UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
COMMISSION FILE NO: 0-17411
PARKVALE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1556590
(State of incorporation) (I.R.S. Employer
Identification Number)
4220 William Penn Highway, Monroeville, Pennsylvania 15146
(Address of principal executive offices; zip code)
Registrant's telephone number, including area code: (412) 373-7200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The closing sales price of the Registrant's Common Stock on April 28, 2006 was
$28.35 per share.
Number of shares of Common Stock outstanding as of April 28, 2006 was 5,667,617.
PARKVALE FINANCIAL CORPORATION
INDEX
Page
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Part I. Financial Information
Item 1.
Consolidated Statements of Financial Condition as of March 31, 2006
and June 30, 2005 3
Consolidated Statements of Operations for the three and nine months
ended March 31, 2006 and 2005 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 2006 and 2005 5-6
Consolidated Statements of Shareholders' Equity for the nine months
ended March 31, 2006 6
Notes to Unaudited Interim Consolidated Financial Statements 7-10
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 18
Item 4.
Controls and Procedures 18
Part II - Other Information 18
Signatures 19
Exhibits 20-22
2
Item 1.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
MARCH 31, June 30,
2006 2005
---------- ----------
ASSETS
Cash and noninterest earning deposits $ 25,892 $ 26,040
Federal funds sold 84,000 81,000
---------- ----------
Cash and cash equivalents 109,892 107,040
Interest-earning deposits in other banks 4,613 9,474
Investment securities available for sale (cost of
$26,456 at March 31 and $24,682 at June 30) 26,653 25,022
Investment securities held to maturity (fair value
of $399,029 at March 31 and $459,645 at June 30) 405,062 460,080
Loans, net of allowance of $15,026 at March 31
and $15,188 at June 30 1,228,776 1,198,070
Foreclosed real estate, net 1,049 1,654
Office properties and equipment, net 17,259 13,053
Goodwill 25,634 25,634
Intangible assets 6,771 7,487
Prepaid expenses and other assets 26,313 28,330
---------- ----------
Total Assets $1,852,022 $1,875,844
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $1,443,284 $1,478,335
Advances from Federal Home Loan Bank 226,941 217,141
Trust preferred securities 32,200 32,200
Other debt 16,728 23,116
Escrow for taxes and insurance 6,170 6,511
Other liabilities 6,317 5,570
---------- ----------
Total Liabilities 1,731,640 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 3,523 3,536
Treasury stock at cost (1,067,277 shares at March 31
and 1,112,948 at June 30) (20,640) (21,680)
Accumulated other comprehensive income 142 216
Retained earnings 130,622 124,164
---------- ----------
Total Shareholders' Equity 120,382 112,971
---------- ----------
Total Liabilities and Shareholders' Equity $1,852,022 $1,875,844
========== ==========
3
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
Interest income:
Loans $17,289 $16,163 $50,395 $42,138
Investments 4,412 4,426 13,485 12,917
Federal funds sold 905 450 2,381 1,070
------- ------- ------- -------
Total interest income 22,606 21,039 66,261 56,125
------- ------- ------- -------
Interest expense:
Savings deposits 9,124 8,206 26,770 22,431
Borrowings 2,945 2,608 8,834 7,453
Trust preferred securities 664 512 1,888 1,214
------- ------- ------- -------
Total interest expense 12,733 11,326 37,492 31,098
------- ------- ------- -------
Net interest income 9,873 9,713 28,769 25,027
Provision for loan losses 180 32 462 143
------- ------- ------- -------
Net interest income after
provision for losses 9,693 9,681 28,307 24,884
------- ------- ------- -------
Noninterest Income:
Service charges on deposit accounts 1,561 1,456 4,726 4,146
Other fees and service charges 307 370 953 860
Gain on sale of assets 83 13 107 27
Miscellaneous 416 313 1,113 896
------- ------- ------- -------
Total other income 2,367 2,152 6,899 5,929
------- ------- ------- -------
Noninterest Expenses:
Compensation and employee benefits 3,841 3,812 11,206 10,091
Office occupancy 1,226 1,329 3,773 3,318
Marketing 125 71 410 256
FDIC insurance 48 47 146 140
Office supplies, telephone and postage 486 538 1,393 1,292
Miscellaneous 1,361 1,464 3,789 3,384
------- ------- ------- -------
Total other expenses 7,087 7,261 20,717 18,481
------- ------- ------- -------
Income before income taxes 4,973 4,572 14,489 12,332
Income tax expense 1,597 1,456 4,645 3,876
------- ------- ------- -------
Net income $ 3,376 $ 3,116 $ 9,844 $ 8,456
======= ======= ======= =======
Net income per share:
Basic $ 0.60 $ 0.55 $ 1.75 $ 1.51
Diluted $ 0.59 $ 0.54 $ 1.73 $ 1.49
4
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
NINE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
--------- ---------
Cash flows from operating activities:
Interest received $ 68,316 $ 60,528
Loan fees received (premiums paid) (163) (361)
Other fees and commissions received 6,443 5,661
Interest paid (37,651) (30,996)
Cash paid to suppliers and others (18,704) (20,021)
Income taxes paid (3,127) (1,470)
--------- ---------
Net cash provided by operating activities 15,114 13,341
Cash flows from investing activities:
Proceeds from sale of investment securities available for sale 1,964 12,242
Proceeds from maturities of investment securities 93,955 167,079
Purchase of investment securities held to maturity (42,996) (160,170)
Maturity of deposits in other banks 4,861 13,334
Purchase of loans (123,351) (80,446)
Proceeds from sales of loans 1,522 1,867
Principal collected on loans 191,860 255,244
Loans made to customers, net of loans in process (100,514) (113,025)
Payment for acquisition of Advance Financial, net of cash acquired -- (12,780)
Other (5,416) 693
Net cash provided by investing activities 21,885 84,038
Cash flows from financing activities:
Net (decrease) increase in checking and savings accounts (34,635) 148
Net (decrease) in certificates of deposit (314) (38,448)
Proceeds from FHLB advances 10,000 10,000
Repayment of FHLB advances (47) (101)
Net (decrease) increase in other borrowings (6,388) 2,926
Decrease in borrowers' advances for taxes and insurance (340) (846)
Cash dividends paid (3,386) (3,351)
Allocation of treasury stock to retirement plans 880 784
Acquisition of treasury stock (158) (70)
Proceeds from exercise of stock options 241 195
--------- ---------
Net cash used in financing activities (34,147) (28,763)
--------- ---------
Net increase in cash and cash equivalents 2,852 68,616
Cash and cash equivalents at beginning of period 107,040 37,814
--------- ---------
Cash and cash equivalents at end of period $ 109,892 $ 106,430
========= =========
5
NINE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
------- ---------
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 9,844 $ 8,456
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,928 1,462
Accretion and amortization of loan fees and discounts 818 1,557
Loan fees collected and deferred (premiums paid) (390) 56
Provision for loan losses 462 143
Gain on sale of assets (107) (27)
Decrease in accrued interest receivable 1,239 2,495
Decrease (increase) in other assets 690 (2,781)
(Decrease) increase in accrued interest payable (49) 129
Increase in other liabilities 679 1,851
------- ---------
Total adjustments 5,270 4,885
------- ---------
Net cash provided by operating activities $15,114 $ 13,341
======= =========
Acquisition of Advance Financial Bancorp:
Cash and cash equivalents $ 23,190
Investments 27,881
Loans 252,770
Net other assets and liabilities 6,186
Deposits (268,703)
FHLB Advances and trust preferred securities (28,544)
---------
Cash paid to acquire AFB $ 12,780
=========
For purposes of reporting cash flows, cash and cash equivalents include cash and
noninterest earning deposits, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods. Loans transferred to foreclosed
assets aggregated $1.4 million for the nine months ended March 31, 2006 and
$553,000 for the nine months ended March 31, 2005.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share data)
Accumulated
Additional Other Total
Common Paid-in Treasury Comprehensive Retained Shareholders'
Stock Capital Stock Income Earnings Equity
------ ---------- -------- ------------- -------- -------------
Balance, June 30, 2005 $6,735 $3,536 ($21,680) $216 $124,164 $112,971
Net income, nine months ended March 31, 2006 9,844 9,844
Accumulated other comprehensive income:
Change in unrealized gain on securities,
net of deferred tax benefit of $(32) (46)
Reclassification adjustment, net of taxes of $(12) (28) (74)
Comprehensive income 9,770
Treasury stock purchased (158) (158)
Treasury stock contributed to retirement plans 880 880
Dividends on common stock at $0.60 per share (3,386) (3,386)
Exercise of stock options (13) 318 305
------ ------ -------- ---- -------- --------
Balance, March 31, 2006 $6,735 $3,523 ($20,640) $142 $130,622 $120,382
====== ====== ======== ==== ======== ========
6
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share data)
Statements of Operations
The statements of operations for the nine months ended March 31, 2006 and 2005
are unaudited, but in the opinion of management reflect all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the results of operations for those periods. The results of operations for
the nine months ended March 31, 2006 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.
MARCH 31, June 30,
2006 2005
---------- ----------
Loans
Loans are summarized as follows:
Mortgage loans:
Residential:
1-4 Family $ 842,181 $ 807,753
Multifamily 29,242 29,920
Commercial 109,931 109,146
Other 22,450 22,448
---------- ----------
1,003,804 969,267
Consumer loans 184,785 187,807
Commercial business loans 47,462 48,302
Loans on savings accounts 5,707 5,611
---------- ----------
1,241,758 1,210,987
Less: Loans in process 273 418
Allowance for loan losses 15,026 15,188
Unamortized premiums and deferred loan fees (2,317) (2,689)
---------- ----------
Loans, net $1,228,776 $1,198,070
========== ==========
Included in the $184,785 of consumer loans are $3,616 of student and unsecured
credit card loans that are classified as held-for-sale. At March 31, 2006, the
market value of these loans approximated $3,650.
The following summarizes the activity in the allowance for loan losses for the
nine-month period ended March 31:
2006 2005
------- -------
Beginning balance $15,188 $13,808
Allowance for loan losses from Advance acquisition -- 1,897
Provision for losses - mortgage loans 133 72
Provision (credit) for losses - consumer loans 256 (5)
Provision for losses - commercial loans 73 76
Loans recovered 71 22
Loans charged off (695) (353)
------- -------
Ending balance $15,026 $15,517
======= =======
Comprehensive Income
Sources of comprehensive income not included in net income are limited to
unrealized gains and losses on certain investments in equity securities. For the
nine months ended March 31, 2006 and 2005, total comprehensive net income
amounted to $9,770 and $8,601, respectively.
7
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
Earnings Per Share ("EPS")
The following table sets forth the computation of basic and diluted earnings per
share for the three and nine months ended March 31:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Numerator for basic and diluted EPS:
Net income (in 000's) $ 3,376 $ 3,116 $ 9,844 $ 8,456
Denominator:
Weighted average shares for basic EPS 5,652,298 5,607,489 5,637,049 5,589,737
Number of dilutive stock options 58,683 85,048 62,427 74,079
---------- ---------- ---------- ----------
Weighted average shares for dilutive EPS 5,710,981 5,692,537 5,699,476 5,663,816
========== ========== ========== ==========
Net income per share:
Basic $ 0.60 $ 0.55 $ 1.75 $ 1.51
========== ========== ========== ==========
Diluted $ 0.59 $ 0.54 $ 1.73 $ 1.49
========== ========== ========== ==========
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued No.
123R, a revised Statement, Share-Based Payment Amendment of FASB Statements No.
123 and APB No. 95, previously issued on March 31, 2004, that addressed the
accounting for share-based payment transactions in which an enterprise receives
services in exchange for (a) equity instruments of the enterprise and (b)
liabilities that are based on the fair value of the enterprise's equity
instruments that may be settled by the issuance of such equity instruments.
Under FAS 123R, all forms of share-based payments to employees, including
employee stock options, are treated the same as other forms of compensation by
recognition of the related cost in the income statement. The expense of the
award would generally be measured at fair value at the grant date. Previous
accounting guidance permitted the expense relating to so-called fixed plan
employee stock options only be disclosed in the footnotes to the financial
statements. The revised statement eliminated the ability to account for
share-based compensation transactions using APB Opinion No. 25, Accounting for
Stock Issued to Employees. The revised statement eliminated the alternative to
use the intrinsic value method of accounting. This statement requires the use of
fair value recognition principles. This statement did not have a significant
impact on Parkvale's results of operations, which became effective for Parkvale
on July 1, 2005. At March 31, 2006, Parkvale does not have any unvested stock
options outstanding.
Investments
U.S. Government and Agency Obligations The unrealized losses on Parkvale's
investments in U.S. Government and Agency obligations were caused by interest
rate increases. The contractual terms of those investments do not permit the
issuer to settle the securities at a price less than the amortized cost of the
investment. Because Parkvale has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, Parkvale does
not consider those investments to be other-than-temporarily impaired at March
31, 2006.
8
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
Corporate Debt Parkvale's unrealized losses on investments in corporate bonds
relates to $3,000 of investments in Ford Motor Credit Corp and Nationsbank
Capital Trust III. The unrealized losses were primarily caused by interest rate
increases. The contractual terms of those investments do not permit debtors to
settle the security at a price less than the face value of the investment. The
investment rating for Ford Motor Credit, which matures in January 2007, is below
investment grade at BB- and Nationsbank is considered investment grade at A.
Parkvale currently does not believe it is probable that it will be unable to
collect all amounts due according to the contractual terms of the investment.
Therefore, it is expected that the debentures would not be settled at a price
less than the amortized cost of the investment. Because Parkvale has the ability
and intent to hold these investments until a recovery of fair value, which may
be maturity, it does not consider these debentures to be other-than-temporarily
impaired at March 31, 2006.
Marketable Equity Securities Parkvale's investments in marketable equity
securities consist primarily of investments in common stock of companies in
various industries. Parkvale's unrealized loss relates to a mutual fund,
Franklin Adjustable US Government, representing, $4,749 of the fair value and
$251 of unrealized loss. Parkvale evaluated the near-term prospects of the
issuer in relation to the severity and duration of the impairment. Based on that
evaluation and Parkvale's ability and intent to hold this investment for a
reasonable period of time sufficient for a forecasted recovery of fair value,
Parkvale does not consider this investment to be other-than-temporarily impaired
at March 31, 2006.
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 complemented 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 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.
9
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
New Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154,
"Accounting Changes and Error Corrections", replacing APB Opinion No. 20,
"Accounting Changes", and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changing 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. Parkvale adopted this statement for the second quarter of
fiscal 2006. This statement has not impacted Parkvale's financial statements.
In November 2005, the FASB issued Staff Position (FSP) Nos. FAS 115-1 and FAS
124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. This FSP addresses the determination of when an investment
is considered to be impaired, whether the impairment is other-than-temporary,
and the measurement of an impairment loss. This FSP also includes accounting
considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary. The guidance in this FSP must be
applied to all reporting periods beginning after December 15, 2005. Parkvale has
adopted this statement for the second quarter of fiscal 2006.
10
Item 2.
PARKVALE FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in the
accompanying consolidated financial statements for Parkvale Financial
Corporation. The Corporation's consolidated financial condition and results of
operations consist almost entirely of Parkvale Bank's financial condition and
results of operations. Current performance does not guarantee, and may not be
indicative of, similar performance in the future. These are unaudited financial
statements and, as such, are subject to year-end audit review.
FORWARD-LOOKING STATEMENTS:
In addition to historical information, this filing may contain forward-looking
statements. We have made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of the
Corporation and its subsidiaries. When we use words such as believe, expect,
anticipate, or similar expressions, we are making forward-looking statements.
The statements in this filing that are not historical fact are forward-looking
statements. Forward-looking information should not be construed as guarantees of
future performance. Actual results may differ from expectations contained in
such forward-looking information as a result of factors including but not
limited to the interest rate environment, economic policy or conditions, federal
and state banking and tax regula-tions 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 the previous year's
financial statements to the current year's presentation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities as of the
dates of the balance sheets and revenues and expenditures for the periods
presented. Therefore, actual results could differ significantly from those
estimates. Accounting policies involving significant judgments and assumptions
by management, which have or could have a material impact on the carrying value
of certain assets or comprehensive income, are considered critical accounting
policies. The Corporation recognizes the following as critical accounting
policies: Allowance for Loan Loss, Carrying Value of Investment Securities,
Valuation of Foreclosed Real Estate and Carrying Value of Goodwill and Other
Intangible Assets.
11
The Corporation's critical accounting policies and judgments disclosures are
contained in the 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)
MARCH 31,
-----------------------
2006 2005
---------- ----------
BALANCE SHEET DATA:
Total assets $1,852,022 $1,891,547
Loans, net 1,228,776 1,205,102
Interest-earning deposits and
federal funds sold 88,613 106,430
Total investments 431,715 505,728
Deposits 1,443,284 1,512,416
FHLB advances 226,941 202,241
Shareholders' equity 120,382 110,855
Book value per share $ 21.24 $ 19.73
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, (1) MARCH 31, (1)
------------------ -----------------
2006 2005 2006 2005
------ ------ ------ ------
Statistical Profile:
Average yield earned on all
interest-earning assets 5.18% 4.67% 5.04% 4.59%
Average rate paid on all interest-bearing
liabilities 2.97 2.55 2.90 2.61
Average interest rate spread 2.21 2.12 2.14 1.98
Net yield on average interest-earning assets 2.26 2.16 2.19 2.05
Other expenses to average assets 1.54 1.53 1.49 1.44
Taxes to pre-tax income 32.11 31.85 32.06 31.43
Dividend payout ratio 33.90 37.04 34.68 40.27
Return on average assets 0.73 0.66 0.71 0.66
Return on average equity 11.29 11.31 11.22 10.45
Average equity to average total assets 6.49 5.80 6.32 6.32
Dividends per share $ 0.20 $ 0.20 $ 0.60 $ 0.60
AT MARCH 31,
-------------
2006 2005
----- -----
One year gap to total assets -3.84% 1.05%
Intangibles to total equity 26.92 29.03
Capital to assets ratio 6.50 5.86
Ratio of nonperforming assets to total assets 0.28 0.43
Number of full-service offices 47 46
(1) The applicable income and expense figures have been annualized in
calculating the percentages.
12
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE:
Nonperforming and impaired loans and foreclosed real estate (REO) consisted of
the following:
(Dollar amounts in 000's) MARCH 31, 2006 June 30, 2005
-------------- -------------
Delinquent single-family mortgage loans $1,648 $3,535
Delinquent other loans 2,459 3,625
------ ------
Total nonperforming loans 4,107 7,160
Total impaired loans 21 1
Real estate owned, net 1,049 1,654
------ ------
Total $5,177 $8,815
====== ======
Nonperforming (delinquent 90 days or more) and impaired loans and real estate
owned represent 0.28% and 0.47% of total assets at the respective balance sheet
dates. Delinquent single-family mortgage loans at March 31, 2006 consisted of 39
single-family owner occupied homes. As of March 31, 2006, $16,000 or 0.1% of the
nonaccrual mortgage loans totaling $1.6 million were purchased from others. The
$16,000 of the delinquent loans purchased from others is comprised of one loan
which management believes is 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 $118,000 at March 31, 2006 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 $21,000 and
$1,000 of loans classified as impaired at March 31, 2006 and at June 30, 2005.
The average recorded investment in impaired loans is $46,000 at March 31, 2006.
The interest income has been recognized for the impaired loan during the March
31, 2006 quarter. Impaired assets include $1.0 million of foreclosed real estate
as of March 31, 2006. Foreclosed real estate properties are recorded at the
lower of the carrying amount or fair value of the property less the cost to
sell. The net book value of foreclosed real estate normally consists of 1-4
family single-family dwellings. In addition, 5 properties of commercial real
estate at March 31, 2006 are valued at $607,000.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses was $15.0 million at March 31, 2006, $15.2 million
at June 30, 2005 and $15.5 million at March 31, 2005 or 1.21%, 1.25% and 1.27%
of gross loans at March 31, 2006, June 30, 2005 and March 31, 2005. The adequacy
of the allowance for loan loss is determined by management through evaluation of
the loss probable on individual nonperforming, delinquent and high dollar loans,
economic and business trends, growth and composition of the loan portfolio and
historical loss experience, as well as other relevant factors. The loan
portfolio includes $184 million of initial interest only mortgage loans at March
31, 2006, which are considered well collateralized.
13
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 increased $3 million or 3.7% from June 30, 2005 to March 31,
2006. Investment securities held to maturity decreased $55.0 million or 12.0%
and loans increased $30.7 million or 2.6% from June 30, 2005 to March 31, 2006
as the funds from the maturing investments were primarily deployed to fund new
loans. Deposits decreased $35.1 million or 2.4% from June 30, 2005 to March 31,
2006. Of the $35.1 million, $20.9 million were deposits acquired from the
Advance acquisition. Advances from the Federal Home Loan Bank increased $9.8
million or 4.5%. Parkvale Bank's FHLB advance available maximum borrowing
capacity is $829.7 million. If Parkvale were to experience a deposit decrease in
excess of the available cash resources and cash equivalents, available FHLB
borrowing capacity could be utilized to fund a rapid decrease in deposits.
Shareholders' equity was $120.4 million or 6.5% of total assets at March 31,
2006. 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 March 31, 2006, 5,785 shares were
purchased at an average price of $27.32 per share, representing 2.7% of the
currently authorized program. The Bank is required to maintain Tier I (Core)
capital equal to at least 4% of the institution's adjusted total assets, and
Tier II (Supplementary) risk-based capital equal to at least 8% of the
risk-weighted assets. At March 31, 2006, Parkvale Bank was in compliance with
all applicable regulatory requirements, with Tier I and Tier II ratios of 6.54%
and 12.97%, respectively.
The regulatory capital ratios for Parkvale Bank at March 31, 2006 are calculated
as follows:
Tier I Tier I Tier II
Core Risk-Based Risk-Based
Capital Capital Capital
---------- ---------- ----------
Equity Capital (1) $ 150,888 $ 150,888 $ 150,888
Less non-allowable intangible assets (32,404) (32,404) (32,404)
Less unrealized securities gains (135) (135) (135)
Plus permitted valuation allowances (2) -- -- 12,663
Plus allowable unrealized holding gains (3) -- -- 96
---------- ---------- ----------
Total regulatory capital 118,349 118,349 131,108
Minimum required capital 72,353 40,445 80,889
---------- ---------- ----------
Excess regulatory capital $ 45,996 $ 77,904 $ 50,219
Adjusted total assets $1,808,826 $1,011,116 $1,011,116
Regulatory capital as a percentage 6.54% 11.70% 12.97%
Minimum capital required as a percentage 4.00% 4.00% 8.00%
---------- ---------- ----------
Excess regulatory capital as a percentage 2.54% 7.70% 4.97%
========== ========== ==========
Well capitalized requirement 5.00% 6.00% 10.00%
========== ========== ==========
(1) Represents equity capital of the consolidated Bank as reported to the
Pennsylvania Department of Banking and FDIC on Form 041 for the quarter
ended March 31, 2006.
(2) Limited to 1.25% of risk adjusted total assets.
(3) Limited to 45% of pretax net unrealized holding gains.
14
On January 18, 2006, Parkvale purchased the Parkvale Building located at the
corner of Routes 22 and 48 in Monroeville. This building has served as the main
office and headquarters for Parkvale Bank since 1987 and the vast majority of
Parkvale's administrative staff is employed at this location. This 40,000 square
foot building was purchased from Parkvale's former landlords at a purchase price
of $4,375,000 and was funded from existing liquidity.
Management is not aware of any trends, events, uncertainties or current
recommendations by any regulatory authority that will have, or that are
reasonably likely to have, material effects on Parkvale's liquidity, capital
resources or operations.
RESULTS OF OPERATIONS - COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006 AND 2005
For the three months ended March 31, 2006, net income was $3.4 million or $0.59
per diluted share, was up 9.3% on a per share basis, compared to net income of
$3.1 million or $0.54 per diluted share for the quarter ended March 31, 2005.
The $260,000 increase in net income for the March 2006 quarter reflects a
$160,000 increase in net interest income, a $215,000 increase in non-interest
income and a $174,000 decrease in non-interest expense, which were partially
offset by increases in the provision for loan losses and income taxes. Return on
average equity was 11.29% for the March 2006 quarter compared to 11.31% for the
March 2005 quarter.
INTEREST INCOME:
Parkvale had interest income of $22.6 million during the three months ended
March 31, 2006 versus $21.0 million during the comparable period in 2005. The
$1.6 million increase is the result of a 51 basis point increase in the average
yield from 4.67% in 2005 to 5.18% in 2006, mitigated by a $56.5 million or 3.1%
decrease in the average balance of interest-earning assets due to decreases in
average loans and investments. Interest income from loans increased $1.1 million
or 7.0% resulting from a 39 basis point increase in the average yield from 5.25%
in 2005 to 5.64% in 2006 and recovery of $98,000 of interest income from loans
previously classified as non-accrual, offset by a decrease in the average
outstanding loan balances of $4.3 million or 0.4%. Investment interest income
decreased by $14,000 or 0.3% due to a decrease of $60.8 million or 12.3% in the
average balance and offset by a 48 basis point increase in the average yield
from 3.57% in 2005 to 4.05% in 2006. Interest income earned on federal funds
sold increased $455,000 or 101.1% from the 2005 quarter due to a 196 basis point
increase in the average yield from 2.47% in 2005 to 4.43% in 2006 and by an
increase in the average balance of $8.6 million or 11.8%. The weighted average
yield on all interest-earning assets was 5.21% at March 31, 2006 and 4.74% at
March 31, 2005.
INTEREST EXPENSE:
Interest expense increased $1.4 million or 12.4% from the 2005 quarter to the
2006 quarter. The increase was due to a 42 basis point increase in the average
rate paid on deposits and borrowings from 2.55% in 2005 to 2.97% and mitigated
by a $65.0 million decrease in the average deposits and borrowings in 2006. At
March 31, 2006, the average rate payable on liabilities was 2.65% for deposits,
4.88% for borrowings, 8.48% for trust-preferred securities and 3.07% 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 provision for loan losses for the quarter ended
March 2006 increased by $148,000 from the 2005 quarter to provide for losses on
consumer and commercial real estate loans. Aggregate valuation allowances were
1.21% and 1.25% of gross loans at March 31, 2006 and June 30, 2005,
respectively.
15
Nonperforming loans, impaired loans and real estate owned aggregated $5.2
million, $8.8 million and $8.1 million at March 31, 2006, June 30, 2005 and
March 31, 2005, representing 0.28%, 0.47% and 0.43% of total assets at the
respective balance sheet dates. Total loan loss reserves at March 31, 2006 were
$15.0 million. Management considers loan loss reserves sufficient when compared
to the value of underlying collateral. Collateral is considered and evaluated
when establishing provision for loan losses and the sufficiency of the allowance
for loan losses. Management believes the allowance for loan losses is adequate
to cover the amount of probable loan losses.
OTHER INCOME:
Total other income increased by $215,000 or 10.0% in 2006 due to a $105,000 or
7.2% increase in 2006 for service charges on deposit accounts, offset by a
$63,000 or 17.0% decrease in 2006 for loan fees and service charges for all
types of products and services. Gain on sale of assets was $83,000 due to
recovery of write-downs in 2002 of WorldCom Bonds. Miscellaneous income
increased $103,000 or 32.9% primarily due to recoveries of $109,000 from
previous write-downs of assets acquired from Advance.
OTHER EXPENSE:
Total other expense decreased by $174,000 or 2.4% for the three months ended
March 31, 2006. This decrease is due principally to decreases of $103,000 or
7.8% in office occupancy, $52,000 or 9.7% in office supplies, telephone, and
postage, and $103,000 or 7.0% in miscellaneous expense, and mitigated by an
increase of $54,000 or 76.1% in marketing expense. Office occupancy expense
decreased primarily due to lower rent expense due to the purchase of the
headquarters building. Office supplies and miscellaneous expense decreased due
to efficiencies of purchases and data processing expense. Miscellaneous expense
in 2006 includes $111,000 related to uncollectible checks with altered payees.
Annualized noninterest expense as a percentage of average assets was 1.54% for
the quarter ended March 31, 2006 and 1.53% for the quarter ended March 31, 2005.
RESULTS OF OPERATIONS - COMPARISON OF NINE MONTHS ENDED MARCH 31, 2006 AND 2005
Net income for the nine months ended March 31, 2006 was $9.8 million or $1.73
per diluted share, up 16.1% on a per share basis, compared to net income of $8.5
million or $1.49 per diluted share for the nine months ended March 31, 2005. The
$1.4 million increase, or 16.4% in net income for the March 2006 nine-month
period reflects increases of $3.7 million in net interest income and $970,000 of
non-interest income partially offset by increases of $2.2 million in
non-interest expense and $769,000 in income tax expense. Net interest income for
the nine months ended March 31, 2006 increased to $28.8 million from $25.0
million for the nine months ended March 31, 2005. The results of operations for
2005 includes only three months of activity for the seven Advance offices
acquired on December 31, 2004 as discussed in the Notes on Page 9. Return on
average equity was 11.22% for the nine months ended March 2006, up from 10.45%
for the nine months ended March 2005.
INTEREST INCOME:
Parkvale had interest income of $66.3 million during the nine months ended March
31, 2006 versus $56.1 million during the comparable period in 2005. The increase
of $10.1 million is attributable to an increase in the average interest-earning
asset portfolio of $122.9 million or 7.5% and by a 45 basis point increase in
the average yield from 4.59% in 2005 to 5.04% in 2006. Interest income from
loans increased $8.3 million or 19.6% due to an increase in the average loan
balance of $125.3 million or 11.6% and by a 38 basis point increase in the
average yield from 5.18% in 2005 to 5.56% in 2006. Income from investments
increased by $568,000 or 4.4% from 2005 due to an increase of 24 basis points in
the average yield from 3.63% in 2005 to 3.87%, offset by a decrease in the
average investment balance of
16
$10.4 million or 2.2% in 2006. Interest income earned on federal funds sold
increased $1.3 million or 122.5% from the prior nine months ended March 31,
2005. This was due to a 199 basis point increase in the average yield from 2.00%
in 2005 to 3.99% in 2006 and by an increase in the average federal fund balance
of $8.0 million or 11.1%.
INTEREST EXPENSE:
Interest expense increased by $6.4 million or 20.6% from the 2005 nine month
period to the 2006 nine-month period. The increase was due to a 29 basis point
increase in the average rate paid from 2.61% in 2005 to 2.90% in 2006, and by an
increase in the average deposits and borrowings of $137.2 million.
PROVISION FOR LOAN LOSSES:
Provision for loan losses increased by $319,000 in the nine month period ended
March 31, 2006 from the nine months ended March 31, 2005 primarily due to losses
on consumer and commercial real estate loans. Aggregate valuation allowances
were 1.21% of gross loans at March 31, 2006, 1.25% of gross loans at June 30,
2005 and 1.27% of gross loans at March 31, 2005. Total loan loss reserves at
March 31, 2006 were $15.0 million.
OTHER INCOME:
Total other income increased by $970,000 or 16.4% for the nine months ended
March 31, 2006 from the nine months ended March 31, 2005, due primarily to an
increase of $580,000 or 14.0% on service fees on all types of deposit products
and $93,000 or 10.8% for loan fees and service charges for all types of products
and services. Gain on sale of assets was $107,000 due primarily to recoveries of
2002 write-downs of WorldCom bonds. Miscellaneous income increased $217,000 or
24.2% primarily due to recoveries from previous write-downs of assets acquired
from Advance.
OTHER EXPENSE:
Total other expenses increased by $2.2 million or 12.1% for the nine month
period ended March 31, 2006 from the comparable period in 2005. This increase is
due principally to increases in compensation of $1.1 million or 11.0%, in office
occupancy expense of $455,000 or 13.7%, in office supplies, telephone and
postage of $101,000 or 7.8%, in marketing of $154,000 or 60.2% and in
miscellaneous expense of $405,000 or 12.0%. Compensation increased due to
additional employees gained through the AFB acquisition. Office occupancy
expense, office supplies and marketing increased due to the addition of the
seven AFB branch offices acquired and due to the opening of our 47th branch
office. 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 expenses as a percentage of average assets
were 1.49% for the nine months ended March 31, 2006 as compared to 1.44% for the
nine months ended March 31, 2005.
IMPACT OF INFLATION AND CHANGING PRICES:
The financial statements and related data presented herein have been prepared in
accordance with US GAAP, which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services as measured by the consumer price index.
17
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
Parkvale's management, including the CEO and CFO, regarding the
effectiveness of the design and operation of Parkvale's disclosure controls
and procedures. Parkvale's management, including the CEO and CFO, concluded
that Parkvale's disclosure controls and procedures were effective as of
March 31, 2006. There have been no changes in Parkvale's internal controls
or in other factors that materially affected, or that are reasonable likely
to materially affect, Parkvale's internal controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
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 March 31, 2006, Parkvale did not purchase shares.
The following table sets forth information with respect to any purchase made by
or on behalf of Parkvale or any "affiliated purchaser", as defined in Section
240. 10b-18(a)(3) under the Exchange Act, of shares of Parkvale common stock
during the indicated periods.
Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet Be
of Shares Price Paid Announced Plans Purchased Under the
Period Purchased Per Share or Programs Plans or Programs (1)
- ------ ------------ ---------- ------------------- ----------------------
January 1-31, 2006 -- -- -- 209,965
February 1-28, 2006 -- -- -- 209,965
March 1-31, 2006 -- -- -- 209,965
(1) The repurchase program approved on June 19, 2003 is scheduled to expire on
June 30, 2006.
18
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
The following exhibits are filed here within:
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Parkvale Financial Corporation
DATE: May 2, 2006 By: /s/ Robert J. McCarthy, Jr.
------------------------------------
Robert J. McCarthy, Jr.
President and
Chief Executive Officer
DATE: May 2, 2006 By: /s/ Timothy G. Rubritz
------------------------------------
Timothy G. Rubritz
Vice President, Treasurer and
Chief Financial Officer
19