.
.
.
Exhibit 13
Selected Consolidated FINANCIAL AND OTHER DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA AT JUNE 30: 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $1,642,803 $1,632,192 $1,407,864 $1,250,986 $1,201,880
Loans 1,241,779 1,217,639 1,113,264 1,034,369 995,671
Investment securities 230,570 212,940 145,017 121,607 115,131
Savings deposits 1,331,760 1,349,339 1,180,797 1,080,096 1,037,416
FHLB advances and other debt 174,157 147,996 119,316 73,467 64,708
Shareholders' equity 99,474 97,404 95,094 84,266 85,071
Book value per share 17.93 17.09 16.78 14.75 13.84
- ------------------------------------------------------------------------------------------------------------------------
OPERATING DATA FOR THE YEAR ENDED JUNE 30: 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 86,030 92,945 93,956 84,670 79,711
Total interest expense 53,764 59,798 58,166 49,835 48,172
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 32,266 33,147 35,790 34,835 31,539
Provision for loan losses 308 205 320 236 196
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 31,958 32,942 35,470 34,599 31,343
Other income 8,045 10,660 4,642 3,563 3,659
Other expenses 24,566 27,828 18,587 17,368 15,788
- ------------------------------------------------------------------------------------------------------------------------
Income before taxes 15,437 15,774 21,525 20,794 19,214
Income tax expense 4,908 5,344 7,524 7,576 7,116
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 10,529 $ 10,430 $ 14,001 $ 13,218 $ 12,098
- ------------------------------------------------------------------------------------------------------------------------
Net income per diluted share $ 1.86 $ 1.81 $ 2.43 $ 2.23 $ 1.88
- ------------------------------------------------------------------------------------------------------------------------
OTHER SELECTED DATA (STATISTICAL PROFILE):
EAR ENDED JUNE 30, 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Average yield earned on all interest-earning assets 5.49% 6.44% 7.40% 7.16% 7.11%
Average rate paid on interest-bearing liabilities 3.53 4.34 4.85 4.46 4.57
Average interest rate spread 1.96 2.10 2.55 2.70 2.54
Net yield on average interest-earning assets 2.06 2.30 2.82 2.95 2.81
Other expenses to average assets 1.51 1.87 1.42 1.42 1.36
Efficiency ratio 60.94 63.52 45.97 45.23 44.85
Return on average assets 0.65 0.70 1.07 1.08 1.05
Dividend payout ratio 38.71 39.78 29.63 32.29 31.91
Return on average equity 10.82 10.96 16.20 16.53 14.98
Average equity to average total assets 5.98 6.38 6.61 6.56 6.98
- ------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
One year gap to total assets -0.79% -4.09% 3.37% 2.76% -5.10%
Intangibles to total equity 11.63 12.10 0.26 0.35 0.40
Shareholders' equity to assets ratio 6.06 5.97 6.75 6.74 7.08
Ratio of nonperforming assets to total assets 0.61 0.32 0.39 0.30 0.27
Nonperforming assets $ 9,979 $ 5,186 $ 5,421 $ 3,784 $ 3,266
Allowance for loan losses as a% of gross loans 1.20% 1.26% 1.19% 1.27% 1.30%
Number of full-service offices 39 38 33 31 30
- ------------------------------------------------------------------------------------------------------------------------
Corporation Annual Report 1
MANAGEMENT'S Discussion
The purpose of this discussion is to summarize the financial condition and
results of operations of Parkvale Financial Corporation ("Parkvale") and provide
other information which is not readily apparent from the consolidated financial
statements included in this annual report. Reference should be made to those
statements, the notes thereto and the selected financial data presented
elsewhere in this report for a complete understanding of the following
discussion and analysis.
FINANCIAL CONDITION
Parkvale's average interest-earning assets increased $120 million for the
year ended June 30, 2003 over fiscal year 2002. This increase is primarily the
result of growth in deposits and borrowings with funds being deployed into
interest earning assets. Average loan and average deposit balances rose $57
million and $87 million, respectively, in fiscal year 2003.
ASSET AND LIABILITY MANAGEMENT
Parkvale functions as a financial intermediary, and as such, its financial
condition should be examined in terms of its ability to manage interest rate
risk ("IRR"), and diversify credit risk.
Parkvale's asset and liability management ("ALM") is driven by the ability
to manage the exposure of current and future earnings and capital to fluctuating
interest rates. This exposure occurs because the present value of future cash
flows, and in many cases the cash flows themselves, change when interest rates
change. One of Parkvale's ALM goals is to minimize this exposure.
IRR is measured and analyzed using static interest rate sensitivity gap
indicators, net interest income simulation and net present value sensitivity
measures. These combined methods enable Parkvale's management to regularly
monitor both the direction and magnitude of potential changes in the pricing
relationship between interest-earning assets and interest-bearing liabilities.
Interest rate sensitivity gap analysis provides one indicator of potential
interest rate risk by comparing interest-earning assets and interest-bearing
liabilities maturing or repricing at similar intervals. The gap ratio is defined
as rate-sensitive assets minus rate-sensitive liabilities for a given time
period divided by total assets. Parkvale continually monitors gap ratios, and
within the IRR framework and in conjunction with net interest income
simulations, implements actions to reduce exposure to fluctuating interest
rates. Such actions have included maintaining high liquidity, deploying excess
liquidity, increasing the repricing frequency of the loan portfolio and
lengthening the overall maturities of interest-bearing liabilities. Management
believes these ongoing actions minimize Parkvale's vulnerability to fluctuations
in interest rates. The one-year gap ratio has shifted from -4.09% as of June 30,
2002 to -0.79% as of June 30, 2003, and the five-year gap ratio was 4.47% at
June 30, 2002 versus 12.97% as of June 30, 2003. The shift is due to a decrease
in certificates of deposits and an increase in adjustable rate loans at year
end.
Gap indicators of IRR are not necessarily consistent with IRR simulation
estimates. Parkvale utilizes net interest income simulation estimates under
various assumed interest rate environments to more fully capture the details of
IRR. Assumptions included in the simulation process include measurement over a
probable range of potential interest rate changes, prepayment speeds on
amortizing financial instruments, other imbedded options, loan and deposit
volumes and rates, nonmaturity deposit assumptions and management's capital
requirements. The estimated impact on projected net interest income in fiscal
2004 assuming an immediate shift in current interest rates, excluding the impact
of premium amortization, would result in the following percentage changes over
fiscal 2003 net interest income: +100 bp, +4.7%; +200 bp, -1.1%; -100 bp, +1.8%;
- -200 bp, -3.9%. This compares to projected net interest income for fiscal 2003
made at June 30, 2002 of: +100 bp, -2.5%; +200 bp, -8.7%; -100 bp,+3.0%; -200
bp, +1.8%. The fluctuation in projected net interest income between fiscal 2003
and 2002 is reflective of the change in asset mix during fiscal 2003 as
discussed earlier in this section.
ASSET MANAGEMENT. A primary goal of Parkvale's asset management is to
maintain a high level of liquid assets. Parkvale defines the following as liquid
assets: cash, federal funds sold, certain corporate debt maturing in less than
one year, U.S. Government and agency obligations maturing in less than one year
and short-term bank deposit accounts. The average daily liquidity was 18.9% for
the quarter ended June 30, 2003. During fiscal 2003, Parkvale's investment
strategy was to utilize excess liquidity by purchasing single-family ARM loans
to enhance yields and reduce the risk associated with rate volatility. Such
investments reduce the inherent risk of the volatility of overnight interest
rates. If interest rates were to fall substantially, net interest income may
decrease if the yield on liquid assets, such as Federal funds sold, were to fall
faster than liabilities would reprice.
Parkvale's lending strategy has been designed to shorten the average
maturity of its assets and increase the rate sensitivity of its loan portfolio.
In fiscal 2003, 2002 and 2001, 90.6%, 89.7% and 89.5%, respectively, of mortgage
loans originated or purchased were
4 2003 Parkvale Financial
and ANALYSIS
adjustable-rate loans. Parkvale has continually emphasized the origination and
purchase of ARM loans. ARMs totaled $831.5 million or 79.3% of total mortgage
loans at June 30, 2003 versus $696.7 million or 69.4% of total mortgage loans at
June 30, 2002. To supplement local mortgage originations, Parkvale purchased
loans aggregating $619.1 million, $339.8 million and $202.2 million in fiscal
2003, 2002 and 2001, respectively, from mortgage bankers and other financial
institutions. The loan packages purchased were predominately 3/1 and 5/1 ARMs.
All of the 2003 and 2002 purchases were ARMs. The practice of purchasing loans
in the secondary market is expected to continue in fiscal 2004 when liquidity
exceeds targeted levels. At June 30, 2003, Parkvale had commitments to originate
mortgage loans totaling $7.2 million and commercial loans of $3.7 million.
Commitments to fund construction loans in process at June 30, 2003 were $23.7
million. Such commitments are expected to be funded from current liquidity.
Parkvale continues to increase its consumer loan portfolio through new
originations. Home equity lines of credit are granted up to 120% of collateral
value at competitive rates. In general, these loans have shorter maturities and
greater interest rate sensitivity and margins than residential real estate
loans. At June 30, 2003 and 2002, consumer loans were $152.5 million and $168.0
million which represented a 9.2% decrease and a 26.7% increase over the balances
at June 30, 2002 and 2001, respectively, with fixed-rate second mortgage loans
totaling $74.2 million, $92.0 million and $83.5 million outstanding balances at
June 30, 2003, 2002 and 2001, respectively, with average maturities of five
years.
Investments in mortgage backed securities and other securities, such as
U.S. Government and agency obligations and corporate debt, are purchased to
enhance Parkvale's overall net interest margin and to reduce credit risk
concentration. Parkvale's investment policy focuses on long-term trends, rather
than short-term swings in the financial markets. Accordingly, all debt
securities are classified as held to maturity, and are not available for sale
nor held for trading.
LIABILITY MANAGEMENT. Parkvale's favorable liquidity allows investment
decisions to be made with the funding source as a secondary issue. Deposits are
priced according to management's asset/liability objectives, alternate funding
sources and competition. A concentrated effort is made to extend the maturities
of deposits by offering competitive rates for longer term certificates.
Certificates of deposit maturing after one year as a percent of total deposits
are 31.4% at June 30, 2003 and 30.3% at June 30, 2002. Parkvale has also made a
concentrated effort to increase low cost deposits by attracting new checking
customers to our community branch offices. Checking accounts at June 30, 2003
and 2002 have increased by 13.1% and 28.5%, respectively, showing growing
acceptance of Parkvale as a full service bank. Parkvale's primary sources of
funds are deposits received through its branch network, loan and mortgage-backed
security repayments and advances from the Federal Home Loan Bank ("FHLB"). FHLB
advances can be used on a short-term basis for liquidity purposes or on a
long-term basis to support lending activities.
CONCENTRATION OF CREDIT RISK
Financial institutions, such as Parkvale, generate income primarily
through lending and investing activities. The risk of loss from lending and
investing activities includes the possibility that losses may occur from the
failure of another party to perform according to the terms of the loan or
investment agreement. This possibility of loss is known as credit risk.
Credit risk is increased by lending and investing activities that
concentrate a financial institution's earning assets in a way that exposes the
institution to a material loss from any single occurrence or group of related
occurrences. Diversifying loans and investments to prevent concentrations of
risks is one manner a financial institution can reduce potential losses due to
credit risk. Examples of asset concentrations would include, but not be limited
to, geographic concentrations, loans or investments of a single type, multiple
loans to a single borrower, loans made to a single type of industry and loans of
an imprudent size relative to the total capitalization of the institution. For
loans purchased and originated, Parkvale has taken steps to reduce exposure to
credit risk by emphasizing low-risk, single-family mortgage loans, which
comprise 74.5% of the gross loan portfolio as of June 30, 2003. The next largest
component of the loan portfolio are consumer loans at 12.2%, which generally
consist of lower balance second mortgages and home equity loans originated in
the greater Pittsburgh area.
Corporation Annual Report 5
MANAGEMENT'S Discussion
INTEREST-SENSITIVITY ANALYSIS. The following table reflects the maturity and
repricing characteristics of Parkvale's assets and liabilities at June 30, 2003:
(in thousands, except per share data) < 3 months 4-12 months 1-5 years 5+ years Total
- -------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE ASSETS:
ARM and other variable rate loans $ 106,487 $ 184,018 $ 520,621 $ 50,988 $ 862,114
Other fixed rate loans, net (1) 65,398 19,113 119,416 175,738 379,665
Variable rate mortgage-backed securities 2,122 340 23,459 -- 25,921
Fixed rate mortgage-backed securities (1) 165 266 11,985 2,093 14,509
Investments and Federal funds sold 129,011 41,371 82,878 38,780 292,040
Equities, primarily FHLB 163 4,952 13,022 1,606 19,743
- -------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets $ 303,346 $ 250,060 $ 771,381 $ 269,205 $1,593,992
- -------------------------------------------------------------------------------------------------------------------------
Ratio of interest-sensitive assets to total assets 18.5% 15.2% 47.0% 16.4% 97.0%
- -------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
Passbook deposits and club accounts (2) $ 42,012 $ 25,435 $ 29,220 $ 103,413 $ 200,080
Checking accounts (3) 21,585 12,628 25,256 177,333 236,802
Money market deposit accounts -- 40,584 40,584 -- 81,168
Certificates of deposit 157,654 228,581 349,632 68,187 804,054
FHLB advances and other borrowings, including
trust preferred securities 37,903 -- 100,500 60,754 199,157
- -------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive liabilities $ 259,154 $ 307,228 $ 545,192 $ 409,687 $1,521,261
- -------------------------------------------------------------------------------------------------------------------------
Ratio of interest-sensitive liabilities
to total liabilities and equity 15.8% 18.7% 33.2% 24.9% 92.6%
- -------------------------------------------------------------------------------------------------------------------------
Ratio of interest-sensitive assets
to interest-sensitive liabilities 117.0% 81.4% 141.5% 65.7% 104.8%
- -------------------------------------------------------------------------------------------------------------------------
Periodic Gap to total assets 2.69% (3.48)% 13.77% (8.55)% 4.43%
- -------------------------------------------------------------------------------------------------------------------------
Cumulative Gap to total assets 2.69% (0.79)% 12.97% 4.43%
- -------------------------------------------------------------------------------------------------------------------------
(1) Includes total repayments and prepayments at an assumed rate of 10%
per annum for fixed-rate mortgage loans and mortgage-backed
securities, with the amounts for other loans based on the estimated
remaining loan maturity by loan type.
(2) Assumes passbook deposits are rate sensitive at the rate of 32.6%
per annum, compared with 28.1% for fiscal 2002.
(3) Includes preferred plus accounts which are assumed to be immediately
rate sensitive and checking accounts which are assumed to be 5.6% in
the first year and 2.8% per annum thereafter, compared with 5.4% and
2.7%, respectively, for fiscal 2002.
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE
Nonperforming and impaired loans and foreclosed real estate (REO) consisted of
the following at June 30
2003 2002
- --------------------------------------------------------------------------------
(Dollars in 000's)
Delinquent single-family mortgage loans $3,786 $2,373
Delinquent other loans 2,379 598
- --------------------------------------------------------------------------------
Total of nonperforming loans $6,165 $2,971
Total of impaired loans 1,119 498
Real Estate Owned 2,695 1,717
- --------------------------------------------------------------------------------
Total $9,979 $5,186
6 2003 Parkvale Financial
and ANALYSIS (continued)
Nonperforming and impaired loans and real estate owned represent 0.61% and
0.32% of total assets at the respective balance sheet dates. June 30, 2003
delinquent single-family mortgage loans consisted of 38 single family owner
occupied homes. As of June 30, 2003, $2.1 million or 56.2% of the nonaccrual
mortgage loans totaling $3.8 million were purchased from others. Management
believes the loans are well collateralized. The delinquent other loans at June
30, 2003 included $1.5 million which were in the process of refinancing and have
either paid off or paid current subsequent to June 30, 2003.
Loans are placed on nonaccrual status when, in management's judgement, 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. As a result,
uncollected interest income is not included in earnings for nonaccrual loans.
The amount of interest income on nonaccrual loans that has not been recognized
in interest income was $248,000 at June 30, 2003 and $191,000 at June 30, 2002.
Parkvale provides an allowance for the loss of accrued but uncollected interest
on mortgage, consumer and commercial business loans which are more than 90 days
contractually past due.
In addition, loans totaling $7.6 million were classified as special
mention or substandard for regulatory purposes at June 30, 2003. These loans,
while current or less than 90 days past due, have exhibited characteristics
which warrant special monitoring. Examples of these concerns include irregular
payment histories, questionable collateral values, investment properties having
cash flows insufficient to service debt, and other financial inadequacies of the
borrower. These loans are regularly monitored with efforts being directed
towards resolving the underlying concerns while continuing with the performing
status classification of such loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan loss was $15.0 million at June 30, 2003 and $15.5
million at June 30, 2002 or 1.20% and 1.26% of gross loans at June 30, 2003 and
June 30 2002, respectively. The adequacy of the allowance for loan loss is
determined by management through evaluation of individual nonperforming,
delinquent and high dollar loans, economic and business trends, growth and
composition of the loan portfolio and historical loss experience, as well as
other relevant factors.
The allowance for loan loss is continually monitored by management to
identify potential portfolio risks and detect potential credit deterioration in
the early stages. Management then establishes reserves based upon its evaluation
of the inherent risks in the loan portfolio. Management believes the allowance
for loan loss is adequate to absorb probable loan losses.
RESULTS OF OPERATIONS
Net income for the year ended June 30, 2003 was $10.5 million or $1.86 per
diluted share representing a 2.8% increase from net income of $10.4 million or
$1.81 per diluted share for the year ended June 30, 2002. Fiscal 2003 results
contain gains on the sale of investments of $1.1 million offset by a $1.1
million expense related to foreclosed real estate. Fiscal 2002 results contain
gains of $7.1 million on the sale of investments and losses of $2.6 million on
the impairment of securities and $6.5 million related to foreclosed real estate.
The June 2003 quarter was impacted by narrower interest margins.
Net interest income is the difference between interest earned on loans and
investments and interest paid for deposits and borrowings. A positive interest
rate spread is achieved with interest-earning assets in excess of interest-
bearing liabilities which results in increased net interest income. Net interest
income was $32.3 million in fiscal 2003 compared to $33.1 million in fiscal
2002. The decrease in net interest income is due to the accumulative affect of
the Federal Reserve Board's rate reductions during calendar 2001. The
unprecedented number of rate reductions occurring in such a short period of time
resulted in assets repricing at a faster pace than deposit accounts.
INTEREST INCOME
Interest income from loans decreased by $7.1 million or 8.9% in fiscal
2003. Average loans outstanding increased $57.1 million or 5.0%, primarily due
to loan package purchases amounting to $619.1 million during fiscal 2003. This
was offset due to a decrease in the average loan yield which was 6.96% in fiscal
2002 and declined to 6.04% in fiscal 2003. Interest income on loans increased by
$1.3 million or 1.6% from fiscal 2001 to 2002. The average yield on loans
decreased from 7.60% in fiscal 2001 to 6.96% in fiscal 2002, and the average
outstanding loan balance increased $78.4 million or 7.4% between fiscal 2001 and
2002.
Interest income on investments increased $1.2 million or 11.6% in fiscal
2003. This is the result of a $70.1 million increase in the average balance
offset by a decrease in the average yield on investments to 4.75% in fiscal 2003
from 5.92% in fiscal 2002. The average yield on investments decreased to 5.92%
in fiscal 2002 from 6.68% in fiscal 2001 due to investing in shorter term
investments. Interest income on investments increased by $1.3 million or 14.2%
from fiscal 2001 to 2002. This was the result of a $40.5 million increase in the
average balance.
Corporation Annual Report 7
MANAGEMENT'S Discussion
YIELDS EARNED AND RATES PAID
The following table sets forth the average yields earned on Parkvale's
interest-earning assets and the average rates paid on its interest-bearing
liabilities, the resulting average interest rate spreads, the net yield on
interest-earning assets and the weighted average yields and rates at June 30,
2003.
Year Ended June 30, At June 30,
- ---------------------------------------------------------------------------------------
2003 2002 2001 2003
- ---------------------------------------------------------------------------------------
Average yields on (1):
Loans 6.04% 6.96% 7.60% 6.33%
Investments (2) 4.75 5.92 6.68 4.67
Federal funds sold 1.45 2.22 5.64 1.00
- ---------------------------------------------------------------------------------------
All interest-earning assets 5.49 6.43 7.40 5.27
- ---------------------------------------------------------------------------------------
Average rates paid on (1):
Savings deposits 3.30 4.22 4.77 2.83
Borrowings 5.16 5.54 5.70 4.99
Trust preferred securities 5.23 5.65 -- 4.61
- ---------------------------------------------------------------------------------------
All interest-bearing liabilities 3.53 4.34 4.84 3.11
- ---------------------------------------------------------------------------------------
Average interest rate spread 1.96% 2.09% 2.56% 2.17%
- ---------------------------------------------------------------------------------------
Net yield on interest-earning assets (3) 2.06% 2.29% 2.82%
(1) Average yields and rates are calculated by dividing the interest income or
expense for the period by the average balance for the year. The weighted
averages at June 30, 2003 are based on the weighted average contractual
interest rates. Nonaccrual loans are excluded in the average yield and
balance calculations.
(2) Includes held-to-maturity and available-for-sale investments, including
mortgage backed securities and interest-bearing deposits.
(3) Net interest income on a tax equivalent basis divided by average
interest-earning assets.
The following table presents for the periods indicated the average
balances of each category of interest-earning assets and interest-bearing
liabilities.
Year Ended June 30,
- -------------------------------------------------------------------------------------------------------
(in thousands) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $1,199,725 $1,142,646 $1,064,220
Investments 250,087 180,027 139,486
Federal funds sold 116,065 122,960 66,357
- -------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,565,877 1,445,633 1,270,063
- -------------------------------------------------------------------------------------------------------
Noninterest-earning assets 61,863 45,107 36,943
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,627,740 $1,490,740 $1,307,006
- -------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 1,335,538 1,248,234 1,104,476
FHLB advances and other borrowings 161,253 121,385 95,732
Trust Preferred Securities 25,000 6,725 --
- -------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,521,791 1,376,344 1,200,208
- -------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities 8,689 19,327 20,355
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,530,480 1,395,671 1,220,563
Shareholders' equity 97,260 95,069 86,443
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $1,627,740 $1,490,740 $1,307,006
- -------------------------------------------------------------------------------------------------------
NET INTEREST-EARNING ASSETS $ 44,086 $ 69,289 $ 69,855
- -------------------------------------------------------------------------------------------------------
Interest-earning assets as a % of interest-bearing liabilities 102.9% 104.9% 105.8%
- -------------------------------------------------------------------------------------------------------
An excess of interest-earning assets over interest-bearing liabilities will
enhance a positive interest rate spread.
8 2003 Parkvale Financial
and ANALYSIS (continued)
Interest income from federal funds sold decreased $1.1 million from fiscal
2002 to 2003. The decrease was attributable primarily to a decrease in the
average yield from 2.22% in fiscal 2002 to 1.45% in fiscal 2003. The average
federal funds sold balance decreased from $123.0 million in fiscal 2002 to
$116.1 million in fiscal 2003. The decrease is attributable to investing
available funds in yielding loans and investments. The target federal funds rate
decreased 75 basis points in fiscal 2003 from 1.75% to 1.00% at June 30, 2003.
The average balance of federal funds sold increased $56.6 million between fiscal
2002 and 2001, and interest income decreased $1.0 million between the two years.
The average yield decreased from 5.64% in fiscal 2001 to 2.22% in fiscal 2002.
INTEREST EXPENSE
Interest expense on deposits decreased $8.6 million or 16.2% between
fiscal 2002 and 2003. The average deposit balance increased $87.3 million or
7.0% in fiscal 2003 which was offset by a decrease in the average cost from
4.22% in fiscal 2002 to 3.30% in 2003. Interest expense on deposits decreased by
$17,000 or 0.3% between fiscal 2001 and 2002. The average deposit balance also
increased by $143.8 million between the two fiscal years, offset by a decrease
in the average cost from 4.77% in fiscal 2001 to 4.22% in fiscal 2002.
Interest expense on borrowed money increased by $1.6 million or 23.8% in
fiscal 2003, due to new borrowings with the FHLB totaling $40 million at an
average rate of 4.27% during fiscal 2003. The overall average cost of borrowings
decreased from 5.54% in fiscal 2002 to 5.16% in fiscal 2003. Interest expense on
trust preferred securities was $1.3 million for the twelve months ended June 30,
2003 as compared to $380,000 for the three months ended June 30, 2002. In fiscal
2002, interest expense on borrowed money increased by $1.6 million or 30.2% due
to new borrowings with the FHLB totaling $20 million at an average rate of 5.30%
and due to the issuance of $25 million of trust preferred securities on March
26, 2002.
Net interest income decreased $881,000 or 2.7% from fiscal 2002 to 2003.
The average interest rate spread decreased to 1.96% in fiscal 2003 from 2.09% in
fiscal 2002, while the average net interest earning assets decreased $25.2
million. In fiscal 2002, net interest income increased $2.6 million or 7.3%. The
average interest rate spread decreased from 2.56% in fiscal 2001 to 2.09% in
2002, while average net interest earning assets decreased $566,000 between the
two years.
At June 30, 2003, the weighted average yield on loans and investments was
5.27%. The average rate payable on liabilities was 2.83% for deposits, 4.99% for
borrowings, 4.61% for trust preferred securities and 3.11% for combined
deposits, borrowings and trust preferred securities.
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 was $308,000 in
2003, $205,000 in 2002 and $320,000 in 2001, respectively. The provision
increased by $103,000 or 50.2% in fiscal 2003 compared to fiscal year 2002.
Aggregate allowances were 1.20% of gross loans as of June 30, 2003. Management
believes the allowance for loan losses is adequate to cover the amount of
probable credit losses incurred in the loan portfolio as of June 30, 2003.
OTHER INCOME
Other income decreased $2.6 million or 24.5% in fiscal 2003 compared to
fiscal 2002. This is primarily attributable to a lower gain on sale of
investments of $1.1 million in fiscal 2003 compared to gains on sale of
investments of $7.1 million offset by security investment impairment charges of
$2.6 million primarily related to WorldCom bonds in fiscal 2002. The security
gains in fiscal 2002 were realized on the sale of 112,496 shares of Freddie Mac
Common Stock.
Service charges on deposit accounts increased by $662,000 or 17.9% in
fiscal 2003, mainly due to an increase in the average balances over fiscal 2002
and to increased services for all types of deposits. Other service charges and
fees increased by $450,000 or 43.0% in fiscal 2003. This increase is also
attributable to the increased average balances from the acquisition of the
Second National Bank of Masontown ("SNB"). Service charges on deposit accounts
increased by $949,000 or 34.4% and other service charges and fees increased by
$168,000 or 19.1% between fiscal 2002 and 2001.
Miscellaneous income decreased $268,000 or 19.8% in fiscal 2003, and
increased by $351,000, or 35.0%, in fiscal 2002. The primary decrease in 2003
came from investment service fee income which decreased by $104,000 to $869,000
in fiscal 2003 versus $973,000 in fiscal 2002 and $675,000 in fiscal 2001.
Parkvale offers nondeposit investment products directly to customers through an
operating division, Parkvale Financial Services.
OTHER EXPENSE
Other expense decreased $3.3 million or 11.7% in fiscal 2003, mainly due
to lower levels of expenses and writedowns related to foreclosed real estate
during fiscal 2003 as compared to fiscal 2002. The writedowns and
Corporation Annual Report 9
MANAGEMENT'S Discussion
expenses aggregating $1.1 million and $6.5 million recorded in 2003 and 2002,
respectively related to a commercial property undergoing rehabilitation and
renovation, reducing the net book value of the building to its estimated net
realizable value, as estimated costs to remediate and renovate the building
proved higher than originally estimated.
Compensation and employee benefits increased by $1.4 million or 12.4%
during fiscal 2003 and by $913,000 or 8.6% during fiscal 2002 over the
respective prior period.
Compensation expense increased $1.2 million or 12.3% in fiscal 2003 and
increased $864,000 or 10.0% in fiscal 2002. The 2003 increase is attributable to
the effect of a full fiscal year of additional employees acquired through the
merger with the SNB on January 31, 2002. The 2002 increase is primarily
attributable to the effect of a partial fiscal year of additional employees
gained from the SNB acquisition. Payroll related taxes increased $96,000 during
fiscal 2003 as a direct result of increased compensation. The 2003 increase
represented normal merit pay increases and increased staffing related to new
offices and products.
Office occupancy expense increased $561,000 or 15.6% in fiscal 2003 and
$472,000 or 15.1% in fiscal 2002 over the respective prior period. The increases
in fiscal 2003 and 2002 are due to the addition of a new branch office during
fiscal 2003 and the effects of a full fiscal year of occupancy expense due to
the addition of five SNB branch offices in January 2002.
Marketing expenses decreased by $104,000 or 17.3% in fiscal 2003 and
increased by $80,000 or 15.4% in fiscal 2002. The fiscal 2003 decrease is due to
lower levels of advertising spending as compared to the higher levels of fiscal
2002 expense was due to the the acquisition of SNB and various loan and deposit
promotions.
Parkvale Savings Bank ("the Bank") is insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF"). FDIC insurance expense was $224,000, $222,000 and $213,000 relating to
savings deposit premiums averaging 1.68 basis points during fiscal 2003, 1.83
basis points during fiscal 2002 and 1.91 basis points during fiscal 2001,
respectively.
Miscellaneous expenses increased by $31,000 or 0.79% in fiscal 2003.
Miscellaneous expense increased by $1.2 million or 42.9% in 2002 primarily
attributable to merger related data processing conversion costs of $400,000 in
connection with the January 31, 2002 SNB acquisition.
INCOME TAXES
Federal and state income tax expense decreased by $436,000 or 8.2% due to
a decrease in pre-tax income and a lower effective tax rate as a result from the
benefits of certain investments made by the company and its subsidiaries. As
discussed in Note H, the effective tax rate for fiscal 2003, 2002 and 2001 was
31.8%, 33.9% and 35.0%, respectively.
COMMITMENTS
At June 30, 2003, Parkvale was committed under various agreements to
originate fixed and adjustable rate mortgage loans aggregating $4.1 million and
$3.1 million, respectively, at rates ranging from 4.91% to 5.53% for fixed rate
and 2.70% to 5.00% for adjustable rate loans, and had $83.2 million of unused
consumer lines of credit and $18.2 million in unused commercial lines of credit.
In addition, Parkvale was committed to purchase $78.9 million of adjustable rate
loans. Parkvale was also committed to originate commercial loans totaling $3.7
million at June 30, 2003. Available but unused consumer and commercial credit
card lines amounted to $10.7 million and $515,000 respectively, at June 30,
2003.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity risk represents the inability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers, as well
as, the obligations to depositors and debtholders. Parkvale uses its
asset/liability management policy and contingency funding plan to control and
manage liquidity risk.
Federal funds sold decreased $47.0 million or 39.5% from $119 million at
June 30, 2002 to $72 million at June 30, 2003. Loan balances increased $24.1
million or 2.0%, investment balances increased $17.6 million or 7.6% and
increased cash balances of $7.0 million or 28.0%, resulted from decreased
deposit balances of $17.6 million or 1.3% and increased advances and other debt
of $26.2 million or 17.7%. Parkvale's FHLB advance available maximum borrowing
capacity is $867.2 million. If Parkvale were to experience a deposit run off in
excess of available cash resources and cash equivalents, available FHLB
borrowing capacity could be utilized to fund the decrease in deposits.
Shareholders' equity increased $2.1 million or 2.1% during the year ended
June 30, 2003 compared to June 30, 2002. Comprehensive income was $10.1 million
while dividends declared were $4.0 million resulting in 38.0% of net income paid
to shareholders (equal to $0.72 per share) for fiscal year ended June 30, 2003.
Treasury stock purchased in fiscal 2003 was $4.9 million which was partially
deployed for funding stock options and benefit plans totaling $896,000. The book
value of Parkvale's common stock increased 4.9% to $17.93 at
10 2003 Parkvale Financial
and ANALYSIS (continued)
June 30, 2003 from $17.09 at June 30, 2002 as a result of these increases in
shareholders' equity.
The Bank is a wholly owned subsidiary of Parkvale. The Bank's primary
regulators are the Federal Deposit Insurance Corporation ("FDIC") and the
Pennsylvania Department of Banking. The Office of Thrift Supervision retains
jurisdiction over Parkvale Financial Corporation due to its status as a unitary
savings and loan holding company. Parkvale continues to maintain a "well
capitalized" status, sustaining a 6.9% Tier 1 capital level as of June 30, 2003.
Strong capitalization allows Parkvale to continue building shareholder value
through traditionally conservative operations and potentially profitable growth
opportunities. Management is not aware of any trends, events, uncertainties or
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.
CRITICAL ACCOUNTING POLICIES AND JUDGEMENTS
Parkvale's consolidated financial statements are prepared based upon the
application of certain accounting policies, the most significant of which are
described in Note A - Significant Accounting Policies. Certain of these policies
require numerous estimates and strategic or economic assumptions that may prove
inaccurate or subject to variations and may significantly affect Parkvale's
reported results and financial position for the period or in future periods.
Changes in underlying factors, assumptions, or estimates in any of these areas
could have a material impact on Parkvale's future financial condition and
results of operations.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is increased by
charges to income and decreased by net charge-offs. The Bank's periodic
evaluation of the adequacy of the allowance is based on known and inherent risks
in the portfolio, past loan loss experience, current economic conditions, trends
within Parkvale's market area and other relevant factors.
The first step in determining the allowance for loan losses is recognizing
a specific allowance on individual impaired loans. Nonaccrual, substandard and
doubtful commercial and other real estate loans are considered for impairment.
An allowance is recognized for loan losses in the remainder of the loan
portfolio based on known and inherent risk characteristics in the portfolio,
past loss experience and prevailing market conditions. Because evaluating
potential losses involves a high degree of management judgement, a margin is
included for the imprecision inherent in making these estimates. While
management believes that the allowance is adequate to absorb estimated credit
losses in its existing loan portfolio, future adjustments may be necessary if
circumstances differ substantially from the assumptions used in evaluating the
adequacy of the allowance for loan losses.
The allowance for loan losses at June 30, 2003 includes $11.5 million or
76.3% of the allowance allocated to loans that are not secured by single family
homes. The ability for Bank customers to repay commercial or consumer loans are
most dependent upon the success of their business, continuing income and general
economic conditions. Accordingly, the risk of loss is higher on such loans than
single family loans, which generally incur fewer losses as the collateral value
exceeds the loan amounts in the event of foreclosure.
INVESTMENT SECURITIES HELD TO MATURITY. Securities for which the Bank has
the positive intent and ability to hold to maturity are reported at cost
adjusted for premiums and discounts that are recognized in interest income using
the interest method over the period to maturity. Declines in the fair value of
individual held-to-maturity securities below their amortized cost that are
other than temporary result in writedowns of the individual securities to their
estimated fair value. Such writedowns are included in earnings as realized
losses. Regular quarterly reviews of investment ratings and publicly available
information are conducted by management and reviewed by the Audit-Finance
committee. A listing of securities with ratings below investment grade are
monitored and evaluated for possible writedowns. There were no writedowns in
fiscal 2003. In fiscal 2002, writedowns were $2.6 million, primarily related to
the decline in market value of WorldCom Bonds to an estimated value of 19.5
cents per par dollar at June 30, 2002. At June 30, 2003, WorldCom is attempting
to emerge from bankruptcy protection, which should result in a partial recovery
for the 2002 writedown. If the financial markets experience further
deterioration on these bonds or on other corporate bonds held for investment,
additional charges to income could occur in future periods.
FORECLOSED REAL ESTATE. Real estate properties acquired through, or in
lieu of, loan foreclosure are to be sold and recorded at the lower of the
carrying amount or fair value of the property less cost to sell. After
foreclosure, valuations are periodically performed by management and a valuation
allowance is established for declines in the fair value less cost to sell below
the property's carrying amount. Revenues, expenses and changes in the valuation
allowance are included in the statement of operations. Gains and losses upon
disposition are reflected in earnings as realized. The net book value of
foreclosed real estate at June 30, 2003 includes $1.6 million related to a
vacant office building, which is undergoing renovation and rehabilitation. In
Corporation Annual Report 11
MANAGEMENT'S Discussion and Analysis (continued)
fiscal 2003 and fiscal 2002, writedowns and expenses related to this property of
$1.1 and $6.5 million, respectively were recorded as estimated costs to
remediate and renovate the building were higher than originally estimated and
greater than the estimated net realizable value. The ability to recover costs
incurred is dependent upon real estate market conditions and demand for
commercial property. To the extent that economic conditions and improvement
costs vary from current estimates, additional losses could occur in future
periods.
GOODWILL AND OTHER INTANGIBLE ASSETS. FAS 141, Accounting for Business
Combinations is the standard of accounting for business combinations initiated
after June 30, 2001. FAS 141 requires use of the purchase method and eliminated
the use of the pooling-of-interest method of accounting for business
combinations. FAS 141 also provided criteria to determine whether an acquired
intangible should be recognized separately from goodwill. FAS 142, Accounting
for Goodwill and Other Intangible Assets establishes standards for the
amortization of acquired intangible assets and the non-amortization and
impairment assessment of goodwill. Parkvale has $4.0 million of core deposit
intangible assets subject to amortization and $7.6 million in goodwill, which is
not subject to periodic amortization. Parkvale determined the amount of
identifiable intangible assets based upon an independent core deposit analysis,
which was updated in fiscal 2003.
Goodwill arising from business acquisitions represents the value
attributable to unidentifiable intangible elements in the business acquired.
Parkvale's goodwill relates to value inherent in the banking business and the
value is dependent upon Parkvale's ability to provide quality, cost effective
services in the face of free competition from other market participants on a
regional basis. This ability relies upon continuing investments in processing
systems, the development of value-added service features, and the ease of use of
Parkvale's services. As such, goodwill value is supported ultimately by revenue
which is driven by the volume of business transacted. A decline in earnings as a
result of a lack of growth or the inability to deliver cost effective services
over sustained periods can lead to impairment of goodwill which could result in
a charge and adversely impact earnings in future periods.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with accounting principles generally accepted 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 effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the consumer price index.
FORWARD LOOKING STATEMENTS
The statements in this Annual Report which are not historical fact are
forward looking statements. Forward looking information should not be construed
as guarantees of future performance. Actual results may differ from expectations
contained in such forward looking information as a result of factors including
but not limited to the interest rate environment, economic policy or conditions,
federal and state banking and tax regulations and competitive factors in the
marketplace. Each of these factors could affect estimates, assumptions,
uncertainties and risks considered in the development of forward looking
information and could cause actual results to differ materially from
management's expectations regarding future performance.
12 2003 Parkvale Financial
Consolidated STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30,
- -------------------------------------------------------------------------------------------------------
ASSETS 2003 2002
- -------------------------------------------------------------------------------------------------------
Cash and noninterest-earning deposits $ 32,067 $ 25,050
Federal funds sold 72,000 119,000
Interest-earning deposits in other banks 17,576 17,473
Investment securities available for sale (cost of $19,185 in 2003
and $11,780 in 2002) (Note B) 19,743 13,080
Investment securities held to maturity (fair value of $215,587 in 2003
and $201,098 in 2002) (Note B) 210,827 199,860
Loans, net of allowance of $15,013 in 2003
and $15,492 in 2002 (Note C) 1,241,779 1,217,639
Foreclosed real estate (Note D) 2,695 1,717
Office properties and equipment, net (Note D) 11,196 10,080
Intangible assets and deferred charges 11,572 11,787
Prepaid expenses and other assets (Note M) 23,348 16,506
- -------------------------------------------------------------------------------------------------------
Total assets $ 1,642,803 $ 1,632,192
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------
LIABILITIES
- -------------------------------------------------------------------------------------------------------
Savings deposits (Note E) $ 1,331,760 $ 1,349,339
Advances from Federal Home Loan Bank and other debt (Note F) 174,157 147,996
Trust preferred securities (Note F) 25,000 25,000
Advance payments from borrowers for taxes and insurance 7,144 7,882
Other liabilities (Note M) 5,268 4,571
- -------------------------------------------------------------------------------------------------------
Total liabilities $ 1,543,329 $ 1,534,788
- -------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes G and I)
- -------------------------------------------------------------------------------------------------------
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 issued) 6,735 6,735
Additional paid-in capital 4,132 4,293
Treasury stock at cost - 1,186,663 shares in 2003
and 1,034,483 shares in 2002 (22,951) (19,128)
Accumulated other comprehensive income 355 826
Retained earnings 111,203 104,678
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 99,474 97,404
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,642,803 $ 1,632,192
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Corporation Annual Report 13
Consolidated STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended June 30,
2003 2002 2001
- -------------------------------------------------------------------------------------------
INTEREST INCOME
- -------------------------------------------------------------------------------------------
Loans $72,473 $79,568 $80,891
Investments 11,879 10,649 9,322
Federal funds sold 1,678 2,728 3,743
- -------------------------------------------------------------------------------------------
Total interest income 86,030 92,945 93,956
- -------------------------------------------------------------------------------------------
INTEREST EXPENSE
- -------------------------------------------------------------------------------------------
Savings deposits (Note E) 44,127 52,688 52,705
Borrowings 8,329 6,730 5,461
Trust preferred securities 1,308 380 --
- -------------------------------------------------------------------------------------------
Total interest expense 53,764 59,798 58,166
- -------------------------------------------------------------------------------------------
Net interest income 32,266 33,147 35,790
Provisions for loan losses (Note C) 308 205 320
- -------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 31,958 32,942 35,470
- -------------------------------------------------------------------------------------------
NONINTEREST INCOME
- -------------------------------------------------------------------------------------------
Service charges on deposit accounts 4,370 3,708 2,759
Other service charges and fees 1,497 1,047 879
Net gain on sale and writedown of securities (Note J) 1,091 4,550 --
Miscellaneous 1,087 1,355 1,004
- -------------------------------------------------------------------------------------------
Total other income 8,045 10,660 4,642
- -------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Compensation and employee benefits 12,984 11,548 10,635
Office occupancy 4,155 3,594 3,122
Marketing 496 600 520
FDIC insurance 224 222 213
Office supplies, telephone, and postage 1,661 1,449 1,357
Real estate owned expenses and writedowns 1,100 6,500 --
Miscellaneous 3,946 3,915 2,740
- -------------------------------------------------------------------------------------------
Total other expenses 24,566 27,828 18,587
- -------------------------------------------------------------------------------------------
Income before income taxes 15,437 15,774 21,525
Income tax expense (Note H) 4,908 5,344 7,524
- -------------------------------------------------------------------------------------------
NET INCOME $10,529 $10,430 $14,001
- -------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
Basic $ 1.89 $ 1.84 $ 2.46
Diluted $ 1.86 $ 1.81 $ 2.43
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14 2003 Parkvale Financial
Consolidated STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended June 30,
2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------------------
Interest received $ 91,279 $ 93,048 $ 92,314
Loan fees paid (1,623) (16) (445)
Other fees and commissions received 6,955 5,938 4,518
Interest paid (53,629) (59,686) (57,864)
Cash paid to suppliers and employees (33,279) (23,822) (18,195)
Income taxes paid (2,100) (6,601) (7,336)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,603 8,861 12,992
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of investment securities available for sale 1,804 15,790 --
Proceeds from maturities of investments 249,825 48,157 51,828
Purchase of investment securities available for sale (7,405) -- (295)
Purchase of investment securities held to maturity (262,672) (80,196) (70,984)
Maturity of deposits in other banks (103) (5,122) (6,991)
Purchase of loans (619,098) (339,807) (202,219)
Proceeds from sales of loans 3,128 2,690 3,363
Principal collected on loans 797,275 576,084 244,254
Loans made to customers, net of loans in process (207,480) (227,382) (126,099)
Payment for acquisition of Second National Bank, net -- (19,309) --
Capital expenditures (2,416) (1,075) (1,389)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (47,142) (30,170) (108,532)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in checking and savings accounts 44,144 43,441 37,032
Net (decrease) increase in certificates of deposit (61,723) (31,409) 63,668
Proceeds from FHLB advances 40,000 20,000 50,500
Repayment of FHLB advances (10,014) (5,013) (13)
Proceeds from trust preferred securities -- 25,000 --
Net (decrease) increase in other borrowings (3,825) 2,058 (4,638)
Net (decrease) in borrowers advances for tax and insurance (738) (206) (768)
Dividends paid (4,093) (4,086) (4,101)
Allocation of treasury stock to retirement plans 685 712 878
Payment for treasury stock (4,880) (346) (2,365)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (444) 50,151 140,193
- -------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (39,983) 28,842 44,653
Cash and cash equivalents at beginning of year 144,050 115,208 70,555
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 104,067 $ 144,050 $ 115,208
- -------------------------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash provided by operating activities:
Net Income $ 10,529 $ 10,430 $ 14,001
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,739 1,180 768
Accretion and amortization of fees and discounts 2,440 487 (691)
Loan fees collected and deferred (523) (16) (445)
Provisions for loan losses 308 205 320
Writedowns and expenses related to REO 1,100 6,500 --
Gain on sale of assets (1,091) (4,550) --
Decrease (increase) in accrued interest receivable 1,058 (942) (1,294)
Increase in other assets (9,101) (6,811) (30)
Increase in accrued interest payable 135 112 302
Increase in deferred income tax asset -- 2,698 --
Increase (decrease) in other liabilities 1,009 (432) 61
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments (2,926) (1,569) (1,009)
- -------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 7,603 $ 8,861 $ 12,992
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Corporation Annual Report 15
Consolidated STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Accumulated
Additional Other Total
Common Paid-In Treasury Comprehensive Retained Shareholders'
Stock Capital Stock Income Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 6,735 $ 4,495 $(18,471) $3,075 $ 88,432 $84,266
- ---------------------------------------------------------------------------------------------------------------------------------
2001 net income 14,001 14,001
Other Comprehensive income, net of tax
Unrealized security gains (losses) on
available-for-sale securities 2,321 2,321
-----
Comprehensive income 16,322
Treasury stock purchased (2,365) (2,365)
Treasury stock contributed to benefit plan 879 879
Exercise of stock options (148) 232 84
Cash dividends declared on common stock
at $.72 per share (4,092) (4,092)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ 6,735 $ 4,347 $(19,725) $5,396 $ 98,341 $95,094
- ---------------------------------------------------------------------------------------------------------------------------------
2002 net income 10,430 10,430
Other Comprehensive income, net of tax
Unrealized security gains on securities of
$156, net of reclassification adjustment for
gains included in net income $4,726 (4,570) (4,570)
-----
Comprehensive income 5,860
Treasury stock purchased (346) (346)
Treasury stock contributed to benefit plan 712 712
Exercise of stock options (54) 231 177
Cash dividends declared on common stock
at $.72 per share (4,093) (4,093)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 6,735 $ 4,293 $(19,128) $ 826 $104,678 $97,404
- ---------------------------------------------------------------------------------------------------------------------------------
2003 net income 10,529 10,529
Other Comprehensive income, net of tax
Unrealized gains on securities of $273,
net of reclassification adjustment for
gains included in net income of $744 (471) (471)
----
Comprehensive income 10,058
Treasury stock purchased (4,880) (4,880)
Treasury stock contributed to benefit plan 685 685
Exercise of stock options (161) 372 211
Cash dividends declared on common stock
at $.72 per share (4,004) (4,004)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $ 6,735 $ 4,132 $(22,951) $ 355 $111,203 $99,474
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16 2003 Parkvale Financial
NOTES TO Consolidated Financial Statements
NOTE A SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Parkvale Financial Corporation ("Parkvale" or "PFC"), its wholly owned
subsidiary, Parkvale Savings Bank (the "Bank") and its wholly owned
subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation.
BUSINESS
The primary business of Parkvale consists of attracting deposits from the
general public in the communities that it serves and investing such deposits,
together with other funds, in residential real estate loans, consumer loans,
commercial loans and investment securities. Parkvale focuses on providing a wide
range of consumer and commercial services to individuals, partnerships and
corporations in the greater Pittsburgh metropolitan area, which comprises its
primary market area. Parkvale is subject to the regulations of certain federal
and state agencies and undergoes periodic examinations by certain regulatory
authorities.
OPERATING SEGMENTS
An operating segment is defined as a component of an enterprise that
engages in business activities that generate revenue and incur expense, and the
operating results of which are reviewed by management. Parkvale's business
activities are currently confined to one operating segment which is community
banking.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expense during
the reported period. Actual results could differ from those estimates.
CASH AND NONINTEREST-EARNING DEPOSITS
The Bank is required to maintain cash and reserve balances with the
Federal Reserve Bank. The reserve calculation is 0% of the first $6.0 million of
checking deposits, 3% of the next $36.1 million of checking deposits and 10% of
total checking deposits over $42.1 million. These required reserves, net of
allowable credits, amounted to $4.2 million at June 30, 2003.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consist solely of equity
securities. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of shareholders' equity until realized. Gains and losses on the sale
of available-for-sale securities are determined using the
specific-identification method. Declines in the fair value of individual
available-for-sale securities below their cost that are other than temporary
will result in write-downs of the individual securities to their fair value. Any
related write-downs will be included in earnings as realized losses. The FHLB of
Pittsburgh stock is a restricted equity security that does not have a readily
determinable fair value. The FHLB requires member institutions to maintain a
minimum level of stock ownership based on a percentage of residential mortgages,
subject to periodic redemption at par if the stock owned is over the minimum
requirement. As such, FHLB stock is recorded at cost with no unrealized gains or
losses as an investment available for sale. No securities have been classified
as trading.
INVESTMENT SECURITIES HELD TO MATURITY
Securities for which the Bank has the positive intent and ability to hold
to maturity are reported at cost adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity. Declines in the fair value of individual held-to-maturity securities
below their amortized cost that are other than temporary will result in
write-downs of the individual securities to their fair value. Any related
write-downs will be included in earnings as realized losses.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal adjusted for any charge-offs, the allowance for loan losses, and any
deferred fees or costs on originated loans and unamortized premiums or discounts
on purchased loans. Loan origination and commitment fees and certain direct
origination costs have been deferred and recognized as an adjustment of the
yield of the related loan, adjusted for anticipated loan prepayments. Discounts
and premiums on purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments.
Loans are placed on nonaccrual status when in the judgment of management,
the probability of collection of principal and interest is deemed to be
insufficient to warrant further accrual. All loans which are 90 or more days
delinquent are treated as nonaccrual loans. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest ultimately
collected is credited to income in the period of recovery.
Corporation Annual Report 17
NOTES TO Consolidated
NOTE A (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). The Bank's periodic evaluation of
the adequacy of the allowance is based on known and inherent risks in the
portfolio, past loan loss experience, current economic conditions, trends within
Parkvale's market area and other relevant factors.
The first step in determining the allowance for loan losses is recognizing
a specific allowance on individual impaired loans. Nonaccrual, substandard and
doubtful commercial and other real estate loans are considered for impairment.
Impaired loans are generally evaluated based on the present value of the
expected future cash flows discounted at the loan's effective interest rate, at
the loan's observable market price or at the fair value of the collateral if the
loan is collateral dependent. Based on this evaluation, specific loss reserves
are established on impaired loans when necessary.
An allowance is recognized for loan losses in the remainder of the loan
portfolio based on known and inherent risk characteristics in the portfolio,
past loss experience and prevailing market conditions. Because evaluating
potential losses involves a high degree of management judgement, a margin is
included for the imprecision inherent in making these estimates. While
management believes that the allowance is adequate to absorb estimated credit
losses in its existing loan portfolio, future adjustments may be necessary in
circumstances that differ substantially from the assumptions used in evaluating
the adequacy of the allowance for loan losses.
OFFICE PROPERTY AND EQUIPMENT
Office property and equipment is recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
useful lives of the various classes of assets. Amortization of leasehold
improvements is computed using the straight-line method over the useful lives of
the leasehold improvements.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three years ended June 30:
2003 2002 2001
- ------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share:
Net Income (in 000's) $ 10,529 $ 10,430 $ 14,001
Denominator:
Weighted average shares for basic earnings per share 5,572,974 5,680,696 5,694,295
Effect of dilutive employee stock options 79,089 88,757 74,361
- ------------------------------------------------------------------------------------------------------
Weighted average shares for dilutive earnings per share 5,652,063 5,769,453 5,768,656
- ------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 1.89 $ 1.84 $ 2.46
Diluted $ 1.86 $ 1.81 $ 2.43
- ------------------------------------------------------------------------------------------------------
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and recorded at the lower of the carrying amount or fair value of
the property less cost to sell. After foreclosure, valuations are periodically
performed by management and a valuation allowance is established for any
declines in the fair value less cost to sell below the property's carrying
amount. Revenues, expenses and changes in the valuation allowance are included
in the statement of operations. Gains and losses upon disposition are reflected
in earnings as realized. Loans transferred to foreclosed real estate during
fiscal 2003 were $1.7 million and in 2002 and 2001 were $1.2 million and $1.1
million, respectively. The foreclosures in 2003 and 2002 were primarily due to
loans on single family dwellings foreclosed throughout the year.
STOCK BASED COMPENSATION
Stock options and shares issued under Stock Option Plans are accounted for
under Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for
Stock Issued to Employees. Stock options are granted at exercise prices not less
than fair value of the common stock at the date of grant. Under APB 25, no
compensation expense is recognized related to these plans.
Proforma information regarding net income and earnings per share as
required by FAS 123, has been determined as if PFC had accounted for its stock
options using the fair value recognition provisions. The fair value for these
options was estimated at the date of the grants using a Black-Scholes option
pricing model with assumptions as follows. The risk-free interest rate for the
fiscal 2003 grants was 3.69% with a dividend yield of
18 2003 Parkvale Financial
FINANCIAL STATEMENTS (continued)
NOTE A (CONTINUED)
3.18%. The volatility factor of the expected market price of PFC's common stock
is 0.17 and the expected life of the options is nine years.
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 proforma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Parkvale's
proforma information follows.
(dollar amounts in thousands, except per share data)
Fiscal year ended June 30,
2003 2002 2001
- --------------------------------------------------------------------------------
Net income before
stock options $ 10,529 $ 10,430 $ 14,001
Compensation expense
from stock option grants 248 28 86
- --------------------------------------------------------------------------------
Proforma net income $ 10,281 $ 10,402 $ 13,915
- --------------------------------------------------------------------------------
Proforma income per share:
Basic - proforma $ 1.84 $ 1.83 $ 2.44
Basic - as reported $ 1.89 $ 1.84 $ 2.46
Diluted - proforma $ 1.82 $ 1.80 $ 2.41
Diluted - as reported $ 1.86 $ 1.81 $ 2.43
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOW
For the purposes of reporting cash flows, cash and cash equivalents
include cash and noninterest-earning deposits and federal funds sold.
Additionally, allocation of treasury stock to retirement plans includes exercise
of stock options and allocation to the employee stock ownership plan.
TREASURY STOCK
The purchase of PFC common stock is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the average cost basis, with any excess proceeds being credited to
Additional Paid-in Capital.
The repurchase program approved on June 18, 2002 expired on June 30, 2003.
This program repurchased 202,639 shares at an average price of $24.09
representing 3.6% of the outstanding stock. A new repurchase program was
approved on June 19, 2003 permitting the purchase of 5% of outstanding stock, or
276,500 shares, to be repurchased periodically through fiscal year 2004 at
prevailing market prices in open-market transactions.
BUSINESS COMBINATIONS
Parkvale adopted FAS 141, Accounting for Business Combinations, during
fiscal 2002. FAS 141 eliminates the pooling-of-interests method of accounting
for business combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. FAS 141 also includes new criteria to recognize
intangible assets separately from goodwill. The requirements of FAS 141 are
effective for any business combination accounted for by the purchase method that
is completed after June 30, 2001, and has been applied in the acquisition of SNB
on January 31, 2002. See Note K.
GOODWILL AND OTHER INTANGIBLE ASSETS
Parkvale adopted FAS 142, Accounting for Goodwill and Other Intangible
Assets, during fiscal 2002. FAS 142 defines goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Separable intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. Parkvale applied the nonamortization
provisions of FAS 142 to goodwill recorded on January 31, 2002 as a result of
the SNB acquisition. See Note K.
DERIVATIVE FINANCIAL INSTRUMENTS
Parkvale adopted FAS 133, Accounting for Derivative Instruments and
Hedging Activities, during the first quarter of 2001. FAS 133 establishes
accounting and reporting standards requiring that every derivative be recorded
in the balance sheet as either an asset or liability measured at its fair value.
FAS 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The adoption had no impact on
Parkvale's financial statements, as Parkvale has not held any instruments that
meet the definition of a derivative contract under FAS 133 since adoption of the
statement.
RECENT ACCOUNTING STANDARDS
The FASB issued FAS 146, Accounting for Costs Associated with Exit or
Disposal Activities, which establishes financial accounting and reporting for
costs associated with exit or disposal activities. This statement is effective
for disposal activities initiated after December 31,
Corporation Annual Report 19
NOTES TO Consolidated
NOTE A (CONTINUED)
2002. Management has evaluated the impact of this statement and has determined
that there is no material effect on Parkvale's financial position or results of
operations.
Statement of Financial Accounting Standards No. 147, Acquisition of
Certain Financial Instruments, which clarifies FAS 142 that, if certain
conditions are met, an acquisition of less-than-whole financial institutions
should be accounted for as a business combination. As a result of statement 147,
entities are required to reclassify and restate both goodwill and amortization
expense as of the date FAS 142 was adopted. This statement was effective October
1, 2002. Management has evaluated the impact of this statement and has
determined that there is no material effect on Parkvale's financial position or
results of operations.
Statement of Financial Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends Statement of Financial
Standard No. 123 to provide alternative methods of transition to Statement No.
123's fair value method of accounting for stock-based compensation. Statement
No. 148 also amends the disclosure provisions of Statement 123 and APB Opinion
No. 28, Interim Financial Reporting, to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While this
statement does not amend Statement No. 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions of
Statement 148 are applicable to all companies with stock based compensation,
regardless of whether they account for that compensation using the fair value
method of Statement 123 or the intrinsic method of Opinion 25.
Statement of Financial Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities
addressed under FAS 133, Accounting for Derivative Instruments and Hedging
Activities. This accounting guidance amends FAS 133 for decisions made by the
FASB as part of the Derivatives Implementations Group process and also amends
FAS 133 to clarify the definition of a derivative. FAS 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. Management has evaluated the
impact of this statement and has determined that there is no material effect on
Parkvale's financial position or results of operations.
Statement of Financial Standards No. 150, Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity, which
establishes standards for how an issuer is to classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments that would
previously have been classified as equity as liabilities (or as assets in some
circumstances). Specifically, FAS 150 requires that financial instruments issued
in the form of shares that are mandatorily redeemable; financial instruments
that embody an obligation to repurchase the issuer's equity shares or are
indexed to such an obligation; or financial instruments that embody an
unconditional obligation or a conditional obligation that can be settled in
certain ways be classified as liabilities. This statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
25, 2003. Management has evaluated the impact of this statement and has
determined that there is no material effect on Parkvale's financial position or
results of operation.
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
of Guarantees, Including Indirect Guarantees of Indebtness of Others, which
expands on the accounting guidance of FAS 5, 57, and 107 and incorporates
without change the provisions of FAS Interpretation 34, which is being
superseded. Each guarantee meeting the characteristics described in FIN 45 is to
be recognized and initially measured at fair value, which will be a change from
current practice for most entities. In addition, guarantors will be required to
make significant new disclosures, even if the likelihood of the guarantor making
payments under the guarantee is remote, which represents another change from
current general practice. FIN 45 disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002, while the initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued of modified after
December 31, 2002. Management has evaluated the impact of this interpretation
and has determined that there is no material effect on Parkvale's financial
position or results of operation.
Interpretation No. 46, Consolidation of Variable Interest Entities
("VIE's"), an interpretation of Accounting Research bulletin No. 51,
Consolidated Financial Statements, to improve financial reporting of special
purpose and other entities. In accordance with FIN 46, business enterprises that
represent the primary beneficiary of another entity by retaining a controlling
financial interest in that entity's assets, liabilities and results of operating
activities must consolidate the entity in its financial statements. Prior to the
issuance of FIN 46, consolidation generally occurred when an entity controlled
another entity through voting interests. Certain VIEs that
20 2003 Parkvale Financial
FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A (CONTINUED)
are qualifying special purpose entities subject to the reporting requirements
for FAS 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities will not be required to be consolidated under the
provisions of FIN 46. The consolidation provisions of FIN 46 apply to VIEs
entered into after January 31, 2003, and for preexisting VIEs in the first
interim reporting period after June 15, 2003. Management has evaluated the
impact of this interpretation and has determined that there is no material
effect on Parkvale's financial position or results of operation at June 30,
2003. See note G.
NOTE B INVESTMENT SECURITIES
The amortized cost, gross unrecorded gains and losses and fair values for
investment securities classified as available for sale or held to maturity at
June 30 are as follows:
2003
- ---------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
Available for sale:
FHLB of Pittsburgh stock $ 13,022 $ -- $ -- $ 13,022
Equity securities - other 6,163 606 48 6,721
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS SECURITIES AVAILABLE FOR SALE $ 19,185 $ 606 $ 48 $ 19,743
- ---------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Government and agency obligations due:
Within 1 year $ 2,016 $ 13 $ -- $ 2,029
Within 5 years 12,619 291 -- 12,910
Within 10 years -- -- -- --
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 14,635 304 -- 14,939
- ---------------------------------------------------------------------------------------------------------
Municipal obligations:
Within 1 year 795 11 -- 806
Within 5 years 3,831 169 -- 4,000
Within 10 years 1,203 68 -- 1,271
After 10 years 3,315 251 -- 3,566
- ---------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS 9,144 499 -- 9,643
- ---------------------------------------------------------------------------------------------------------
Corporate debt:
Within 1 year 56,956 1,077 132 57,901
Within 5 years 66,530 2,082 37 68,575
After 10 years 23,132 1,156 455 23,833
- ---------------------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBT 146,618 4,315 624 150,309
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS,
MUNICIPAL OBLIGATIONS AND CORPORATE DEBT 170,397 5,118 624 174,891
- ---------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
FHLMC 2,248 162 -- 2,410
FNMA 23,732 13 168 23,577
GNMA 1,904 224 1 2,127
SBA 75 -- -- 75
Collateralized mortgage obligations ("CMOs") 12,003 36 -- 12,039
Other participation certificates 468 -- -- 468
- ---------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES 40,430 435 169 40,696
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS SECURITIES HELD
TO MATURITY $210,827 $5,553 $793 $215,587
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO $230,012 $6,159 $841 $235,330
- ---------------------------------------------------------------------------------------------------------
2002
- ---------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------
Available for sale:
FHLB of Pittsburgh stock $ 10,319 $ -- $ -- $ 10,319
Equity securities - other 1,461 1,300 -- 2,761
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS SECURITIES AVAILABLE FOR SALE $ 11,780 $1,300 $ -- $ 13,080
- ---------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Government and agency obligations due:
Within 1 year $ 4,571 $ 9 $ -- $ 4,580
Within 5 years 33,077 245 35 33,287
Within 10 years 14,384 56 -- 14,440
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 52,032 310 35 52,307
- ---------------------------------------------------------------------------------------------------------
Municipal obligations:
Within 1 year 1,065 9 -- 1,074
Within 5 years 4,529 195 -- 4,724
Within 10 years 1,516 16 -- 1,532
After 10 years 3,330 63 -- 3,393
- ---------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL OBLIGATIONS 10,440 283 -- 10,723
- ---------------------------------------------------------------------------------------------------------
Corporate debt:
Within 1 year 33,391 210 495 33,106
Within 5 years 65,606 1,332 679 66,259
After 10 years 22,456 383 458 22,381
- ---------------------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBT 121,453 1,925 1,632 121,746
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS,
MUNICIPAL OBLIGATIONS AND CORPORATE DEBT 183,925 2,518 1,667 184,776
- ---------------------------------------------------------------------------------------------------------
Mortgage-backed securities:
FHLMC 3,615 216 -- 3,831
FNMA 678 17 2 693
GNMA 1,998 146 1 2,143
SBA 86 -- -- 86
Collateralized mortgage obligations ("CMOs") 8,985 51 40 8,996
Other participation certificates 573 -- -- 573
- ---------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES 15,935 430 43 16,322
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS SECURITIES HELD
TO MATURITY $199,860 $2,948 $1,710 $201,098
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO $211,640 $4,248 $1,710 $214,178
- ---------------------------------------------------------------------------------------------------------
Mortgage-backed securities and CMOs are not due at a single maturity date;
periodic payments are received on the securities based on the payment patterns
of the underlying collateral.
See Note J concerning Net Gain on Sales in fiscal 2003 and 2002 and Writedown of
Securities in fiscal 2002.
Corporation Annual Report 21
NOTES TO Consolidated
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C LOANS
Loans at June 30 are summarized as follows:
2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Mortgage loans:
Residential:
1-4 Family $ 932,535 $ 895,330 $ 851,765
Multifamily 19,477 18,140 24,602
Commercial 59,796 59,136 54,958
Other 36,581 35,108 22,164
- --------------------------------------------------------------------------------------------------------
1,048,389 1,007,714 953,489
Consumer loans 152,458 167,956 132,580
Commercial business loans 47,983 53,055 39,336
Loans on savings accounts 2,974 3,224 2,265
- --------------------------------------------------------------------------------------------------------
Gross loans 1,251,804 1,231,949 1,127,670
Less:
Loans in process 117 205 205
Allowance for loan losses 15,013 15,492 13,428
Unamortized (premium) discount and deferred loan fees (5,105) (1,387) 773
- --------------------------------------------------------------------------------------------------------
$ 1,241,779 $ 1,217,639 $1,113,264
- --------------------------------------------------------------------------------------------------------
The following summary sets forth the activity in the allowance for loan losses
for the years ended June 30:
2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Beginning balance $ 15,492 $ 13,428 $ 13,368
Provision for losses 308 205 320
Provision for losses from SNB acquisition -- 1,994 --
- --------------------------------------------------------------------------------------------------------
Loans recovered:
Commercial 1 -- --
Consumer 39 34 188
Mortgage 69 110 57
- --------------------------------------------------------------------------------------------------------
Total recoveries 109 144 245
- --------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial (253) (19) --
Consumer (241) (148) (421)
Mortgage (402) (112) (84)
- --------------------------------------------------------------------------------------------------------
Total charge-offs (896) (279) (505)
- --------------------------------------------------------------------------------------------------------
Net charge-offs (787) (135) (260)
- --------------------------------------------------------------------------------------------------------
Ending balance $ 15,013 $ 15,492 $ 13,428
- --------------------------------------------------------------------------------------------------------
The following table sets forth the allowance for loan loss allocation for the
years ended June 30:
2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Residential mortgages $ 3,555 $ 3,928 $ 3,929
Commercial mortgages 4,156 3,795 3,254
Consumer Loans 4,297 4,924 4,045
Commercial Loans 3,005 2,845 2,200
- --------------------------------------------------------------------------------------------------------
Total allowance for loan losses $ 15,013 $ 15,492 $ 13,428
- --------------------------------------------------------------------------------------------------------
22 2003 Parkvale Financial
FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C (CONTINUED)
At June 30, 2003, Parkvale was committed under various agreements to
originate fixed and adjustable rate mortgage loans aggregating $4,100 and
$3,100, respectively, at rates ranging from 4.91% to 5.53% for fixed rate and
2.70% to 5.00% for adjustable rate loans, and had $83,200 of unused consumer
lines of credit and $18,200 in unused commercial lines of credit. In addition,
Parkvale was committed to purchase $78,900 of adjustable rate loans. Parkvale
was also committed to originate commercial loans totaling $3,700 at June 30,
2003. Available but unused consumer and commercial credit card lines amounted to
$10,700 and $515 respectively, at June 30, 2003. Substantially, all commitments
are expected to fund within one year.
At June 30, Parkvale serviced loans for the benefit of others as follows:
2003 - $24,077, 2002 - $13,097 and 2001 - $7,825. The fiscal 2003 increase is
related to an increase in loans serviced for Freddie Mac.
At June 30, 2003, Parkvale's loan portfolio consisted primarily of
residential real estate loans collateralized by single and multifamily
residences, nonresidential real estate loans secured by industrial and retail
properties and consumer loans including lines of credit.
Parkvale has geographically diversified its mortgage loan portfolio,
having loans outstanding in 49 states and the District of Columbia. Parkvale's
highest concentrations are in the following states/area along with their
respective share of the outstanding mortgage loan balance: Pennsylvania - 32.7%;
Ohio - 6.7%; and Virginia - 6.5%. The ability of debtors to honor these
contracts depends largely on economic conditions affecting the Pittsburgh,
Columbus and greater Washington D.C. metropolitan areas, with repayment risk
dependent on the cash flow of the individual debtors. Substantially all mortgage
loans are secured by real property with a loan amount of generally no more than
80% of the appraised value at the time of origination. Mortgage loans in excess
of 80% of appraised value generally require private mortgage insurance.
The nonaccrual loans were $7,284 and $3,469 at June 30, 2003 and 2002,
respectively. At June 30, the amount of interest income of nonaccrual loans that
had not been recognized in interest income was $248 for 2003, $191 for 2002 and
$124 for 2001. There was a $1,119 loan considered impaired at June 30, 2003 and
$498 at June 30, 2002. The average recorded investment in impaired loans was
$397 during fiscal 2003 and $249 during fiscal 2002. These loans were included
in management's assessment of the adequacy of the aggregate allowance.
NOTE D OFFICE PROPERTIES AND EQUIPMENT AND FORECLOSED REAL ESTATE
Office properties and equipment at June 30 are summarized by major
classifications as follows:
2003 2002 2001
- --------------------------------------------------------------------------------
Land $ 2,132 $ 1,832 $ 1,154
Office building and leasehold improvements 9,649 8,728 6,500
Furniture, fixtures, and equipment 10,386 10,097 6,544
- --------------------------------------------------------------------------------
22,167 20,657 14,198
Less accumulated depreciation and amortization 10,971 10,577 7,082
- --------------------------------------------------------------------------------
Office properties and equipment, net $11,196 $10,080 $ 7,116
- --------------------------------------------------------------------------------
Depreciation expense $ 1,300 $ 970 $ 723
A summary of foreclosed real estate
at June 30 is as follows: 2003 2002 2001
- ---------------------------------------------------------------------------
Real estate acquired through foreclosure: $ 2,695 $ 1,728 $ 3,780
Allowance for losses -- (11) (18)
- ---------------------------------------------------------------------------
$ 2,695 $ 1,717 $ 3,762
- ---------------------------------------------------------------------------
During fiscal 2003 and 2002, writedowns and expenses aggregating $1,100 and
$6,500, respectively were recorded to reduce the carrying value of a commercial
property undergoing rehabilitation and renovation. The fiscal 2002 writedown
included $2,317 that was part of book value at June 30, 2001.
Changes in the allowance for losses on foreclosed real estate for the years
ended June 30 were as follows:
2003 2002 2001
- -------------------------------------------------------
Beginning balance $ 11 $ 18 $ 8
Provision for losses -- 38 10
Less charges to allowance (11) (45) --
- -------------------------------------------------------
$ -- $ 11 $ 18
Corporation Annual Report
23
Notes to Consolidated
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE E SAVINGS DEPOSITS
The following schedule sets forth interest expense for the years ended June 30
by type of deposit:
2003 2002 2001
- ----------------------------------------------------------------------
Checking and money market accounts $ 2,194 $ 2,948 $ 1,997
Passbook accounts 2,591 2,735 2,794
Certificates 39,342 47,005 47,914
- ----------------------------------------------------------------------
$44,127 $52,688 $52,705
- ----------------------------------------------------------------------
A summary of savings deposits at June 30 is as follows:
2003 2002
- ---------------------------------------------------------------------------------------
Amount % Amount %
- ----------------------------------------------------------------------------------------
Transaction accounts:
Checking and money market accounts $ 228,706 17.2 $206,354 15.3
Checking accounts - noninterest-bearing 89,264 7.1 79,863 5.9
Passbook accounts 200,080 14.6 187,617 13.9
- ----------------------------------------------------------------------------------------
518,050 38.9 473,834 35.1
Certificate of deposits 804,054 60.4 864,354 64.1
- ----------------------------------------------------------------------------------------
1,322,104 99.3 1,338,188 99.2
Accrued Interest 9,656 0.7 11,151 0.8
- ----------------------------------------------------------------------------------------
$1,331,760 100.0 $1,349,339 100.0
- ----------------------------------------------------------------------------------------
The aggregate amount of time deposits over $100 was $117,833 and $119,725 at
June 30, 2003 and 2002, respectively.
At June 30, the scheduled maturities of certificate accounts were as follows:
Maturity Period 2003 2002
- -------------------------------------------------
1-12 months $386,235 $455,023
13-24 months 145,837 220,776
25-36 months 99,767 63,509
37-48 months 65,178 25,628
49-60 months 38,850 48,727
Thereafter 68,187 50,691
- -------------------------------------------------
$804,054 $864,354
- -------------------------------------------------
24 2003 Parkvale Financial
FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE F ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER DEBT
The advances from the FHLB at June 30 consisted of the following:
2003 2002
-------- --------
Interest Interest
Balance Rate % Balance Rate %
- ---------------------------------------------------------------------------
Due within one year $ -- -- $10,000 5.82-6.37%
Due within five years 20,000 5.48-5.76 -- --
Due within ten years 80,260 3.00-5.62 40,000 4.86-5.76
Due within twenty years 60,847 3.00-6.75 81,121 3.00-6.75
- ---------------------------------------------------------------------------
$161,107 $131,121
- ---------------------------------------------------------------------------
Weighted average interest rate
at end of period 5.25% 5.62%
Included in the $161,107 of advances, is approximately $110,500 of
convertible select advances. These advances reset to the 3 month London Bank
Interbank Offer Rate Index (LIBOR) and have various spreads and call dates. The
FHLB has the right to call any convertible select advance on its call date or
quarterly thereafter. Should the advance be called, Parkvale has the right to
pay off the advance without penalty.
The FHLB advances are secured by Parkvale's FHLB stock and investment
securities and are subject to substantial prepayment penalties.
Trust preferred securities are $25,000 at June 30, 2003. $16,000 qualifies
as Tier 1 Capital for regulatory purposes. The interest rate resets quarterly.
On June 30, 2003 and 2002, the rates were 4.61% and 5.47%, respectively.
Other debt consists of recourse loans and commercial investment agreements
with certain commercial checking account customers. These daily borrowings had
balances of $13,050 and $16,875 at June 30, 2003 and 2002, respectively.
NOTE G REGULATORY CAPITAL
Parkvale is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Parkvale's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Parkvale
must meet specific capital guidelines that involve quantitative measures of
Parkvale's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Parkvale's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Parkvale to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of June 30, 2003, that Parkvale meets all capital
adequacy requirements to which it is subject.
As of June 30, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized Parkvale Savings Bank as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the institution's category.
- --------------------------------------------------------------------------------
Parkvale's actual regulatory capital amounts and ratios compared to minimum
levels are as follows:
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
- -------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------
As of June 30, 2003:
Total Capital to Risk Weighted Assets $124,158 11.87% $ 83,654 8.00% $104,567 10.00%
Tier I Capital to Risk Weighted Assets 110,827 10.60% 41,827 4.00% 62,740 6.00%
Tier I Capital to Average Assets 110,827 6.91% 64,197 4.00% 80,246 5.00%
As of June 30, 2002:
Total Capital to Risk Weighted Assets $114,938 11.25% $ 81,739 8.00% $102,174 10.00%
Tier I Capital to Risk Weighted Assets 101,957 9.98% 40,870 4.00% 61,305 6.00%
Tier I Capital to Average Assets 101,957 6.35% 64,181 4.00% 80,226 5.00%
Corporation Annual Report
25
NOTES TO Consolidated
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G (CONTINUED)
Parkvale has determined that the provisions of FIN No. 46 referred to in
Note A may require de-consolidation of the subsidiary grantor trusts, which
issue mandatorily redeemable preferred securities of the grantor trusts. In the
event of a de-consolidation, the grantor trusts may be de-consolidated and the
junior subordinated debentures of Parkvale owned by the grantor trusts would be
disclosed. Trust Preferred Securities amounting to $16,000 currently qualify as
Tier 1 capital of the Bank for regulatory capital purposes. In July 2003, the
Federal Reserve Board issued a supervisory letter indicating that
Trust-Preferred Securities currently will continue to qualify as Tier 1 capital
for regulatory purposes until further notice. The Federal Reserve Board has also
stated that it will continue to review the regulatory implications of any
accounting treatment changes and will provide further guidance, if necessary.
However, as of June 30, 2003, assuming the Bank was not allowed to include the
Trust Preferred Securities in Tier 1 capital, the Bank would still exceed the
regulatory required minimums for capital adequacy purposes.
NOTE H INCOME TAXES
Income tax expense (credits) for the years ended June 30 are comprised of:
2003 2002 2001
- -------------------------------------------------------------
Federal:
Current $3,368 $8,042 $7,256
Deferred 1,503 (2,698) --
State 37 -- 268
- ------------------------------------------------------------
$4,908 $5,344 $7,524
- ------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Parkvale's deferred tax assets and liabilities at June 30 are as follows:
2003 2002
- -------------------------------------------------------
Deferred tax assets:
Book bad debt reserves $5,081 $5,308
Deferred loan fees 77 61
Fixed assets 561 579
Deferred compensation 137 125
Other, including asset writedowns 148 1,770
- -------------------------------------------------------
Total deferred tax assets 6,004 7,843
- -------------------------------------------------------
Deferred tax liabilities:
Tax bad debt reserves -- 120
Purchase accounting adjustments 1,837 2,205
Other, net 192 40
Unrealized gains on securities
available for sale 204 474
- -------------------------------------------------------
Total deferred tax liabilities 2,233 2,839
- -------------------------------------------------------
Net deferred tax assets $3,771 $5,004
- -------------------------------------------------------
No valuation allowance was required at June 30, 2003 or 2002.
Parkvale's effective tax rate differs from the expected federal income tax rate
for the years ended June 30 as follows:
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
Expected federal statutory income tax
provision/rate $ 5,403 35.0% $ 5,521 35.0% $ 7,535 35.0%
Tax-exempt interest (344) -2.2% (169) -1.1% (179) -0.8%
State income taxes, net of federal
benefit 25 0.2% -- 0.0% 174 0.8%
Other (176) -1.2% (8) 0.0% (6) 0.0%
- -----------------------------------------------------------------------------------------------------------
$ 4,908 31.8% $ 5,344 33.9% $ 7,524 35.0%
- -----------------------------------------------------------------------------------------------------------
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax
which is calculated at 11.5% of Pennsylvania earnings based on accounting
principles generally accepted in the United States with certain adjustments.
2003 Parkvale Financial
26
FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I EMPLOYEE COMPENSATION PLANS
RETIREMENT PLAN
Parkvale provides eligible employees participation in a 401(k) defined
contribution plan. Benefit expense was $345, $325 and $264 in fiscal years 2003,
2002 and 2001, respectively, which represented a 50% company match on deferred
compensation and a profit sharing contribution equal to 2% of eligible
compensation.
EMPLOYEE STOCK OWNERSHIP PLAN
Parkvale also provides an Employee Stock Ownership Plan ("ESOP") to all
employees who have met minimum service and age requirements. Parkvale recognized
expense of $637 in fiscal 2003, $500 in fiscal 2002 and $540 in fiscal 2001 for
ESOP contributions, which were used for the purchase of additional shares of
Parkvale's Common Stock in open-market transactions or to contribute treasury
shares. At June 30, 2003, the ESOP owned 555,587 shares of Parkvale Common
Stock.
STOCK OPTION PLANS
Parkvale has Stock Option Plans for the benefit of directors, officers and
other selected key employees of Parkvale who are deemed to be responsible for
the future growth of Parkvale. All of the original shares under the 1987 Plan
have been awarded. In October 1993, the 1993 Directors' Stock Option Plan was
adopted. An aggregate of 190,734 shares of authorized but unissued Common Stock
of Parkvale was reserved for future issuance. As of June 30, 2003, 180,350
option shares have been granted under this plan. Additionally, the 1993 Key
Employee Stock Compensation Program was adopted in October 1993. An aggregate of
461,578 shares of authorized but unissued Common Stock of Parkvale was reserved
for future issuance. As of June 30, 2003, 450,861 option shares have been
granted under this plan. The 1993 Directors' Stock Option Plan shares were
exercisable on the date of the grant. The 1993 Key Employee Stock Compensation
Program option shares are 50% exercisable upon one month of continuous service
after the grant date and the remaining 50% is exercisable more than one year
after continuous service from the grant date. At June 30, 2003, 50% of all the
fiscal 2003 grants are exercisable. The following table presents option share
data related to the Stock Option Plans for the years indicated.
Exercise Price Per Share $10.322 $15.637* $16.32 $19.979# $21.50 $24.475 $22.995 Total
- --------------------------------------------------------------------------------------------------------------------
June 30, 2000 80,620 53,393 96,145 30,000 100,000 360,158
Granted 10,000 10,000
Exercised (16,832) (10,937) (1,000) (28,769)
Forfeitures (2,343) (6,000) (8,343)
- --------------------------------------------------------------------------------------------------------------------
June 30, 2001 63,788 53,393 82,865 40,000 93,000 333,046
Granted 8,000 8,000
Exercised (1,000) 11,442) (2,343) (4,000) (6,000) (24,785)
Forfeitures (3,813) (781) (2,000) (7,000) (13,594)
- --------------------------------------------------------------------------------------------------------------------
June 30, 2002 62,788 38,138 79,741 42,000 80,000 302,667
Granted 8,000 134,250 142,250
Exercised (10,681) (7,814) (5,587) (3,000) (27,082)
Forfeitures --
- --------------------------------------------------------------------------------------------------------------------
June 30, 2003 52,107 30,324 74,154 42,000 77,000 8,000 134,250 417,835
- --------------------------------------------------------------------------------------------------------------------
* Represents the average remaining exercise price of Director awards made
annually in October 1994 to 1997.
# Represents the average remaining exercise price of awards made in fiscal 1999
through fiscal 2002.
Corporation Annual Report
27
NOTES TO Consolidated
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J NET GAIN ON SALE AND WRITEDOWN OF SECURITIES
Gains aggregating $1,091 were recognized in fiscal 2003 from the sale of
equity securities. Fiscal 2002 gains aggregating $7,106 were from the sale of
securities, specifically, Freddie Mac common stock during each quarter of the
fiscal year. Writedowns of $2,556 were recorded in June 2002 related to impaired
corporate debt, primarily WorldCom bonds.
NOTE K SNB ACQUISITION
On January 31, 2002, Parkvale completed the acquisition of the Second
National Bank of Masontown ("SNB") based in Fayette County. The acquisition
consisted of loans and deposits which complements Parkvale's existing portfolio
and expanded the branch network into a new county. The acquisition was accounted
for as a purchase business combination and its operations are included for the
five months ended June 30, 2002 and all of fiscal 2003. The shareholders of SNB
received $92 per share or $36,800. The fair value of assets acquired included
$72,700 of investments and cash, $120,800 of loans with $157,600 of deposits
assumed. The core deposit intangibles valued at $4,410 represent 5.2% of core
deposit accounts and the premium is being amortized over an average life of
11.21 years. Resulting goodwill of $7,600 is not subject to periodic
amortization. Core deposit intangible amortization expense was $438 in fiscal
2003. Amortization over the next five years is expected to be $2,117. Goodwill
and amortizing core deposit intangibles aggregating $11,600 are not deductible
for federal income tax purposes.
Proforma Unaudited Consolidated Statement of Operations
For the Twelve Months Ended June 30, 2002
SNB Parkvale Combined
- --------------------------------------------------------------------------------
Total interest income $ 8,819 $84,126 $92,945
Total interest expense 4,179 55,619 59,798
- --------------------------------------------------------------------------------
Net interest income 4,640 28,507 33,147
Provisions for loan losses 107 98 205
- --------------------------------------------------------------------------------
Net interest income after provision for losses 4,533 28,409 32,942
Other income 880 9,780 10,660
Other expense 3,258 24,570 27,828
- --------------------------------------------------------------------------------
Income before income taxes 2,155 13,619 15,774
Income tax expense 465 4,879 5,344
- --------------------------------------------------------------------------------
Net Income $ 1,690 $ 8,740 $10,430
- --------------------------------------------------------------------------------
Net income per share:
Diluted $ 0.17 $ 1.64 $ 1.81
- --------------------------------------------------------------------------------
NOTE L LEASES
Parkvale's rent expense for leased real properties amounted to
approximately $1,591 in 2003, $1,501 in 2002 and $1,376 in 2001. At June 30,
2003, Parkvale was obligated under 20 noncancelable operating leases,which
expire through 2021. The minimum rental commitments for the fiscal years
subsequent to June 30, 2003 are as follows: 2004 - $1,556, 2005 - $1,440, 2006 -
$910, 2007 - $645, 2008 - $614 and later years - $2,823
- --------------------------------------------------------------------------------
2003 Parkvale Financial
28
FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M SELECTED BALANCE SHEET INFORMATION
Selected balance sheet data at June 30 are summarized as follows:
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------
Prepaid expenses and other
assets: Other liabilities:
Accrued interest on loans $ 5,614 $ 6,218 Accounts payable
Reserve for uncollected and accrued expenses $3,586 $4,143
interest (239) (125) Other liabilities 434 428
Bank owned life insurance 10,000 -- Federal and state
Accrued interest on income taxes payable 1,248 --
investments 2,863 3,203
Other prepaids 1,339 2,206
Net deferred tax asset 3,771 5,004
- --------------------------------------------------------------------------------------------
$23,348 $16,506 $5,268 $4,571
- --------------------------------------------------------------------------------------------
NOTE N QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Year
Ended
- -------------------------------------------------------------------------------------
Sep. 02 Dec. 02 Mar. 03 June 03 June 03
- -------------------------------------------------------------------------------------
Total interest income $23,194 $21,898 $20,916 $20,022 $86,030
Total interest expense 14,708 14,136 12,723 12,197 53,764
- -------------------------------------------------------------------------------------
Net interest income 8,486 7,762 8,193 7,825 32,266
Provision for loan losses 48 74 116 70 308
- -------------------------------------------------------------------------------------
Net interest income after
provision for losses 8,438 7,688 8,077 7,755 31,958
Other income 1,728 1,743 1,727 2,847 8,045
Other expense 5,796 5,802 5,887 7,081 24,566
- -------------------------------------------------------------------------------------
Income before income taxes 4,370 3,629 3,917 3,521 15,437
Income tax expense 1,508 1,124 1,214 1,062 4,908
- -------------------------------------------------------------------------------------
Net income $ 2,862 $ 2,505 $ 2,703 $ 2,459 $10,529
- -------------------------------------------------------------------------------------
Net income per share:
Basic $ 0.51 $ 0.45 $ 0.49 $ 0.44 $ 1.89
Diluted $ 0.50 $ 0.45 $ 0.48 $ 0.43 $ 1.86
- -------------------------------------------------------------------------------------
Three Months Ended Year
Ended
- --------------------------------------------------------------------------------------
Sep. 01 Dec. 01 Mar. 02 June 02 June 02
- --------------------------------------------------------------------------------------
Total interest income $23,786 $22,524 $22,797 $23,838 $ 92,945
Total interest expense 15,587 14,840 14,507 14,864 59,798
- --------------------------------------------------------------------------------------
Net interest income 8,199 7,684 8,290 8,974 33,147
Provision for loan losses 52 56 53 44 205
- --------------------------------------------------------------------------------------
Net interest income after
provision for losses 8,147 7,628 8,237 8,930 32,942
Other income 1,931 2,263 5,500 966 10,660
Other expense 4,737 4,713 9,006 9,372 27,828
- --------------------------------------------------------------------------------------
Income before income taxes 5,341 5,178 4,713 524 15,774
Income tax expense 1,854 1,794 1,615 81 5,344
- --------------------------------------------------------------------------------------
Net income $ 3,487 $ 3,384 $ 3,116 $ 443 $ 10,430
- --------------------------------------------------------------------------------------
Net income per share:
Basic $ 0.62 $ 0.60 $ 0.55 $ 0.07 $ 1.84
Diluted $ 0.61 $ 0.59 $ 0.54 $ 0.07 $ 1.81
- --------------------------------------------------------------------------------------
Corporation Annual Report
29
NOTES TO Consolidated
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE O PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The condensed balance sheets and statements of income and cash flows for
Parkvale Financial Corporation as of June 30, 2003 and 2002 and the years then
ended are presented below. PFC's primary subsidiary is Parkvale Savings Bank
("PSB").
BALANCE SHEETS
2003 2002
- ------------------------------------------------------
Assets:
Investment in PSB $ 122,746 $ 113,999
Cash 2,272 7,275
Other equity investments 23 1,621
Other assets 719 744
- ------------------------------------------------------
Total assets $ 125,760 $ 123,639
- ------------------------------------------------------
Liabilities and
Shareholders' Equity:
Accounts payable $ 282 ($119)
Trust preferred securities 25,000 25,000
Deferred taxes 5 328
Dividends payable 999 1,026
Shareholders' equity 99,474 97,404
- ------------------------------------------------------
Total liabilities and
shareholders' equity $ 125,760 $ 123,639
- ------------------------------------------------------
STATEMENTS OF INCOME
2003 2002 2001
- ----------------------------------------------------------------
Dividends from PSB $ 2,000 $ 2,000 $ 6,000
Other income 166 159 100
Gain on sale of 1,091 -- --
assets
Operating expenses (1,384) (373) (100)
Income before equity
in undistributed
earnings of subsidiary 1,873 1,786 6,000
Equity in undistributed
income of PSB 8,656 8,644 8,001
- ----------------------------------------------------------------
Net income $ 10,529 $10,430 $14,001
- ----------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Management fee income received $ 166 $ 159 $ 100
Dividends received 2,000 2,000 6,000
Taxes received from PSB (323) 93 130
Cash paid to suppliers (958) (1,163) (152)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 885 1,089 6,078
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of available for sale securities 2,400 -- --
Proceeds of trust preferred securities -- 25,000 --
Additional investment in PSB -- (16,000) --
- ---------------------------------------------------------------------------------------------------
Net cash provided by investing activities 2,400 9,000 --
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payment for treasury stock (4,880) (346) (2,365)
Allocation of treasury stock to retirement plans 685 712 878
Dividends paid to stockholders (4,093) (4,086) (4,101)
- ---------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,288) (3,720) (5,588)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,003) 6,369 490
Cash and cash equivalents at beginning of year 7,275 906 416
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,272 $ 7,275 $ 906
- ---------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 10,529 $ 10,430 $ 14,001
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of investments (1,091) -- --
Undistributed income of PSB (8,656) (8,644) (8,001)
Taxes received from PSB (323) 93 130
Increase in other assets 25 (774) --
Increase in accrued expenses 401 (16) (52)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 885 $ 1,089 6,078
- ---------------------------------------------------------------------------------------------------
30
FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE P FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS 107, Disclosure About Fair Value of Financial Instruments, requires
the determination of fair value for certain of the Bank's assets, liabilities
and contingent liabilities. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments:
CASH AND NONINTEREST BEARING DEPOSITS: The carrying amount of cash which
includes noninterest-bearing demand deposits approximates fair value.
FEDERAL FUNDS SOLD: The carrying amount of overnight federal funds
approximates fair value.
INTEREST-EARNING DEPOSITS IN OTHER BANKS: The carrying amount of other
overnight interest-bearing balances approximates fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: The fair values of investment
securities are obtained from the Wall Street Journal, the Interactive Data
Corporation pricing service and various investment brokers for securities not
available from public sources.
LOANS RECEIVABLE: Fair values were estimated by discounting contractual
cash flows using interest rates currently being offered for loans with similar
credit quality adjusted for standard prepayment assumptions.
DEPOSIT LIABILITIES: For checking, savings and money market accounts, fair
value is the amount payable on demand at June 30. The fair values of
fixed-maturity certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on time
deposits of similar remaining maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK: Fair value is determined by
discounting the advances using current rates of advances with comparable
maturities as of the reporting date.
TRUST PREFERRED SECURITIES: Fair value is determined by discounting the
securities using current rates of securities with comparable reset rate and
maturities.
COMMERCIAL INVESTMENT AGREEMENTS: The carrying amount of these overnight
borrowings approximates fair value.
LOAN COMMITMENTS: Fair value for off-balance-sheet instruments (primarily
loan commitments) are estimated using internal valuation models and are limited
to fees charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
Unused consumer and commercial lines of credit are assumed equal to the
outstanding commitment amount due to the variable interest rate attached to
these lines of credit.
2003 2002
- ----------------------------------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
FINANCIAL ASSETS: Fair Value Value Fair Value Value
Cash and noninterest-earning deposits $ 32,067 $ 32,067 $ 25,050 $ 25,050
Federal funds sold 72,000 72,000 119,000 119,000
Interest-earning deposits in other banks 17,576 17,576 17,473 17,473
Investment securities 194,634 190,140 197,856 197,005
Mortgage-backed securities 40,696 40,430 16,322 15,935
Loans receivable 1,282,650 1,256,792 1,264,780 1,233,131
Bank owned life insurance policy 10,000 10,000 -- --
- ----------------------------------------------------------------------------------------------------
$1,649,623 $1,619,005 $1,640,481 $1,607,594
- ----------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Checking, savings and money market accounts $ 518,050 $ 518,050 $473,834 $ 473,834
Savings certificates 837,911 804,054 884,954 864,354
Advances from Federal Home Loan Bank 180,353 161,107 132,692 131,121
Trust preferred securities 25,626 25,000 24,998 25,000
Commercial investment agreements 12,494 13,050 15,984 16,875
- ----------------------------------------------------------------------------------------------------
$1,574,434 $1,521,261 $1,532,462 $1,511,184
- ----------------------------------------------------------------------------------------------------
Loan Commitments $ (259) $ -- $ (207) $ --
- ----------------------------------------------------------------------------------------------------
Corporation Annual Report
31
REPORT OF Independent Auditors
ERNST & YOUNG LLP LOGO
The Board of Directors
Parkvale Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Parkvale Financial Corporation ("Parkvale") as of June 30, 2003 and 2002, and
the related consolidated statements of operations, cash flows and shareholders'
equity for each of the three years in the period ended June 30, 2003. These
financial statements are the responsibility of Parkvale's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Parkvale Financial
Corporation at June 30, 2003 and 2002, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2003 in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
July 18, 2003
32
CAPITAL STOCK
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m., Thursday,
October 23, 2003, at the Pittsburgh Athletic Association, 4215 Fifth Avenue,
Pittsburgh, Pennsylvania.
STOCK LISTING AND DIVIDENDS
Parkvale's Common Stock is traded in the over-the-counter market and
quoted on the NASDAQ National Market System under the symbol "PVSA." Prices
shown below are based on the prices reported by the NASDAQ system.
For the Quarter Ended High Low Dividends
- ----------------------------------------------------------
June 03 $ 25.01 $ 21.85 $ 0.18
March 03 25.25 20.95 0.18
December 02 25.00 22.30 0.18
September 02 28.95 22.55 0.18
June 02 $ 30.55 $ 24.95 $ 0.18
March 02 25.35 21.50 0.18
December 01 23.45 21.15 0.18
September 01 25.50 21.90 0.18
- ----------------------------------------------------------
There were 5,528,856 shares of Common Stock outstanding as of August 25, 2003,
the Voting Record Date, which shares were held as of such date by approximately
430 holders of record.
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Toll free phone: 1 (800) 368-5948
Fax: (908) 497-2312
INFORMATION REQUESTS
A copy of the 2003 Annual Report of Parkvale Financial Corporation on Form
10-K filed with the Securities and Exchange Commission, and a list of exhibits
thereto, will be furnished to shareholders without charge upon their written
request to the Treasurer of the Corporation at its Headquarters Office, 4220
William Penn Highway, Monroeville, PA 15146 or via e-mail to
timothy.rubritz@parkvale.com. The telephone number is (412) 373-7200.
WEB SITE
Parkvale's web site is http://www.parkvale.com
Corporation Annual Report
39