UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
COMMISSION FILE NO: 0-17411
PARKVALE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1556590
(State of incorporation) (I.R.S. Employer
Identification Number)
4220 William Penn Highway, Monroeville, Pennsylvania 15146
(Address of principal executive offices; zip code)
Registrant's telephone number, including area code: (412) 373-7200
Indicate by check mark whether the registrant (1) has filed all reports required
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
----- -----
The closing sales price of the Registrant's Common Stock on October 25, 2005 was
$27.42 per share.
Number of shares of Common Stock outstanding as of October 25, 2005 was
5,629,893.
PARKVALE FINANCIAL CORPORATION
INDEX
Page
-----
Part I. Financial Information
Item 1.
Consolidated Statements of Financial Condition as of September 30, 2005
and June 30, 2005 3
Consolidated Statements of Operations for the three months ended
September 30, 2005 and 2004 4
Consolidated Statements of Cash Flows for the three months ended
September 30, 2005 and 2004 5-6
Consolidated Statements of Shareholders' Equity for the three months
ended September 30, 2005 6
Notes to Unaudited Interim Consolidated Financial Statements 7-9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations 10-15
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 15
Item 4.
Controls and Procedures 15
Part II - Other Information 16
Signatures 17
2
Item 1.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
SEPTEMBER 30, June 30,
2005 2005
------------- ----------
(unaudited) (audited)
ASSETS
Cash and noninterest earning deposits $ 25,716 $ 26,040
Federal funds sold 65,000 81,000
---------- ----------
Cash and cash equivalents 90,716 107,040
Interest-earning deposits in other banks 6,137 9,474
Investment securities available for sale (cost of
$27,456 at September 30 and $24,682 at June 30) 27,711 25,022
Investment securities held to maturity (fair value
of $449,562 at September 30 and $459,645 at June 30) 453,033 460,080
Loans, net of allowance of $15,150 at September 30
and $15,188 at June 30 1,196,538 1,198,070
Foreclosed real estate, net 1,045 1,654
Office properties and equipment, net 12,887 13,053
Goodwill 25,634 25,634
Intangible assets 7,248 7,487
Prepaid expenses and other assets 27,722 28,330
---------- ----------
Total Assets $1,848,671 $1,875,844
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $1,447,590 $1,478,335
Advances from Federal Home Loan Bank 227,084 217,141
Trust preferred securities 32,200 32,200
Other debt 17,694 23,116
Escrow for taxes and insurance 3,513 6,511
Other liabilities 5,511 5,570
---------- ----------
Total Liabilities 1,733,592 1,762,873
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock ($1.00 par value; 5,000,000
shares authorized; 0 shares issued) -- --
Common stock ($1.00 par value; 10,000,000 shares
authorized; 6,734,894 shares issued) 6,735 6,735
Additional paid in capital 3,473 3,536
Treasury stock at cost (1,102,903 shares at September 30
and 1,112,948 at June 30) (21,571) (21,680)
Accumulated other comprehensive income 176 216
Retained earnings 126,266 124,164
---------- ----------
Total Shareholders' Equity 115,079 112,971
---------- ----------
Total Liabilities and Shareholders' Equity $1,848,671 $1,875,844
========== ==========
3
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2005 2004
-------- -------
(unaudited)
Interest Income:
Loans $16,341 $13,034
Investments 4,536 4,227
Federal funds sold 775 243
------- -------
Total interest income 21,652 17,504
------- -------
Interest Expense:
Deposits 8,725 7,161
Borrowings 2,899 2,359
Trust preferred securities 592 339
------- -------
Total interest expense 12,216 9,859
------- -------
Net interest income 9,436 7,645
Provision for loan losses 136 57
------- -------
Net interest income after
provision for loan losses 9,300 7,588
------- -------
Noninterest Income:
Service charges on deposit accounts 1,589 1,254
Other fees and service charges 339 321
Gain on sale of assets -- 14
Miscellaneous 355 314
------- -------
Total other income 2,283 1,903
------- -------
Noninterest Expenses:
Compensation and employee benefits 3,698 3,226
Office occupancy 1,262 1,009
Marketing 139 83
Office supplies, telephone, and postage 451 355
Miscellaneous 1,290 1,011
------- -------
Total other expenses 6,840 5,684
------- -------
Income before income taxes 4,743 3,807
Income tax expense 1,515 1,179
------- -------
Net income $ 3,228 $ 2,628
======= =======
Net income per share:
Basic $ 0.57 $ 0.47
Diluted $ 0.57 $ 0.47
4
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2005 2004
--------- --------
Cash flows from operating activities: (unaudited)
Interest received $ 23,113 $ 18,789
Loan premiums paid (82) (59)
Other fees and commissions received 2,167 1,769
Interest paid (12,247) (9,837)
Cash paid to suppliers and others (6,870) (4,294)
Income taxes paid (1,395) (350)
--------- --------
Net cash provided by operating activities 4,686 6,018
Cash flows from investing activities:
Proceeds from maturities of investment
securities 22,247 94,960
Purchase of investment securities
available for sale (1,906) (74)
Purchase of investment securities held to
maturity (16,285) (31,987)
Maturity of deposits in other banks 3,337 6,098
Purchase of loans (37,709) (61,997)
Proceeds from sales of loans 982 1,209
Principal collected on loans 75,982 87,044
Loans made to customers, net of loans
in process (37,210) (39,478)
Other (232) 845
--------- --------
Net cash provided by investing activities 9,206 56,620
Cash flows from financing activities:
Net (decrease) in checking and savings
accounts (11,796) (5,233)
Net (decrease) in certificates of deposit (18,916) (18,275)
Proceeds from FHLB advances 10,000 10,000
Repayment of FHLB advances (6) (94)
Net increase (decrease) in other
borrowings (5,423) 3,740
Decrease in borrowers' advances for taxes
and insurance (2,997) (3,185)
Cash dividends paid (1,124) (1,117)
Proceeds from stock option exercise 138 28
Acquisition of treasury stock (92) (70)
--------- --------
Net cash used in financing activities (30,216) (14,206)
--------- --------
Net increase (decrease) in cash and cash
equivalents (16,324) 48,432
Cash and cash equivalents at beginning of
period 107,040 37,814
--------- --------
Cash and cash equivalents at end of period $ 90,716 $ 86,246
========= ========
5
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2005 2004
------ ------
Reconciliation of net income to net cash provided by operating activities:
Net income $3,228 $2,628
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 637 411
Accretion and amortization of loan fees and discounts 349 650
Loan fees collected and deferred (premiums paid) (150) (59)
Provision for loan losses 136 57
Gain on sale of assets -- (14)
Decrease in accrued interest receivable 1,041 568
(Increase) decrease in other assets (420) 490
Increase in accrued interest payable 6 1,265
(Decrease) increase in other liabilities (141) 22
------ ------
Total adjustments 1,458 3,390
------ ------
Net cash provided by operating activities $4,686 $6,018
====== ======
For purposes of reporting cash flows, cash and cash equivalents include cash and
noninterest earning deposits, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods. Loans transferred to foreclosed
assets aggregated $160,000 for the three months ended September 30, 2005 and
$31,000 for the three months ended September 30, 2004.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands, except share data)
Accumulated
Additional Other Total
Common Paid-in Treasury Comprehensive Retained Shareholders'
Stock Capital Stock Income Earnings Equity
------ ---------- -------- ------------- -------- -------------
Balance, June 30, 2005 $6,735 $3,536 ($21,680) $216 $124,164 $112,971
Net income, three months ended September 30, 2005 3,228 3,228
Accumulated other comprehensive income:
Change in unrealized gain on securities,
net of deferred tax benefit of $23 (40) (40)
--------
Comprehensive income 3,188
Treasury stock purchased (92) (92)
Dividends on common stock at $0.20 per share (1,126) (1,126)
Exercise of stock options (63) 201 138
------ ------ -------- ---- -------- --------
Balance, September 30, 2005 $6,735 $3,473 ($21,571) $176 $126,266 $115,079
====== ====== ======== ==== ======== ========
6
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share data)
Statements of Operations
The statements of operations for the three months ended September 30, 2005 and
2004 are unaudited, but in the opinion of management reflect all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the results of operations for those periods. The results of operations for
the three months ended September 30, 2005 are not necessarily indicative of the
results that may be expected for fiscal 2006. The Annual Report on Form 10-K for
the year ended June 30, 2005 contains additional information and should be read
in conjunction with this report.
Loans
Loans are summarized as follows:
SEPTEMBER 30, June 30,
2005 2005
------------- ----------
Mortgage loans:
Residential:
1-4 Family $ 804,474 $ 807,753
Multifamily 29,247 29,920
Commercial 108,974 109,146
Other 22,747 22,448
---------- ----------
965,442 969,267
Consumer loans 188,707 187,807
Commercial business loans 49,451 48,302
Loans on savings accounts 5,669 5,611
---------- ----------
1,209,269 1,210,987
Less: Loans in process 157 418
Allowance for loan losses 15,150 15,188
Unamortized discount (premiums) and deferred loan fees (2,576) (2,689)
---------- ----------
Loans, net $1,196,538 $1,198,070
========== ==========
Included in the $188,707 of consumer loans are $229 of unsecured credit card
loans that are classified as available-for-sale. At September 30, 2005, the
market value of these loans is approximately $229.
The following summarizes the activity in the allowance for loan losses for the
three months ended September 30:
2005 2004
------- -------
Beginning balance $15,188 $13,808
Provision for losses - mortgage loans 43 32
Provision (credit) for losses - consumer loans 43 (5)
Provision for losses - commercial loans 50 30
Loans recovered 9 5
Loans charged off (183) (48)
------- -------
Ending balance $15,150 $13,822
======= =======
Comprehensive Income
Sources of comprehensive income not included in net income are limited to
unrealized gains and losses on certain investments in equity securities. For the
three months ended September 30, 2005 and 2004, total comprehensive income
amounted to $3,188 and $2,672, respectively.
7
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
Earnings Per Share ("EPS")
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended September 30:
2005 2004
---------- ----------
Numerator for basic and diluted earnings per share:
Net Income $ 3,228 $ 2,628
Denominator:
Weighted average shares for basic earnings per share 5,628,141 5,580,097
Effect of dilutive stock options 69,021 62,694
---------- ----------
Weighted average shares for dilutive earnings per share 5,697,162 5,642,791
========== ==========
Net income per share:
Basic $ 0.57 $ 0.47
Diluted $ 0.57 $ 0.47
Dividends per share $ 0.20 $ 0.20
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued No.
123R, a revised Statement, Share-Based Payment Amendment of FASB Statements No.
123 and APB No. 95, previously issued on March 31, 2004, that addresses the
accounting for share-based payment transactions in which an enterprise receives
services in exchange for (a) equity instruments of the enterprise and (b)
liabilities that are based on the fair value of the enterprise's equity
instruments that may be settled by the issuance of such equity instruments.
Under FAS 123R, all forms of share-based payments to employees, including
employee stock options, would be treated the same as other forms of compensation
by recognition of the related cost in the income statement. The expense of the
award would generally be measured at fair value at the grant date. Current
accounting guidance permits the expense relating to so-called fixed plan
employee stock options only be disclosed in the footnotes to the financial
statements. The revised statement eliminates the ability to account for
share-based compensation transactions using APB Opinion No. 25, Accounting for
Stock Issued to Employees. The revised statement eliminates the alternative to
use the intrinsic value method of accounting. This statement requires the use of
fair value recognition principles. This statement did not have a significant
impact on Parkvale's results of operations, which became effective for Parkvale
on July 1, 2005.
Acquisition
On December 31, 2004, Parkvale completed the acquisition of 100% of the voting
equity interests of Advance Financial Bancorp ("AFB" or "Advance"). The
acquisition of loans and deposits complements Parkvale's existing portfolio and
expanded the branch network into a new area west of the existing footprint in
southwestern Pennsylvania. Advance Financial Savings Bank operated seven branch
office locations in Belmont and Jefferson Counties in Ohio and Brooke County,
West Virginia, which are now operated as Parkvale Bank offices. The acquisition
was accounted for as a purchase business combination, and Advance's operations
were included in the consolidated statement of operations effective January 1,
2005. Advance shareholders received $26 per share in cash or an aggregate
$35,970. Payments to former option holders and transaction costs increased the
total consideration paid to $38,700. The fair value of assets acquired included
$51,071 of investments and cash and $250,900 of loans with $268,703 of deposits
assumed. Core deposit intangibles valued at $4,611 represent 4.7% of core
deposit accounts and the premium's expected amortization period is 8.94 years.
The resulting goodwill of $18,100 is not subject to periodic amortization.
8
New Accounting Pronouncements
In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF
Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (EITF 03-1). The quantitative and qualitative
disclosure provisions of EITF 03-1 were effective for years ending after
December 15, 2003 and were included in the Corporation's fiscal 2004 Form 10-K.
In March 2004, the EITF issued a Consensus on EITF 03-1 requiring that the
provisions of EITF 03-1 be applied for reporting periods beginning after June
15, 2004 to investments accounted for under SFAS No. 115 and 124. On September
30, 2004, the FASB delayed the effective date for the measurement and
recognition guidance contained in paragraphs 10-20 of EITF 03-1. EITF 03-1
establishes a three-step approach for determining whether an investment is
considered impaired, whether that impairment is other-than-temporary, and the
measurement of an impairment loss. PFC does not expect this EITF to have a
significant impact on Parkvale's financial statements.
Statement of Financial Accounting Standard No. 154, "Accounting Changes and
Error Corrections, "replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for reporting of a change in
accounting principle. This Statement requires retrospective application to prior
period financial statements of a voluntary change in accounting principle unless
it is impracticable. Statement No. 154 is effective for fiscal years beginning
after December 15, 2005, with earlier application permitted.
9
Item 2.
PARKVALE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in the
accompanying consolidated financial statements for Parkvale Financial
Corporation. The Corporation's consolidated financial condition and results of
operations consist almost entirely of Parkvale Bank's financial condition and
results of operations. Current performance does not guarantee, and may not be
indicative of, similar performance in the future. These are unaudited financial
statements and, as such, are subject to year-end audit review.
FORWARD-LOOKING STATEMENTS:
In addition to historical information, this Form 10-Q may contain
forward-looking statements. We have made forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results of
operations of the Corporation and its subsidiaries. When we use words such as
believe, expect, anticipate, or similar expressions, we are making
forward-looking statements.
The statements in this Form 10-Q that are not historical fact are
forward-looking statements. Forward-looking information should not be construed
as guarantees of future performance. Actual results may differ from expectations
contained in such forward-looking information as a result of factors including
but not limited to the interest rate environment, economic policy or conditions,
federal and state banking and tax regulations and competitive factors in the
marketplace. Each of these factors could affect estimates, assumptions,
uncertainties and risks considered in the development of forward-looking
information and could cause actual results to differ materially from
management's expectations regarding future performance.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document could affect the future financial results of the
Corporation and its subsidiaries and could cause those results to differ
materially from those expressed in our forward-looking statements contained in
this document. These factors include the following: operating, legal and
regulatory risks; economic, political and competitive forces affecting our
businesses; and the risk that our analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Corporation and its subsidiaries
conform to accounting principles generally accepted in the United States of
America (US GAAP) and general practices within the financial services industry.
All significant inter-company transactions are eliminated in consolidation and
certain reclassifications are made when necessary to conform with the previous
year's financial statements to the current year's presentation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities as of the
dates of the balance sheets and revenues and expenditures for the periods
presented. Therefore, actual results could differ significantly from those
estimates. Accounting policies involving significant judgments and assumptions
by management, which have or could have a material impact on the carrying value
of certain assets or comprehensive income, are considered critical accounting
policies. The Corporation recognizes the following as critical accounting
policies: Allowance for Loan Loss, Carrying Value of Investment Securities,
Valuation of Foreclosed Real Estate and Carrying Value of Goodwill and Other
Intangible Assets.
10
The Corporation's critical accounting policies and judgments disclosures are
contained in the June 30, 2005 Parkvale Financial Corporation's Annual Report
printed in September 2005. Management believes that there have been no material
changes since June 30, 2005. The Corporation has not substantively changed its
application of the foregoing policies, and there have been no material changes
in assumptions or estimation techniques used as compared to prior periods.
(Dollar amounts in thousands, except per share data)
SEPTEMBER 30,
-----------------------
BALANCE SHEET DATA: 2005 2004
- ------------------- ---------- ----------
Total assets $1,848,671 $1,602,235
Loans, net 1,196,538 1,029,971
Interest-earning deposits and federal funds sold 71,137 72,449
Total investments 480,744 434,687
Deposits 1,447,590 1,258,463
FHLB advances 227,084 180,999
Shareholders' equity 115,079 106,198
Book value per share $ 20.43 $ 19.03
Statistical Profile:
THREE MONTHS ENDED
SEPTEMBER 30, (1)
------------------
2005 2004
----- -----
Average yield earned on all
interest-earning assets 4.90% 4.53%
Average rate paid on all
interest-bearing liabilities 2.81% 2.65%
Average interest rate spread 2.09% 1.88%
Net yield on average
interest-earning assets 2.13% 1.98%
Other expenses to average assets 1.46% 1.41%
Taxes to pre-tax income 31.94% 30.97%
Return on average assets 0.69% 0.65%
Return on average equity 11.27% 9.92%
Average equity to average total assets 6.13% 6.57%
AT SEPTEMBER 30,
----------------
2005 2004
----- -----
One year gap to total assets 2.05% 2.04%
Intangibles to total equity 28.57% 10.38%
Ratio of nonperforming assets to total assets 0.36% 0.30%
Number of full-service offices 46 39
(1) The applicable income and expense figures have been annualized in
calculating the percentages.
11
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE:
Nonperforming and impaired loans and foreclosed real estate (REO) consisted of
the following:
(Dollar amounts in 000's)
SEPTEMBER 30, 2005 June 30, 2005
------------------ -------------
Delinquent single-family mortgage loans $2,603 $3,535
Delinquent other loans 2,983 3,625
------ ------
Total nonperforming loans 5,586 7,160
Total impaired loans 1 1
Real estate owned, net 1,045 1,654
------ ------
Total $6,632 $8,815
====== ======
Nonperforming (delinquent 90 days or more) and impaired loans and real estate
owned represent 0.36% and 0.47% of total assets at the respective balance sheet
dates. Delinquent single-family mortgage loans at September 30, 2005 consisted
of 48 single-family owner occupied homes. As of September 30, 2005, $461,000 or
17.7% of the nonaccrual mortgage loans totaling $2.6 million were purchased from
others. The $461,000 of the delinquent loans purchased by others are comprised
of three loans which management believes are well collateralized.
Loans are placed on nonaccrual status when, in management's judgment, the
probability of collection of principal and interest is deemed to be insufficient
to warrant further accrual. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is deducted from interest income. As a
result, uncollected interest income is not included in earnings for nonaccrual
loans. The amount of interest income on nonaccrual loans that had not been
recognized in interest income was $132,000 at September 30, 2005 and $144,000 at
June 30, 2005. Parkvale provides an allowance for the loss of accrued but
uncollected interest on mortgage, consumer and commercial business loans that
are 90 days or more contractually past due.
Nonaccrual, substandard and doubtful commercial and other real estate loans are
assessed for impairment. Loans are considered impaired when the fair value is
insufficient as compared to the contractual amount due. Parkvale excludes
single-family loans, credit card and installment consumer loans in the
determination of impaired loans consistent with the exception under paragraph 6
of SFAS 114 of loans measured for impairment. Parkvale Bank had $1,000 of loans
classified as impaired at September 30, 2005 and at June 30, 2005. The average
recorded investment in impaired loans is $1,000 at September 30, 2005. The
amount of interest income that was not recognized was under $1,000 for the
September 30, 2005 quarter. Impaired assets include $1.0 million of foreclosed
real estate as of September 30, 2005. Foreclosed real estate properties are
recorded at the lower of the carrying amount or fair value of the property less
the cost to sell. The net book value of foreclosed real estate primarily
consists of 1-4 family single-family dwellings with $382,000 of commercial real
estate at September 30, 2005.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses was $15.2 million at September 30, 2005, $15.2
million at June 30, 2005 and $13.8 million at September 30, 2004 or 1.25%, 1.25%
and 1.33% of gross loans at September 30, 2005, June 30, 2005 and September 30,
2004. The net dollar increase in the allowance at September 30, 2005 compared to
September 30, 2004 includes $1.9 million related to the AFB acquisition. The
adequacy of the allowance for loan loss is determined by management through
evaluation of the loss probable on individual nonperforming, delinquent and high
dollar loans, economic and business trends, growth and composition of the loan
portfolio and historical loss experience, as well as other relevant factors.
12
Management continually monitors the loan portfolio to identify potential
portfolio risks and to detect potential credit deterioration in the early
stages. Management then establishes reserves based upon its evaluation of the
inherent risks in the loan portfolio. Changes to the levels of reserves are made
quarterly based upon perceived changes in risk. Management believes the
allowance for loan losses is adequate to absorb loan losses.
LIQUIDITY AND CAPITAL RESOURCES:
Federal funds sold decreased $16 million or 19.8% from June 30, 2005 to
September 30, 2005. Investment securities held to maturity decreased $7.0
million or 1.5% and loans decreased $1.5 million or 0.1% from June 30, 2005 to
September 30, 2005. Deposits decreased $30.7 million or 2.1% from June 30, 2005
to September 30, 2005. Advances from the Federal Home Loan Bank increased $9.9
million or 4.6%. Escrow for taxes and insurance decreased by $3.0 million or
46.1% as a result of the remittance of property taxes to the various taxing
districts. Parkvale Bank's FHLB advance available maximum borrowing capacity is
$812.4 million. If Parkvale were to experience a deposit decrease in excess of
the available cash resources and cash equivalents, available FHLB borrowing
capacity could be utilized to fund a rapid decrease in deposits.
Shareholders' equity was $115.1 million or 6.2% of total assets at September 30,
2005. A stock repurchase program, extended in June 2005, permits the purchase of
3.8% of outstanding stock or 215,750 shares during fiscal 2006 at prevailing
prices in open-market transactions. Through September 30, 2005, 3,380 shares
were purchased at an average price of $27.25 per share, representing 1.6% of the
currently authorized program. The Bank is required to maintain Tier I (Core)
capital equal to at least 4% of the institution's adjusted total assets, and
Tier II (Supplementary) risk-based capital equal to at least 8% of the
risk-weighted assets. At September 30, 2005, Parkvale Bank was in compliance
with all applicable regulatory requirements, with Tier I and Tier II ratios of
6.21% and 12.17%, respectively.
The regulatory capital ratios for Parkvale Bank at September 30, 2005 are
calculated as follows:
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
---------- ---------- ----------
Equity Capital (1) $ 145,756 $ 145,756 $ 145,756
Less non-allowable intangible assets (32,882) (32,882) (32,882)
Less unrealized securities gains (178) (178) (178)
Plus permitted valuation allowances (2) - - 12,952
Plus allowable unrealized holding gains (3) - - 126
---------- ---------- ----------
Total regulatory capital 112,696 112,696 125,774
Minimum required capital 73,200 41,372 82,745
---------- ---------- ----------
Excess regulatory capital $ 39,496 $ 71,324 $ 43,029
Adjusted total assets $1,830,009 $1,034,311 $1,034,311
Regulatory capital as a percentage 6.16% 10.90% 12.16%
Minimum capital required as a percentage 4.00% 4.00% 8.00%
---------- ---------- ----------
Excess regulatory capital as a percentage 2.16% 6.90% 4.16%
========== ========== ==========
Well capitalized requirement 5.00% 6.00% 10.00%
========== ========== ==========
(1) Represents equity capital of the consolidated Bank as reported to the
Pennsylvania Department of Banking and FDIC on Form 041 for the quarter
ended September 30, 2005.
(2) Limited to 1.25% of risk adjusted total assets.
(3) Limited to 45% of pretax net unrealized holding gains.
13
Management is not aware of any trends, events, uncertainties or current
recommendations by any regulatory authority that will have, or that are
reasonably likely to have, material effects on Parkvale's liquidity, capital
resources or operations.
RESULTS OF OPERATIONS - COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 AND
2004
For the three months ended September 30, 2005, Parkvale reported net income of
$3.2 million or $0.57 per diluted share, up 21.8%, compared to net income of
$2.6 million or $0.47 per diluted share for the quarter ended September 30,
2004. The $600,000 increase in net income for the September 2005 quarter
reflects increased margins on net earning assets, offset by an increase in
non-interest expense. Net interest income increased to $9.4 million from $7.6
million for the prior period. Return on average equity was 11.27% for the
September 2005 quarter compared to 9.92% for the September 2004 quarter.
INTEREST INCOME:
Parkvale had interest income of $21.7 million during the three months ended
September 30, 2005 versus $17.5 million during the comparable period in 2004.
The $4.2 million increase is the result of a 37 basis point increase in the
average yield from 4.53% in 2004 to 4.90% in 2005 coupled with a $222.7 million
or 14.4% increase in the average balance of interest-earning assets primarily
due to the AFB acquisition. Interest income from loans increased by $3.3 million
due to an increase in the average outstanding loan balances of $180 million or
17.8% along with an increase of 33 basis points in the average yield from 5.15%
in 2004 to 5.48% in 2005. Investment interest income increased by $309,000 or
7.3% due to an increase of $20.8 million or 4.5% in the average balance and a 10
basis point increase in the average yield from 3.63% in 2004 to 3.73% in 2005.
Interest income earned on federal funds sold increased $532,000 or 218.9% from
the 2004 quarter due to an increase in the average balance of $21.7 million or
32.6%, and by a 206 basis point increase in the average yield from 1.46% in 2004
to 3.52% in 2005. The weighted average yield on all interest earning assets was
4.95% at September 30, 2005 and 4.54% at September 30, 2004.
INTEREST EXPENSE:
Interest expense increased $2.4 million or 23.9% from the 2004 to the 2005
quarter. The increase was due to a 16 basis point increase in the average rate
paid on deposits and borrowings from 2.65% in 2004 to 2.81% in 2005 and by an
increase in the average deposits and borrowings of $251.6 million or 16.9%
primarily due to the AFB acquisition. At September 30, 2005, the average rate
payable on liabilities was 2.43% for deposits, 4.82% for borrowings, 7.48% for
trust-preferred securities and 2.86% for combined deposits and borrowings.
PROVISION FOR LOAN LOSSES:
The provision for loan losses is an amount added to the allowance against which
loan losses are charged. The quarterly provision for loan losses increased by
$79,000 in 2005 compared to 2004. Aggregate valuation allowances were 1.25% of
gross loans at both September 30, 2005 and June 30, 2005.
Nonperforming loans and real estate owned were $6.6 million, $8.8 million and
$4.8 million at September 30, 2005, June 30, 2005 and September 30, 2004,
representing 0.36%, 0.47% and 0.30% of total assets at the respective balance
sheet dates. Total loan loss allowance at September 30, 2005 was $15.2 million.
Management considers loan loss allowance sufficient when compared to the value
of
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underlying collateral. Collateral is considered and evaluated when establishing
provision for loan losses and the sufficiency of the allowance for loan losses.
Management believes the allowance for loan losses is adequate to cover the
amount of probable loan losses.
OTHER INCOME:
Total other income increased by $380,000 or 20.0% in 2005 due mainly to an
increase of $335,000, or 26.7% for service charges on deposit accounts for all
types of products and services.
OTHER EXPENSE:
Total other expense increased by $1.2 million or 20.3% for the three months
ended September 30, 2005. This increase is due principally to increases in
compensation of $472,000, or 14.6%, office occupancy of $253,000, or 25.1% and
miscellaneous expense of $279,000, or 27.6%. Compensation increased due to
additional employees gained through the AFB acquisition. Office occupancy
expense and office supplies increased due to the addition of the seven AFB
branch offices acquired. Miscellaneous expense increased primarily due to an
increase of data processing expense related to the AFB acquisition and
enhancements to products and services. Annualized noninterest expense as a
percentage of average assets were 1.46% for the quarter ended September 30, 2005
compared to 1.41% for the quarter ended September 30, 2004.
IMPACT OF INFLATION AND CHANGING PRICES:
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles in the United States,
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services as
measured by the consumer price index.
Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative
and qualitative disclosures about market risk are presented at June 30,
2005 in Item 7A of Parkvale Financial Corporation's Form 10-K, filed
with the SEC on September 13, 2005. Management believes that there have
been no material changes in Parkvale's market risk since June 30, 2005.
Item 4. Controls and Procedures
Disclosure controls and procedures are monitored and supervised by the
Registrant's management, including the CEO and CFO, regarding the
effectiveness of the design and operation of the Registrant's disclosure
controls and procedures. The Registrant's management, including the CEO
and CFO, concluded that the Registrant's disclosure controls and
procedures were effective as of September 30, 2005. There have been no
significant changes in the Registrant's internal controls or in other
factors that could significantly affect internal controls subsequent to
September 30, 2005.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) No equity securities were sold by PFC during the period covered by this
report that were not registered under the Securities Act of 1933.
(b) Not Applicable
(c) During the quarter ended September 30, 2005, Parkvale purchased 3,380
shares at an average price per share of $27.25.
The following table sets forth information with respect to any purchase made by
or on behalf of Parkvale or any "affiliated purchaser", as defined in section
240. 10b-18(a)(3) under the Exchange Act, of shares of Parkvale common stock
during the indicated periods.
Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet Be
of Shares Price Paid Announced Plans Purchased Under the
Period Purchased Per Share or Programs Plans or Programs (1)
- ------ ------------ ---------- ------------------- ----------------------
July 1-31, 2005 -- -- -- 215,750
August 1-31, 2005 -- -- -- 215,750
September 1-30, 2005 3,380 27.25 3,380 212,370
(1) The repurchase program approved on June 19, 2003 is now scheduled to expire
on June 30, 2006.
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2005 Annual Meeting of Shareholders of Parkvale Financial Corporation
was held on October 27, 2005. Of 5,635,371 shares eligible to vote, 94.6%
or 5,331,048 were voted by proxy.
(b) The shareholders voted to re-elect the nominees for director, as described
in the Proxy Statement for the Annual Meeting. The results for the
re-election of Fred P. Burger, Jr. as director were 5,214,464 shares in
favor and 116,584 shares withheld. The results for the re-election of Harry
D Reagan as director were 5,028,681 shares in favor and 302,367 shares
withheld.
(c) The recommendation by the Board of Directors to ratify the appointment of
Parente Randolph, LLC as the Corporation's independent auditors, as
described in the Proxy Statement for the Annual Meeting, was approved with
5,314,111 shares in favor, 11,855 shares against and 5,082 shares
abstaining.
Item 5. Other Information None
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (as furnished as Exhibit 31.1)
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (as furnished as Exhibit 31.2)
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. (as furnished as Exhibit 32.1)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Parkvale Financial Corporation
DATE: October 28, 2005 By: /s/ Robert J. McCarthy, Jr.
------------------------------------
Robert J. McCarthy, Jr.
President and Chief Executive
Officer
DATE: October 28, 2005 By: /s/ Timothy G. Rubritz
------------------------------------
Timothy G. Rubritz
Vice President, Treasurer and
Chief Financial Officer
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