.
.
.
EXHIBIT 13
Selected Consolidated Financial and other Data
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA AT JUNE 30: 2004 2003 2002 2001 2000
- ------------------------------ ---------- ---------- ---------- ---------- ----------
Total Assets $1,612,453 $1,642,803 $1,632,192 $1,407,864 $1,250,986
Loans 1,015,078 1,241,779 1,217,639 1,113,264 1,034,369
Investment securities 497,946 230,570 212,940 145,017 121,607
Deposits 1,281,971 1,331,760 1,349,339 1,180,797 1,080,096
FHLB advances and other debt 190,403 174,157 147,996 119,316 73,467
Shareholders' equity 104,686 99,474 97,404 95,094 84,266
Book value per share 18.76 17.93 17.09 16.78 14.75
---------- ---------- ---------- ---------- ----------
OPERATING DATA FOR THE YEAR ENDED JUNE 30: 2004 2003 2002 2001 2000
- ------------------------------------------ -------- ------ ------ ------ ------
Total interest income $ 70,043 86,030 92,945 93,956 84,670
Total interest expense 41,519 53,764 59,798 58,166 49,835
-------- -------- -------- -------- --------
Net interest income 28,524 32,266 33,147 35,790 34,835
Provision for loan losses (106) 308 205 320 236
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 28,630 31,958 32,942 35,470 34,599
Other income 8,068 8,045 10,660 4,642 3,563
Other expenses 22,346 24,566 27,828 18,587 17,368
-------- -------- -------- -------- --------
Income before taxes 14,352 15,437 15,774 21,525 20,794
Income tax expense 4,336 4,908 5,344 7,524 7,576
-------- -------- -------- -------- --------
Net income $ 10,016 $ 10,529 $ 10,430 $ 14,001 $ 13,218
-------- -------- -------- -------- --------
Net income per diluted share $ 1.77 $ 1.86 $ 1.81 $ 2.43 $ 2.23
-------- -------- -------- -------- --------
OTHER SELECTED DATA (STATISTICAL PROFILE):
YEAR ENDED JUNE 30, 2004 2003 2002 2001 2000
- ------------------------------------------ ------ ------ ------ ------ ------
Average yield earned on all
interest-earning assets 4.53% 5.49% 6.43% 7.40% 7.16%
Average rate paid on interest-bearing liabilities 2.77 3.53 4.34 4.85 4.46
Average interest rate spread 1.76 1.96 2.09 2.55 2.70
Net yield on average interest-earning assets 1.84 2.06 2.30 2.82 2.95
Other expenses to average assets 1.39 1.51 1.87 1.42 1.42
Efficiency ratio 61.07 60.94 63.52 45.97 45.23
Return on average assets 0.62 0.65 0.70 1.07 1.08
Dividend payout ratio 40.68 38.71 39.78 29.63 32.29
Return on average equity 9.75 10.82 10.96 16.20 16.53
Average equity to average total assets 6.38 5.98 6.38 6.61 6.56
----- ----- ----- ----- -----
AT JUNE 30, 2004 2003 2002 2001 2000
- ----------------------------------------------- --------- --------- --------- --------- ---------
One year gap to total assets -0.81% -0.79% -4.09% 3.37% 2.76%
Intangibles to total equity 10.64 11.63 12.10 0.26 0.35
Shareholders' equity to assets ratio 6.49 6.06 5.97 6.75 6.74
Ratio of nonperforming assets to total assets 0.49 0.61 0.32 0.39 0.30
Nonperforming assets $ 7,953 $ 9,979 $ 5,186 $ 5,421 $ 3,784
Allowance for loan losses as a % of gross loans 1.34% 1.20% 1.26% 1.19% 1.27%
Number of full-service offices 39 39 38 33 31
--------- --------- --------- --------- ---------
Corporation Annual Report
1
Management's Discussion and Analysis
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 decreased $19.8 million for the
year ended June 30, 2004 over fiscal year 2003. This decrease is primarily the
result of combined lower deposits and borrowings of $25.5 million.
ASSET AND LIABILITY MANAGEMENT CONDITION
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 had a minimal change from -0.79% as of
June 30, 2003 to -0.81% as of June 30, 2004, and the five-year gap ratio was
12.97% at June 30, 2003 versus 9.30% as of June 30, 2004. The shift at the end
of five years is due to a decrease in certificates of deposits and adjustable
rate loans.
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
2005 assuming an immediate shift in current interest rates, excluding the impact
of premium amortization, would result in the following percentage changes over
fiscal 2004 net interest income +100 bp, +11.9%; +200 bp, +1.6%; -100 bp, +9.1%;
- -200 bp, -5.3%. This compares to projected net interest income for fiscal 2004
made at June 30, 2003 of: +100 bp, +4.7%; +200 bp, -1.1%; -100 bp,+1.8%; -200
bp, -3.9%. The fluctuation in projected net interest income between fiscal 2004
and 2003 is reflective of the change in asset mix during fiscal 2004 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 12.5% for
the quarter ended June 30, 2004. During fiscal 2004, Parkvale's investment
strategy was to utilize excess liquidity by purchasing higher quality investment
securities and 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, 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 2004, 2003 and 2002, 89.7%, 90.6% and 89.7%, respectively, of mortgage
loans originated or purchased were adjustable-rate loans. Parkvale has
continually emphasized the origination and purchase of ARM loans. ARMs totaled
$666.9 million or 79.5% of total mortgage loans at June 30, 2004 versus $831.5
million or 79.3% of total mortgage loans at June 30, 2003. To supplement
2004 Parkvale Financial
4
Management's Discussion and Analysis (continued)
local mortgage originations, Parkvale purchased loans aggregating $227.1
million, $619.1 million and $339.8 million in fiscal 2004, 2003 and 2002,
respectively, from mortgage bankers and other financial institutions. The loan
packages purchased were predominately 3/1 and 5/1 ARMs. All of the 2004 and 2003
purchases were ARMs. The practice of purchasing loans in the secondary market is
expected to continue in fiscal 2005 when liquidity exceeds targeted levels. At
June 30, 2004, Parkvale had commitments to originate mortgage loans totaling
$2.7 million and commercial loans of $9.1 million. Commitments to fund
construction loans in process at June 30, 2004 were $19.4 million. Such
commitments are expected to be funded from current liquidity and regular monthly
loan payments.
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, 2004 and 2003, consumer loans were $143.5 million and $152.5
million which represented a 5.9% and 9.2% decrease over the balances at June 30,
2003 and 2002, respectively, with fixed-rate second mortgage loans totaling
$68.2 million, $74.2 million and $92.0 million outstanding balances at June 30,
2004, 2003 and 2002, 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 33.8% at June 30, 2004 and 31.4% at June 30, 2003. 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, 2004
and 2003 have increased by 5.1% and 13.1%, 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 70.3% of the gross loan portfolio as of June 30, 2004. The next largest
component of the loan portfolio is consumer loans at 14.2%, 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 and Analysis (continued)
INTEREST-SENSITIVITY ANALYSIS. The following table reflects the maturity and
repricing characteristics of Parkvale's assets and liabilities at June 30, 2004:
(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 $ 112,008 $ 195,600 $ 351,540 $ 31,785 $ 690,933
Other fixed rate loans, net (1) 70,702 29,036 123,307 113,527 336,572
Variable rate mortgage-backed securities 1,199 312 39,406 - 40,917
Fixed rate mortgage-backed securities (1) 184 551 6,477 1,203 8,415
Investments and Federal funds sold 56,247 26,985 200,384 177,865 461,481
Equities, primarily FHLB 737 4,835 13,924 876 20,372
---------- ----------- ---------- ---------- ----------
Total interest-sensitive assets $ 241,077 $ 257,319 $ 735,038 $ 325,256 $1,558,690
---------- ----------- ---------- ---------- ----------
Ratio of interest-sensitive assets to total assets 15.0% 16.0% 45.6% 20.2% 96.7%
---------- ----------- ---------- ---------- ----------
INTEREST-SENSITIVE LIABILITIES:
Passbook deposits and club accounts (2) $ 43,897 $ 25,204 $ 29,220 $ 109,374 $ 207,695
Checking accounts (3) 26,158 13,502 27,006 173,102 239,768
Money market deposit accounts 46,396 31,000 31,000 - 108,396
Certificates of deposit 100,364 180,713 374,307 59,559 714,943
FHLB advances and other borrowings, including
trust preferred securities 44,209 - 110,500 60,695 215,404
---------- ----------- ---------- ---------- ----------
Total interest-sensitive liabilities $ 261,024 $ 250,419 $ 572,033 $ 402,730 $1,486,206
---------- ----------- ---------- ---------- ----------
Ratio of interest-sensitive liabilities
to total liabilities and equity 16.2% 15.5% 35.5% 25.0% 92.2%
---------- ----------- ---------- ---------- ----------
Ratio of interest-sensitive assets
to interest-sensitive liabilities 92.4% 102.8% 128.5% 80.8% 104.9%
---------- ----------- ---------- ---------- ----------
Periodic Gap to total assets (1.24)% 0.43% 10.11% (4.80)% 4.50%
---------- ----------- ---------- ---------- ----------
Cumulative Gap to total assets (1.24)% (0.81)% 9.30% 4.50%
---------- ----------- ---------- ----------
(1) Includes total repayments and prepayments at an assumed rate of 20%
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 33.2%
per annum, compared with 32.6% for fiscal 2003.
(3) Includes investment checking accounts which are assumed to be
immediately rate sensitive, with remaining checking accounts assumed
to be rate sensitive at 10% in the first year and 2.5% per annum
thereafter.
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE
Nonperforming and impaired loans and foreclosed real estate (REO) consisted of
the following at June 30
2004 2003
------ ------
(Dollars in 000's)
Delinquent single-family mortgage loans $2,610 $3,786
Delinquent other loans 2,205 2,379
------ ------
Total of nonperforming loans 4,815 6,165
Total of impaired loans 140 1,119
Real Estate Owned 2,998 2,695
------ ------
Total $7,953 $9,979
Nonperforming and impaired loans and real estate owned represent 0.49% and
0.61% of total assets at the respective balance sheet dates. June 30, 2004
delinquent single-family mortgage loans consisted of 7 single family owner
occupied homes. As of June 30, 2004, $1.4 million or 52.3% of the nonaccrual
mortgage loans totaling $2.6 million were purchased from others. Management
believes the loans are well collateralized.
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 $152,000 at June 30, 2004 and $248,000 at June 30, 2003.
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.
2004 Parkvale Financial
6
Management's Discussion and Analysis (continued)
In addition, loans totaling $5.7 million were classified as special
mention or substandard for regulatory purposes at June 30, 2004. 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 $13.8 million at June 30, 2004 and $15.0
million at June 30, 2003 or 1.34% and 1.20% of gross loans at June 30, 2004 and
June 30 2003, 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 for
potential portfolio risks and to detect potential credit deterioration in the
early stages. Management then establishes reserves based upon its evaluation of
the inherent risks in the loan portfolio. 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, 2004 was $10.0 million or $1.77 per
diluted share representing a 4.9% decrease from net income of $10.5 million or
$1.86 per diluted share for the year ended June 30, 2003. Fiscal 2004 results
contain gains on the sale of investments of $1.1 million. Fiscal 2003 results
contain gains of $1.1 million offset by a $1.1 million expense related to
foreclosed real estate. Fiscal 2004 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. Apositive 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 $28.5 million in fiscal 2004 compared to $32.3 million in
fiscal 2003. The decrease in net interest income is due to the accumulative
effect of the Federal Reserve Board's rate reductions since 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 $16.1 million or 22.3% in fiscal
2004. Average loans outstanding decreased $74.9 million or 6.2%, primarily due
to a $392.0 decrease in amount of loan package purchases amounting to $227.1
million during fiscal 2004. The lower interest income also reflected a decrease
in the average loan yield, which was 6.04% in fiscal 2003 and declined to 5.01%
in fiscal 2004. Interest income on loans decreased by $7.1 million or 8.9% from
fiscal 2002 to 2003. The average yield on loans decreased from 6.96% in fiscal
2002 to 6.04% in fiscal 2003.
Interest income on investments increased $674,000 or 5.7% in fiscal 2004.
This was the result of a $57.9 million or 23.2% increase in the average balance
offset by a decrease in the average yield on investments to 4.08% in fiscal 2004
from 4.75% in fiscal 2003. The average yield on securities decreased to 4.75% in
fiscal 2003 from 5.92% in fiscal 2002 due to investing in shorter term
investments. Interest income on investments increased by $1.2 million or 11.6%
from fiscal 2002 to 2003. This was the result of a$70.1 million increase in the
average balance.
Interest income from federal funds sold decreased $527,000 from fiscal
2003 to 2004.The decrease was attributable primarily to a decrease in the
average yield from 1.45% in fiscal 2003 to 1.02% in fiscal 2004. The average
federal funds sold balance decreased from $116.1 million in fiscal 2003 to
$113.2 million in fiscal 2004. The decrease is attributable to investing
available funds in higher yielding loans and investments. The target federal
funds rate increased 25 basis points in fiscal 2004 from 1.00% to 1.25% on June
30, 2004. The average balance of federal funds sold decreased to $116.1 million
from $123.0 million between fiscal 2003 and 2002, and interest income decreased
$1.1 million between the two years. The average yield decreased from 2.22% in
fiscal 2002 to 1.45% in fiscal 2003.
INTEREST EXPENSE
Interest expense on deposits decreased $12.8 million or 29.0% between
fiscal 2003 and 2004. The average deposit balance decreased $43.4 million or
3.3% in fiscal 2004 which was offset by a decrease in the average cost from
3.30% in fiscal 2003 to 2.43% in 2004. Interest expense on deposits decreased by
$8.6 million or 16.2% between fiscal 2002 and 2003. The average deposit balance
also increased by $87.3 million between the two fiscal years, offset by a
decrease in the average cost from 4.22% in fiscal 2002 to 3.30% in fiscal 2003.
Interest expense on borrowed money increased by $619,000 or 7.4% in fiscal
2004, due to a new borrowing with the FHLB of $10 million at a rate of 4.14%
during fiscal 2004. The overall average cost of borrowings
Corporation Annual Report
7
Management's Discussion and Analysis (continued)
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,
2004.
Year Ended June 30, At June 30,
-------------------- -----------
2004 2003 2002 2004
---- ---- ---- ----
Average yields on (1):
Loans 5.01% 6.04% 6.96% 4.95%
Investments (2) 4.08 4.75 5.92 3.62
Federal funds sold 1.02 1.45 2.22 1.25
---- ---- ---- ----
All interest-earning assets 4.53 5.49 6.43 4.46
---- ---- ---- ----
Average rates paid on (1):
Savings deposits 2.43 3.30 4.22 2.23
Borrowings 4.99 5.16 5.54 4.81
Trust preferred securities 4.89 5.23 5.65 5.19
---- ---- ---- ----
All interest-bearing liabilities 2.77 3.53 4.34 2.61
---- ---- ---- ----
Average interest rate spread 1.76% 1.96% 2.09% 1.85%
---- ---- ---- ----
Net yield on interest-earning assets (3) 1.84% 2.06% 2.29%
(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, 2004 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) 2004 2003 2002
- -------------------------------------------------------------- ---------- ---------- ----------
Interest-earning assets:
Loans $1,124,828 $1,199,725 $1,142,646
Investments 308,031 250,087 180,027
Federal funds sold 113,241 116,065 122,960
---------- ---------- ----------
Total interest-earning assets 1,546,100 1,565,877 1,445,633
---------- ---------- ----------
Noninterest-earning assets 63,682 61,863 45,107
---------- ---------- ----------
TOTAL ASSETS $1,609,782 $1,627,740 $1,490,740
---------- ---------- ----------
Interest-bearing liabilities:
Savings deposits 1,292,093 1,335,538 1,248,234
FHLB advances and other borrowings 179,171 161,253 121,385
Trust Preferred Securities 25,000 25,000 6,725
---------- ---------- ----------
Total interest-bearing liabilities 1,496,264 1,521,791 1,376,344
---------- ---------- ----------
Noninterest-bearing liabilities 10,838 8,689 19,327
---------- ---------- ----------
TOTAL LIABILITIES 1,507,102 1,530,480 1,395,671
Shareholders' equity 102,680 97,260 95,069
---------- ---------- ----------
TOTAL LIABILITIES AND EQUITY $1,609,782 $1,627,740 $1,490,740
---------- ---------- ----------
NET INTEREST-EARNING ASSETS $ 49,836 $ 44,086 $ 69,289
---------- ---------- ----------
Interest-earning assets as a % of interest-bearing liabilities 103.3% 102.9% 104.9%
---------- ---------- ----------
An excess of interest-earning assets over interest-bearing liabilities will
enhance a positive interest rate spread.
2004 Parkvale Financial
8
Management's Discussion and Analysis (continued)
decreased from 5.16% in fiscal 2003 to 4.99% in fiscal 2004. Interest expense on
trust preferred securities was $1.2 million for fiscal 2004 as compared to $1.3
in fiscal 2003. In fiscal 2003, interest expense on borrowed money increased by
$1.6 million or 23.8% due to new borrowings with the FHLB totaling $40 million
at an average rate of 4.27%.
Net interest income decreased $3.7 million or 11.6% from fiscal 2003 to
2004. The average interest rate spread decreased to 1.76% in fiscal 2004 from
1.96% in fiscal 2003, while the average net interest earning assets increased
$5.8 million. In fiscal 2003, net interest income decreased $881,000 or 2.7%.
The average interest rate spread decreased from 2.09% in fiscal 2002 to 1.96% in
2003, while average net interest earning assets decreased $25.2 million between
the two years.
At June 30, 2004, the weighted average yield on loans and investments was
4.46%. The average rate payable on liabilities was 2.23% for deposits, 4.81% for
borrowings, 5.19% for trust preferred securities and 2.61% 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 a credit of
$106,000 in 2004, a charge of $308,000 in 2003 and $205,000 in 2002,
respectively. The provision decreased by $414,000 or 134.4% in fiscal 2004
compared to fiscal year 2003. The fiscal 2004 credit provision reflects the
recovery of previous chargeoffs and the decrease in the loan portfolio due to
payoffs. Aggregate allowances were 1.34% of gross loans as of June 30, 2004.
Management believes the allowance for loan losses is adequate to cover the
amount of probable credit losses in the loan portfolio as of June 30, 2004.
OTHER INCOME
Other income increased $23,000 or 0.3% in fiscal 2004 compared to fiscal
2003. This is primarily attributable to a comparable gain on sale of investments
and assets aggregating $1.1 million in fiscal 2004 compared to gains on sale of
investments of $1.1 million in fiscal 2003.
Service charges on deposit accounts increased by $104,000 or 2.4% in
fiscal 2004, mainly due to increased services for all types of deposits. Other
service charges and fees decreased by $427,000 or 28.5% in fiscal 2004. This
decrease is attributable to decrease on fees derived from loan products. Service
charges on deposit accounts increased by $662,000 or 17.9% and other service
charges and fees increased by $450,000 or 43.0% between fiscal 2003 and 2002.
Miscellaneous income increased $382,000 or 35.1% in fiscal 2004, and
decreased by $268,000, or 19.8%, in fiscal 2003. The primary increase in 2004 is
attributable to income earned on Bank Owned Life Insurance. Investment service
fee income decreased by $175,000 to $694,000 in fiscal 2004 versus $869,000 in
fiscal 2003 and $973,000 in fiscal 2002. Parkvale offers nondeposit investment
products directly to customers through an operating division, Parkvale Financial
Services.
OTHER EXPENSE
Other expense decreased $2.2 million or 9.0% in fiscal 2004, due to lower
levels of expenses and no writedowns related to foreclosed real estate during
fiscal 2004 as compared to $1.1 million in fiscal 2003. The writedowns and
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 decreased by $656,000 or 5.1% during
fiscal 2004 and increased by $1.4 million or 12.4% during fiscal 2003 over the
respective prior period which is attributable to a decrease in full-time
equivalents due to consolidation of processing functions. The 2004 decrease is
attributable to the effect of a full fiscal year of a reduction in full-time
equivalent employees. The 2003 increase is primarily attributable to the effect
of additional employees gained from the SNB acquisition and normal merit pay
increases and increased staffing related to new offices and products.
Office occupancy expense increased $42,000 or 1.0% in fiscal 2004 and
$561,000 or 15.6% in fiscal 2003 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 $115,000 or 23.2% in fiscal 2004 and
decreased by $104,000 or 17.3% in fiscal 2003. The fiscal 2004 and 2003
decreases are due to lower levels of advertising spending as compared to the
higher levels of fiscal 2002 expense which was due to the acquisition of SNB and
various loan and deposit promotions.
Corporation Annual Report
9
Management's Discussion and Analysis (continued)
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 $200,000, $224,000 and $222,000 relating to
savings deposit premiums averaging 1.55 basis points during fiscal 2004, 1.68
basis points during fiscal 2003 and 1.83 basis points during fiscal 2002,
respectively.
Miscellaneous expenses decreased by $288,000 or 7.3% in fiscal 2004 due
mainly to lower data processing costs, primarily driven by consolidated
processing systems. Miscellaneous expense increased by $31,000 or 0.8% in 2003.
INCOME TAXES
Federal and state income tax expense decreased by $572,000 or 11.6% 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 2004, 2003 and 2002 was
30.2%, 31.8%, and 33.9%, respectively.
COMMITMENTS
At June 30, 2004, Parkvale was committed under various agreements to
originate fixed and adjustable rate mortgage loans aggregating $1.2 million and
$1.5 million, respectively, at rates ranging from 5.63% to 6.58% for fixed rate
and 2.88% to 5.11% for adjustable rate loans, and had $81.1 million of unused
consumer lines of credit and $17.1 million in unused commercial lines of credit.
In addition, Parkvale was also committed to originate commercial loans totaling
$9.1 million at June 30, 2004. Outstanding letters of credit total $4.0 million
at June 30, 2004.
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 $58.0 million or 80.6% from $72 million at
June 30, 2003 to $14 million at June 30, 2004. Loan balances decreased $226.7
million or 18.3%, investment balances increased $267.4 million or 116.0% and
decreased cash balances of $8.2 million or 25.5%, resulted from decreased
deposit balances of $49.8 million or 3.7% and increased advances and other debt
of $16.2 million or 9.3%. Parkvale's FHLB advance available maximum borrowing
capacity is $716.2 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 $5.2 million or 5.2% during the year ended
June 30, 2004 compared to June 30, 2003. Comprehensive income was $9.7 million
while dividends declared were $4.2 million resulting in 42.0% of net income paid
to shareholders (equal to $0.76 per share) for fiscal year ended June 30, 2004.
Treasury stock purchased in fiscal 2004 was $1.5 million which was partially
deployed for funding stock options and benefit plans totaling $1.2 million. The
book value of Parkvale's common stock increased 4.6% to $18.76 at June 30, 2004
from $17.93 at June 30, 2003 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. The Bank continues to maintain a "well
capitalized" status, sustaining a 7.4% Tier 1 capital level as of June 30, 2004.
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 JUDGMENTS
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.
2004 Parkvale Financial
10
Management's Discussion and Analysis (continued)
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, 2004 includes $11.0 million or
79.9% 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
generally 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 2004 and 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. On April 20, 2004, WorldCom
emerged from bankruptcy and is operating under the name MCI.
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, 2004 includes $1.8 million related to a
vacant office building, which was sold on July 19, 2004. In fiscal 2003 and
fiscal 2002, writedowns and expenses related to this property of $1.1 million
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.
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 $3.6 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.
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.
Corporation Annual Report
11
Management's Discussion and Analysis (continued)
PENDING ACQUISITION
On September 1, 2004, Parkvale Financial Corporation entered into a definitive
agreement to purchase the $321 million asset West Virginia based Advance
Financial Bancorp. Upon completion of the acquisition, Parkvale Financial
Corporation will have approximately $1.9 billion in total assets and a total of
46 branches. The agreement provides the shareholders of Advance Financial
Bancorp will receive $26.00 per share in cash. The acquisition, which will be
accounted for as a purchase, is expected to close late 2004 or early 2005. The
transaction has been approved by the boards of directors of both companies and
is subject to approval by bank regulatory authorities and Advance's
shareholders. The acquisition is valued at approximately $38 million. This
reflects 167% of the seller's book value at June 30, 2004 and 14.4 times its
trailing 12-month earnings.
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.
2004 Parkvale Financial
12
Consolidated Statements of Financial Condition
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30,
-----------------------------
2004 2003
----------- -----------
ASSETS
Cash and noninterest-earning deposits $ 23,814 $ 32,067
Federal funds sold 14,000 72,000
----------- -----------
Cash and cash equivalents 37,814 104,067
Interest-earning deposits in other banks 13,547 17,576
Investment securities available for sale (cost of $20,304 in 2004
and $19,185 in 2003) (Note B) 20,372 19,743
Investment securities held to maturity (fair value of $475,759 in 2004
and $215,587 in 2003) (Note B) 477,574 210,827
Loans, net of allowance of $13,808 in 2004 and $15,013 in 2003 (Note C) 1,015,078 1,241,779
Foreclosed real estate (Note D) 2,998 2,695
Office properties and equipment, net (Note D) 10,049 11,196
Goodwill 7,561 7,561
Intangible assets and deferred charges 3,573 4,011
Prepaid expenses and other assets (Note M) 23,887 23,348
----------- -----------
Total assets $ 1,612,453 $ 1,642,803
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits (Note E) $ 1,281,971 $ 1,331,760
Advances from Federal Home Loan Bank and other debt (Note F) 190,403 174,157
Trust preferred securities (Note F) 25,000 25,000
Advance payments from borrowers for taxes and insurance 6,030 7,144
Other liabilities (Note M) 4,363 5,268
----------- -----------
Total liabilities $ 1,507,767 $ 1,543,329
----------- -----------
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 3,616 4,132
Treasury stock at cost - 1,153,806 shares in 2004 and 1,186,663 shares in 2003 (22,687) (22,951)
Accumulated other comprehensive income 43 355
Retained earnings 116,979 111,203
----------- -----------
Total shareholders' equity $ 104,686 $ 99,474
----------- -----------
Total liabilities and shareholders' equity $ 1,612,453 $ 1,642,803
----------- -----------
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,
2004 2003 2002
-------- -------- --------
INTEREST INCOME
Loans $ 56,339 $ 72,473 $ 79,568
Investments 12,553 11,879 10,649
Federal funds sold 1,151 1,678 2,728
-------- -------- --------
Total interest income 70,043 86,030 92,945
-------- -------- --------
INTEREST EXPENSE
Deposits (Note E) 31,348 44,127 52,688
Borrowings 8,948 8,329 6,730
Trust preferred securities 1,223 1,308 380
-------- -------- --------
Total interest expense 41,519 53,764 59,798
-------- -------- --------
Net interest income 28,524 32,266 33,147
Provision for loan losses (Note C) (106) 308 205
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 28,630 31,958 32,942
-------- -------- --------
NONINTEREST INCOME
Service charges on deposit accounts 4,474 4,370 3,708
Other service charges and fees 1,070 1,497 1,047
Net gain on sale and writedown of securities and loans
(Note J) 1,055 1,091 4,550
Miscellaneous 1,469 1,087 1,355
-------- -------- --------
Total non interest income 8,068 8,045 10,660
-------- -------- --------
NONINTEREST EXPENSE
Compensation and employee benefits 12,328 12,984 11,548
Office occupancy 4,197 4,155 3,594
Marketing 381 496 600
FDIC insurance 200 224 222
Office supplies, telephone, and postage 1,582 1,661 1,449
Real estate owned expenses and writedowns 0 1,100 6,500
Miscellaneous 3,658 3,946 3,915
-------- -------- --------
Total noninterest expense 22,346 24,566 27,828
-------- -------- --------
Income before income taxes 14,352 15,437 15,774
Income tax expense (Note H) 4,336 4,908 5,344
-------- -------- --------
NET INCOME $ 10,016 $ 10,529 $ 10,430
-------- -------- --------
NET INCOME PER SHARE:
Basic $ 1.80 $ 1.89 $ 1.84
Diluted $ 1.77 $ 1.86 $ 1.81
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
2004 Parkvale Financial
14
Consolidated Statements of Cash Flows
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended June 30,
---------------------------------------
2004 2003 2002
--------- --------- ---------
OPERATING ACTIVITIES
Interest received $ 76,169 $ 91,279 $ 93,048
Loan fees paid (3,420) (1,623) (16)
Other fees and commissions received 6,467 6,955 5,938
Interest paid (41,532) (53,629) (59,686)
Cash paid to suppliers and employees (21,446) (33,279) (23,822)
Income taxes paid (4,780) (2,100) (6,601)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,458 7,603 8,861
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 1,075 1,804 15,790
Proceeds from maturities of investments 211,701 249,825 48,157
Purchase of investment securities available for sale (210) (7,405) -
Purchase of investment securities held to maturity (481,736) (262,672) (80,196)
Maturity of deposits in other banks 4,029 (103) (5,122)
Purchase of loans (227,145) (619,098) (339,807)
Proceeds from sales of loans 5,903 3,128 2,690
Principal collected on loans 613,126 797,275 576,084
Loans made to customers, net of loans in process (164,564) (207,480) (227,382)
Payment for acquisition of Second National Bank, net - - (19,309)
Capital expenditures (243) (2,416) (1,075)
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (38,064) (47,142) (30,170)
--------- --------- ---------
FINANCING ACTIVITIES
Net increase in checking and savings accounts 40,993 44,144 43,441
Net (decrease) increase in certificates of deposit (90,783) (61,723) (31,409)
Proceeds from FHLB advances 10,000 40,000 20,000
Repayment of FHLB advances (14) (10,014) (5,013)
Proceeds from trust preferred securities - - 25,000
Net (decrease) increase in other borrowings 6,260 (3,825) 2,058
Net (decrease) in borrowers advances for tax and insurance (1,114) (738) (206)
Dividends paid (4,240) (4,093) (4,086)
Allocation of treasury stock to retirement plans 731 685 712
Payment for treasury stock (1,480) (4,880) (346)
--------- --------- ---------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (39,647) (444) 50,151
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (66,253) (39,983) 28,842
Cash and cash equivalents at beginning of year 104,067 144,050 115,208
--------- --------- ---------
Cash and cash equivalents at end of year $ 37,814 $ 104,067 $ 144,050
--------- --------- ---------
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 10,016 $ 10,529 $ 10,430
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,830 1,739 1,180
Accretion and amortization of fees and discounts 5,008 2,440 487
Loan fees collected and deferred (3,420) (523) (16)
Provisions for loan losses (106) 308 205
Writedowns and expenses related to REO - 1,100 6,500
Gain on sale of assets (1,077) (1,091) (4,550)
Decrease (increase) in accrued interest receivable 497 1,058 (942)
Increase in other assets (1,037) (9,101) (4,113)
Increase in accrued interest payable (13) 135 112
Increase (decrease) in other liabilities (240) 1,009 (432)
--------- --------- ---------
Total adjustments 1,442 (2,926) (1,569)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 11,458 $ 7,603 $ 8,861
--------- --------- ---------
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, 2001 $6,735 $ 4,347 $(19,725) $ 5,396 $ 98,341 $ 95,094
------ ---------- -------- ------------- -------- ------------
2002 net income 10,430 10,430
Accumulated other comprehensive income:
Change in unrealized gain on securities, net of
deferred tax expense of $90 156
Reclassification adjustment, net of taxes of $(2,717) 4,726) (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
Accumulated other comprehensive income:
Change in unrealized gain on securities, net of
deferred tax expense of $157 273
Reclassification adjustment, net of taxes of $(427) (744) (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
------ ---------- -------- ------------- -------- -------------
2004 net income 10,016 10,016
Accumulated other comprehensive income:
Change in unrealized gain on securities, net of
deferred tax expense of $56 98
Reclassification adjustment, net of taxes of $(235) (410) (312)
-------------
Comprehensive income 9,704
Treasury stock purchased (1,480) (1,480)
Treasury stock contributed to benefit plan 731 731
Exercise of stock options (516) 1,013 497
Cash dividends declared on common stock
at $.76 per share (4,240) (4,240)
------ ---------- -------- ------------- -------- -------------
Balance at June 30, 2004 $6,735 $ 3,616 $(22,687) $ 43 $116,979 $ 104,686
------ ---------- -------- ------------- -------- -------------
The accompanying notes are an integral part of these financial statements.
2004 Parkvale Financial
16
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 $6.6 million of
checking deposits, 3% of the next $38.8 million of checking deposits and 10% of
total checking deposits over $45.4 million. These required reserves, net of
allowable credits, amounted to $6.1 million at June 30, 2004.
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 pay-off 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 Financial Statements (continued)
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 allowances
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:
2004 2003 2002
---------- ---------- ----------
Numerator for basic and diluted earnings per share:
Net Income (in 000's) $ 10,016 $ 10,529 $ 10,430
Denominator:
Weighted average shares for basic earnings per share 5,571,733 5,572,974 5,680,696
Effect of dilutive employee stock options 77,511 79,089 88,757
---------- ---------- ----------
Weighted average shares for dilutive earnings per share 5,649,244 5,652,063 5,769,453
---------- ---------- ----------
Net income per share:
Basic $ 1.80 $ 1.89 $ 1.84
Diluted $ 1.77 $ 1.86 $ 1.81
---------- ---------- ----------
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 2004 were $881,000 and in 2003 and 2002 were $1.7 million and $1.2
million, respectively. The foreclosures in the last three years 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.
2004 Parkvale Financial
18
Notes to Consolidated Financial Statements (continued)
NOTE A (CONTINUED)
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 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,
2004 2003 2002
--------- ---------- ------------
Net income before
stock options $ 10,016 $ 10,529 $ 10,430
Compensation expense
from stock option grants 123 248 28
--------- ---------- ------------
Proforma net income $ 9,893 $ 10,281 $ 10,402
--------- ---------- ------------
Proforma income per share:
Basic - proforma $ 1.78 $ 1.84 $ 1.83
Basic - as reported $ 1.80 $ 1.89 $ 1.84
Diluted - proforma $ 1.75 $ 1.82 $ 1.80
Diluted - as reported $ 1.77 $ 1.86 $ 1.81
Black-Scholes option pricing model assumptions are as
follows:
Risk-free rate 3.94% 3.69% 5.08%
Dividend yield 3.00% 3.18% 3.19%
Volatility factor 0.18 0.17 0.22
Expected life 9 9 9
STATEMENT OF CASH FLOWS
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 19, 2003 was scheduled to expire
on June 30, 2004 was extended on June 18, 2004 to expire on June 30, 2005.
During fiscal 2004, this program repurchased 58,100 shares at an average price
of $25.49 representing 1.1% of the outstanding stock. The extension of the
program will permit the purchase of 3.9% of outstanding stock, or 218,400
shares, to be repurchased periodically through fiscal year 2005 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. The core deposit intangibles valued at $4.4 million at
acquisition represented 5.2% of core deposit accounts and the premium is being
amortized over the average life of 11.21 years. Resulting goodwill of $7.6
million is not subject to periodic amortization. Core deposit intangible
amortization expense was $438,000 in fiscal 2004. Amortization for each of the
next five years is expected to be $438,000. Goodwill and amortizing core deposit
intangibles aggregating $11.1 million are not deductible for federal income tax
purposes. 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
Corporation Annual Report
19
Notes to Consolidated Financial Statements (continued)
NOTE A (CONTINUED)
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
In December 2003 the American Institute of Certified Public Accountants,
Inc issued Statement of Position (SOP) 03-3 "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer." This SOP addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investors initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. It includes such loans acquired in purchase business
combinations and applies to all non-governmental entities, including
not-for-profit organizations. This SOP does not apply to loans originated by the
entity. This SOP is effective for loans acquired in fiscal years beginning on or
before December 2004, and within the scope of Practice Bulletin 6, paragraphs 7
and 8 of this SOP, as they apply to decrease in cash flows expected to be
collected, should it be applied prospectively for fiscal years beginning after
December 15, 2004. Parkvale will evaluate how this SOP will apply to future
acquisitions of loans.
2004 Parkvale Financial
20
Notes to Consolidated Financial Statements (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values for
investment securities classified as available for sale or held to maturity at
June 30 are as follows:
2004 2003
----------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- -------- --------- ---------- ---------- --------
Available for sale:
FHLB of Pittsburgh stock $ 13,924 $ - $ - $ 13,924 $ 13,022 $ - $ - $ 13,022
Equity securities - other 6,380 228 160 6,448 6,163 606 48 6,721
---------- -------- --------- -------- --------- -------- ---------- --------
TOTAL INVESTMENTS SECURITIES AVAILABLE FOR SALE $ 20,304 $ 228 $ 160 $ 20,372 $ 19,185 $ 606 $ 48 $ 19,743
---------- -------- --------- -------- --------- -------- ---------- --------
Held to maturity:
U.S. Government and agency obligations due:
Within 1 year $ 7,538 $ 42 $ 9 $ 7,571 $ 2,016 $ 13 $ - $ 2,029
Within 5 years 169,316 215 433 169,098 12,619 291 - 12,910
Within 10 years 160,802 83 2,592 158,293 - - - -
---------- -------- --------- -------- --------- -------- ---------- --------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 337,656 340 3,034 334,962 14,635 304 - 14,939
---------- -------- --------- -------- --------- -------- ---------- --------
Municipal obligations:
Within 1 year - - - - 795 11 - 806
Within 5 years 2,233 99 - 2,332 3,831 169 - 4,000
Within 10 years 130 3 - 133 1,203 68 - 1,271
After 10 years 3,298 140 - 3,438 3,315 251 - 3,566
---------- -------- --------- -------- --------- -------- ---------- --------
TOTAL MUNICIPAL OBLIGATIONS 5,661 242 - 5,903 9,144 499 - 9,643
---------- -------- --------- -------- --------- -------- ---------- --------
Corporate debt:
Within 1 year 33,762 190 1 33,951 56,956 1,077 132 57,901
Within 5 years 29,835 537 71 30,301 66,530 2,082 37 68,575
Within 10 years 156 - 16 140 - - - -
After 10 years 20,939 828 45 21,722 23,132 1,156 455 23,833
---------- -------- --------- -------- --------- -------- ---------- --------
TOTAL CORPORATE DEBT 84,692 1,555 133 86,114 146,618 4,315 624 150,309
---------- -------- --------- -------- --------- -------- ---------- --------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS,
MUNICIPAL OBLIGATIONS AND CORPORATE DEBT 428,009 2,137 3,167 426,979 170,397 5,118 624 174,891
---------- -------- --------- -------- --------- -------- ---------- --------
Mortgage-backed securities:
FHLMC 9,088 93 130 9,051 2,248 162 - 2,410
FNMA 33,129 5 749 32,385 23,732 13 168 23,577
GNMA 1,784 114 2 1,896 1,904 224 1 2,127
SBA 57 - - 57 75 - - 75
Collateralized mortgage obligations ("CMOs") 5,123 2 118 5,007 12,003 36 - 12,039
Other participation certificates 384 - - 384 468 - - 468
---------- -------- --------- -------- --------- -------- ---------- --------
TOTAL MORTGAGE-BACKED SECURITIES 49,565 214 999 48,780 40,430 435 169 40,696
---------- -------- --------- -------- --------- -------- ---------- --------
TOTAL INVESTMENTS SECURITIES HELD
TO MATURITY $ 477,574 $ 2,351 $ 4,166 $475,759 $ 210,827 $ 5,553 $ 793 $215,587
---------- -------- --------- -------- --------- -------- ---------- --------
TOTAL INVESTMENT PORTFOLIO $ 497,878 $ 2,579 $ 4,326 $496,131 $ 230,012 $ 6,159 $ 841 $235,330
---------- -------- --------- -------- --------- -------- ---------- --------
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.
Investment securities with an estimated fair value of $16,524 and $21,552 were
pledged to secure public deposits and other purposes as required by law at June
30, 2004, and 2003, respectively.
Investment securities with an estimated fair value of $26,095 and $17,211 were
pledged to secure commercial investment agreements at June 30, 2004, and 2003,
respectively.
See Note J concerning Net Gain on Sales in fiscal 2004, 2003, and 2002 and
Writedown of Securities in fiscal 2002.
The following table represents the gross unrealized losses and fair value of
investments aggregated by investment category and length of time that individual
securities have been in continuous unrealized loss position at June 30, 2004.
Less than 12 months 12 months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ------------ ---------- ---------- ----------- -----------
U.S. Government and agency obligations: $ 271,087 $ 3,034 $ - $ - $ 271,087 $ 3,034
Corporate debt 13,128 82 5,629 51 18,757 133
----------- ------------ ---------- ---------- ----------- -----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS, 284,215 3,116 5,629 51 289,844 3,167
MUNICIPAL OBLIGATIONS AND CORPORATE DEBT
----------- ------------ ---------- ---------- ----------- -----------
Agency MBS and CMO's 32,672 481 11,764 518 44,436 999
Equity Securities - other - - 6,237 160 6,237 160
----------- ------------ ---------- ---------- ----------- -----------
TOTAL TEMPORARILY IMPAIRED SECURITIES $ 316,887 $ 3,597 $ 23,630 $ 729 $ 340,517 $ 4,326
----------- ------------ ---------- ---------- ----------- -----------
The investments in debt securities have not been significantly impaired. The
unrealized losses are primarily the result of volatility in interest rates.
Based on the credit worthiness of the issuers, management determined that the
debt securities were not other-than temporarily impaired.
Corporation Annual Report
21
Notes to Consolidated Financial Statements (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C LOANS
Loans at June 30 are summarized as follows:
2004 2003 2002
----------- ----------- ------------
Mortgage loans:
Residential:
1-4 Family $ 723,551 $ 932,535 $ 895,330
Multifamily 23,910 19,477 18,140
Commercial 82,186 59,796 59,136
Other 12,987 36,581 35,108
----------- ----------- ------------
842,634 1,048,389 1,007,714
Consumer loans 143,476 152,458 167,956
Commercial business loans 38,869 47,983 53,055
Loans on savings accounts 2,790 2,974 3,224
----------- ----------- ------------
Gross loans 1,027,769 1,251,804 1,231,949
Less:
Loans in process 313 117 205
Allowance for loan losses 13,808 15,013 15,492
Unamortized (premium) discount and deferred loan fees (1,430) (5,105) (1,387)
----------- ----------- ------------
$ 1,015,078 $ 1,241,779 $ 1,217,639
----------- ----------- ------------
The following summary sets forth the activity in the allowance for loan losses
for the years ended June 30:
2004 2003 2002
----------- ----------- ------------
Beginning balance $ 15,013 $ 15,492 $ 13,428
Provision for loan losses (106) 308 205
Provision for loan losses from SNB acquisition - - 1,994
----------- ----------- ------------
Loans recovered:
Commercial 6 1 -
Consumer 122 39 34
Mortgage 235 69 110
----------- ----------- ------------
Total recoveries 363 109 144
----------- ----------- ------------
Loans charged off:
Commercial (779) (253) (19)
Consumer (301) (241) (148)
Mortgage (382) (402) (112)
----------- ----------- ------------
Total charge-offs (1,462) (896) (279)
----------- ----------- ------------
Net charge-offs (1,099) (787) (135)
----------- ----------- ------------
Ending balance $ 13,808 $ 15,013 $ 15,492
----------- ----------- ------------
The following table sets forth the allowance for loan loss allocation for the
years ended June 30:
2004 2003 2002
----------- ----------- ------------
Residential mortgages $ 2,781 $ 3,555 $ 3,928
Commercial mortgages 4,029 4,156 3,795
Consumer loans 3,810 4,297 4,924
Commercial loans 3,188 3,005 2,845
----------- ----------- ------------
Total allowance for loan losses $ 13,808 $ 15,013 $ 15,492
----------- ----------- ------------
The loan loss portfolio is reviewed on a periodic basis to insure Parkvale's
allowance for loans loss is adequate to absorb potential losses due to inherent
risk in the loan portfolio.
2004 Parkvale Financial
22
Notes to Consolidated Financial Statements (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C (CONTINUED)
At June 30, 2004, Parkvale was committed under various agreements to
originate fixed and adjustable rate mortgage loans aggregating $1,158 and
$1,499, respectively, at rates ranging from 5.63% to 6.58% for fixed rate and
2.88% to 5.11% for adjustable rate loans, and had $81,060 of unused consumer
lines of credit and $17,056 in unused commercial lines of credit. Parkvale was
also committed to originate commercial loans totaling $9,053 at June 30, 2004.
Outstanding letters of credit totaled $4,022. Substantially, all commitments are
expected to fund within one year.
At June 30, Parkvale serviced loans for the benefit of others as follows:
2004 - $24,132, 2003 - $24,077 and 2002 - $13,097.
At June 30, 2004, 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 - 35.4%;
Virginia - 7.2%; and Ohio - 7.1%. 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.
At June 30, the amount of interest income of nonaccrual loans that had not
been recognized in interest income was $152 for 2004, $248 for 2003, and $191
for 2002. There were $140 in loans considered impaired at June 30, 2004 and
$1,119 at June 30, 2003. The average recorded investment in impaired loans was
$160 during fiscal 2004 and $397 during fiscal 2003. These loans were included
in management's assessment of the adequacy of the general valuation allowances.
NOTE D OFFICE PROPERTIES AND EQUIPMENT AND FORECLOSED REAL ESTATE
Office properties and equipment at June 30 are summarized by major
classifications as follows:
2004 2003 2002
---------- ------------ -----------
Land $ 2,080 $ 2,132 $ 1,832
Office building and leasehold improvements 9,435 9,649 8,728
Furniture, fixtures and equipment 10,339 10,386 10,097
---------- ------------ -----------
21,854 22,167 20,657
Less accumulated depreciation and amortization 11,805 10,971 10,577
---------- ------------ -----------
Office properties and equipment, net $ 10,049 $ 11,196 $ 10,080
---------- ------------ -----------
Depreciation expense $ 1,370 $ 1,300 $ 970
A summary of foreclosed real estate at June 30 is as follows: 2004 2003 2002
- ------------------------------------------------------------- ---------- ------------ -----------
Real estate acquired through foreclosure: $ 3,056 $ 2,695 $ 1,728
Allowance for losses (58) - (11)
---------- ------------ -----------
$ 2,998 $ 2,695 $ 1,717
---------- ------------ -----------
On July 19, 2004, Parkvale completed the combined sale at $2,750 of a $1,794
commercial property included as real estate acquired through foreclosure and of
a $900 commercial office building included as office, properties and equipment.
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.
Changes in the allowance for losses on foreclosed real estate for the years
ended June 30 were as follows:
2004 2003 2002
---------- ------------ -----------
Beginning balance $ - $ 11 $ 18
Provision for losses 58 - 38
Less charges to allowance - (11) (45)
---------- ------------ -----------
Ending balance $ 58 $ - $ 11
Corporation Annual Report
23
Notes to Consolidated Financial Statements (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE E - DEPOSITS
The following schedule sets forth interest expense for the years ended June 30
by type of deposit:
2004 2003 2002
---- ---- ----
Checking and money market accounts $ 2,227 $ 2,194 $ 2,948
Passbook accounts 1,107 2,591 2,735
Certificates 28,014 39,342 47,005
----------- ---------- ----------
$ 31,348 $ 44,127 $ 52,688
----------- ---------- ----------
A summary of deposits at June 30 is as follows:
2004 2003
----------------------------------------------------
Amount % Amount %
------------- ------ ------------- -------
Transaction accounts:
Checking and money market accounts $ 269,207 21.0 $ 228,706 17.2
Checking accounts - noninterest-bearing 88,125 6.9 89,264 7.1
Passbook accounts 201,723 15.7 200,080 14.6
------------- ------ ------------- -------
559,055 43.6 518,050 38.9
Certificate of deposits 714,943 55.8 804,054 60.4
------------- ------ ------------- -------
1,273,998 99.4 1,322,104 99.3
Accrued Interest 7,973 0.6 9,656 0.7
------------- ------ ------------- -------
$ 1,281,971 100.00 $ 1,331,760 100.0
------------- ------ ------------- -------
The aggregate amount of time deposits over $100 was $110,147 and $117,833 at
June 30, 2004 and 2003, respectively.
At June 30, the scheduled maturities of certificate accounts were as follows:
Maturity Period 2004 2003
- --------------- ---- ----
1-12 months $ 281,077 $ 386,235
13-24 months 151,246 145,837
25-36 months 145,041 99,767
37-48 months 41,753 65,178
49-60 months 36,267 38,850
Thereafter 59,559 68,187
----------- -----------
$ 714,943 $ 804,054
----------- -----------
2004 Parkvale Financial
24
Notes to Consolidated 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:
2004 2003
----------------------------------------------------------
Interest Interest
Balance Rate % Balance Rate %
---------- --------- ----------- -------------
Due within one year $ - - $ - -
Due within five years 40,000 5.48-5.76 20,000 5.48-5.76
Due within ten years 70,509 3.00-5.62 80,260 3.00-5.62
Due within twenty years 60,584 4.97-6.75 60,847 3.00-6.75
---------- --------- ----------- -------------
171,093 $ 161,107
---------- --------- ----------- -------------
Weighted average interest rate at end of period 5.19 % 5.25 %
Included in the $171,093 of advances, is $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, 2004. $16,000 qualifies
as Tier 1 Capital for regulatory purposes. The interest rate resets quarterly.
On June 30, 2004 the rate was 5.19% and 4.61% at June 30, 2003.
Additionally, other debt consists of recourse loans, repurchase
agreements, and commercial investment agreements with certain commercial
checking account customers. These daily borrowings had balances of $19,310 and
$13,050 at June 30, 2004 and 2003, respectively.
NOTE G REGULATORY CAPITAL
The Bank 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, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank'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 the Bank 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, 2004, that the Bank meets all capital
adequacy requirements to which it is subject.
As of June 30, 2004, 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.
The Bank'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, 2004:
Total Capital to Risk Weighted Assets $ 130,220 14.34% $ 72,623 8.00% $ 90,779 10.00%
Tier I Capital to Risk Weighted Assets 118,827 13.09% 36,312 4.00% 54,467 6.00%
Tier I Capital to Average Assets 118,827 7.41% 64,176 4.00% 80,220 5.00%
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%
Corporation Annual Report
25
Notes to Consolidated Financial Statements (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G (CONTINUED)
Parkvale has determined that the provisions of FIN No. 46 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, 2004, 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:
2004 2003 2002
------------ --------- ----------
Federal:
Current $ 4,391 $ 3,368 $ 8,042
Deferred (74) 1,503 (2,698)
State 19 37 -
------------ --------- ----------
$ 4,336 $ 4,908 $ 5,344
------------ --------- ----------
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:
2004 2003
----------- -----------
Deferred tax assets:
Book bad debt reserves $ 4,593 $ 5,081
Deferred loan fees 41 77
Fixed assets 296 561
Deferred compensation 118 137
Prepaid tax deposits 719 -
Other, including asset writedowns 86 148
----------- -----------
Total deferred tax assets 5,853 6,004
----------- -----------
Deferred tax liabilities:
Purchase accounting adjustments 1,386 1,837
Other, net 418 192
Unrealized gains on securities available for sale 25 204
----------- -----------
Total deferred tax liabilities 1,829 2,233
----------- -----------
Net deferred tax assets $ 4,024 $ 3,771
----------- -----------
No valuation allowance was required at June 30, 2004 or 2003.
Parkvale's effective tax rate differs from the expected federal income tax rate
for the years ended June 30 as follows:
2004 2003 2002
------------------- ----------------- ------------------
Expected federal statutory income tax provision/rate $ 5,023 35.0% $ 5,403 35.0% $ 5,521 35.0%
Tax-exempt interest (244) -1.7% (344) -2.2% (169) -1.1%
Cash surrender value of life insurance (191) -1.3% - 0.0% - 0.0%
Dividends paid to ESOP participants (140) -1.0% (192) -1.3% - 0.0%
State income taxes, net of federal benefit 13 0.1% 25 0.2% - 0.0%
Other (125) -0.9% 16 0.1% (8) 0.0%
---------- ---- -------- ---- --------- ----
$ 4,336 30.2% $ 4,908 31.8% $ 5,344 33.9%
---------- ---- -------- ---- --------- ----
2004 Parkvale Financial
26
Notes to Consolidated 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 $321, $345 and $325 in fiscal years 2004,
2003 and 2002, 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 $529 in fiscal 2004, $637 in fiscal 2003, and $500 in fiscal 2002 for
ESOP contributions, which were used for the purchase of additional shares of
Parkvale's Common Stock in open-market transactions. At June 30, 2004, the ESOP
owned 565,273 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, 2004, 190,350
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, 2004, 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, 2004, all grants are
exercisable. No further awards will be granted under the 1993 Plans. The
following table presents option share data related to the Stock Option Plans for
the years indicated.
Total
--------
Exercise Price
Per Share $ 10.322 $ 15.637* $ 16.32 $ 19.979# $ 21.50 $ 24.475 $ 22.995 $ 25.625
-------- -------- --------- -------- ------- -------- --------- ---------
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
Granted 10,000 10,000
Exercised (49,578) (7,797) (11,366) (8,000) (9,250) (85,991)
Forfeitures (2,156) (3,000) (8,500) (13,656)
-------- -------- --------- -------- ------- -------- --------- --------- --------
June 30, 2004 2,529 22,527 60,632 42,000 66,000 8,000 116,500 10,000 328,188
-------- -------- --------- -------- ------- -------- --------- --------- --------
* 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 Financial Statements (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J NET GAIN ON SALE AND WRITEDOWN OF SECURITIES AND LOANS
Fiscal 2004 gains aggregated $1,055 which consisted of $586 from the sale
of available for sale securities and $510 from the sale of available for sale
unsecured credit card loan portfolio. Loss on sale of assets includes $41 from
the sale of equipment and vacant office buildings previously used as branch
locations. Fiscal 2003 gains aggregated $1,091 are from the sale of equity
securities. Fiscal 2002 gains aggregated $7,106 were from the sale of equity
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 at acquisition
represented 5.2% of core deposit accounts and the premium is being amortized
over an average life of 11.21 years. Resulting goodwill of $7,561 is not subject
to periodic amortization. Core deposit intangible amortization expense was $438
in fiscal 2004. Amortization for each of the next five years is expected to be
$438. 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 $1,633 in 2004, $1,591 in 2003 and $1,501 in 2002. At June 30,
2004, Parkvale was obligated under 23 noncancelable operating leases, which
expire through 2021. The minimum rental commitments for the fiscal years
subsequent to June 30, 2004 are as follows: 2005 - $ 1,617, 2006 - $1,088, 2007
- - $785, 2008 - $717, 2009 - $559 and later years - $2,559.
2004 Parkvale Financial
28
Notes to Consolidated Financial Statements (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE M SELECTED INFORMATION
Selected statement of financial condition data at June 30 are summarized
as follows:
2004 2003 2004 2003
-------- ------- ------- -------
Prepaid expenses and other assets: Other liabilities:
Accrued interest on loans $ 3,863 $ 5,614 Accounts payable and
Reserve for uncollected interest (152) (239) accrued expenses $ 3,237 $ 3,586
Bank owned life insurance 10,547 10,000 Other liabilities 353 434
Accrued interest on investments 4,030 2,863 Federal and state
Other prepaids 1,575 1,339 income taxes payable 773 1,248
Net deferred tax asset 4,024 3,771
-------- ------- ------- -------
$ 23,887 $23,348 $ 4,363 $ 5,268
-------- ------- ------- -------
NOTE N QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Year
Three Months Ended Ended
-------------------------------------------------- ----------
Sep. 03 Dec. 03 Mar. 04 June 04 June 04
---------- ---------- ---------- ---------- ----------
Total interest income $ 18,229 $ 17,967 $ 17,488 $ 16,359 $ 70,043
Total interest expense 11,367 10,297 9,984 9,871 41,519
---------- ---------- ---------- ---------- ----------
Net interest income 6,862 7,670 7,504 6,488 28,524
Provision for loan losses 47 (102) 23 (74) (106)
---------- ---------- ---------- ---------- ----------
Net interest income after provision for losses 6,815 7,772 7,481 6,562 28,630
Other noninterest income 2,199 1,718 1,876 2,275 8,068
Other noninterest expense 5,549 5,600 5,553 5,644 22,346
---------- ---------- ---------- ---------- ----------
Income before income taxes 3,465 3,890 3,804 3,193 14,352
Income tax expense 1,035 1,187 1,148 966 4,336
---------- ---------- ---------- ---------- ----------
Net income $ 2,430 $ 2,703 $ 2,656 $ 2,227 $ 10,016
---------- ---------- ---------- ---------- ----------
Net income per share:
Basic $ 0.44 $ 0.49 $ 0.47 $ 0.40 $ 1.80
Diluted $ 0.43 $ 0.48 $ 0.47 $ 0.39 $ 1.77
---------- ---------- ---------- ---------- ----------
Year
Three Months Ended 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 noninterest income 1,728 1,743 1,727 2,847 8,045
Other noninterest 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
---------- ---------- ---------- ---------- ----------
Corporation Annual report
29
Notes to Consolidated Financial Statements (continued)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE O PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The condensed statement of financial condition and statements of
operations and cash flows for Parkvale Financial Corporation as of June 30, 2004
and 2003 and for each of the three years in the period ended June 30, 2004 are
presented below. PFC's primary subsidiary is Parkvale Savings Bank ("PSB").
STATEMENTS OF FINANCIAL CONDITION
2004 2003
---------- ----------
Assets:
Investment in PSB $ 129,995 $ 122,746
Cash 246 2,272
Other equity investments 24 23
Other assets 695 719
---------- ----------
Total assets $ 130,960 $ 125,760
---------- ----------
Liabilities and Shareholders' Equity:
Accounts payable $ 151 $ 282
Trust preferred securities 25,000 25,000
Deferred taxes 5 5
Dividends payable 1,118 999
Shareholders' equity 104,686 99,474
---------- ----------
Total liabilities and shareholders' equity $ 130,960 $ 125,760
---------- ----------
STATEMENTS OF OPERATIONS
2004 2003 2002
---------- ---------- ----------
Dividends from PSB $ 3,250 $ 2,000 $ 2,000
Other income 85 166 159
Gain on sale of assets - 1,091 -
Operating expenses (880) (1,384) (373)
---------- ---------- ----------
Income before equity in
undistributed earnings
of subsidiary 2,455 1,873 1,786
Equity in undistributed
income of PSB 7,561 8,656 8,644
---------- ---------- ----------
Net income $ 10,016 $ 10,529 $ 10,430
---------- ---------- ----------
STATEMENTS OF CASH FLOWS
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Management fee income received $ 84 $ 166 $ 159
Dividends received 3,250 2,000 2,000
Taxes received from PSB 428 (323) 93
Cash paid to suppliers (800) (958) (1,163)
---------- ---------- ----------
Net cash provided by operating activities 2,962 885 1,089
---------- ---------- ----------
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 (1,480) (4,880) (346)
Allocation of treasury stock to retirement plans 731 685 712
Dividends paid to stockholders (4,239) (4,093) (4,086)
---------- ---------- ----------
Net cash used in financing activities (4,988) (8,288) (3,720)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (2,026) (5,003) 6,369
Cash and cash equivalents at beginning of year 2,272 7,275 906
---------- ---------- ----------
Cash and cash equivalents at end of year $ 246 $ 2,272 $ 7,275
---------- ---------- ----------
Reconciliation of net income to net cash provided by operating activities:
Net income $ 10,016 $ 10,529 $ 10,430
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of investments - (1,091) -
Undistributed income of PSB (7,561) (8,656) (8,644)
Taxes received from PSB 428 (323) 93
Increase in other assets 24 25 (774)
Increase in accrued expenses 55 401 (16)
---------- ---------- ----------
Net cash provided by operating activities $ 2,962 $ 885 $ 1,089
---------- ---------- ----------
2004 Parkvale Financial
30
Notes to Consolidated 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.
2004 2003
------------------------------ ------------------------------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
------------- ------------- ------------- -------------
FINANCIAL ASSETS:
Cash and noninterest-earning deposits $ 23,814 $ 23,814 $ 32,067 $ 32,067
Federal funds sold 14,000 14,000 72,000 72,000
Interest-earning deposits in other banks 13,547 13,547 17,576 17,576
Investment securities 447,351 448,381 194,634 190,140
Mortgage-backed securities 48,780 49,565 40,696 40,430
Loans receivable 1,045,964 1,028,886 1,282,650 1,256,792
------------- ------------- ------------- -------------
FINANCIAL LIABILITIES:
Checking, savings and money market accounts $ 559,055 $ 559,055 $ 518,050 $ 518,050
Savings certificates 720,995 714,943 837,911 804,054
Advances from Federal Home Loan Bank 179,650 171,093 180,353 161,107
Trust preferred securities 26,145 25,000 25,626 25,000
Commercial investment agreements 18,051 19,310 12,494 13,050
------------- ------------- ------------- -------------
OFF BALANCE SHEET:
Loan Commitments $ (9) $ - $ (259) $ -
------------- ------------- ------------- -------------
Corporation Annual Report
31
Report of Independent Auditors
PARENTE RANDOLPH
The Power of Ideas
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Parkvale Financial Corporation:
We have audited the consolidated statement of financial condition of Parkvale
Financial Corporation and subsidiaries ("Parkvale") as of June 30, 2004, and the
related consolidated statements of operations, cash flows, and shareholders'
equity for the year then ended. These financial statements are the
responsibility of Parkvale's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of Parkvale Financial Corporation as of June 30, 2003, and
for the years ended June 30, 2003 and 2002, were audited by other auditors whose
report dated July 18, 2003, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2004 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Parkvale
Financial Corporation and subsidiaries as of June 30, 2004, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
[PARENTE RANDOLPH, LLC.]
Pittsburgh, Pennsylvania
July 20, 2004
2004 Parkvale Financial
32
Capital Stock Information
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m., Thursday,
October 28, 2004, 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 04 $ 30.53 $ 25.21 $ 0.20
March 04 30.73 26.41 0.20
December 03 29.26 25.49 0.18
September 03 26.98 23.25 0.18
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
---------- ---------- ----------
There were 5,580,967 shares of Common Stock outstanding as of August 30, 2004,
the Voting Record Date, which shares were held as of such date by approximately
421 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 2004 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
39
Corporation Annual Report