,684
---------- ---------- ---------- ----------
Interest expense:
Savings deposits 8,206 7,471 22,431 24,106
Borrowings 2,608 2,204 7,453 6,623
Trust preferred securities 512 309 1,214 919
---------- ---------- ---------- ----------
Total interest expense 11,326 9,984 31,098 31,648
---------- ---------- ---------- ----------
Net interest income 9,713 7,504 25,027 22,036
Provision (credit) for loan losses 32 23 143 (32)
---------- ---------- ---------- ----------
Net interest income after
provision (credit) for losses 9,681 7,481 24,884 22,068
---------- ---------- ---------- ----------
Noninterest Income:
Service charges on deposit accounts 1,456 1,049 4,146 3,266
Other fees and service charges 370 265 860 820
Gain on sale of assets 13 203 27 609
Miscellaneous 313 359 896 1,098
---------- ---------- ---------- ----------
Total other income 2,152 1,876 5,929 5,793
---------- ---------- ---------- ----------
Noninterest Expenses:
Compensation and employee benefits 3,812 3,065 10,091 9,204
Office occupancy 1,329 1,075 3,318 3,186
Marketing 71 75 256 264
FDIC insurance 47 49 140 151
Office supplies, telephone and postage 538 399 1,292 1,188
Miscellaneous 1,464 890 3,384 2,709
---------- ---------- ---------- ----------
Total other expenses 7,261 5,553 18,481 16,702
---------- ---------- ---------- ----------
Income before income taxes 4,572 3,804 12,332 11,159
Income tax expense 1,456 1,148 3,876 3,370
---------- ---------- ---------- ----------
Net income $ 3,116 $ 2,656 $ 8,456 $ 7,789
========== ========== ========== ==========
Net income per share:
Basic $ 0.55 $ 0.47 $ 1.51 $ 1.40
Diluted $ 0.54 $ 0.47 $ 1.49 $ 1.38
4
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
NINE MONTHS ENDED
MARCH 31,
2005 2004
---------- ----------
(unaudited)
Cash flows from operating activities:
Interest received $ 60,528 $ 59,607
Loan fees received (premiums paid) (361) (2,527)
Other fees and commissions received 5,661 4,774
Interest paid (30,996) (31,651)
Cash paid to suppliers and others (19,826) (16,205)
Income taxes paid (1,470) (2,130)
---------- ----------
Net cash provided by operating activities 13,536 11,868
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale 12,242 1,075
Proceeds from maturities of investment securities 167,079 166,939
Purchase of investment securities held to maturity (160,170) (258,477)
Maturity of deposits in other banks 13,334 2,671
Purchase of loans (80,446) (171,870)
Proceeds from sales of loans 1,867 2,485
Principal collected on loans 255,244 479,477
Loans made to customers, net of loans in process (113,025) (124,262)
Payment for acquisition of Advance Financial, net of cash acquired (12,780) -
Other 693 (255)
---------- ----------
Net cash provided by investing activities 84,038 97,783
Cash flows from financing activities:
Net increase in checking and savings accounts 148 26,291
Net (decrease) in certificates of deposit (38,448) (73,931)
Proceeds from FHLB advances 10,000 10,000
Repayment of FHLB advances (101) (11)
Net increase in other borrowings 2,926 547
Decrease in borrowers' advances for taxes and insurance (846) (2,721)
Cash dividends paid (3,351) (3,123)
Allocation of treasury stock to retirement plans 784 731
Acquisition of treasury stock (70) (472)
---------- ----------
Net cash used in financing activities (28,958) (42,689)
---------- ----------
Net increase in cash and cash equivalents 68,616 66,962
Cash and cash equivalents at beginning of period 37,814 104,067
---------- ----------
Cash and cash equivalents at end of period $ 106,430 $ 171,029
========== ==========
5
NINE MONTHS ENDED MARCH 31,
2005 2004
------------ ------------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 8,456 $ 7,789
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,462 1,376
Accretion and amortization of loan fees and discounts 1,557 3,850
Loan fees collected and deferred (premiums paid) 56 (2,527)
Provision (credit) for loan losses 143 (32)
Gain on sale of assets (27) (609)
Decrease in accrued interest receivable 2,495 1,590
(Increase) in other assets (2,781) (891)
Increase (decrease) in accrued interest payable 129 (2)
Increase in other liabilities 2,046 1,324
------------ ------------
Total adjustments 5,080 4,079
------------ ------------
Net cash provided by operating activities $ 13,536 $ 11,868
============ ============
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 $553,000 for the nine months ended March 31, 2005 and $677,000
for the nine months ended March 31, 2004.
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, nine months ended March 31, 2005 8,456 8,456
Accumulated other comprehensive income:
Change in unrealized gain on securities,
net of deferred tax expense $60 154
Reclassification adjustment, net of taxes $(4) (9)
145
-----------
Comprehensive income 8,601
Treasury stock purchased (70) (70)
Dividends on common stock at $0.60 per share (3,359) (3,359)
Treasury stock contributed to benefit plans 806 806
Exercise of stock options (58) 249 191
------- ---------- --------- ------------- -------- -----------
Balance, March 31, 2005 $ 6,735 $ 3,558 ($ 21,702) $ 188 $122,076 $ 110,855
======= ========== ========= ============= ======== ===========
6
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share data)
Statements of Operations
The statements of operations for the three and nine months ended March 31, 2005
and 2004 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, 2005 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 nine months ended March 31,
2005 2004
------------ ------------
Net income before stock options $ 8,456 $ 7,789
Compensation expense from stock options, net of tax:
Nine months ended March 31 30 122
------------ ------------
Pro forma net income $ 8,426 $ 7,667
============ ============
Basic - proforma $ 1.51 $ 1.38
Basic - as reported $ 1.51 $ 1.40
Diluted - proforma $ 1.49 $ 1.36
Diluted - as reported $ 1.49 $ 1.38
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 and (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 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 measured at fair
7
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
value at the grant date. Current accounting guidance permits the expense
relating to so-called fixed plan employee stock options only be disclosed in the
footnotes to the financial statements. The revised statement eliminates 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 revised statement and its effects on its results of
operations. This statement will affect Parkvale on July 1, 2005.
Loans
Loans are summarized as follows:
MARCH 31, June 30,
2005 2004
------------ ------------
Mortgage loans:
Residential:
1-4 Family $ 810,826 $ 723,551
Multifamily 30,674 23,910
Commercial 109,477 82,186
Other 19,567 12,987
------------ ------------
970,544 842,634
Consumer loans 191,255 143,476
Commercial business loans 50,767 38,869
Loans on savings accounts 5,599 2,790
------------ ------------
1,218,165 1,027,769
Less: Loans in process 131 313
Allowance for loan losses 15,517 13,808
Unamortized discount (premiums) and deferred loan fees (2,585) (1,430)
------------ ------------
Loans, net $ 1,205,102 $ 1,015,078
============ ============
The following summarizes the activity in the allowance for loan losses for the
nine months ended March 31:
2005 2004
---------- ----------
Beginning balance $ 13,808 $ 15,013
Allowance for loan losses from Advance acquisition 1,897 -
Provision (credit) for losses - mortgage loans 72 (225)
Provision (credit) for losses - consumer loans (5) 160
Provision for losses - commercial loans 76 33
Loans recovered 22 268
Loans charged off (353) (672)
---------- ----------
Ending balance $ 15,517 $ 14,577
========== ==========
Included in the $191,255 of consumer loans are $254 of unsecured credit card
loans that are classified as available-for-sale. At March 31, 2005, the market
value of these loans is approximately $254.
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, 2005 and 2004, total comprehensive income amounted
to $8,601 and $7,389, respectively.
8
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Share ("EPS")
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,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Numerator for basic and diluted EPS:
Net income (in 000's) $ 3,116 $ 2,656 $ 8,456 $ 7,789
Denominator:
Weighted average shares for basic EPS 5,607,489 5,594,881 5,589,737 5,561,478
Effect of dilutive employee stock options 85,048 75,197 74,079 81,910
---------- ---------- ---------- ----------
Weighted average shares for dilutive EPS 5,692,537 5,670,078 5,663,816 5,643,388
========== ========== ========== ==========
Net income per share:
Basic $ 0.55 $ 0.47 $ 1.51 $ 1.40
========== ========== ========== ==========
Diluted $ 0.54 $ 0.47 $ 1.49 $ 1.38
========== ========== ========== ==========
Acquisition (Dollar amounts in thousands)
On December 31, 2004, Parkvale completed the acquisition of 100% of the voting
equity interests 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 Advance's
operations were 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 $4,611
represent 4.7% of core deposit accounts and the premium's expected amortization
period is 8.94 years. The resulting goodwill of $16,895 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 values were
estimated at December 31, 2004 and are revised at March 31, 2005 to reflect
better information concerning the acquired portfolios. The valuation of the
acquired loan portfolio is thought to be complete but remains subject to
revision until June 30, 2005.
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.
FORWARD-LOOKING STATEMENTS:
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.
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.
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
10
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.
(Dollar amounts in thousands, except per share data)
BALANCE SHEET DATA:
MARCH 31,
2005 2004
---------- ----------
Total assets $1,891,547 $1,608,618
Loans, net 1,205,102 1,055,905
Interest-earning deposits and federal funds sold 106,430 171,029
Total investments 505,728 319,494
Deposits 1,512,416 1,284,120
FHLB advances 202,241 171,096
Shareholders' equity 110,855 104,408
Book value per share $ 19.73 $ 18.60
Statistical Profile:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, (1) MARCH 31, (1)
2005 2004 2005 2004
------ ------ ------ ------
Average yield earned on all
interest-earning assets 4.67% 4.51% 4.59% 4.63%
Average rate paid on all
interest-bearing liabilities 2.55% 2.69% 2.61% 2.82%
Average interest rate spread 2.12% 1.82% 1.98% 1.81%
Net yield on average
interest-earning assets 2.16% 1.94% 2.05% 1.90%
Other expenses to average assets 1.53% 1.39% 1.44% 1.38%
Return on average assets 0.66% 0.66% 0.66% 0.65%
Return on average equity 11.31% 10.21% 10.45% 10.19%
Average equity to average total assets 5.80% 6.49% 6.32% 6.33%
Dividends per share $ 0.20 $ 0.20 $ 0.60 $ 0.56
AT MARCH 31,
2005 2004
----- -----
One year gap to total assets 1.05% 9.07%
Intangibles to total equity 29.03% 10.77%
Capital to assets ratio 5.86% 6.49%
Ratio of nonperforming assets to total assets 0.43% 0.45%
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) MARCH 31, 2005 June 30, 2004
-------------- -------------
Delinquent single-family mortgage loans $ 3,258 $ 2,610
Delinquent other loans 2,865 2,205
-------- --------
Total nonperforming loans 6,123 4,815
Total impaired loans 334 140
Real estate owned, net 1,645 2,998
-------- --------
Total $ 8,102 $ 7,953
======== ========
Nonperforming and impaired loans and real estate owned represent 0.43% and 0.49%
of total assets at the respective balance sheet dates. Included in the above
nonperforming chart at March 31, 2005 are $4.2 million of nonperforming and
impaired loans and $196,000 of real estate owned and repossessed assets from the
Advance acquisition completed on December 31, 2004. The valuation of the loans
acquired from Advance is thought to be complete but is subject to revision based
upon additional review of individual loan files of the acquired portfolio.
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 $215,000 at March 31, 2005 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 $334,000 of
loans classified as impaired at March 31, 2005 and $140,000 at June 30, 2004.
The average recorded investment in impaired loans is $216,000 at March 31, 2005.
The amount of interest income that was not recognized was $61,000 for the March
31, 2005 quarter. Impaired assets include $1.6 million of foreclosed real estate
as of March 31, 2005. 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 $372,000 of vacant land at March 31, 2005.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses was $15.5 million at March 31, 2005, $13.8 million
at June 30, 2004 and $14.6 million at March 31, 2004 or 1.27%, 1.34% and 1.37%
of gross loans at March 31, 2005, June 30, 2004 and March 31, 2004. The net
dollar increase in the allowance at March 31, 2005 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.
Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect
12
potential credit deterioration in the early stages. Management then establishes
reserves based upon its evaluation of the inherent risks in the loan portfolio.
Changes to the levels of reserves are made quarterly based upon perceived
changes in risk. Management believes the allowance for loan losses is adequate
to absorb loan losses.
LIQUIDITY AND CAPITAL RESOURCES:
Federal funds sold increased $66 million or 471.4% from June 30, 2004 to March
31, 2005. Investment securities held to maturity increased $7.6 million or 1.6%
and loans increased $190.0 million or 18.7% from June 30, 2004 to March 31,
2005. Deposits increased $230.4 million or 18.0% from June 30, 2004 to March 31,
2005. Escrow for taxes and insurance decreased by $243,000 or 4.0% as a result
of the remittance of property taxes to the various taxing districts. Parkvale
Bank's FHLB advance available maximum borrowing capacity is $844.7 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 $110.9 million or 5.9% of total assets at March 31,
2005. 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 March 31, 2005, 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 March 31, 2005, Parkvale was in compliance with all
applicable regulatory requirements, with Tier I and Tier II ratios of 5.85% and
11.65%, respectively.
The regulatory capital ratios for Parkvale Bank at March 31, 2005 are calculated
as follows:
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
----------- ----------- -----------
Equity Capital (1) $ 141,586 $ 141,586 $ 141,586
Less non-allowable intangible assets (32,183) (32,183) (32,183)
Less unrealized securities gains (178) (178) (178)
Plus permitted valuation allowances (2) - - 13,159
Plus allowable unrealized holding gains (3) - - 126
----------- ----------- -----------
Total regulatory capital 109,225 109,225 122,510
Minimum required capital 74,660 42,059 84,118
----------- ----------- -----------
Excess regulatory capital $ 34,565 $ 67,166 $ 38,392
Adjusted total assets $ 1,866,491 $ 1,051,474 $ 1,051,474
Regulatory capital as a percentage 5.85% 10.39% 11.65%
Minimum capital required as a percentage 4.00% 4.00% 8.00%
----------- ----------- -----------
Excess regulatory capital as a percentage 1.85% 6.39% 3.65%
=========== =========== ===========
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, 2005.
(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, 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, 2005 AND 2004
For the three months ended March 31, 2005, net income was $3.1 million or $0.54
per diluted share, up 14.9% on a per share basis, compared to net income of $2.7
million or $0.47 per diluted share for the quarter ended March 31, 2004. The
$460,000 or 17.3% increase in net income for the March 2005 quarter reflects
increases in net interest income and non-interest income mitigated by an
increase in non-interest expense. The improved margins and increases to
non-interest expense are attributable to the AFB acquisition completed on
December 31, 2004. Net interest income increased to $9.7 million from $7.5
million for the prior period. The March 2004 quarter reflected a gain on the
sale of investments of $203,000 (pre-tax) compared to a gain of $13,000
(pre-tax) for the March 2005 quarter. Return on average equity was 11.31% for
the March 2005 quarter, up from 10.21% for the March 2004 quarter.
INTEREST INCOME:
Parkvale had interest income of $21.0 million during the three months ended
March 31, 2005 versus $17.5 million during the comparable period in 2004. The
$3.5 million increase is the result of a 16 basis point increase in the average
yield from 4.51% in 2004 to 4.67% in 2005 coupled with a $250.1 million or 16.1%
increase in the average balance of interest-earning assets due to the increases
in loans and investments acquired with the completion of the AFB acquisition on
December 31, 2004. Interest income from loans increased $2.2 million or 16.0%
resulting from a 24 basis point increase in the average yield from 5.01% in 2004
to 5.25% in 2005, coupled with an increase in the average outstanding loan
balances of $119.5 million or 10.8%. Investment interest income increased by
$1.2 million or 36.2% due to an increase of $178.9 million or 56.4% in the
average balance and offset by a 53 basis point decrease in the average yield
from 4.10% in 2004 to 3.57% in 2005. Interest income earned on federal funds
sold increased $146,000 or 48.0% from the 2004 quarter due to a 147 basis point
increase in the average yield from 1.00% in 2004 to 2.47% in 2005. This increase
was offset by a decrease in the average balance of $48.3 million or 39.8%. The
weighted average yield on all interest-earning assets was 4.74% at March 31,
2005 and 4.40% at March 31, 2004.
INTEREST EXPENSE:
Interest expense increased $1.3 million or 13.4% from the 2004 quarter to the
2005 quarter. The increase was due to a $290.4 million increase in deposits and
borrowings primarily due to the AFB acquisition and mitigated by a 14 basis
point decrease in the average rate paid on deposits and borrowings from 2.69% in
2004 to 2.55% in 2005. At March 31, 2005, the average rate payable on
liabilities was 2.21% for deposits, 4.82% for borrowings, 6.61% for trust
preferred securities and 2.62% 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 has increased by
$9,000 from the 2004 to the 2005 quarter. Aggregate valuation allowances were
1.27% and 1.34% of gross loans at March 31, 2005 and June 30, 2004,
respectively.
Nonperforming loans, impaired loans and real estate owned aggregated $8.1
million, $8.0 million and $7.3 million at March 31, 2005, June 30, 2004 and
March 31, 2004, representing 0.43%, 0.49% and 0.45% of
14
total assets at the respective balance sheet dates. Total loan loss reserves at
March 31, 2005 were $15.5 million. Management considers loan loss reserves
sufficient when compared to the value of underlying collateral. Collateral is
considered and evaluated when establishing provision for loan losses and the
sufficiency of the allowance for loan losses. Management believes the allowance
for loan losses is adequate to cover the amount of probable loan losses.
OTHER INCOME:
Total other income increased by $276,000 or 14.7% in 2005 due to increases of
$407,000 in fee income derived from deposit accounts and $105,000 in other fees
and charges for loan accounts partially offset by a decrease of $190,000 in
gains due to a prior period gain on the sale of assets.
OTHER EXPENSE:
Total other expense increased by $1.7 million or 30.8% for the three months
ended March 31, 2005. This increase is due principally to increases of $747,000
or 24.4% in compensation, $254,000 or 23.6% in office occupancy, $139,000 or
34.8% in office supplies, and $574,000 or 64.5% in miscellaneous expense.
Compensation increased due to additional employees gained through the AFB
acquisition. Office occupancy expense and office supplies increased due to the
addition of the seven AFB branch offices acquired. Miscellaneous expense
increased primarily due to an increase of data processing expense related to the
AFB acquisition and enhancements to products and services. Annualized
noninterest expense as a percentage of average assets was 1.53% for the quarter
ended March 31, 2005 as compared to 1.39% for the quarter ended March 31, 2004.
RESULTS OF OPERATIONS - COMPARISON OF NINE MONTHS ENDED MARCH 31, 2005 AND 2004
Net income for the nine months ended March 31, 2005 was $8.5 million or $1.49
per diluted share, up 8.0% on a per share basis, compared to net income of $7.8
million or $1.38 per diluted share for the nine months ended March 31, 2004. The
$667,000 or 8.6% increase in net income for the March 2005 nine months reflects
increases in net interest income and non-interest income mitigated by an
increase in non-interest expense. The increased margins are primarily
attributable to the AFB acquisition. Net interest income for the nine months
ended March 31, 2005 increased to $25.0 million from $22.0 million for the nine
months ended March 31, 2004. The nine months ended March 31, 2004 reflected a
prior period gain on the sale of investments of $609,000 (pre-tax) compared to a
gain on the sale of assets of $27,000 (pre-tax) for the nine months ended March
31, 2005. Return on average equity was 10.45% for the nine months ended March
2005, up from 10.19% for nine months ended March 2004.
INTEREST INCOME:
Parkvale had interest income of $56.1 million during the nine months ended March
31, 2005 versus $53.7 million during the comparable period in 2004. The increase
of $2.4 million is attributable to an increase in the average interest-earning
asset portfolio of $85.3 million or 5.5%, offset by a 4 basis point decrease in
the average yield from 4.63% in 2004 to 4.59% in 2005. Interest income from
loans decreased $2.0 million or 4.5% due to a decrease in the average loan
balance of $79.3 million or 6.8% and offset by a 13 basis point increase in the
average yield from 5.05% in 2004 to 5.18% in 2005. Income from investments
increased by $4.1 million or 46.7% from 2004 due to an increase in the average
investment balance of $195.6 million or 70.1%, offset by a 57 basis point
decrease in the average yield from 4.20% in 2004 to 3.63% in 2004. Interest
income earned on federal funds sold increased $290,000 or 37.2% from the prior
nine months ended March 31, 2004. This was due to a 99 basis point increase in
the average yield from 1.01% in 2004 to 2.00% in 2005 and offset by a decrease
in the average federal fund balance of $31.0 million or 30.3%.
15
INTEREST EXPENSE:
Interest expense decreased by $550,000 or 1.7% from the 2004 nine-month period
to the 2005 nine-month period. The decrease was due to a 21 basis point decrease
in the average rate paid from 2.82% in 2004 to 2.61% in 2005, offset with an
increase in the average deposits and borrowings of $88.9 million.
PROVISION FOR LOAN LOSSES:
Provision for loan losses increased by $175,000 from the nine-month period ended
March 31, 2004 to the nine months ended March 31, 2005. The prior period
provision for loan loss includes the recovery of a previous charge off of
$235,000. A commercial real estate loan partially charged off in fiscal 2003 was
paid in full during December 2003. Aggregate valuation allowances were 1.27% of
gross loans at March 31, 2005, 1.34% of gross loans at June 30, 2004 and 1.37%
of gross loans at March 31, 2004. The allowance percentage has declined slightly
as the loan portfolio acquired from Advance was discounted to fair value. The
allowances acquired from Advance were $1.9 million or 0.74% of the acquired loan
portfolio. Total loan loss reserves at March 31, 2005 were $15.5 million.
OTHER INCOME:
Other income increased by $136,000 or 2.4% for the nine months ended March 31,
2005 from the nine months ended March 31, 2004, due primarily to an increase of
$880,000 on service fees on all types of deposit products and primarily offset
by a decrease of $582,000 or 95.6 % from gain on sale of assets. Gain on sale of
assets during the nine months ended March 31, 2005 was $27,000 versus $609,000
during the comparable period in 2004.
OTHER EXPENSE:
Other expenses increased by $1.8 million for the nine-month period ended March
31, 2005 from the comparable period in 2004. This increase is due to increases
of $887,000 or 9.6% in compensation, $132,000 or 4.1% in office occupancy,
$104,000 or 8.8% in office supplies, and $675,000 or 24.9 % in miscellaneous
expense. Compensation increased due to additional employees gained through the
AFB acquisition. Office occupancy expense and office supplies increased due to
the addition of the seven AFB branch offices acquired. Miscellaneous expense
increased primarily due to an increase of data processing expense related to the
systems conversion of the AFB offices in February 2005 and enhancements to
products and services. Annualized non-interest expenses as a percentage of
average assets were 1.44% for the nine months ended March 31, 2005 as compared
to 1.38% for the nine months ended March 31, 2004.
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.
16
Item 3. Quantitative and Qualitative 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, regarding 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, 2005. There have been no
significant changes in the Registrant's internal controls or in other
factors that could significantly affect internal controls subsequent to
March 31, 2005.
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
March 31, 2005.
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: May 5, 2005 By: /s/ Robert J. McCarthy, Jr.
---------------------------
Robert J. McCarthy, Jr.
President and
Chief Executive Officer
DATE: May 5, 2005 By: /s/ Timothy G. Rubritz
----------------------
Timothy G. Rubritz
Vice President, Treasurer and
Chief Financial Officer
18