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, 2007
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
to 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The closing sales price of the Registrant's Common Stock on April 19, 2007 was
$29.04 per share.
Number of shares of Common Stock outstanding as of April 19, 2007 was 5,651,736.
PARKVALE FINANCIAL CORPORATION
INDEX
Page
-----
Part I. Financial Information
Item 1.
Consolidated Statements of Financial Condition as of March 31, 2007
and June 30, 2006 3
Consolidated Statements of Operations for the three and nine months
ended March 31, 2007 and 2006 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 2007 and 2006 5-6
Consolidated Statements of Shareholders' Equity for the nine months
ended March 31, 2007 6
Notes to Unaudited Interim Consolidated Financial Statements 7-10
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-18
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 18
Item 4.
Controls and Procedures 18
Part II - Other Information 19
Signatures 20
Exhibits 21-23
2
Item 1.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
MARCH 31, June 30,
2007 2006
---------- ----------
ASSETS
Cash and noninterest-earning deposits $ 26,203 $ 25,676
Federal funds sold 74,000 104,000
---------- ----------
Cash and cash equivalents 100,203 129,676
Interest-earning deposits in other banks 5,335 8,307
Investment securities available for sale (cost of
$25,055 at March 31 and $27,755 at June 30) 25,455 27,917
Investment securities held to maturity (fair value
of $363,475 at March 31 and $389,964 at June 30) 365,149 397,266
Loans, net of allowance of $14,804 at March 31
and $14,907 at June 30 1,251,612 1,217,328
Foreclosed real estate, net 2,034 975
Office properties and equipment, net 17,629 17,592
Goodwill 25,634 25,634
Intangible assets 5,831 6,532
Prepaid expenses and other assets 26,429 27,488
---------- ----------
Total Assets $1,825,311 $1,858,715
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $1,444,990 $1,451,764
Advances from Federal Home Loan Bank 216,714 221,885
Trust preferred securities 7,200 32,200
Other debt 14,888 17,528
Advance payments from borrowers for taxes and
insurance 6,652 7,292
Other liabilities 6,019 5,342
---------- ----------
Total Liabilities 1,696,463 1,736,011
---------- ----------
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 3,497 3,517
Treasury stock at cost (1,066,458 shares at March
31 and 1,065,830 at June 30) (21,043) (20,620)
Accumulated other comprehensive income 302 116
Retained earnings 139,357 132,956
---------- ----------
Total Shareholders' Equity 128,848 122,704
---------- ----------
Total Liabilities and Shareholders' Equity $1,825,311 $1,858,715
========== ==========
3
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
----------------- -----------------
2007 2006 2007 2006
------- ------- ------- -------
Interest income:
Loans $18,121 $17,289 $53,676 $50,395
Investments 4,820 4,412 14,343 13,485
Federal funds sold 1,391 905 4,924 2,381
------- ------- ------- -------
Total interest income 24,332 22,606 72,943 66,261
------- ------- ------- -------
Interest expense:
Deposits 11,249 9,124 33,541 26,770
Borrowings 2,838 2,945 8,663 8,834
Trust preferred securities 693 664 2,191 1,888
------- ------- ------- -------
Total interest expense 14,780 12,733 44,395 37,492
------- ------- ------- -------
Net interest income 9,552 9,873 28,548 28,769
Provision for loan losses 304 180 612 462
------- ------- ------- -------
Net interest income after provision for
losses 9,248 9,693 27,936 28,307
------- ------- ------- -------
Noninterest Income:
Service charges on deposit accounts 1,677 1,561 5,217 4,726
Other fees and service charges 279 307 895 953
Gain on sale of assets 256 83 380 107
Other 379 416 1,256 1,113
------- ------- ------- -------
Total noninterest income 2,591 2,367 7,748 6,899
------- ------- ------- -------
Noninterest Expenses:
Compensation and employee benefits 3,899 3,841 11,434 11,206
Office occupancy 1,253 1,226 3,602 3,773
Marketing 93 125 354 410
FDIC insurance 46 48 135 146
Office supplies, telephone and postage 460 486 1,411 1,393
Early extinguishment of debt 625 -- 625 --
Other 1,176 1,361 3,582 3,789
------- ------- ------- -------
Total noninterest expenses 7,552 7,087 21,143 20,717
------- ------- ------- -------
Income before income taxes 4,287 4,973 14,541 14,489
Income tax expense 1,415 1,597 4,732 4,645
------- ------- ------- -------
Net income $ 2,872 $ 3,376 $ 9,809 $ 9,844
======= ======= ======= =======
Net income per share:
Basic $ 0.51 $ 0.60 $ 1.73 $ 1.75
Diluted $ 0.50 $ 0.59 $ 1.71 $ 1.73
4
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
NINE MONTHS ENDED
MARCH 31,
---------------------
2007 2006
--------- ---------
Cash flows from operating activities:
Interest received $ 73,972 $ 68,316
Loan fees received (premiums paid) 28 (163)
Other fees and commissions received 6,980 6,443
Interest paid (44,671) (37,651)
Cash paid to suppliers and others (18,878) (18,704)
Income taxes paid (3,803) (3,127)
--------- ---------
Net cash provided by operating activities 13,628 15,114
Cash flows from investing activities:
Proceeds from sale of investment securities
available for sale 4,542 1,964
Proceeds from maturities of investment
securities 143,652 93,955
Purchase of investment securities held to
maturity (113,129) (42,996)
Maturity of deposits in other banks 2,972 4,861
Purchase of loans (129,816) (123,351)
Proceeds from sales of loans 1,017 1,522
Principal collected on loans 209,355 191,860
Loans made to customers, net of loans in
process (116,590) (100,514)
Other (1,223) (5,416)
--------- ---------
Net cash provided by investing activities 780 21,885
Cash flows from financing activities:
Net (decrease) in checking and savings
accounts (16,646) (34,635)
Net increase (decrease) in certificates of
deposit 9,994 (314)
Proceeds from FHLB advances -- 10,000
Repayment of FHLB advances (5,017) (47)
Redemption of trust preferred securities (25,000) --
Net (decrease) in other borrowings (2,640) (6,388)
Decrease in borrowers' advances for taxes
and insurance (641) (340)
Cash dividends paid (3,408) (3,386)
Allocation of treasury stock to retirement
plans 612 880
Acquisition of treasury stock (1,305) (158)
Proceeds from exercise of stock options 170 241
--------- ---------
Net cash used in financing activities (43,881) (34,147)
--------- ---------
Net (decrease) increase in cash and cash
equivalents (29,473) 2,852
Cash and cash equivalents at beginning of
period 129,676 107,040
--------- ---------
Cash and cash equivalents at end of period $ 100,203 $ 109,892
========= =========
5
NINE MONTHS ENDED
MARCH 31,
-----------------
2007 2006
------- ------
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 9,809 $ 9,844
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,882 1,928
Accretion and amortization of loan fees
and discounts 449 818
Loan fees collected and deferred
(premiums paid) (181) (390)
Provision for loan losses 612 462
Gain on sale of assets (380) (107)
Decrease in accrued interest receivable 580 1,239
Decrease in other assets 427 690
(Decrease) in accrued interest payable (165) (49)
Increase in other liabilities 595 679
------- -------
Total adjustments 3,819 5,270
------- -------
Net cash provided by operating activities $13,628 $15,114
======= =======
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 $2.1 million for the nine months ended March 31, 2007 and $1.4
million for the nine months ended March 31, 2006.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(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, 2006 $ 6,735 $ 3,517 ($20,620) $116 $132,956 $122,704
Net income, nine months ended March 31, 2007 9,809 9,809
Accumulated other comprehensive income:
Change in unrealized gain on securities,
net of deferred tax benefit of $5 7
Reclassification adjustment, net of
taxes of $77 179 186
--------
Comprehensive income 9,995
Treasury stock purchased (1,305) (1,305)
Treasury stock contributed to retirement
plans 612 612
Dividends declared on common stock at
$0.60 per share (3,408) (3,408)
Exercise of stock options (20) 270 250
------- ------- -------- ---- -------- --------
Balance, March 31, 2007 $ 6,735 $ 3,497 ($21,043) $302 $139,357 $128,848
======= ======= ======== ==== ======== ========
6
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share data)
Statements of Operations
The statements of operations for the nine months ended March 31, 2007 and 2006
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 nine months ended March 31, 2007 are not necessarily indicative of the
results that may be expected for fiscal 2007. The Annual Report on Form 10-K for
the year ended June 30, 2006 contains additional information and should be read
in conjunction with this report.
Loans
MARCH 31, June 30,
2007 2006
---------- ----------
Loans are summarized as follows:
Mortgage loans:
Residential:
1-4 Family $ 878,126 $ 833,262
Multifamily 32,115 28,911
Commercial 111,379 108,977
Other 18,292 20,834
---------- ----------
1,039,912 991,984
Consumer loans 174,951 182,506
Commercial business loans 44,541 49,875
Loans on savings accounts 5,222 5,721
---------- ----------
1,264,626 1,230,086
Less: Loans in process 128 142
Allowance for loan losses 14,804 14,907
Unamortized premiums and
deferred loan fees (1,918) (2,291)
---------- ----------
Loans, net $1,251,612 $1,217,328
========== ==========
Included in the $174,951 of consumer loans are $454 of student loans that are
classified as held-for-sale. At March 31, 2007, the market value of these loans
approximated $454.
The following summarizes the activity in the allowance for loan losses for the
nine-month period ended March 31:
2007 2006
-------- -------
Beginning balance $14,907 $15,188
Provision for losses - mortgage loans 384 133
Provision for losses - consumer loans 174 256
Provision for losses - commercial loans 54 73
Loans recovered 30 71
Loans charged off (745) (695)
------- -------
Ending balance $14,804 $15,026
======= =======
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, 2007 and 2006, total comprehensive net income
amounted to $9,995 and $9,770, respectively.
7
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
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,
----------------------- -----------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Numerator for basic and diluted EPS:
Net income (in 000's) $ 2,872 $ 3,376 $ 9,809 $ 9,844
Denominator:
Weighted average shares for basic EPS 5,694,439 5,652,298 5,684,259 5,637,049
Number of dilutive stock options 54,976 58,683 67,142 62,427
---------- ---------- ---------- ----------
Weighted average shares for dilutive EPS 5,749,415 5,710,981 5,751,401 5,699,476
========== ========== ========== ==========
Net income per share:
Basic $ 0.51 $ 0.60 $ 1.73 $ 1.75
========== ========== ========== ==========
Diluted $ 0.50 $ 0.59 $ 1.71 $ 1.73
========== ========== ========== ==========
Stock Based Compensation
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 addressed 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, are 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 value at the grant date. Previous
accounting guidance permitted the expense relating to so-called fixed plan
employee stock options only be disclosed in the footnotes to the financial
statements. The revised statement eliminated the ability to account for
share-based compensation transactions using APB Opinion No. 25, Accounting for
Stock Issued to Employees. The revised statement eliminated the alternative to
use the intrinsic value method of accounting. This statement requires the use of
fair value recognition principles. This statement did not have a significant
impact on Parkvale's results of operations, which became effective for Parkvale
on July 1, 2005. At March 31, 2007, Parkvale does not have any unvested stock
options outstanding.
Investments
U.S. Government and Agency Obligations The unrealized losses on Parkvale's
investments in U.S. Government and Agency obligations were caused by interest
rate increases. The contractual terms of those investments do not permit the
issuer to settle the securities at a price less than the face value of the
investment. Because Parkvale has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, Parkvale does
not consider those investments to be other-than-temporarily impaired at March
31, 2007.
8
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
Corporate Debt Parkvale's unrealized losses on investment in corporate bonds
relate to two corporate bonds aggregating $5,000. The unrealized losses were
primarily caused by interest rate increases. The contractual terms of those
investments do not permit debtors to settle the security at a price less than
the face value of the investment. The investment ratings of the investments are
considered investment grade at Baa1 and Aa3. Parkvale currently does not believe
it is probable that it will be unable to collect all amounts due according to
the contractual terms of the investment. Therefore, it is expected that the
debentures would not be settled at a price less than the face value of the
investment. Because Parkvale has the ability and intent to hold these
investments until a recovery of fair value, which may be maturity, it does not
consider these debentures to be other-than-temporarily impaired at March 31,
2007.
Marketable Equity Securities Parkvale's investments in marketable equity
securities consist primarily of investments in common stock of companies in the
financial services industry. Parkvale's unrealized loss relates to a mutual
fund, Franklin Adjustable U.S. Government, representing $4,739 of fair value and
$261 of unrealized loss. Parkvale evaluated the near-term prospects of the
issuer in relation to the severity and duration of the impairment. Based on that
evaluation and Parkvale's ability and intent to hold this investment for a
reasonable period of time sufficient for a forecasted recovery of fair value,
Parkvale does not consider this investment to be other-than-temporarily impaired
at March 31, 2007.
New Accounting Pronouncements
In February 2006, the FASB issued Statement of Financial Accounting ("FAS") No.
155, Accounting for Certain Hybrid Instruments, as an amendment of FAS No. 133
and 140. FAS No. 155 allows financial instruments that have embedded derivatives
to be accounted for as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole instrument on a
fair value basis. This statement is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. The adoption of this standard is not expected
to have a material effect on the Company's results of operations or financial
position.
In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of
Financial Assets. This Statement, which is an amendment to FAS No. 140, will
simplify the accounting for servicing assets and liabilities, such as those
common with mortgage securitization activities. Specifically, FAS No. 156
addresses the recognition and measurement of separately recognized servicing
assets and liabilities and provides an approach to simplify efforts to obtain
hedge-like (offset) accounting. FAS No. 156 also clarifies when an obligation to
service financial assets should be separately recognized as a servicing asset or
a servicing liability; states that a separately recognized servicing asset or
servicing liability should be initially measured at fair value, if practicable,
and permits an entity with a separately recognized servicing asset or servicing
liability to choose either the amortization or fair value methods for subsequent
measurement. The provisions of FAS No. 156 are effective for Parkvale on July 1,
2007. The adoption of this standard is not expected to have a material effect on
the Company's results of operations or financial position.
9
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes. This pronouncement, which will be effective for Parkvale in
fiscal 2008, clarifies accounting for income tax positions that are either: (1)
complex, and therefore, subject to varied interpretation, or (2) controversial.
Management does not expect this pronouncement to have a significant impact on
the Company's financial position or results of operations in fiscal 2008.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in accounting principles generally accepted in the United States of America, and
expands disclosures about fair value measurements. This Statement is effective
for Parkvale on July 1, 2008. The adoption of this standard is not expected to
have a material effect on the Company's results of operations or financial
position.
In September 2006, the FASB issued FAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FAS No.
87, 88, 106 and 132R. This Statement requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. The
Statement also requires an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited
exceptions. An employer with public traded equity securities is required to
initially recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal year ending
after December 15, 2006. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial position.
In February 2007, the FASB issued FAS No. 159, The Fair Value for Financial
Assets and Financial Liabilities-Including an amendment to FAS No. 115. This
statement permits entities to choose to measure many financial instruments and
certain other items at fair value. This objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
expected to expand the use of fair value measurement, which is consistent with
FASB's long-term measurement objectives for accounting for financial
instruments. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of the fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FAS No. 157, Fair
Value Measurements. Parkvale is evaluating the effects of this statement on its
financial statements and has not made a decision on the possible early adoption
option.
10
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 the
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 filing may contain forward-looking
statements. We have made forward-looking statements in this document 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 filing 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 various 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, 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 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 (U.S. 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
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.
11
The Corporation's critical accounting policies and judgments disclosures are
contained in the Corporation's June 30, 2006 Annual Report printed in September
2006. Management believes that there have been no material changes since June
30, 2006. 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.
(Dollar amounts in thousands, except per share data)
BALANCE SHEET DATA:
MARCH 31,
-----------------------
2007 2006
---------- ----------
Total assets $1,825,311 $1,852,022
Loans, net 1,251,612 1,228,776
Interest-earning deposits and federal funds sold 79,335 88,613
Total investments 390,604 431,715
Deposits 1,444,990 1,443,284
FHLB advances 216,714 226,941
Shareholders' equity 128,848 120,382
Book value per share $ 22.73 $ 21.24
Statistical Profile:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, (1) MARCH 31, (1)
------------------ -----------------
2007 2006 2007 2006
------ ------ ------ ------
Average yield earned on all
interest-earning assets 5.56% 5.18% 5.53% 5.04%
Average rate paid on all interest-bearing liabilities 3.46 2.97 3.44 2.90
Average interest rate spread 2.10 2.21 2.09 2.14
Net yield on average interest-earning assets 2.18 2.26 2.16 2.19
Other expenses to average assets 1.63 1.54 1.51 1.49
Taxes to pre-tax income 33.01 32.11 32.54 32.06
Dividend payout ratio 40.00 33.90 35.09 34.68
Return on average assets 0.62 0.73 0.70 0.71
Return on average assets without early redemption
of trust preferred securities 0.71 0.73 0.73 0.71
Return on average equity 8.93 11.29 10.32 11.22
Return on average equity without early redemption
of trust preferred securities 10.19 11.29 10.75 11.22
Average equity to average total assets 6.95 6.49 6.81 6.32
Dividends per share $ 0.20 $ 0.20 $ 0.60 $ 0.60
AT MARCH 31,
-------------
2007 2006
----- -----
One year gap to total assets -2.36% -3.84%
Intangibles to total equity 24.42 26.92
Capital to assets ratio 7.06 6.50
Ratio of nonperforming assets to total assets 0.37 0.28
Number of full-service offices 47 47
(1) The applicable income and expense figures have been annualized in
calculating the percentages.
12
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE:
Nonperforming and impaired loans and foreclosed real estate (REO) consisted of
the following at:
(Dollar amounts in 000's)
3/31/07 12/31/06 6/30/06 3/31/06
------- -------- ------- -------
Delinquent single-family mortgage loans $1,837 $2,827 $1,700 $1,648
Delinquent other loans 2,049 2,380 1,759 2,459
------ ------ ------ ------
Total nonperforming loans 3,886 5,207 3,459 4,107
Total impaired loans 790 18 130 21
Real estate owned, net 2,034 2,036 975 1,049
------ ------ ------ ------
Total $6,710 $7,261 $4,564 $5,177
====== ====== ====== ======
Nonperforming (delinquent 90 days or more) and impaired loans and real estate
owned represented 0.37%, 0.39%, 0.25% and 0.28% of total assets at the
respective balance sheet dates shown above. Delinquent single-family mortgage
loans at March 31, 2007 consisted of 34 single-family owner occupied homes. As
of March 31, 2007, $663,000 or 36.1% of the nonaccrual mortgage loans totaling
$1.8 million were purchased from others. The $663,000 of delinquent loans
purchased from others are comprised of two loans which management believes are
well collateralized. One multi-family apartment building loan with a balance of
$705,000 is 150 days past due, with repayment plans in place to bring the loan
current in May 2007.
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 $186,000 at March 31, 2007 and $135,000 at
June 30, 2006. Parkvale provides an allowance for the loss of accrued but
uncollected interest on mortgage, consumer and commercial business loans that
are 90 days or more 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 $790,000 and
$130,000 of loans classified as impaired at March 31, 2007 and at June 30, 2006.
The average recorded balance of impaired loans was $263,000 at March 31, 2007.
Impaired loans include a relationship with a bankrupt automobile dealer with a
balance of $548,000 that is in process of repayment by collateral liquidation.
Interest income of $62,600 on the impaired loans was not recognized during the
March 31, 2007 quarter. Impaired assets include $2.0 million of foreclosed real
estate as of March 31, 2007. 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 normally consists of 1-4
family single-family dwellings. In addition, five properties of foreclosed
commercial real estate at March 31, 2007 are valued at $1.0 million. The largest
commercial property is valued at $613,000 and is under an agreement to be sold
during the June 2007 quarter.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses was $14.8 million at March 31, 2007, $14.9 million
at June 30, 2006 and $15.0 million at March 31, 2006 or 1.17%, 1.21% and 1.21%
of gross loans at March 31, 2007, June 30,
13
2006 and March 31, 2006, respectively. 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 loan portfolio includes
$219.2 million of initial interest only mortgage loans at March 31, 2007, which
are considered well collateralized.
Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect potential credit deterioration in the early
stages. Management then establishes reserves based upon its evaluation of the
inherent risks in the loan portfolio. Changes to the levels of reserves are made
quarterly based upon perceived changes in risk. Management believes the
allowance for loan losses is adequate to absorb probable loan losses.
LIQUIDITY AND CAPITAL RESOURCES:
Federal funds sold decreased $30.0 million or 28.9% from June 30, 2006 to March
31, 2007 primarily due to the redemption of $25.0 million of trust preferred
securities. Investment securities held to maturity decreased $32.1 million or
8.1% as funds were deployed into loans. The net loan portfolio increased $34.3
million or 2.8% from June 30, 2006 to March 31, 2007, as funds from maturing
investments were partially deployed into loans. Deposits decreased $6.8 million
or 0.5% from June 30, 2006 to March 31, 2007. Federal Home Loan Bank advances
decreased $5.2 million or 2.3%. Parkvale Bank's FHLB advance available maximum
borrowing capacity is $934.5 million. If Parkvale were to experience a deposit
decrease in excess of the available cash resources and cash equivalents, the
FHLB borrowing capacity could be utilized to fund a rapid decrease in deposits.
As reported in our December 31, 2006 Form 10-Q, the Board of Directors approved
a plan on January 25, 2007 to repay $25.0 million of 8.97% trust-preferred
securities on March 26, 2007. The early extinguishment of $25.0 million of
trust-preferred securities resulted in a one-time pre-tax charge of $625,000
($407,000 after taxes) or $0.07 per diluted share. In future quarters, the
redemption of this higher cost debt is expected to improve earnings by nearly
$0.03 per share per quarter.
Shareholders' equity was $128.8 million or 7.1% of total assets at March 31,
2007. A stock repurchase program, approved in June 2006, permits the purchase of
5.0% of outstanding stock or 283,400 shares during fiscal 2007 at prevailing
prices in open-market transactions. Through March 31, 2007, 43,900 shares were
purchased at an average price of $29.72 per share, representing 15.5% of the
currently authorized program. Banks are required to maintain Tier 1 (Core)
capital equal to at least 4% of the institution's adjusted total assets, and
Tier 2 (Supplementary) risk-based capital equal to at least 8% of the
risk-weighted assets. At March 31, 2007, Parkvale Bank was in compliance with
all applicable regulatory requirements, with Tier 1 and Tier 2 ratios of 5.67%
and 11.34%, respectively. The Bank capital ratios at March 31, 2007 are lower
than previous quarters due to the transfer of capital from the Bank to the
holding Company to provide the cash necessary to permit the redemption of trust
preferred securities. Despite this transfer, the Bank continues to maintain a
"well-capitalized" status.
14
The regulatory capital ratios for Parkvale Bank at March 31, 2007 are calculated
as follows:
(in 000's)
Tier 1 Tier 1 Tier 2
Core Risk-Based Risk-Based
Capital Capital Capital
---------- ---------- ----------
Equity capital (1) $ 134,743 $ 134,743 $ 134,743
Less non-allowable intangible assets (31,465) (31,465) (31,465)
Less unrealized securities gains (251) (251) (251)
Plus permitted valuation allowances (2) -- -- 12,804
Plus allowable unrealized holding gains (3) -- -- 178
---------- ---------- ----------
Total regulatory capital 103,027 103,027 116,009
Minimum required capital 71,692 40,933 81,865
---------- ---------- ----------
Excess regulatory capital $ 30,335 $ 62,094 $ 34,144
========== ========== ==========
Adjusted total assets $1,817,293 $1,023,313 $1,023,313
Regulatory capital as a percentage 5.67% 10.07% 11.34%
Minimum capital required as a percentage 4.00% 4.00% 8.00%
---------- ---------- ----------
Excess regulatory capital as a percentage 1.67% 6.07% 3.34%
========== ========== ==========
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, 2007.
(2) Limited to 1.25% of risk adjusted total assets.
(3) Limited to 45% of pretax net unrealized holding gains.
Management is not aware of any trends, events, uncertainties or current
recommendations by any regulatory authority that will have, 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, 2007 AND
2006:
For the three months ended March 31, 2007, net income was $2.9 million or $0.50
per diluted share, compared to net income of $3.4 million or $0.59 per diluted
share for the quarter ended March 31, 2006. The $504,000 decrease in net income
for the March 2007 quarter reflects an unusual expense of $625,000 on the early
extinguishment of debt, a decrease in net interest income of $321,000 and higher
loss provisions of $124,000, offset by higher non-interest income of $224,000
and a decrease in other non-interest expense of $160,000. As previously
disclosed in the December 2006 Form 10-Q, $25 million of trust preferred
securities with an 8.97% rate were prepaid on March 26, 2007, with the
unamortized issuance costs of $625,000 expensed in the March 2007 quarter. This
unusual charge reduced net income by $407,000 after taxes or $0.07 per share.
Non-interest income includes gains on the sale of assets of $256,000 in 2007
versus a gain of $83,000 in 2006.
INTEREST INCOME:
Parkvale had interest income of $24.3 million during the three months ended
March 31, 2007 versus $22.6 million during the comparable period in 2006. The
$1.7 million increase is the result of a 38 basis point increase in the average
yield from 5.18% in 2006 to 5.56% in 2007 and a $6.8 million or 0.4% increase in
the average balance of interest-earning assets. Interest income from loans
increased $832,000 or 4.8% resulting from a 21 basis point increase in the
average yield from 5.64% in 2006 to 5.85% in
15
2007 and an increase in the average outstanding loan balances of $11.3 million
or 0.9%. Investment interest income increased by $408,000 or 9.2% due to a 69
basis point increase in the average yield from 4.05% in 2006 to 4.74% in 2007,
offset by a decrease of $28.4 million or 6.5% in the average balance. The
average loan portfolio increased and the average investment portfolio decreased
as the Bank used a portion of the proceeds from maturing investment securities
to fund additional loans, as the loans have a higher average yield than
investment securities. Interest income earned on federal funds sold increased
$486,000 or 53.7% from the 2006 quarter due to an 84 basis point increase in the
average yield from 4.43% in 2006 to 5.27% in 2007 and an increase in the average
balance of $23.9 million or 29.3%. The weighted average yield on all
interest-earning assets was 5.61% at March 31, 2007 and 5.21% at March 31, 2006.
INTEREST EXPENSE:
Interest expense increased $2.0 million or 16.1% from the 2006 quarter to the
2007 quarter. The increase was due to a 49 basis point increase in the average
rate paid on deposits and borrowings from 2.97% in 2006 to 3.46% and mitigated
by a $3.0 million decrease in the average deposits and borrowings in 2007. The
cost of deposits was 3.12% for the March 2007 quarter compared to 3.16% for the
December 2006 quarter and 2.55% for the March 2006 quarter. Although the deposit
costs are up on a year-to-year basis, efforts to monitor deposits rates have
resulted in a reduction of 4 basis points from the December 2006 quarter to the
March 2007 quarter. At March 31, 2007, the weighted average rate payable on
liabilities was 3.16% for deposits, 4.85% for borrowings, 9.03% for
trust-preferred securities and 3.41% for combined deposits and borrowings.
NET INTEREST INCOME:
Net interest income was $9.6 million for the quarter ended March 31, 2007
compared to $9.9 million for the quarter ended March 2006. The $321,000 decrease
is attributable to the cost of funds increase of 49 basis points exceeding the
increased yield on earning assets of 38 basis points. The cost of funds increase
relates to the shorter average maturity of the deposit accounts and competitive
factors to retain deposits.
PROVISION FOR LOAN LOSSES:
The provision for loan losses is an amount added to the allowance against which
loan losses are charged. The provision for loan losses for the quarter ended
March 31, 2007 increased by $124,000 or 68.9% from the March 2006 quarter
primarily to provide for losses on mortgage loans. Aggregate valuation
allowances were 1.17% and 1.21% of gross loans at March 31, 2007 and June 30,
2006, respectively.
Nonperforming loans, impaired loans and real estate owned aggregated $6.7
million, $4.6 million and $5.2 million at March 31, 2007, June 30, 2006 and
March 31, 2006, representing 0.37%, 0.25% and 0.28% of total assets at the
respective balance sheet dates. Total loan loss reserves at March 31, 2007 were
$14.8 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.
NONINTEREST INCOME:
Total noninterest income for the March 2007 quarter increased by $224,000 or
9.5% due to a $116,000 or 7.4% increase in service charges on deposit accounts
and a $173,000 increase in gain on sale assets, offset by a $28,000 or 9.1%
decrease in loan fees and service charges for all types of products and
services. Deposit account revenue increases were earned on NSF charges. The
$256,000 gain on sale of
16
assets was due to the sale of $2.9 million of available for sale securities. At
March 31, 2007, $25.5 million of investment securities were available for sale,
including a net unrealized gain of $400,000. Other income decreased $37,000 or
8.9%. Annuity fee and commission income was $147,000 in the 2007 quarter
compared to $158,000 in the 2006 quarter.
NONINTEREST EXPENSE:
Total noninterest expense increased by $465,000 or 6.6% for the three months
ended March 31, 2007 compared to the March 2006 quarter. This increase is due
principally to the early extinguishment of $25.0 million of trust preferred
securities, which resulted in a one-time pre-tax charge of $625,000. Annualized
noninterest expense as a percentage of average assets was 1.63% for the quarter
ended March 31, 2007 and 1.54% for the quarter ended March 31, 2006. Annualized
noninterest expense as a percentage of average assets, absent the one time
charge of $625,000 from the early extinguishment of the trust preferred
securities was 1.50% for the quarter ended March 31, 2007.
RESULTS OF OPERATIONS - COMPARISON OF NINE MONTHS ENDED MARCH 31, 2007 AND 2006:
Net income for the nine months ended March 31, 2007 was $9.81 million or $1.71
per diluted share, down 1.2% on a per share basis, compared to net income of
$9.84 million or $1.73 per diluted share for the nine months ended March 31,
2006. The $35,000 decrease in net income for the March 2007 nine months reflects
an unusual expense of $625,000 on the early extinguishment of debt, a decrease
in net interest income of $221,000 and higher loss provisions of $150,000,
offset by increases in noninterest income of $849,000 and a decrease in other
noninterest expense of $199,000. Net interest income for the nine months ended
March 31, 2007 decreased to $28.5 million from $28.8 million for the nine months
ended March 31, 2006. Return on average equity was 10.32% for the nine months
ended March 31, 2007.
INTEREST INCOME:
Parkvale had interest income of $72.9 million during the nine months ended March
31, 2007 versus $66.3 million during the comparable period in 2006. The increase
of $6.7 million or 10.1% is attributable to an increase in the average
interest-earning asset portfolio of $7.0 million or 0.4% and a 49 basis point
increase in the average yield from 5.04% in 2006 to 5.53% in 2007. Interest
income from loans increased $3.3 million or 6.5% due to an increase in the
average loan balance of $10.4 million or 0.9% and a 31 basis point increase in
the average yield from 5.56% in 2006 to 5.87% in 2007. Income from investments
increased by $858,000 or 6.4% from 2006 due to an increase of 71 basis points in
the average yield from 3.87% in 2006 to 4.58%, offset by a decrease in the
average investment balance of $47.0 million or 10.1% in 2007. The average loan
portfolio increased and the average investment portfolio decreased as the Bank
used a portion of the $143.7 million of proceeds from maturing investment
securities to fund additional loans, as the loans have a higher average yield
than investment securities. Interest income earned on federal funds sold
increased $2.5 million or 106.8% from the prior nine months ended March 31,
2006. This was due to a 134 basis point increase in the average yield from 3.99%
in 2006 to 5.33% in 2007 and an increase in the average federal fund balance of
$43.6 million or 54.8%.
INTEREST EXPENSE:
Interest expense increased by $6.9 million or 18.4% from the 2006 nine-month
period to the 2007 nine-month period. The increase was due to a 54 basis point
increase in the average rate paid from 2.90% in 2006 to 3.44% in 2007, offset by
a decrease in the average deposits and borrowings of $1.8 million.
17
PROVISION FOR LOAN LOSSES:
Provision for loan losses increased by $150,000 in the nine-month period ended
March 31, 2007 from the nine months ended March 31, 2006. Aggregate valuation
allowances were 1.17% of gross loans at March 31, 2007, 1.21% of gross loans at
June 30, 2006 and 1.21% of gross loans at March 31, 2006. Total loan loss
reserves at March 31, 2007 were $14.8 million.
NONINTEREST INCOME:
Noninterest income increased by $849,000 or 12.3% for the nine months ended
March 31, 2007 from the nine months ended March 31, 2006 due to increases of
$491,000 or 10.4% in service charges on deposit accounts, of $273,000 or 255.1%
for gain on the sale of assets and of $143,000 or 12.8% for other income, offset
by a decrease of $58,000 or 6.1% in loan fees and service charges for all types
of products and services.
NONINTEREST EXPENSE:
Noninterest expenses increased by $426,000 or 2.1% for the nine-month period
ended March 31, 2007 from the comparable period in 2006. This increase is due
principally to the early extinguishment of $25.0 million of trust preferred
securities, which resulted in a one-time pre-tax charge of $625,000. Additional
reasons include increases in compensation and employee benefits of $228,000 or
2.0% and in office supplies, telephone and postage of $18,000 or 1.3%, offset by
decreases in office occupancy expense of $171,000 or 4.5%, marketing of $56,000
or 13.7%, other expense of $207,000 or 5.5% and FDIC insurance of $11,000 or
7.5%. Annualized noninterest expenses as a percentage of average assets were
1.51% for the nine months ended March 31, 2007 compared to 1.49% for the nine
months ended March 31, 2006. Annualized noninterest expense as a percentage of
average assets, absent the one time charge of $625,000 from the early
extinguishment of the trust preferred securities, is 1.47% for the nine months
ended March 31, 2007.
IMPACT OF INFLATION AND CHANGING PRICES:
The financial statements and related data presented herein have been prepared in
accordance with U.S. GAAP, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are presented at
June 30, 2006 in Item 7A of Parkvale Financial Corporation's Form 10-K,
filed with the SEC on September 11, 2006. Management believes that there
have been no material changes in Parkvale's market risk since June 30,
2006.
Item 4. Controls and Procedures
Disclosure controls and procedures are monitored and supervised by
Parkvale's management, including the CEO and CFO, regarding the
effectiveness of the design and operation of Parkvale's disclosure controls
and procedures. Parkvale's management, including the CEO and CFO, concluded
that Parkvale's disclosure controls and procedures were effective as of
March 31, 2007. There have been no changes in Parkvale's internal controls
or in other factors that materially affected, or that are reasonable likely
to materially affect, Parkvale's internal controls.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 1A. Risk Factors
Risk Factor disclosures are presented at June 30, 2006 in Item 1A of
Parkvale Financial Corporation's Form 10-K, filed with the SEC on September
11, 2006. Management believes that there have been no material changes in
Parkvale's risk factors since June 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) No equity securities were sold by the Corporation during the period covered
by this report that were not registered under the Securities Act of 1933.
(b) Not applicable
(c) During the quarter ended March 31, 2007, Parkvale purchased 43,900 shares.
The following table sets forth information with respect to any purchase made by
or on behalf of Parkvale or any "affiliated purchaser", as defined in Section
240. 10b-18(a)(3) under the Exchange Act, of shares of Parkvale common stock
during the indicated periods.
Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet Be
of Shares Price Paid Announced Plans Purchased Under the
Period Purchased Per Share or Programs Plans or Programs (1)
- ------ ------------ ---------- ------------------- ----------------------
January 1-31, 2007 -- -- -- 283,400
February 1-28, 2007 20,700 $30.00 20,700 262,700
March 1-31, 2007 23,200 $29.47 23,200 239,500
(1) The repurchase program approved on June 21, 2006 is scheduled to expire on
June 30, 2007.
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information None
Item 6. Exhibits
The following exhibits are filed here within:
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.
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.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C.
19
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Parkvale Financial Corporation
DATE: April 26, 2007 By: /s/ Robert J. McCarthy, Jr.
------------------------------------
Robert J. McCarthy, Jr.
President and
Chief Executive Officer
DATE: April 26, 2007 By: /s/ Timothy G. Rubritz
------------------------------------
Timothy G. Rubritz
Vice President, Treasurer and
Chief Financial Officer
20