Attached files
file | filename |
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EX-31.2 - EX-31.2 - PARKVALE FINANCIAL CORP | l41861exv31w2.htm |
EX-32.1 - EX-32.1 - PARKVALE FINANCIAL CORP | l41861exv32w1.htm |
EX-31.1 - EX-31.1 - PARKVALE FINANCIAL CORP | l41861exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
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)
(Address of principal executive offices; zip code)
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
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 o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The closing sales price of the Registrants Common Stock on February 10, 2011 was $10.39 per share.
Number of shares of Common Stock outstanding as of February 10, 2011 was 5,582,362.
PARKVALE FINANCIAL CORPORATION
INDEX
2
Table of Contents
Item 1.
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
December 31, | June 30, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and noninterest-earning deposits |
$ | 17,097 | $ | 17,736 | ||||
Federal funds sold |
106,550 | 135,773 | ||||||
Cash and cash equivalents |
123,647 | 153,509 | ||||||
Interest-earning deposits in other banks |
3,362 | 801 | ||||||
Investment securities available for sale at fair value (cost of
$5,501 at December 31 and $65,778 at June 30) |
5,245 | 65,770 | ||||||
Investment securities held to maturity (fair value
of $499,734 at December 31 and $437,931 at June 30) |
501,852 | 443,452 | ||||||
Federal Home Loan Bank Stock, at cost |
13,640 | 14,357 | ||||||
Loans, net of allowance of $19,621 at December 31
and $19,209 at June 30 |
1,017,834 | 1,032,363 | ||||||
Foreclosed real estate, net |
8,869 | 8,637 | ||||||
Office properties and equipment, net |
17,045 | 17,374 | ||||||
Goodwill |
25,634 | 25,634 | ||||||
Intangible assets |
2,422 | 2,877 | ||||||
Prepaid expenses and other assets |
71,566 | 77,606 | ||||||
Total assets |
$ | 1,791,116 | $ | 1,842,380 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
LIABILITIES |
||||||||
Deposits |
$ | 1,458,571 | $ | 1,488,073 | ||||
Advances from Federal Home Loan Bank |
165,875 | 185,973 | ||||||
Term debt |
22,500 | 23,750 | ||||||
Other debt |
11,294 | 13,865 | ||||||
Advance payments from borrowers for taxes and insurance |
6,965 | 7,526 | ||||||
Other liabilities |
3,775 | 4,249 | ||||||
Total liabilities |
1,668,980 | 1,723,436 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Preferred stock ($1.00 par value, liquidation preference $1,000;
5,000,000 shares authorized; 31,762 shares issued) |
31,762 | 31,762 | ||||||
Common stock ($1.00 par value; 10,000,000 shares
authorized; 6,734,894 shares issued) |
6,735 | 6,735 | ||||||
Additional paid-in capital |
2,235 | 2,734 | ||||||
Treasury stock at cost (1,159,215 shares at December 31
and 1,205,683 shares at June 30) |
(24,222 | ) | (25,193 | ) | ||||
Accumulated other comprehensive loss |
(13,740 | ) | (13,413 | ) | ||||
Retained earnings |
119,366 | 116,319 | ||||||
Total shareholders equity |
122,136 | 118,944 | ||||||
Total liabilities and shareholders equity |
$ | 1,791,116 | $ | 1,842,380 | ||||
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Table of Contents
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 12,814 | $ | 14,231 | $ | 25,861 | $ | 29,023 | ||||||||
Investments |
3,464 | 4,964 | 7,134 | 10,096 | ||||||||||||
Federal funds sold |
85 | 105 | 207 | 203 | ||||||||||||
Total interest income |
16,363 | 19,300 | 33,202 | 39,322 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
4,767 | 7,386 | 9,995 | 15,379 | ||||||||||||
Borrowings |
2,384 | 2,824 | 5,136 | 5,535 | ||||||||||||
Total interest expense |
7,151 | 10,210 | 15,131 | 20,914 | ||||||||||||
Net interest income |
9,212 | 9,090 | 18,071 | 18,408 | ||||||||||||
Provision for loan losses |
1,015 | 1,398 | 2,049 | 3,687 | ||||||||||||
Net interest income after
provision for losses |
8,197 | 7,692 | 16,022 | 14,721 | ||||||||||||
Noninterest Income: |
||||||||||||||||
Other-than-temporary impairment losses
recognized in earnings |
(946 | ) | (3,240 | ) | (3,981 | ) | (6,001 | ) | ||||||||
Non-credit related losses recognized in
other comprehensive income |
| 2,458 | 2,039 | 2,458 | ||||||||||||
Net impairment losses recognized in earnings |
(946 | ) | (782 | ) | (1,942 | ) | (3,543 | ) | ||||||||
Service charges on deposit accounts |
1,665 | 1,615 | 3,424 | 3,267 | ||||||||||||
Other service charges and fees |
381 | 359 | 762 | 726 | ||||||||||||
Net gain on sale of investments |
194 | 1,103 | 1,366 | 2,205 | ||||||||||||
Other |
522 | 511 | 1,292 | 1,054 | ||||||||||||
Total noninterest income |
1,816 | 2,806 | 4,902 | 3,709 | ||||||||||||
Noninterest Expense: |
||||||||||||||||
Compensation and employee benefits |
3,472 | 3,625 | 7,400 | 7,432 | ||||||||||||
Office occupancy |
1,047 | 1,095 | 2,114 | 2,206 | ||||||||||||
Marketing |
94 | 93 | 178 | 160 | ||||||||||||
FDIC insurance |
904 | 645 | 1,798 | 1,213 | ||||||||||||
Office supplies, telephone and postage |
538 | 463 | 1,010 | 933 | ||||||||||||
Other |
1,597 | 1,393 | 3,202 | 2,962 | ||||||||||||
Total noninterest expense |
7,652 | 7,314 | 15,702 | 14,906 | ||||||||||||
Income before income taxes |
2,361 | 3,184 | 5,222 | 3,524 | ||||||||||||
Income tax expense |
520 | 759 | 1,158 | 244 | ||||||||||||
Net income |
1,841 | 2,425 | 4,064 | 3,280 | ||||||||||||
Less: Preferred stock dividend |
397 | 397 | 794 | 794 | ||||||||||||
Income to common shareholders |
$ | 1,444 | $ | 2,028 | $ | 3,270 | $ | 2,486 | ||||||||
Net income per common basic share |
$ | 0.26 | $ | 0.38 | $ | 0.59 | $ | 0.46 | ||||||||
Net income per common diluted share |
$ | 0.26 | $ | 0.38 | $ | 0.59 | $ | 0.46 |
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Table of Contents
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
Six months ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Interest received |
$ | 33,814 | $ | 38,828 | ||||
Loan fees received |
358 | 182 | ||||||
Other fees and commissions received |
4,932 | 4,490 | ||||||
Interest paid |
(15,239 | ) | (20,882 | ) | ||||
Cash paid to suppliers and others |
(11,217 | ) | (31,617 | ) | ||||
Income taxes refund |
3,750 | | ||||||
Net cash provided by (used in) operating activities |
16,398 | (8,999 | ) | |||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of investment securities available for sale |
51,308 | 2,192 | ||||||
Proceeds from maturities of investment securities held to maturity |
149,541 | 180,056 | ||||||
Purchase of investment securities held to maturity |
(202,022 | ) | (256,644 | ) | ||||
(Purchase) maturity of deposits in other banks |
(2,561 | ) | 3,307 | |||||
Loan sales |
| 7,527 | ||||||
Purchase of loans |
(10,722 | ) | | |||||
Principal collected on loans |
141,221 | 135,861 | ||||||
Loans made to customers, net of loans in process |
(118,292 | ) | (91,292 | ) | ||||
Other |
(93 | ) | (149 | ) | ||||
Net cash provided by (used in) investing activities |
8,380 | (19,142 | ) | |||||
Cash flows from financing activities: |
||||||||
Net increase in checking and savings accounts |
11,517 | 51,673 | ||||||
Net (decrease) in certificates of deposit |
(41,019 | ) | (34,779 | ) | ||||
Repayment of FHLB advances |
(19,997 | ) | (13 | ) | ||||
Net (decrease) in other borrowings |
(2,571 | ) | (5,776 | ) | ||||
Repayment of term debt |
(1,250 | ) | | |||||
Net (decrease) in borrowers advances for taxes and insurance |
(561 | ) | (680 | ) | ||||
Dividends paid |
(1,181 | ) | (1,336 | ) | ||||
Contribution to benefit plans |
422 | 588 | ||||||
Net cash (used in) provided by financing activities |
(54,640 | ) | 9,677 | |||||
Net (decrease) in cash and cash equivalents |
(29,862 | ) | (18,464 | ) | ||||
Cash and cash equivalents at beginning of period |
153,509 | 165,891 | ||||||
Cash and cash equivalents at end of period |
$ | 123,647 | $ | 147,427 | ||||
Reconciliation of net income to net cash provided
by operating activities: |
||||||||
Net income |
$ | 4,064 | $ | 3,280 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation and amortization |
877 | 965 | ||||||
(Accretion) and amortization of loan fees and discounts |
158 | (969 | ) | |||||
Loan fees collected and deferred and (premiums paid) |
42 | (2 | ) | |||||
Provision for loan losses |
2,049 | 3,687 | ||||||
Net writedown on sale of securities |
576 | 1,338 | ||||||
Decrease in accrued interest receivable |
369 | 414 | ||||||
Decrease (increase) in other assets |
5,670 | (14,950 | ) | |||||
Increase in accrued interest payable |
6 | 146 | ||||||
Increase (decrease) in other liabilities |
2,587 | (2,908 | ) | |||||
Total adjustments |
12,334 | (12,279 | ) | |||||
Net cash provided by (used in) operating activities |
$ | 16,398 | ($8,999 | ) | ||||
For purposes of reporting cash flows, cash and cash equivalents include cash and noninterest
earning deposits, and federal funds sold. Generally, federal funds are sold for one-day periods.
Loans transferred to foreclosed assets aggregated $4.3 million for the six months ended December
31, 2010 and $2.8 million for the six months ended December 31, 2009, and is included in the
principal collected on loans component of the consolidated statements of cash flows. Loans were
transferred to foreclosed assets at the lesser of their carrying value or indicated fair value,
less costs to sell.
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Table of Contents
PARKVALE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands, except share data)
(Unaudited)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands, except share data)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Preferred | Common | Paid-in | Treasury | Comprehensive | Retained | Shareholders | ||||||||||||||||||||||
Stock | Stock | Capital | Stock | Income (Loss) | Earnings | Equity | ||||||||||||||||||||||
Balance, June 30, 2010 |
$ | 31,762 | $ | 6,735 | $ | 2,734 | ($25,193 | ) | ($13,413 | ) | $ | 116,319 | $ | 118,944 | ||||||||||||||
Net income, six months ended
December 31, 2010 |
4,064 | 4,064 | ||||||||||||||||||||||||||
Accumulated other comprehensive income (loss): |
||||||||||||||||||||||||||||
Change in swap liability, net of tax |
(160 | ) | ||||||||||||||||||||||||||
Change in unrealized gain (loss)
on securities, net of deferred
tax benefit of ($113) |
322 | |||||||||||||||||||||||||||
Reclassification adjustment, net
of taxes of $263 |
(489 | ) | (327 | ) | ||||||||||||||||||||||||
Comprehensive income |
3,737 | |||||||||||||||||||||||||||
Dividends declared on common
stock at $0.02 per share |
(223 | ) | (223 | ) | ||||||||||||||||||||||||
Dividends on preferred stock |
(794 | ) | (794 | ) | ||||||||||||||||||||||||
Sale of treasury stock to
ESOP |
(549 | ) | 971 | 422 | ||||||||||||||||||||||||
Recognition of stock option
compensation expense |
50 | 50 | ||||||||||||||||||||||||||
Balance, December 31, 2010 |
$ | 31,762 | $ | 6,735 | $ | 2,235 | ($24,222 | ) | ($13,740 | ) | $ | 119,366 | $ | 122,136 | ||||||||||||||
Balance, June 30, 2009 |
$ | 31,762 | $ | 6,735 | $ | 4,116 | ($27,314 | ) | ($10 | ) | $ | 135,471 | $ | 150,760 | ||||||||||||||
Net income, six months ended
December 31, 2009 |
3,280 | 3,280 | ||||||||||||||||||||||||||
Accumulated other comprehensive
Income (loss): |
||||||||||||||||||||||||||||
Change in swap liability |
(201 | ) | ||||||||||||||||||||||||||
Change in unrealized gain (loss)
on securities, net of deferred
tax benefit of $(128) |
(201 | ) | ||||||||||||||||||||||||||
Reclassification adjustment, net
of taxes of $(805) |
(1,400 | ) | (1,802 | ) | ||||||||||||||||||||||||
Comprehensive income |
1,478 | |||||||||||||||||||||||||||
Dividends declared on common
stock at $0.10 per share |
(546 | ) | (546 | ) | ||||||||||||||||||||||||
Dividends on preferred stock |
(794 | ) | (794 | ) | ||||||||||||||||||||||||
Sale of treasury stock to ESOP |
(1,160 | ) | 1,748 | 588 | ||||||||||||||||||||||||
Recognition of stock option
compensation expense |
27 | 27 | ||||||||||||||||||||||||||
Balance, December 31, 2009 |
$ | 31,762 | $ | 6,735 | $ | 2,983 | ($25,566 | ) | ($1,812 | ) | $ | 137,411 | $ | 151,513 | ||||||||||||||
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share data)
NOTE 1. STATEMENTS OF OPERATIONS
The statements of operations for the six months ended December 31, 2010 and 2009 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 six months ended December 31, 2010 are not necessarily indicative of the results
that may be expected for fiscal year ended June 30, 2011. The Annual Report on Form 10-K for the
year ended June 30, 2010 contains additional information and should be read in conjunction with
this report.
NOTE 2. RECLASSIFICATION
Certain amounts in prior periods financial statements have been reclassified to conform to
the current period presentation. The reclassifications had no significant effect on Parkvales
financial condition or results of operations.
NOTE 3. SUBSEQUENT EVENTS
The Corporation evaluated and disclosed all material subsequent events that provide evidence about
conditions that existed as of December 31, 2010 through the date the consolidated financial
statements were filed with the Securities and Exchange Commission.
7
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
NOTE
4. LOANS AND THE ALLOWANCE FOR LOAN LOSS
Loans are summarized as follows:
December 31, 2010 | June 30, 2010 | |||||||
Mortgage loans: |
||||||||
1-4 Family |
$ | 646,988 | $ | 660,685 | ||||
Commercial |
164,373 | 159,991 | ||||||
811,361 | 820,676 | |||||||
Consumer loans: |
||||||||
Home Equity |
146,724 | 147,567 | ||||||
Automobile |
30,128 | 34,817 | ||||||
Other
Consumer |
9,249 | 7,250 | ||||||
186,101 | 189,634 | |||||||
Commercial business loans |
39,055 | 40,445 | ||||||
Total gross loans |
1,036,517 | 1,050,755 | ||||||
Less: Loans in process |
2 | 135 | ||||||
Allowance for loan losses |
19,621 | 19,209 | ||||||
Unamortized premiums and deferred loan fees |
(940 | ) | (952 | ) | ||||
Loans, net |
$ | 1,017,834 | $ | 1,032,363 | ||||
The loans
receivable portfolio is segmented into mortgage loans, consumer loans
and commercial business
loans. The mortgage loan segment has two classes, 1-4 family first lien residential mortgage loans
and commercial mortgage loans, which are comprised of commercial real estate, multi-family and
acquisition and development loans. The consumer loan segment consists of the three classes, home
equity loans, automobile loans and other loans. The commercial
segment consists of one class,
commercial and industrial loans.
Portfolio Risk Characteristics:
A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrowers prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan
basis for commercial business loans and commercial mortgage loans by either the present value of
expected future cash flows discounted at the loans effective interest rate or the fair value of
the collateral if the loan is collateral dependent.
8
Table of Contents
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its
estimated fair value. The estimated fair values of substantially all of the Companys impaired
loans are measured based on the estimated fair value of the loans collateral.
For commercial loans secured by real estate, estimated fair values are determined primarily through
third-party appraisals. When a real estate secured loan becomes impaired, a decision is made
regarding whether an updated certified appraisal of the real estate is necessary. This decision is
based on various considerations, including the age of the most recent appraisal, the loan-to-value
ratio based on the original appraisal and the condition of the property. Appraised values are
discounted to arrive at the estimated selling price of the collateral, which is considered to be
the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial business loans secured by non-real estate collateral, such as accounts receivable,
inventory and equipment, estimated fair values are determined based on the borrowers financial
statements, inventory reports, accounts receivable agings or equipment appraisals or invoices.
Indications of value from these sources are generally discounted based on the age of the financial
information or the quality of the assets.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual 1-4 family mortgage loans or
consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt
restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants
such borrowers concessions and it is deemed that those borrowers are experiencing financial
difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary
reduction in interest rate or an extension of a loans stated maturity date. Non-accrual troubled
debt restructurings are restored to accrual status if a pattern of consistent principal and
interest payments under the modified terms is demonstrated after modification. Loans classified as
troubled debt restructurings are designated as impaired.
1-4 family loans include residential first mortgage loans originated by Parkvale Bank in the
greater Pittsburgh Metropolitan area, which comprises its primary market area, and loans purchased
from other financial institutions in the secondary market, which are geographically diversified. We currently originate fixed-rate, fully amortizing mortgage loans with maturities of 15 to 30
years. We also offer adjustable rate mortgage (ARM) loans where the interest rate either adjusts
on an annual basis or is fixed for the initial one, three or five years and then adjusts annually.
We underwrite 1 to 4 family residential mortgage loans with loan-to-value ratios of up to 95%,
provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the
appraised value or sales price, whichever is less, of the secured property. We also require that
title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all
properties securing real estate loans. We require that a licensed appraiser from our list of
approved appraisers perform and submit to us an appraisal on all properties secured by a first
mortgage on 1 to 4 family first mortgage loans. In underwriting 1-4 family residential mortgage
loans, the Company evaluates both the borrowers ability to make monthly payments and the value of
the property securing the loan. Real estate loans originated by the Company generally contain a
9
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due on sale clause allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property. The Company has not engaged in sub-prime residential
mortgage loan originations. Our single-family residential mortgage loans generally are underwritten
on terms and documentation conforming to guidelines issued by Freddie Mac. All of Parkvales lending activities, including loan purchases, are subject to written underwriting
standards and loan origination procedures approved by the Board of Directors.
Commercial
mortgage loans include commercial real estate, multi-family and other loans that are
secured by non-farm nonresidential properties.
Commercial and multi-family real estate loans generally present a higher level of risk than loans
secured by 1-4 family residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the effect of general
economic conditions on income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by commercial and
multi-family real estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced (for example, if leases are not
obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to
fulfill its lease obligations), the borrowers ability to repay the loan may be impaired.
Consumer loans include home equity loans secured by first or second liens on residential property,
automobile loans and other unsecured consumer loans. The Company currently originates most of its consumer loans in its primary market area and
surrounding areas. The Company originates consumer loans primarily on a direct basis. Consumer
loans generally have higher interest rates and shorter terms than residential mortgage loans;
however, they have additional credit risk due to the type of collateral securing the loan.
Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in
the case of consumer loans secured by rapidly depreciable assets, such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. In addition, consumer loan collections are dependent on the borrowers continuing
financial stability, and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including bankruptcy and insolvency
laws, may limit the amount that can be recovered on such loans.
Commercial business loans are primarily short term facilities extended to small businesses and
professional located within the communities served by Parkvale, and are generally secured by
business assets of the borrower. The commercial business loans, which we originated may be either a revolving line of credit or for
a fixed term of generally 10 years or less. Interest rates are adjustable, indexed to a published
prime rate of interest, or fixed. Generally, equipment, machinery, real property or other corporate
assets secure such loans. Personal guarantees from the business principals are generally obtained
as additional collateral.
10
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
Nonaccrual, substandard and doubtful loans are assessed for impairment. The following table
presents the classes of the loan portfolio summarized by the aggregate pass rating and the
classified ratings of special mention, substandard and doubtful within the Companys internal risk
rating system as of December 31, 2010:
Special | ||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
Mortgage loans: |
||||||||||||||||||||
1-4 family |
$ | 621,311 | $ | 3,772 | $ | 21,905 | $ | | $ | 646,988 | ||||||||||
Commercial |
160,559 | 447 | 3,367 | | 164,373 | |||||||||||||||
Consumer loans: |
||||||||||||||||||||
Home Equity |
145,673 | | 1,051 | | 146,724 | |||||||||||||||
Automobile |
29,876 | | 252 | | 30,128 | |||||||||||||||
Other
Consumer |
9,227 | | | 22 | 9,249 | |||||||||||||||
Commercial business
loans |
34,659 | 11 | 4,385 | | 39,055 | |||||||||||||||
Total |
$ | 1,001,305 | $ | 4,230 | $ | 30,960 | $ | 22 | $ | 1,036,517 | ||||||||||
Pass-rated loans consist of facilities which do not currently expose the Bank to sufficient
risk to warrant classifications.
Special mention loans have potential weaknesses requiring managements close attention that if
uncorrected, may result in deterioration of the repayment prospects.
Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt, and
includes loans that are inadequately protected by the current sound net worth and paying capacity
of the obligor or of the collateral pledged, if any.
Doubtful loans have all the weaknesses inherent with substandard facilities with the added
characteristic that collection or liquidation in full, on the basis of current conditions and
facts, is highly improbable.
The following table presents nonaccrual loans by class of the loan portfolio as of December 31,
2010:
Mortgage loans: |
||||
1-4 family |
$ | 21,905 | ||
Commercial |
796 | |||
Consumer loans: |
||||
Home Equity |
751 | |||
Automobile |
190 | |||
Other
Consumer |
22 | |||
Commercial business loans |
3,046 | |||
Total |
$ | 26,710 | ||
11
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
A loan is considered impaired when, based on current information and events, it is probable
that Parkvale will not be able to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. The following table summarizes
information regarding impaired loans by loan portfolio class as of December 31, 2010:
Unpaid | Average | |||||||||||||||||||
Net Recorded | Principal | Related | Recorded | Interest Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With no related allowance
recorded: |
||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||
1-4 family |
$ | 19,454 | $ | 19,454 | $ | | $ | 19,167 | $ | 246 | ||||||||||
Commercial |
| | | | | |||||||||||||||
Consumer loans: |
||||||||||||||||||||
Home Equity |
| | | | | |||||||||||||||
Automobile |
| | | | | |||||||||||||||
Other
Consumer |
| | | | | |||||||||||||||
Commercial business loans |
2,672 | 2,672 | | 2,672 | | |||||||||||||||
With an allowance recorded: |
||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||
1-4 family |
$ | 10,232 | $ | 15,710 | $ | 5,478 | $ | 10,371 | $ | | ||||||||||
Commercial |
1,336 | 1,861 | 525 | 1,429 | 14 | |||||||||||||||
Consumer loans: |
||||||||||||||||||||
Home Equity |
415 | 591 | 176 | 121 | | |||||||||||||||
Automobile |
155 | 284 | 129 | 125 | | |||||||||||||||
Other Consumer |
| 18 | 18 | | | |||||||||||||||
Commercial business loans |
| 49 | 49 | | | |||||||||||||||
Total: |
||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||
1-4 family |
$ | 29,686 | $ | 35,164 | $ | 5,478 | $ | 29,538 | $ | 246 | ||||||||||
Commercial |
1,336 | 1,861 | 525 | 1,429 | 14 | |||||||||||||||
Consumer loans: |
||||||||||||||||||||
Home Equity |
415 | 591 | 176 | 121 | | |||||||||||||||
Automobile |
155 | 284 | 129 | 125 | | |||||||||||||||
Other Consumer |
| 18 | 18 | | | |||||||||||||||
Commercial business loans |
2,672 | 2,721 | 49 | 2,672 | |
12
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
At December 31, 2010, modifications have been performed at market terms on 125 loans totaling
$19,454 primarily related to extension of maturity dates and extension of interest-only payment
periods of thirty-six months or less. These modified loans, which are all performing at December
31, 2010, are included in the reported $22,126 of impaired loans without a related allowance for
loan losses amount above. The discounted cash flow analysis related to these modifications results
in an insignificant impact over the life of the loan.
The performance and credit quality of the loan portfolio is monitored by analyzing the age of the
loans receivable as determined by the length of time a recorded payment is past due. The following
table presents the classes of the loan portfolio summarized by the past due status as of December
31, 2010:
Loans | ||||||||||||||||||||||||||||
60-89 | Total | Receivable | ||||||||||||||||||||||||||
30-59 Days | Days | Greater than | Past | Total Loans | > 90 Days | |||||||||||||||||||||||
Past Due | Past Due | 90 Days | Due | Current | Receivables | and Accruing | ||||||||||||||||||||||
Mortgage loans: |
||||||||||||||||||||||||||||
1-4 family |
$ | 5,428 | $ | 4,601 | $ | 26,675 | $ | 36,704 | $ | 573,580 | $ | 646,988 | $ | | ||||||||||||||
Commercial |
922 | 201 | 1,393 | 2,516 | 159,341 | 164,373 | | |||||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||
Home Equity |
851 | 200 | 812 | 1,863 | 142,998 | 146,724 | | |||||||||||||||||||||
Automobile |
383 | 78 | 276 | 737 | 28,654 | 30,128 | | |||||||||||||||||||||
Other
Consumer |
17 | 5 | 14 | 36 | 9,177 | 9,249 | | |||||||||||||||||||||
Commercial business
loans |
330 | 27 | 3,096 | 3,453 | 32,149 | 39,055 | | |||||||||||||||||||||
Total |
$ | 7,931 | $ | 5,112 | $ | 32,266 | $ | 45,309 | $ | 945,899 | $ | 1,036,517 | $ | | ||||||||||||||
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 following summarizes the allowance for loan loss activity for the six month period ended
December 31:
2010 | 2009 | |||||||
Beginning balance |
$ | 19,209 | $ | 17,960 | ||||
Provision for losses mortgage loans |
2,004 | 3,616 | ||||||
Provision for losses consumer loans |
49 | 74 | ||||||
Provision for (recovery of) losses commercial business loans |
(4 | ) | (3 | ) | ||||
Loans recovered |
43 | 25 | ||||||
Loans charged off |
(1,680 | ) | (2,789 | ) | ||||
Ending balance |
$ | 19,621 | $ | 18,883 | ||||
13
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
The following table presents the Allowance for Loan Losses and Recorded Investment in
Financing Receivables at December 31, 2010:
Commercial | ||||||||||||||||||||||||||||
1-4 family | Commercial | Other | Business | |||||||||||||||||||||||||
Mortgage | Mortgage | Home Equity | Automobile | Consumer | Loans | Total | ||||||||||||||||||||||
Allowance
for Loan Losses: |
||||||||||||||||||||||||||||
Balance at December 31,
2010 |
$ | 10,508 | $ | 3,741 | $ | 2,199 | $ | 852 | $ | 44 | $ | 2,277 | $ | 19,621 | ||||||||||||||
Ending
balance: individually evaluated
for impairment |
$ | 5,478 | $ | 525 | $ | 176 | $ | 129 | $ | 18 | $ | 49 | $ | 6,375 | ||||||||||||||
Ending
balance: collectively evaluated
for impairment |
$ | 5,030 | $ | 3,216 | $ | 2,023 | $ | 723 | $ | 26 | $ | 2,228 | $ | 13,246 | ||||||||||||||
Ending balance: loans
acquired with
deteriorated
credit quality |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Recorded Investment: |
||||||||||||||||||||||||||||
Ending balance |
$ | 646,988 | $ | 164,373 | $ | 146,724 | $ | 30,128 | $ | 9,249 | $ | 39,055 | $ | 1,036,517 | ||||||||||||||
Ending
balance: individually evaluated
for impairment |
$ | 35,164 | $ | 1,861 | $ | 591 | $ | 284 | $ | 18 | $ | 2,721 | $ | 40,639 | ||||||||||||||
Ending
balance: collectively evaluated
for impairment |
$ | 611,824 | $ | 162,512 | $ | 146,133 | $ | 29,844 | $ | 9,231 | $ | 36,334 | $ | 995,878 |
NOTE 5. COMPREHENSIVE INCOME
Sources of comprehensive income (loss) not included in net income are unrealized gains and losses
on certain investments in equity securities, mortgage-backed securities, corporate debt and swaps
on interest rate contracts. For the six months ended December 31, 2010 and 2009, total
comprehensive income amounted to $3,737 and $1,478, respectively.
14
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
US GAAP requires a hierarchal disclosure framework associated with the level of pricing
observations utilized in measuring assets and liabilities at fair value. This hierarchy requires
the use of observable market data when available. The three broad levels of hierarchy are as
follows:
Level I | | Quoted prices are available in the active markets for
identical assets or liabilities as of the measurement date. |
||
Level II | | Pricing inputs are other than quoted prices in active markets,
which are either directly or indirectly observable as of the
measurement date. The nature of these assets and liabilities
includes items for which quoted prices are available but
traded less frequently, and items that are fair valued using
other financial instruments, the parameters of which can be
directly observed. |
||
Level III | | Valuations derived from valuation techniques in which one or
more significant inputs or significant value drivers are
unobservable. Level III valuations incorporate certain
assumptions and projections in determining the fair value
assigned to such assets or liabilities. |
The following table presents the assets and liabilities reported on the consolidated statements of
financial condition at their fair value as of December 31, 2010 by level within the fair value
hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. Equity securities in the
available-for-sale (AFS) security portfolio are measured at fair value using quoted market prices
and classified within Level I of the valuation hierarchy. Mutual funds in the available-for-sale
security portfolio are measured at fair value using Level II valuation hierarchy. Interest rate
swaps are priced using other similar financial instruments and are classified as Level II.
Financial Instruments Measured on a recurring basis
December 31, 2010 | June 30, 2010 | |||||||||||||||||||||||||||||||
Level I | Level II | Level III | Total | Level I | Level II | Level III | Total | |||||||||||||||||||||||||
Available for sale
securities: |
||||||||||||||||||||||||||||||||
CMOs Non
Agency
(Residential) |
$ | | $ | | $ | | $ | | $ | | $ | 59,804 | $ | | $ | 59,804 | ||||||||||||||||
Common Equities |
1 | | | 1 | 682 | | | 682 | ||||||||||||||||||||||||
Mutual Fund
ARM mortgages |
| 5,244 | | 5,244 | | 5,284 | | 5,284 | ||||||||||||||||||||||||
Interest rate swaps |
| 515 | | 515 | | 494 | | 494 | ||||||||||||||||||||||||
Total |
$ | 1 | $ | 5,759 | $ | | $ | 5,760 | $ | 682 | $ | 65,582 | $ | | $ | 66,264 | ||||||||||||||||
15
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
The following table presents the assets measured on a nonrecurring basis on the consolidated
statements of financial condition at their fair value as of December 31, 2010. In cases where
valuation techniques included inputs that are unobservable and are based on estimates and
assumptions developed by the reporting entity based on the best information available under each
circumstance, the asset valuation is classified as Level III inputs. Pooled trust preferred
securities and impaired loans are measured using Level III valuation hierarchy. Our pooled trust
preferred securities are collateralized by the trust preferred securities of individual banks,
thrifts and bank holding companies, and to a lesser extent, insurance companies. There has been
little or no active trading in these securities for approximately twenty-four months; therefore it
was more appropriate to determine estimated fair value using a discounted cash flow analysis. The
discount rate applied to the cash flows is determined by evaluating the current market yields for
comparable corporate and structured credit products along with an evaluation of the risks
associated with the cash flows of the comparable security. Due to the fact that there is no active
market for the pooled trust preferred collateralized debt obligations, one key reference point is
the market yield for the single issue trust preferred securities issued by banks and thrifts for
which there is more activity than for the pooled securities. Adjustments are then made to reflect
the credit and structural differences between these two security types.
The estimated fair value of impaired loans is based upon the estimated fair value of the collateral
less estimated selling costs when the loan is collateral dependent, or based upon the present value
of expected future cash flows available to pay the loan. Collateral values are generally based upon
appraisals from approved, independent state certified appraisers.
The estimated fair value of foreclosed real estate is comprised of commercial and residential real
estate properties obtained in partial or total satisfaction of loan obligations. Foreclosed real
estate acquired in settlement of indebtedness is recorded at the lower of the carrying amount of
the loan or fair value less costs to sell. Subsequently, these assets are carried at the lower of
the carrying value or fair value less costs to sell. Accordingly, it may be necessary to record
nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals
by licensed or certified appraisers and is classified as Level II.
Level I | Level II | Level III | Total | |||||||||||||
Assets Measured on a Nonrecurring
Basis: |
||||||||||||||||
Other than temporarily
impaired (OTTI) Held to
maturity trust preferred
securities |
| | $ | 10,521 | $ | 10,521 | ||||||||||
Impaired loans |
| | 12,138 | 12,138 | ||||||||||||
Impaired foreclosed real estate |
| 3,847 | | 3,847 |
The carrying value of impaired loans was $18,513 with an allowance for loss of $6,375 at
December 31, 2010. The carrying value of the foreclosed real estate was $4,744 with an allowance of
$897 at December 31, 2010, and the charge to earnings during the December 31, 2010 quarter related
to impaired foreclosed real estate was $248.
US GAAP requires the determination of fair value for certain assets, liabilities and contingent
liabilities. The carrying amount approximates fair value for the following categories:
16
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
Cash and Noninterest-Bearing Deposits, which includes noninterest-bearing demand deposits
Federal Funds Sold
Interest-Earning Deposits in Other Banks
Accrued interest
Cash Surrender Value (CSV) of Bank Owned Life Insurance (BOLI)
Checking, savings and money market accounts
Federal Funds Sold
Interest-Earning Deposits in Other Banks
Accrued interest
Cash Surrender Value (CSV) of Bank Owned Life Insurance (BOLI)
Checking, savings and money market accounts
The following methods and assumptions were used to estimate the fair value of other classes of
financial instruments as of December 31, 2010 and June 30, 2010.
Investment Securities: The fair values of investment securities are obtained from the Interactive
Data Corporation pricing service and various investment brokers for securities not available from
public sources. Prices on certain trust preferred securities were calculated using a discounted
cash flow model based upon market spreads for longer term securities as permitted for Level III
assets when market quotes are not available. See accompanying notes for additional information on
investment securities.
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 prepayment
assumptions.
Deposit Liabilities: Fair values of commercial investment agreements and fixed-maturity
certificates of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on commercial investment agreements or time deposits of
similar remaining maturities.
Advances from Federal Home Loan Bank: Fair value is determined by discounting the advances using
estimated incremental borrowing rates for similar types of borrowing arrangements.
Term Debt and Other Debt: Fair value is determined by discounting the term and other debt using
estimated incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Instruments: 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.
17
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
The following table presents additional information about financial assets and liabilities
measured at fair value:
December 31, 2010 | June 30, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Fair Value | Value | Fair Value | Value | |||||||||||||
Financial Assets: |
||||||||||||||||
Cash and non-interest-earning deposits |
$ | 17,097 | $ | 17,097 | $ | 17,736 | $ | 17,736 | ||||||||
Federal funds sold |
106,550 | 106,550 | 135,773 | 135,773 | ||||||||||||
Interest-earning deposits in other banks |
3,362 | 3,362 | 801 | 801 | ||||||||||||
Investment securities available for sale |
5,245 | 5,245 | 65,770 | 65,770 | ||||||||||||
Investment securities held to maturity |
499,734 | 501,852 | 437,931 | 443,452 | ||||||||||||
FHLB stock |
13,640 | 13,640 | 14,357 | 14,357 | ||||||||||||
Loans receivable |
1,065,430 | 1,036,517 | 1,087,009 | 1,050,755 | ||||||||||||
Accrued interest receivable |
5,828 | 5,828 | 7,409 | 7,409 | ||||||||||||
Cash surrender value of BOLI |
25,834 | 25,834 | 25,288 | 25,288 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Checking, savings and money market accounts |
$ | 707,924 | $ | 707,924 | $ | 696,364 | $ | 696,364 | ||||||||
Certificates of deposit |
775,208 | 750,647 | 812,339 | 791,709 | ||||||||||||
Advances from Federal Home Loan Bank |
183,850 | 165,875 | 204,699 | 185,973 | ||||||||||||
Term debt |
23,015 | 22,500 | 24,244 | 23,750 | ||||||||||||
Other debt |
10,717 | 11,294 | 13,156 | 13,865 | ||||||||||||
Interest rate swap |
515 | 515 | 494 | 494 | ||||||||||||
Accrued interest payable |
909 | 909 | 902 | 902 | ||||||||||||
Off-balance sheet loan instruments |
($16 | ) | $ | | $ | 118 | $ | |
NOTE 7. INVESTMENT SECURITIES
Investment significant accounting policies are as follows:
Securities Held to Maturity, Available for Sale and Other than Temporary Impairment
Certain debt securities that management has the positive intent and ability to hold to maturity are
classified as held to maturity and recorded at amortized cost. Trading securities are recorded at
fair value with changes in fair value included in earnings. Securities not classified as held to
maturity or trading, including equity securities with readily determinable fair values, are
classified as available for sale and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts
are recognized in interest income using the interest method over the terms of the securities. Gains
and losses on the sale of securities are recorded on the trade date and are determined using the
specific identification method.
18
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
The recent accounting guidance amends the recognition guidance for other-than-temporary
impairments of debt securities and expands the financial statement disclosures for
other-than-temporary impairment losses on debt and equity securities. The recent guidance replaced
the intent and ability indication in current guidance by specifying that (a) if a company does
not have the intent to sell a debt security prior to recovery and (b) it is more likely than not
that it will not have to sell the debt security prior to recovery, the security would not be
considered other-than-temporarily impaired unless there is a credit loss. When an entity does not
intend to sell the security, and it is more likely than not the entity will not have to sell the
security before recovery of its cost basis, it will recognize the credit component of an
other-than-temporary impairment of a debt security in earnings and the remaining portion in other
comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary
impairment recorded in other comprehensive income for the noncredit portion of a previous
other-than-temporary impairment should be amortized prospectively over the remaining life of the
security on the basis of the timing of future estimated cash flows of the security.
As a result of this guidance, Parkvales consolidated statements of operations as of December 31,
2010 and December 31, 2009 reflect the full impairment (that is, the difference between the
securitys amortized cost basis and fair value) on debt securities that Parkvale intends to sell or
would more-likely-than-not be required to sell before the expected recovery of the amortized cost
basis. For available-for-sale and held-to-maturity debt securities that management has no intent to
sell and believes that it more-likely-than-not will not be required to sell prior to recovery, only
the credit loss component of the impairment is recognized in earnings, while the non-credit loss is
recognized in other comprehensive income, net of applicable taxes.
For equity securities, when Parkvale has decided to sell an impaired available-for-sale security
and Parkvale does not expect the fair value of the security to fully recover before the expected
time of sale, the security is deemed other-than-temporarily impaired in the period in which the
decision to sell is made. Parkvale recognizes an impairment loss when the impairment is deemed
other-than-temporary even if a decision to sell has not been made.
19
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
Federal Home Loan Bank Stock
Parkvale, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an
investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has
no quoted market value and is carried at cost. In December 2008, the FHLB declared a moratorium on
the redemption of its stock. At its discretion, the FHLB may declare dividends on the stock.
However, since 2009 the FHLB suspended its dividend. Management reviews for impairment based on the
ultimate recoverability of the cost basis in the FHLB stock.
Members do not purchase stock in the FHLB for the same reasons that traditional equity investors
acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to
the low-cost products and services offered by the FHLB. Unlike equity securities of traditional
for-profit enterprises, the stock of FHLB does not provide its holders with an opportunity for
capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and
transferred at par value.
The Banks FHLB stock totaled $13,640 at December 31, 2010 and $14,357 at June 30, 2010. The Bank
accounts for the stock based on U.S. GAAP, which requires the investment to be carried at cost and
evaluated for impairment based on the ultimate recoverability of the par value.
The Bank periodically evaluates its FHLB investment for possible impairment based on, among other
things, the capital adequacy of the FHLB and its overall financial condition. The FHLB exceeds all
regulatory capital requirements established by the Federal Housing Finance Agency, the regulator of
the FHLB. Failure by the FHLB to meet this regulatory capital requirement would require an in-depth
analysis of other factors including:
| the members ability to access liquidity from the FHLB; | ||
| the members funding cost advantage with the FHLB compared to alternative sources of funds; | ||
| a decline in the market value of FHLBs net assets relative to book value which may or may not affect future financial performance or cash flow; | ||
| the FHLBs ability to obtain credit and source liquidity, for which one indicator is the credit rating of the FHLB; | ||
| the FHLBs commitment to make payments taking into account its ability to meet statutory and regulatory payment obligations and the level of such payments in relation to the FHLBs operating performance; and | ||
| the prospects of amendments to laws that affect the rights and obligations of the FHLB. |
The Bank believes its holdings in the stock are ultimately recoverable at par value at December 31,
2010 and, therefore, determined that FHLB stock was not other-than-temporarily impaired. In
addition, the Bank has ample liquidity and does not require redemption of its FHLB stock in the
foreseeable future.
20
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
At December 31, 2010 and June 30, 2010, the following comprises Parkvales investment
portfolio:
December 31, 2010 | June 30, 2010 | |||||||||||||||
Available for Sale Investments | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
CMOs Non Agency (Residential) |
| | $ | 59,804 | $ | 59,804 | ||||||||||
Mutual Funds ARM mortgages |
5,500 | 5,244 | 5,500 | 5,284 | ||||||||||||
Common equities |
1 | 1 | 474 | 682 | ||||||||||||
Total available for sale investments |
$ | 5,501 | $ | 5,245 | $ | 65,778 | $ | 65,770 | ||||||||
December 31, 2010 | June 30, 2010 | |||||||||||||||
Held to Maturity Investments | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
U.S. Government and agency obligations |
$ | 158,440 | $ | 158,785 | $ | 194,248 | $ | 195,920 | ||||||||
Municipal obligations |
25,743 | 26,044 | 21,641 | 22,345 | ||||||||||||
Corporate debt: |
||||||||||||||||
Short to medium term corporate debt |
33,121 | 34,101 | 27,112 | 28,352 | ||||||||||||
Pooled trust preferred securities |
21,204 | 19,026 | 24,229 | 16,849 | ||||||||||||
Individual trust preferred securities |
9,334 | 8,045 | 9,322 | 7,977 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Agency |
182,195 | 183,147 | 93,248 | 95,055 | ||||||||||||
Agency Collateralized Mortgage
Obligations (CMOs) |
8,737 | 8,931 | 10,357 | 10,630 | ||||||||||||
CMOs non agency |
63,078 | 61,655 | 63,295 | 60,803 | ||||||||||||
Total held to maturity investments |
$ | 501,852 | $ | 499,734 | $ | 443,452 | $ | 437,931 | ||||||||
The amortized cost and fair value of debt securities at December 31, 2010, by contractual
maturity, is included in the table below. Expected maturities will differ from contractual
maturities because the borrowers may have the right to call or prepay the obligation.
Amortized | ||||||||
Cost | Fair Value | |||||||
Due in one year or less |
$ | 25,558 | $ | 25,823 | ||||
Due after one year through five years |
122,049 | 123,835 | ||||||
Due after five years through ten years |
93,976 | 93,513 | ||||||
Due after ten years |
260,269 | 256,563 | ||||||
Total debt securities |
$ | 501,852 | $ | 499,734 | ||||
Liquidity concerns in the financial markets have made it difficult to obtain reliable market
quotations on some infrequently traded securities that are held to maturity. Corporate debt has
been valued using financial models permitted by guidance in ASC 820 for Level III (see Fair Value
Note) assets as active markets did not exist at December 31, 2010 and June 30, 2010 to provide
reliable market quotes. The assets included in Level III pricing relate to pooled trust preferred
securities. The trust preferred market has been severely impacted by the deteriorating economy and
the lack of liquidity in the credit markets.
21
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
The unrealized losses on investments are primarily the result of volatility in interest rates,
changes in spreads over treasuries and certain investments falling out of favor with investors due
to illiquidity in the financial markets. Based on the credit-worthiness of the issuers and
discounted cash flow analyses, management determined that the remaining investments in debt and
equity securities were not other-than-temporarily impaired. The following table represents gross
unrealized losses and fair value of investments aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss position at December 31,
2010:
Less than 12 months | Greater than 12 months | |||||||||||||||||||||||
Of unrealized losses | of unrealized losses | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Available for Sale Investments | Fair Value | loss | Fair Value | loss | Fair Value | loss | ||||||||||||||||||
Mutual funds ARM mortgages |
$ | | $ | | $ | 4,728 | $ | 272 | $ | 4,728 | $ | 272 | ||||||||||||
Held to Maturity Investments |
||||||||||||||||||||||||
U.S. Government and agency
obligations |
61,941 | 742 | | | 61,941 | 742 | ||||||||||||||||||
Municipal obligations |
11,604 | 201 | | | 11,604 | 201 | ||||||||||||||||||
Corporate debt |
9,161 | 98 | | | 9,161 | 98 | ||||||||||||||||||
Pooled trust preferred securities |
| | 8,505 | 4,465 | 8,505 | 4,465 | ||||||||||||||||||
Individual trust preferred securities |
| | 4,689 | 1,435 | 4,689 | 1,435 | ||||||||||||||||||
Non agency CMOs |
146 | 21 | 24,110 | 3,455 | 24,256 | 3,476 | ||||||||||||||||||
Mortgage-backed securities |
96,993 | 1,094 | 8 | 1 | 97,001 | 1,095 | ||||||||||||||||||
Totals |
$ | 179,845 | $ | 2,156 | $ | 42,040 | $ | 9,628 | $ | 221,885 | $ | 11,784 | ||||||||||||
The following table represents gross unrealized losses and fair value of investments
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position at June 30, 2010:
Less than 12 months | Greater than 12 months | |||||||||||||||||||||||
Of unrealized losses | of unrealized losses | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Available for Sale Investments | Fair Value | loss | Fair Value | loss | Fair Value | loss | ||||||||||||||||||
Mutual funds ARM mortgages |
$ | | $ | | $ | 4,760 | $ | 240 | $ | 4,760 | $ | 240 | ||||||||||||
Held to Maturity Investments |
||||||||||||||||||||||||
U.S. Government and agency
obligations |
29,990 | 9 | | | 29,990 | 9 | ||||||||||||||||||
Pooled trust preferred securities |
| | 10,197 | 7,380 | 10,197 | 7,380 | ||||||||||||||||||
Individual trust preferred securities |
| | 5,054 | 1,550 | 5,054 | 1,550 | ||||||||||||||||||
Non agency CMOs |
| | 18,024 | 4,879 | 18,024 | 4,879 | ||||||||||||||||||
Mortgage-backed securities |
5,300 | 47 | | | 5,300 | 47 | ||||||||||||||||||
Totals |
$ | 35,290 | $ | 56 | $ | 38,035 | $ | 14,049 | $ | 73,325 | $ | 14,105 | ||||||||||||
22
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
Available for sale investments.
Mutual Funds. Parkvale has investments in two adjustable rate mortgage mutual funds with an
aggregate amortized cost of $5,500 at December 31, 2010. The larger of the two investments, which
had a fair value of $4,728 at December 31, 2010, has had an unrealized loss in excess of one year
of $272 and $240 at December 31, 2010 and at June 30, 2010, respectively. Parkvale evaluated the
near-term prospects of the issuer of the mutual fund in relation to the severity and duration of
the impairment. Based on this evaluation and Parkvales ability to hold the investment for a
reasonable period of time sufficient for a forecasted recovery of fair value, Parkvale does not
consider the remaining value of this investment to be other-than-temporarily impaired at December
31, 2010.
Common Equities. At December 31, 2010, Parkvale had investments in three different common
equities, which had an aggregate amortized cost of $1 and an aggregate fair value of $1 at December
31, 2010 and an aggregate amortized cost of $474 and an aggregate fair value of $682 at June 30,
2010.
Held to maturity securities.
U.S. Government and Agency Obligations. At December 31, 2010, the $158,785 fair value of
Parkvales investments in U.S. Government and Agency obligations was greater than the $158,440 book
value of such investments. Certain of these investments show unrealized losses of less than one
year of $742 at the balance sheet date. The contractual terms of those investments do not permit
the issuer to settle the securities at a price less than the face value of the investment. Parkvale
intends to hold these securities to the contractual maturity of such investments and it is more
likely than not that Parkvale will not be required to sell the investments before recovery of its
amortized cost.
Trust Preferred Securities. Trust preferred securities are very long-term (usually 30-year
maturity) instruments with characteristics of both debt and equity. Most of the Corporations
investments in trust preferred securities are of pooled issues, each made up of 23 or more
companies with geographic and size diversification. Unless otherwise noted, the Corporations
pooled trust preferred securities are substantially secured by bank and thrift holding companies
(approximately 85% in the aggregate) and by insurance companies (approximately 15% in the
aggregate). No single company represents more 5% of any individual pooled offering. While certain
companies are in more than one pool, no single company represents more than a 5% interest in the
aggregate pooled investments. The pooled trust preferred investments were all investment grade at
purchase with an initial average investment grade rating of A. As a result of the overall credit
market and the number of underlying issuers deferring interest payments, as well as issuers
defaulting, the rating agencies have downgraded the securities to below investment grade as of
December 31, 2010. All of these investments are classified as held to maturity.
23
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
Management believes trust preferred valuations have been negatively affected by an inactive
market and concerns that the underlying banks and insurance companies may have significant exposure
to losses from sub-prime mortgages, defaulted collateralized debt obligations or other concerns.
When evaluating these investments, a determination is made of the credit portion and the noncredit
portion of impairment. The credit portion is recognized in earnings and represents the expected
shortfall in future cash flows. The noncredit portion is recognized in other comprehensive income
and represents the difference between the fair value of the security and the amount of credit
related impairment, which is discussed in the following paragraphs. A discounted cash flow analysis
provides the best estimate of the credit related portion of the impairment for these securities.
Parkvales pooled trust preferred collateralized debt obligations are measured for other than
temporary impairment within the scope of US GAAP, by determining whether it is probable that an
adverse change in estimated cash flows has occurred. The discounted cash flow analysis is
considered to be the primary evidence when determining whether credit related impairment exists.
Managements estimates and results of a discounted cash flow test are significantly affected by
other variables such as the estimate of future cash flows, credit worthiness of the underlying
banks and insurance companies (issuer) and determination of probability of default of the
underlying collateral. Changes in the variable assumptions could produce different conclusions for
each security. The following provides additional information for each of these variables.
| Estimate of future cash flows cash flows are constructed on Intex software. Intex is a proprietary software program recognized as the industry standard for analyzing all types of collateralized debt obligations. It includes each deals structural features updated with information from trustee reports, including collateral/hedge agreement/cash flow detail, as it becomes available. A present value analysis is then performed on the modeled cash flows to determine any cash flow shortages to Parkvales respective holdings, if any. | ||
| Credit analysis A quarterly credit evaluation is performed for each of the issuers comprising the collateral across the various pooled trust preferred securities. The credit evaluation considers all evidence available and includes the nature of the issuers business and geographic footprint. The analysis focuses on shareholders equity, loan loss reserves, non-performing assets, credit quality ratios and capital adequacy. | ||
| Probability of default A probability of default is determined for each issuer and is used to calculate the expected impact of future deferrals and defaults in the expected cash flow analysis. Each issuer in the collateral pool is assigned a probability of default with an emphasis on near term probability. Issuers currently defaulted or deferring are assigned a 100% probability of loss, and issuers currently deferring are assigned a 20% probability of recovery. All other issuers in the pool are assigned a probability of loss ranging from .36% to 100%, with ranges based upon the results of the credit analysis. The probability of loss of .36% is assigned to only the strongest financial institutions. The probability of default is updated quarterly with data provided by trustees and other sources. |
24
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
Managements estimates of discounted cash flows used to evaluate other-than-temporary
impairment of pooled trust-preferred securities were based on assumptions regarding the timing and
amounts of deferrals and defaults that may occur based upon a credit analysis of each issuer, and
changes in those assumptions could produce different conclusions for each security. In addition to
the above factors, the excess subordination levels for each pooled trust preferred security are
calculated. The results of this excess subordination allows management to identify those pools that
are a greater risk for a future break in cash flows so that issuers in those pools can be monitored
more closely for potential deterioration of credit quality.
A significant portion of the Corporations unrealized losses relate primarily to investments in
trust preferred securities, which consist of single issuer and pooled securities. The portfolio of
trust preferred collateralized debt obligations consists of 16 pooled issues and 8 single issuer
securities. The single issuer securities are primarily from Pennsylvania regional banks.
Investments in pooled securities are primarily mezzanine tranches, except for 2 investments in
senior tranches, and are secured by over-collateralization or default protection provided by
subordinated tranches.
At December 31, 2010, the 16 pooled trust preferred securities have an amortized cost basis of
$21,204 and an estimated fair value of $19,026, while the single-issuer trust preferred securities
have an amortized cost basis of $9,334 and an estimated fair value of $8,045. The net unrealized
losses on the trust preferred securities at December 31, 2010, which aggregated $2,178 on the
pooled securities and $1,289 on the individual securities, are attributable to temporary
illiquidity and the uncertainty affecting these markets, as well as changes in interest rates.
At December 31, 2010, as permitted by the debt instruments, there are 11 pooled trust preferred
securities with an amortized cost basis of $7,993 that have for one reason or another chosen to
defer payments. Interest payments aggregating $465 have been capitalized to the balance of the
securities as permitted by the underlying trust agreement and interest payments aggregating $1,811
have been deferred since the respective securities began to defer payments. Deferred payments are
not included in interest income. Interest payments totaling $186 were deferred during the quarter
ended December 31, 2010 and no payments were capitalized during the quarter.
Contractual terms of the investments do not permit debtors to settle the security at a price less
than the face value of the investments and as such, it is expected that the remaining trust
preferred securities will not be settled at a price less than the current carrying value of the
investments. The Corporation has concluded from detailed cash flow analysis performed as of
December 31, 2010 that it is probable that all contractual principal and interest payments will be
collected on all of its single-issuer and pooled trust preferred securities, except for those on
which OTTI was recognized on the pooled trust preferred securities.
Because Parkvale has the ability and intent to hold the investments until a recovery of fair value,
which may be maturity, and it is more likely than not that Parkvale will not be required to sell
the investments before recovery of its amortized cost, Parkvale does not consider the remaining
value of these assets to be other-than-temporarily impaired at December 31, 2010. However,
continued interest deferrals and/or insolvencies by participating issuers could result in a further
writedown of one or more of the trust preferred investments in the future.
25
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
The following table provides information relating to the Corporations trust preferred securities
as of December 31, 2010.
Excess | ||||||||||||||||||||||||||||||||||||||||
Expected | Subordination | |||||||||||||||||||||||||||||||||||||||
Lowest | Actual | Actual | Defaults (% | (as a % of | ||||||||||||||||||||||||||||||||||||
Amortized | Unrealized | Credit | # of | Default % | Deferral % | of performing | performing | |||||||||||||||||||||||||||||||||
Deal | Note Class | Par Value | Cost | Fair Value | Gain (Loss) | Ratings | Issuers | (1) | (1) (2) | collateral) (3) | collateral) (4) | |||||||||||||||||||||||||||||
Pooled Investments |
||||||||||||||||||||||||||||||||||||||||
P1 |
C1 | 5,000 | 350 | 450 | 100 | C | 80 | 20.4 | % | 15.2 | % | 9.7 | % | 0.0 | % | |||||||||||||||||||||||||
P2 |
A2A | 5,000 | 2,012 | 2,250 | 238 | CCC- | 76 | 16.0 | % | 18.0 | % | 10.5 | % | 7.9 | % | |||||||||||||||||||||||||
P3 |
C1 | 4,592 | 735 | 1,240 | 505 | C | 85 | 11.2 | % | 11.3 | % | 14.5 | % | 0.0 | % | |||||||||||||||||||||||||
P4 |
C1 | 5,058 | 354 | 809 | 455 | C | 72 | 15.3 | % | 8.7 | % | 11.7 | % | 0.0 | % | |||||||||||||||||||||||||
P5 |
C1 | 5,023 | 151 | 151 | | C | 93 | 13.3 | % | 15.1 | % | 13.5 | % | 0.0 | % | |||||||||||||||||||||||||
P6 |
C1 | 3,075 | 30 | 30 | | C | 68 | 19.1 | % | 16.3 | % | 13.3 | % | 0.0 | % | |||||||||||||||||||||||||
P8 |
C | 3,219 | 129 | 225 | 96 | C | 56 | 14.7 | % | 15.3 | % | 10.3 | % | 0.0 | % | |||||||||||||||||||||||||
P9 |
B | 2,008 | 80 | 141 | 61 | C | 54 | 12.2 | % | 26.4 | % | 11.0 | % | 0.0 | % | |||||||||||||||||||||||||
P10 |
B1 | 5,000 | 4,884 | 4,100 | (784 | ) | CCC | 24 | 0.0 | % | 5.8 | % | 16.7 | % | 12.1 | % | ||||||||||||||||||||||||
P11 |
Mezz | 1,500 | 555 | 585 | 30 | C | 23 | 18.3 | % | 19.5 | % | 7.8 | % | 0.0 | % | |||||||||||||||||||||||||
P12 |
B2 | 1,000 | 288 | 440 | 152 | C | 34 | 14.4 | % | 15.9 | % | 11.2 | % | 0.0 | % | |||||||||||||||||||||||||
P13 |
B | 3,909 | 3,759 | 547 | (3,212 | ) | C | 45 | 14.4 | % | 16.2 | % | 10.3 | % | 0.0 | % | ||||||||||||||||||||||||
P14 |
A1 | 4,648 | 4,327 | 3,858 | (469 | ) | CCC | 50 | 18.3 | % | 11.9 | % | 10.2 | % | 34.4 | % | ||||||||||||||||||||||||
P15 |
B | 5,000 | 1,700 | 2,000 | 300 | C | 34 | 24.0 | % | 12.2 | % | 12.3 | % | 0.0 | % | |||||||||||||||||||||||||
P16 |
C1 | 5,000 | 1,100 | 1,350 | 250 | C | 46 | 19.7 | % | 3.4 | % | 8.1 | % | 0.0 | % | |||||||||||||||||||||||||
P17 |
C1 | 5,000 | 750 | 850 | 100 | C | 43 | 21.1 | % | 8.2 | % | 13.1 | % | 0.0 | % | |||||||||||||||||||||||||
Subtotal |
16 | 64,032 | 21,204 | 19,026 | (2,178 | ) | ||||||||||||||||||||||||||||||||||
Single Issuer Investments |
||||||||||||||||||||||||||||||||||||||||
S1 |
N/A | 1,000 | 930 | 711 | (219 | ) | BB+ | 1 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||
S2 |
N/A | 2,000 | 1,969 | 1,356 | (613 | ) | BB+ | 1 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||
S3 |
N/A | 3,000 | 2,778 | 2,337 | (441 | ) | A- | 1 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||
S4 |
N/A | 500 | 447 | 285 | (162 | ) | BB- | 1 | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||
S5 |
N/A | 1,000 | 1,005 | 1,096 | 91 | NR | 1 | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||||||||||||||||||
S6 |
N/A | 700 | 711 | 731 | 20 | NR | 1 | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||||||||||||||||||
S7 |
N/A | 529 | 494 | 508 | 14 | B+ | 1 | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||||||||||||||||||
S8 |
N/A | 1,000 | 1,000 | 1,021 | 21 | BB+ | 1 | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||||||||||||||||||
Subtotal |
8 | 9,729 | 9,334 | 8,045 | (1,289 | ) | ||||||||||||||||||||||||||||||||||
Grand total of Trust Preferred holdings |
73,761 | 30,538 | 27,071 | (3,467 | ) |
The above listings do not include 7 trust preferred investments written off in prior periods.
Notes: | ||
(1) | As a percentage of the total collateral. | |
(2) | Includes deferrals that have not paid current interest payments as permitted by the debt instruments. | |
(3) | Expected defaults are determined by an analysis of each security. | |
(4) | Excess subordination measures the performing collateral coverage of the outstanding liabilities (as a % of performing collateral). |
26
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
Non agency CMOs. The non agency CMO securities of $63,078 at December 31, 2010 are supported
by underlying collateral that was originated as follows:
Year originated | Amortized Cost | Fair Value | ||||||
2003 |
$ | 20,185 | $ | 21,627 | ||||
2004 |
28,518 | 26,873 | ||||||
2005 |
4,290 | 4,524 | ||||||
2007 |
6,341 | 4,892 | ||||||
2008 |
3,744 | 3,739 | ||||||
$ | 63,078 | $ | 61,655 | |||||
The non agency CMO portfolio at December 31, 2010 contains investments that were all rated AAA
at the time of purchase. The amortized cost and fair value by their latest investment rating at
December 31, 2010 is as follows:
Amortized | ||||||||
Cost | Fair Value | |||||||
AAA by Moodys, S&P, or Fitch |
$ | 24,039 | $ | 24,990 | ||||
AA by Moodys or S&P |
6,162 | 6,601 | ||||||
A by Moodys, S&P, or Fitch |
9,080 | 7,937 | ||||||
Baa by Moodys |
10,568 | 10,461 | ||||||
BB by S&P |
6,722 | 6,628 | ||||||
B by Finch |
3,482 | 2,939 | ||||||
CCC by Fitch |
2,859 | 1,953 | ||||||
D by S&P |
166 | 146 | ||||||
$ | 63,078 | $ | 61,655 | |||||
To date, with the exception of one security with an amortized cost of $166, all such
securities have made scheduled payments of principal and interest on a timely basis with additional
collateral provided by support tranches in these structured debt obligations. OTTI charges of
$1,800 were recognized in prior periods regarding the security for which scheduled payments were
not received.
General. At December 31, 2010, Parkvale has unrealized losses that are greater than one year
aggregating $9,356 on held to maturity securities. These unrealized losses over one year relate
primarily to investments in pooled and individual trust preferred securities and non-agency CMOs as
detailed in the preceding tables. The unrealized losses relate to illiquidity and the uncertainty
affecting these markets, interest rate changes, higher spreads to treasuries at
December 31, 2010 compared to the purchase dates and concerns of future bank failures. Pooled trust
preferred securities with unrealized losses for more than 12 months relate to 3 pooled trust
preferred securities aggregating $12,970, representing $8,505 of fair value with $4,465 of
unrealized losses. Individual trust preferred securities with unrealized losses for more than 12
months relate to 4 individual securities aggregating $6,124, representing $4,689 of fair value with
$1,435 of unrealized losses.
27
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
Other-Than-Temporary- Impairment
Securities with a remaining carrying value as of December 31, 2010 that have incurred OTTI charges
are summarized as follows:
Unadjusted | OTTI | OTTI | 12/31/10 | 12/31/10 | ||||||||||||||||
Carrying | Charge to | Charge to | Carrying | Fair | ||||||||||||||||
Security | Value | earnings | OCI | Value | Value | |||||||||||||||
Pooled trust preferred security |
$ | 48,844 | $ | 19,649 | $ | 20,961 | $ | 8,234 | $ | 10,521 |
The following chart shows the balance of other comprehensive income charges related to fair value:
Pooled trust | ||||
preferred securities | ||||
Balance at June 30, 2010 |
$ | 19,868 | ||
Total losses realized/unrealized |
3,035 | |||
Included as a charge to earnings |
(1,942 | ) | ||
Change to other comprehensive income |
| |||
Balance at December 31, 2010 |
$ | 20,961 | ||
The following table displays the cumulative credit component of OTTI charges recognized in
earnings on debt securities for which a portion of an OTTI is recognized in other comprehensive
income at December 31, 2010:
Pooled trust | ||||
preferred securities | ||||
Balance at June 30, 2010 |
$ | 17,707 | ||
Addition for the credit component on debt
securities in which OTTI was not previously
recognized |
1,942 | |||
Balance at December 31, 2010 |
$ | 19,649 | ||
The amount of securities with OTTI
charges to earnings are as follows: |
||||
Recorded in September 30, 2010 quarter |
$ | 996 | ||
Recorded in December 31, 2010 quarter |
946 |
During the December 31, 2009 quarter, two pooled trust preferred securities and one non agency
CMO considered to be other than temporarily impaired were written down to fair value with a net
charge to earnings of $782. During the three months ended December 31, 2010, charges of $946 on
OTTI investments were recognized as net impairment losses in earnings. The current quarter charges
were due to OTTI related to five pooled trust preferred securities. Write-downs were based on
individual securities credit performance and the issuers inability to make its contractual
principal and interest payments. Should credit quality continue to deteriorate, it is possible that
additional write-downs may be required. Based on the credit worthiness of the issuers, management
determined that the remaining investments in debt and equity securities were not
other-than-temporarily impaired at December 31, 2010.
28
Table of Contents
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
NOTE 8. GOODWILL AND MARKET VALUATION
Goodwill of $25,634 shown on the Statement of Financial Condition relates to acquisitions in fiscal
2002 (Masontown) and 2005 (Advance). The operations of both acquisitions have been fully integrated
into Parkvales operations. All of the offices and business activities of both Masontown and
Advance have been retained, remain open and are performing as expected. The market price of
Parkvales common stock was $9.18 per share at December 31, 2010, which is below the book value of
$16.21 at such date. The difference between the market value and the book value at December 31,
2010 is primarily related to the significant deterioration in the financial markets, a weakening
economy and a near global credit crisis. Goodwill is tested on an annual basis as of June 30 of
each year in conjunction with the Corporations fiscal year end but can be tested for impairment at
any time if circumstances warrant.
Because the market value of Parkvales common stock has been below the book value during fiscal
2011, an independent third party was retained during the December 31, 2010 quarter to assist in
determining whether an impairment of goodwill was appropriate. In a report dated January 13, 2011,
the third party certified goodwill non-impairment based on the discounted cash flow estimate of
fair value, and deal value to book value of equity ratios observed in recent comparable banking
sector merger and acquisition transactions. Anecdotal evidence for goodwill non-impairment is also
seen in the strong underlying financial foundations for Parkvales fair value. The third party
reviewed the premiums paid in acquisitions of financial institutions that were announced or
completed between October 1, 2007 and November 30, 2010. The third party reviewed the premiums paid
in 41 acquisitions in the mid-Atlantic states during such period, as well as 363 acquisitions
nationwide during such period. In addition to reviewing the book value multiples of all
acquisitions announced or completed during the above period, the third party also reviewed the
multiples for those acquisitions announced or completed since June 30, 2008, which were lower than
the multiples for the entire period noted above.
Based on the above report, management determined that goodwill was not impaired at December 31,
2010. The annual testing of goodwill as required was performed as of June 30, 2010 and in a similar
report issued by the independent third party on July 23, 2010, goodwill non-impairment was
certified as of June 30, 2010. If Parkvales stock continues to trade significantly below its book
value, if discounted cash flow estimates materially decline, or if the multiples in other
acquisitions financial institutions continue to decline, then a goodwill impairment charge may
become appropriate in a future quarter.
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands, except share data)
(Dollar amounts in thousands, except share data)
NOTE 9. EARNINGS PER SHARE (EPS)
The following table sets forth the computation of basic and diluted earnings per common share for
the three and six months ended December 31:
Three months ended | Six months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator for basic and
diluted earnings per share: |
||||||||||||||||
Net income |
$ | 1,841 | $ | 2,425 | $ | 4,064 | $ | 3,280 | ||||||||
Less: Preferred stock dividend |
397 | 397 | 794 | 794 | ||||||||||||
Net income to common stockholders |
$ | 1,444 | $ | 2,028 | $ | 3,270 | $ | 2,486 | ||||||||
Denominator: |
||||||||||||||||
Weighted average shares
for basic earnings per common share |
5,529,716 | 5,428,604 | 5,529,464 | 5,428,150 | ||||||||||||
Effect of dilutive stock options |
1,300 | | 650 | | ||||||||||||
Weighted average shares for
dilutive earnings per common share |
5,531,016 | 5,428,604 | 5,530,114 | 5,428,150 | ||||||||||||
Net income per common share: Basic |
$ | 0.26 | $ | 0.38 | $ | 0.59 | $ | 0.46 | ||||||||
Diluted |
$ | 0.26 | $ | 0.38 | $ | 0.59 | $ | 0.46 | ||||||||
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. The disclosures will provide financial statement
users with additional information about the nature of credit risks inherent in entities financing
receivables, how credit risk is analyzed and assessed when determining the allowance for credit
losses and the reasons for the change in the allowance for credit losses. This requirement is
effective for all periods ending on or after December 15, 2010, although certain disclosures will
have a deferred effective date. Parkvale has adopted the additional accounting standards and the
required additional disclosure, which have no impact on the consolidated financial statements.
On January 19, 2011, the FASB issued ASU 2011-10: Receivables (Topic 310) Deferral of the Effective
Date of Disclosures about Troubled Debt Restructurings in Update 2010 -20. The disclosures
associated with ASU 2010-20 were originally scheduled to be effective for public entities for the
periods beginning on or after December 15, 2010. Due to significant stakeholder concerns, the
disclosures relating to Troubled Debt Restructuring have been deferred to a later date, anticipated
to be effective for interim and annual periods ending after June 15, 2011. The adoption of this
standard is not anticipated to have a material effect in the financial statements, results of
operations or liquidity of the Corporation.
On December 20, 2010, the FASB issued ASU No. 2010-28, Intangibles-Goodwill and Other (Topic 350),
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. This ASU is a consensus of the FASB Emerging Issues Task Force (EITF). The
amendments are effective for public entities for fiscal years, and interim periods, beginning after
December 15, 2010. Early adoption is not permitted. Non-public entities have an additional year to
comply (December 15, 2011). For public entities, the disclosures as of the end of a reporting
period are effective for interim and annual reporting periods ending on or after December 15, 2010.
The disclosures about activity that occurs during a reporting period are effective for interim and
annual reporting periods beginning on or after December 15, 2010. The adoption of this standard is
not anticipated to have a material effect in the financial statements, results of operations or
liquidity of the Corporation.
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Item 2.
PARKVALE FINANCIAL CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is managements 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 Corporations consolidated financial condition
and results of operations consist almost entirely of Parkvale Banks financial condition and
results of operations. Current performance does not guarantee, and may not be indicative of,
similar performance in the future. The financial statements as of and for the quarter ended
December 31, 2010 are unaudited and, as such, are subject to year-end audit review.
Forward-Looking Statements:
In addition to historical information, this filing may contain forward-looking statements. We have
made forward-looking statements in this document that are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or assumed future results of
operations of the Corporation and its subsidiaries. When we use words such as believe, expect,
anticipate, or similar expressions, we are making forward-looking statements.
The statements in this filing that are not historical fact are forward-looking statements.
Forward-looking information should not be construed as guarantees of future performance. Actual
results may differ from expectations contained in such forward-looking information as a result of
various factors, including but not limited to the interest rate environment, economic policy or
conditions, federal and state banking and tax regulations and competitive factors in the
marketplace. Each of these factors could affect estimates, assumptions, uncertainties and risks
considered in the development of forward-looking information and could cause actual results to
differ materially from managements expectations regarding future performance.
Shareholders should note that many factors, some of which are discussed elsewhere in this document,
could affect the future financial results of the Corporation and its subsidiaries and could cause
those results to differ materially from those expressed in our forward-looking statements contained
in this document. These factors include the following: operating, legal and regulatory risks;
economic, political and competitive forces affecting our businesses; and the risk that our analyses
of these risks and forces could be incorrect and/or that the strategies developed to address them
could be unsuccessful.
Critical Accounting Policies, Judgments and Estimates:
The accounting and reporting policies of the Corporation and its subsidiaries conform to accounting
principles generally accepted in the United States of America (U.S. GAAP) and general practices
within the financial services industry. All significant inter-company transactions are eliminated
in consolidation, and certain reclassifications are made when necessary to conform the previous
years financial statements to the current years presentation. In preparing the consolidated
financial statements, management is required to make
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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, Carrying Value of Goodwill and Other Intangible Assets and
Valuation Allowance of Deferred Tax Asset.
The Corporations critical accounting policies and judgments disclosures are contained in the
Corporations June 30, 2010 Annual Report filed on September 13, 2010, as amended on November 12,
2010. Management believes that there have been no material changes since June 30, 2010 except for
adoption of FASB ASU 2010-20 during the quarter ended December 31, 2010. 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.
Balance Sheet Data:
(Dollar amounts in thousands, except per share data)
(Dollar amounts in thousands, except per share data)
December 31, | ||||||||
2010 | 2009 | |||||||
Total assets |
$ | 1,791,116 | $ | 1,915,986 | ||||
Loans, net |
1,017,834 | 1,053,009 | ||||||
Interest-earning deposits and federal funds sold |
109,912 | 130,021 | ||||||
Total investments |
520,737 | 600,156 | ||||||
Deposits |
1,458,571 | 1,528,142 | ||||||
FHLB advances |
165,875 | 186,087 | ||||||
Shareholders equity |
122,136 | 151,513 | ||||||
Book value per common share |
$ | 16.21 | $ | 21.73 |
Statistical Profile:
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, (1) | December 31, (1) | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Average yield earned on all
interest-earning assets |
3.91 | % | 4.30 | % | 3.93 | % | 4.38 | % | ||||||||
Average rate paid on all
interest-bearing liabilities |
1.70 | % | 2.25 | % | 1.78 | % | 2.39 | % | ||||||||
Average interest rate spread |
2.21 | % | 2.05 | % | 2.15 | % | 1.99 | % | ||||||||
Net yield on average interest-earning assets |
2.20 | % | 2.03 | % | 2.14 | % | 2.05 | % | ||||||||
Other expenses to average assets |
1.69 | % | 1.53 | % | 1.71 | % | 1.56 | % | ||||||||
Taxes to pre-tax income |
22.02 | % | 23.84 | % | 22.18 | % | 6.92 | % | ||||||||
Dividend payout ratio |
7.66 | % | 13.04 | % | 6.76 | % | 21.83 | % | ||||||||
Return on average assets |
0.41 | % | 0.51 | % | 0.44 | % | 0.34 | % | ||||||||
Return on average equity |
5.46 | % | 6.37 | % | 6.07 | % | 4.32 | % | ||||||||
Average equity to average total assets |
7.42 | % | 7.96 | % | 7.30 | % | 7.93 | % | ||||||||
Dividends per common share |
$ | 0.02 | $ | 0.05 | $ | 0.04 | $ | 0.10 |
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At December 31, | ||||||||
2010 | 2009 | |||||||
One year gap to total assets |
9.77 | % | 4.56 | % | ||||
Intangibles to total equity |
22.97 | % | 19.12 | % | ||||
Ratio of nonperforming assets to total assets |
1.99 | % | 1.90 | % | ||||
Number of full-service offices |
47 | 48 |
(1) | The applicable income and expense figures have been annualized in calculating the percentages. |
Nonperforming Loans and Foreclosed Real Estate:
A weak national economy and to a lesser extent local housing sector and credit markets contributed
towards an increased level of non-performing assets, which peaked at September 30, 2009.
Nonperforming loans (delinquent 90 days or more) and real estate owned in the aggregate represented
1.99%, 1.91% and 1.90% of total assets at
December 31, 2010, June 30, 2010 and December 31, 2009, respectively.
. Such
non-performing assets at December 31, 2010 have increased to $35.6 million from $35.2 million at
June 30, 2010, and includes $26.7 million of non-accrual loans. Please refer to the loan charts
and analysis in the notes to unaudited interim consolidated financial statements that precede this
section.
As of December 31, 2010, single-family mortgage loans delinquent 90 days or more include 55 loans
aggregating $22.4 million purchased from others and serviced by national service providers with a
cost basis ranging from $40,000 to $775,000 and 53 loans aggregating $4.2 million in Parkvales
retail market area. Of these total 108 loans, 7 have a cost basis of $500,000 or greater.
Management believes that all of these delinquent 1-4 family mortgage loans are adequately
collateralized with the exception of 45 loans with a remaining net book value of $10.2 million,
which have the necessary related allowances for losses provided. Loans 180 days or more delinquent
are individually evaluated for collateral values in accordance with banking regulations with
specific reserves recorded as appropriate.
At December 31, 2010, modifications have been performed at market terms on 125 1-4 family mortgage
loans totaling $19.5 million primarily related to extension of maturity dates and extension of
interest-only payment periods of thirty-six months or less. These modified loans are all performing
at December 31, 2010. The discounted cash flow analysis related to these modifications results in
an insignificant impact over the life of the loan.
Commercial business loans 90 days or more delinquent of $3.1 million at December 31, 2010, includes
a $1.2 million relationship with a now closed medical facility and a $1.5 million relationship to a
coal extraction and reclamation entity. Management believes that these commercial relationships are
adequately collateralized.
Parkvale has $31.0 million of loans classified as substandard at December 31, 2010. The
substandard loans have exhibited signs of weakness, or have been recently modified or refinanced
and are being monitored to assess if new payment terms are followed by the borrowers. These loans
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
and achieving a performing status classification of such loans.
Foreclosed real estate of $8.9 million at December 31, 2010 includes $5.7 million of single-family
dwellings. Real estate owned includes foreclosure of four units in a single-family residential
development with a net book value of $1.0 million and commercial real estate properties related to
two facilities used as automobile dealerships with a net book value of $1.1 million at December 31,
2010. At December 31, 2010, foreclosed real estate also includes six commercial real estate
properties with an aggregate value of $1.8 million. Foreclosed real estate properties are recorded
at the lower of the carrying amount or fair value of the property less costs to sell, with reserves
established when deemed necessary.
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Loans are placed on nonaccrual status when, in managements 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 $1.3 million at December 31, 2010 and $1.1 million at December 31, 2009. 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.
Allowance for Loan Losses:
The allowance for loan losses was $19.6 million at December 31, 2010, $19.2 million at June 30,
2010 and $18.9 million at December 31, 2009 or 1.89%, 1.83% and 1.76% of gross loans at December
31, 2010, June 30, 2010 and December 31, 2009, respectively. The adequacy of the allowance for loan
loss is determined by management through evaluation of the loss probable on individual
nonperforming, delinquent and high dollar loans, economic and business trends, growth and
composition of the loan portfolio and historical loss experience, as well as other relevant
factors.
Parkvale continually monitors the loan portfolio to identify potential portfolio risks and to
detect potential credit deterioration in the early stages. Reserves are then established based upon
the evaluation of the inherent risks in the loan portfolio. Changes to the levels of reserves are
made quarterly based upon perceived changes in risk. When evaluating the risk elements within the
loan portfolio, Parkvale has a substantial portion of the loans secured by real estate as noted in
the loan footnote. In addition to the $647.0 million of 1-4 family mortgage loans, the majority of
the consumer loans represent either second mortgages in the form of term loans and home equity
lines of credit or first lien positions on home loans. The Bank does not underwrite subprime loans,
negative amortization loans or discounted teaser rates on ARM loans. Included in the 1-4 family
mortgage portfolio is $474.3 of amortizing loans and $172.7 million of interest only loans as of
December 31, 2010. The initial interest only period for $63.5 million of the aggregate $172.7
million has expired, and the loans are contractually amortizing at December 31, 2010. Originated
adjustable 1-4 family mortgage loans are made at competitive market rates in the primary lending
areas of the Bank with add-on margins ranging from 250 to 300 basis points to either the constant
maturity treasury yields or Libor. Adjustable-rate 1-4 family mortgage loans purchased in the
secondary market that are serviced by national service providers are prudently underwritten with
emphasis placed on loans to value of less than 80% combined with high FICO scores. The purchased
loan portfolio is geographically diversified throughout the United States and is generally
considered well collateralized. Aside from the states where Parkvale has offices, no other state
exceeds 5% of the mortgage loan portfolio. While management believes the allowance is adequate to
absorb estimated credit losses in its existing loan portfolio, future adjustments may be necessary
in circumstances where economic conditions change and affect the assumptions used in evaluating the
adequacy of the allowance for loan losses.
Liquidity and Capital Resources:
Federal funds sold decreased $29.2 million or 21.5% from June 30, 2010 to December 31, 2010, as
Parkvale shifted a portion of such funds into higher yielding investment securities. Investment
securities held to maturity increased $58.4 million or 13.2% from June 30, 2010 to December 31,
2010, primarily due to purchases of agency mortgage-backed securities. Interest-earning deposits in
other institutions increased $2.6 million or 319.7%. Loans, net of allowance, decreased $14.5
million or 1.4% from June 30, 2010 to December 31, 2010. The decrease in the loan portfolio was
primarily due to a $13.7 million or 2.1% decline in one-to-four family residential loans. Deposits
decreased $29.5 million or 2.0% from June 30, 2010 to December 31, 2010, FHLB advances decreased
$20.1 million or 10.8% due to the maturity of three advances aggregating $20 million at costs of
4.12% to 6.05%, escrow for taxes and insurance decreased $561,000 or 7.5%, other debt decreased
$2.6 million or 18.5% and other liabilities decreased $474,000 or 11.2%. Parkvale Banks FHLB
advance available maximum borrowing capacity is $579.8
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million at December 31, 2010. If Parkvale were to experience a deposit decrease in excess of the
available cash resources and cash equivalents, the FHLB and Federal Reserve could be utilized to
fund a rapid decrease in deposits.
TARP Capital Purchase Program: On October 14, 2008, the United States Department of the Treasury
(the Treasury) announced a voluntary Capital Purchase Program (the CPP) under which the
Treasury will purchase senior preferred shares from qualifying financial institutions. The plan is
part of the $700 billion Emergency Economic Stabilization Act signed into law in October 2008.
On December 23, 2008, pursuant to the CPP established by the Treasury, Parkvale entered into a
Letter Agreement, which incorporates by reference the Securities Purchase Agreement Standard
Terms, with the Treasury (the Agreement), pursuant to which Parkvale issued and sold to the
Treasury for an aggregate purchase price of $31,762,000 in cash (i) 31,762 shares of its Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, par value $1.00 per share, having a liquidation
preference of $1,000 per share (the Series A Preferred Stock), and (ii) a ten-year warrant to
purchase up to 376,327 shares of common stock, par value $1.00 per share, of Parkvale (Common
Stock), at an initial exercise price of $12.66 per share, subject to certain anti-dilution and
other adjustments (the Warrant).
The Series A Preferred Stock pays cumulative dividends at a rate of 5% per annum on the liquidation
preference for the first five years, and thereafter at a rate of 9% per annum. The Series A
Preferred Stock has no maturity date and ranks senior to the Common Stock (and pari passu with
Parkvales other authorized shares of preferred stock, of which no shares are currently
outstanding) with respect to the payment of dividends and distributions and amounts payable in the
unlikely event of any future liquidation or dissolution of Parkvale. Parkvale may redeem the Series
A Preferred Stock at a price of $1,000 per share plus accrued and unpaid dividends, subject to the
concurrence of the Treasury and its federal banking regulators. Prior to December 23, 2011, unless
the Corporation has redeemed the Series A Preferred Stock or the Treasury has transferred the
Series A Preferred Stock to a third party, the consent of the Treasury will be required for the
Corporation to increase its Common Stock dividend or repurchase its Common Stock or other equity or
capital securities, other than in certain circumstances specified in the Agreement.
The Warrant is immediately exercisable. The Warrant provides for an adjustment of the exercise
price and the number of shares of Common Stock issuable upon exercise pursuant to customary
anti-dilution provisions, such as upon stock splits or distributions of securities or other assets
to holders of Common Stock, and upon certain issuances of Common Stock at or below a specified
price relative to the then-current market price of Common Stock. The Warrant expires ten years from
the issuance date. Pursuant to the Agreement, the Treasury has agreed not to exercise voting power
with respect to any shares of Common Stock issued upon exercise of the Warrant.
Term Debt: On December 30, 2008, the Corporation entered into a Loan Agreement with PNC Bank,
National Association (PNC) for a term loan in the amount of $25.0 million (the Loan). The Loan
pays interest at a rate equal to LIBOR plus three hundred and twenty five basis points, payable
quarterly. Principal on the Loan is due and payable in fifteen consecutive quarterly payments of
$625,000, commencing on March 31, 2010, with the remaining outstanding balance, which is scheduled
to be $15,625,000, due and payable on December 31, 2013 (the Maturity Date). The outstanding
balance due under the credit facility may be repaid, at any time, in whole or in part at the
Corporations option. In connection with the Loan, the Corporation executed a Term Note, dated
December 30, 2008, to evidence the Loan and a Pledge Agreement, dated December 30, 2008, whereby
the Corporation granted PNC a security interest in the outstanding capital stock of Parkvale
Savings Bank, the wholly owned subsidiary of the Corporation. The Loan Agreement contains customary
and standard provisions regarding representations and warranties of the Corporation, covenants and
events of default. If the Corporation has an event of default, the interest rate of the loan may
increase by 2% during the period of default. The
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Corporation was in compliance with all terms and conditions of the Loan Agreement, as amended, at
December 31, 2010.
On January 7, 2009, the Corporation entered into swap arrangements with PNC to convert portions of
the LIBOR floating interest rates to fixed interest rates for three and five years. Under the swap
agreements after the effects of the add-on of 325 basis points to LIBOR, $5.0 million matures on
December 31, 2011 at a rate of 4.92% to 6.92% and an additional $15.0 million matures on December
31, 2013 at a rate of 5.41% to 7.41%.
In January 2009, the Corporation entered into interest rate swap contracts to modify the interest
rate characteristics of designated debt instruments from variable to fixed in order to reduce the
impact of changes in future cash flows due to interest rate changes. The Corporation hedged its
exposure to the variability of future cash flows for all forecasted transactions for a maximum of
three to five years for hedges converting an aggregate of $20.0 million in floating-rate debt to
fixed. The fair value of these derivatives, net of taxes, totals a loss of $334,000 at December 31,
2010, and is reported as a contra account in other liabilities and offset in accumulated other
comprehensive income for the effective portion of the derivatives. Ineffectiveness of these swaps,
if any, is recognized immediately in earnings. The change in value of these derivatives during the
quarter ended December 31, 2010 resulted in no adjustment to current earnings, as the swaps were
measured as effective.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability to
meet contractual terms. When the fair value of a derivative instrument contract is positive, this
generally indicates that the counterparty or customer owes the Corporation, and results in credit
risk to the Corporation. When the fair value of a derivative instrument contract is negative, the
Corporation owes the customer or counterparty and therefore, has no credit risk.
Capital: Of the $56.8 million of gross proceeds from the sale of the Series A Preferred Stock and
the Loan from PNC, the Corporation contributed $50 million to the Bank as additional Tier 1 capital
at the Bank. As noted above, the PNC Loan will be repaid quarterly, with a final principal payment
of $15.6 million due on December 31, 2013, and the dividend rate on the Series A Preferred Stock
will increase from 5% to 9% per annum after the five-year anniversary date of the issuance of such
stock. The Bank may not pay any dividends to the Corporation unless the Bank receives prior
non-objection of its regulators.
Shareholders equity was $122.1 million or 6.82% of total assets at December 31, 2010. During the
six months ended December 31, 2010, shareholders equity increased by $3.2 million due primarily to
net income of $4.1 million, offset by declaration of common and preferred stock dividends of $1.0
million. The other comprehensive loss is due primarily to non-credit related OTTI charges
recognized on held to maturity investment securities. The Corporation is restricted from
repurchasing additional shares of its Common Stock prior to December 23, 2011 unless it either
redeems the Series A Preferred Stock or receives the written consent of the Treasury.
The Bank is required to maintain Tier 1 (Core) capital equal to at least 4% of the institutions
adjusted total assets and Total (Supplementary) Risk-Based capital equal to at least 8% of its
risk-weighted assets. At December 31, 2010, Parkvale Bank was in compliance with all applicable
regulatory requirements, with Tier 1 Core, Tier 1 Risk-Based and Total Risk-Based ratios of 6.52%,
10.09% and 11.23%, respectively.
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The regulatory capital ratios for Parkvale Bank at December 31, 2010 are calculated as follows:
(Dollars in 000s)
Tier 1 | Tier 1 | Total | ||||||||||
Core | Risk-Based | Risk-Based | ||||||||||
Capital | Capital | Capital | ||||||||||
Equity capital (1) |
$ | 140,806 | $ | 140,806 | $ | 140,806 | ||||||
Less non-allowable intangible assets |
(28,057 | ) | (28,057 | ) | (28,057 | ) | ||||||
Less non-allowable deferred tax asset |
(9,168 | ) | (9,168 | ) | (9,168 | ) | ||||||
Plus permitted valuation allowances (2) |
| | 13,247 | |||||||||
Plus accumulated other comprehensive income |
13,243 | 13,243 | 13,243 | |||||||||
Total regulatory capital |
116,824 | 116,824 | 130,071 | |||||||||
Minimum required capital |
71,628 | 46,334 | 92,669 | |||||||||
Excess regulatory capital |
$ | 45,196 | $ | 70,490 | $ | 37,402 | ||||||
Adjusted total assets (1) |
$ | 1,790,705 | $ | 1,158,360 | $ | 1,158,360 | ||||||
Regulatory capital as a percentage |
6.52 | % | 10.09 | % | 11.23 | % | ||||||
Minimum capital required as a percentage |
4.00 | % | 4.00 | % | 8.00 | % | ||||||
Excess regulatory capital as a percentage |
2.52 | % | 6.09 | % | 3.23 | % | ||||||
Well capitalized requirement |
5.00 | % | 6.00 | % | 10.00 | % | ||||||
(1) | Represents amounts for the consolidated Bank as reported to the Pennsylvania Department of Banking and FDIC on Form 041 for the quarter ended December 31, 2010. | |
(2) | Limited to 1.25% of risk adjusted total assets. |
Results of Operations Comparison of Three Months Ended December 31, 2010 and 2009:
For the three months ended December 31, 2010, net income available to common shareholders was $1.4
million compared to $2.0 million for the quarter ended December 31, 2009. Net income per common
diluted share was $0.26 for the quarter ended December 31, 2010 and $0.38 for the quarter ended
December 31, 2009. Excluding the preferred stock dividend, net income was $1.8 million for the
three months ended December 31, 2010, compared to $2.4 million for the three months ended December
31, 2009. The $584,000 decrease in net income for the December 31, 2010 quarter is primarily due to
a $909,000 decrease in gain on sale of assets, a $338,000 increase in non-interest expense and a
$164,000 increase in non-cash debt security impairment charges. These factors were partially offset
by a $383,000 decrease in the provision for loan losses and a $239,000 decrease in income tax
expense, reflecting a lower level of pre-tax income. The increase in non-interest expense for the
quarter was primarily due to a $259,000 increase in FDIC insurance premiums.
Interest Income:
Parkvale had interest income of $16.4 million during the three months ended December 31, 2010
versus $19.3 million during the comparable period in 2009. The $2.9 million or 15.2% decrease is
the result of a 39 basis point decrease in the average yield from 4.30% in the December 2009
quarter to 3.91% in the current quarter and a $123.1 million or 6.9% decrease in the average
balance of interest-earning assets. Interest income from loans decreased $1.4 million or 10.0%,
resulting from a decrease in the average outstanding loan balances of $41.1 million or 3.9% and a
34 basis point decrease in the average yield from 5.35% in 2009 to 5.01% in 2010. The decrease in
the loan portfolio was primarily due to a decline in single-family residential mortgage loans.
Investment interest income decreased by $1.5 million or 30.2% due to a decrease of 81 basis points
in the average yield from 3.51% in 2009 to 2.70% in 2010 and a decrease of $52.1 million or 9.2% in
the average balance. The decrease in the average balance of investment securities was primarily due
to the sale of $49.0 million of investment securities available for sale during the quarter ended
September 30, 2010. Interest income earned on federal funds sold decreased by $20,000 or 19.0% from
the 2009 quarter due to a decrease of $29.9 million or 18.1% in the average balance. The current
Federal Reserve target rate is .25%. The weighted average yield on all interest-earning assets was
3.96% at December 31, 2010 and 4.28% at December 31, 2009.
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Interest Expense:
Interest expense decreased $3.1 million or 30.0% from the 2009 to the 2010 quarter. The decrease
was due to a 55 basis point decrease in the average rate paid on deposits and borrowings from 2.25%
in 2009 to 1.70% in 2010 and a decrease in the average deposits and borrowings of $63.5 million or
3.6%. At December 31, 2010, the average rate payable on liabilities was 1.27% for deposits, 4.71%
for borrowings, 5.09% for term debt and 1.69% for combined deposits, borrowings and debt.
Net Interest Income:
Net interest income was $9.2 million for the quarter ended December 31, 2010 compared to $9.1
million for the quarter ended December 31, 2009. The $122,000 or 1.3% increase is attributable to a
16 basis point increase in the average interest rate spread from 2.05% in 2009 to 2.21% in 2010
partially offset by a decrease of $59.6 million in net average interest-earning assets.
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 December 31, 2010 decreased by
$383,000 or 27.4% from the 2009 quarter based upon an analysis of credit factors, which include the
internal loan classifications and past due analysis related to the Banks portfolio and related
reserve levels as of December 31, 2010. The level of nonperforming loans decreased by $3.7 million
or 12.3% at December 31, 2010 compared to December 31, 2009. Aggregate valuation allowances were
1.89%, 1.83% and 1.76% of gross loans at December 31, 2010, June 30, 2010 and December 31, 2009,
respectively.
Nonperforming loans and real estate owned aggregated $35.6 million, $35.2 million and $36.3 million
at December 31, 2010, June 30, 2010 and December 31, 2009, representing 1.99%, 1.91% and 1.90% of
total assets at the respective balance sheet dates. Total loan loss reserves at December 31, 2010
were $19.6 million, compared to $19.2 million at June 30, 2010 and $18.9 million at December 31,
2009. Management considers loan loss reserves sufficient when compared to the value of underlying
collateral. See Nonperforming Loans and Foreclosed Real Estate and Allowance for Loan Losses
concerning trends experienced. Collateral is considered and evaluated when establishing the
provision for loan losses and the sufficiency of the allowance for loan losses. Management believes
the allowance for loan losses is adequate to cover the amount of probable loan losses.
Noninterest Income:
Total noninterest income for the December 31, 2010 quarter decreased by $990,000 or 35.3% due to
net gains on sale of assets totaling $194,000 during the current quarter compared to a $1.1 million
recovery on the sale of a previously written-down preferred stock during the December 31, 2009
quarter. Non-cash debt security impairment charges recognized in earnings increased by $164,000
during the December 31, 2010 quarter compared to the prior year period. The December 31, 2010
quarter writedowns were due to the other than temporary impairment of five pooled trust preferred
securities resulting primarily from the deterioration of and payment deferral by underlying issuers
during the current quarter. The impairment charge recognized during the December 31, 2009 quarter
was the result of issuers going into default status on two pooled trust preferred securities and
credit deterioration related to one non agency CMO security. Noninterest income included increases
of $50,000 or 3.1% of service charges on deposit accounts, $22,000 or 6.1% of service charges and
other fees, and $11,000 or 2.2% of other income. Annuity fee and commission income was $238,000 in
the 2010 quarter compared to $194,000 in the 2009 quarter.
Noninterest Expense:
Total noninterest expense increased by $338,000 or 4.6% for the three months ended December 31,
2010 compared to the December 31, 2009 quarter. This increase is primarily due to a $259,000 or
40.2% increase in FDIC insurance related to a higher premium rate charged by the FDIC in 2010.
Compensation and employee benefits expense decreased by $153,000 or 4.2% during the quarter ended
December 31, 2010
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from the comparable 2009 quarter, primarily due to a reduction in the amount of incentive
compensation being accrued. Other expense increased $204,000 or 14.6% due to increased expenses
related to foreclosed real estate. Annualized noninterest expense as a percentage of average assets
was 1.69% for the quarter ended December 31, 2010 and 1.53% for the quarter ended December 31,
2009.
Income Tax Expense:
Income tax expense for the three months ended December 31, 2010 was $520,000 compared to $759,000
for the December 31, 2009 quarter. The income tax expense in the December 31, 2010 quarter is lower
primarily due to lower taxable income. The overall effective tax rate was 22.0% and 23.8% for the
three months ended December 31, 2010 and 2009, respectively. The effective tax rate in 2010 is
lower than the federal statutory rate of 35% due to a reversal of a previously provided tax
valuation allowance on equity securities, a tax refund from a tax rate differential due to NOL
carrybacks, and the tax benefits resulting from tax-exempt instruments. The effective tax rate in
2009 was lower than the federal statutory rate of 35% primarily due to a $243,000 reversal of a
previously provided tax valuation allowance from the partial recovery of a sale of preferred stock.
Results of Operations Comparison of Six Months Ended December 31, 2010 and 2009:
For the six months ended December 31, 2010, net income available to common shareholders was $3.3
million compared to $2.5 million for the six months ended December 31, 2009. Net income per common
diluted share was $0.59 for the six months ended December 31, 2010 and $0.46 for the six months
ended December 31, 2009. Excluding the preferred stock dividend, net income was $4.1 million for
the six months ended December 31, 2010, compared to $3.3 million for the six months ended December
31, 2009. The $784,000 increase in net income for the six months ended December 31, 2010 reflects a
$1.6 million decrease in the provision for loan losses and a $1.6 million decrease in non-cash debt
security impairment charges. These factors were partially offset by an $839,000 decrease in gain
on sale of assets, a $585,000 increase in FDIC insurance premiums and a $914,000 increase in income
tax expense.
Interest Income:
Parkvale had interest income of $33.2 million during the six months ended December 31, 2010 versus
$39.3 million during the comparable period in 2009. The decrease of $6.1 million or 15.6% is
attributable to a 45 basis point decrease in the average yield from 4.38% in 2009 to 3.93% in 2010
and a $107.5 million or 6.0% decrease in the average interest-earning asset portfolio. Interest
income from loans decreased $3.2 million or 10.9% due to a decrease in the average loan balance of
$55.5 million or 5.2% and a 32 basis point decrease in the average yield from 5.38% in 2009 to
5.06% in 2010. Income from investments decreased by $3.0 million or 29.3% from 2009 due to a 77
basis point decrease in the average yield from 3.61% in 2009 to 2.84% in 2010 and a decrease in the
average investment balance of $56.2 million or 10.1%. Interest income earned on federal funds sold
increased by $4,000 or 2.0% from the six months ended December 31, 2009 due to an increase of $4.2
million or 2.7% in the average federal fund balance.
Interest Expense:
Interest expense decreased by $5.8 million or 27.7% from the 2009 six-month period to the 2010
six-month period. The decrease was due to a 61 basis point decrease in the average rate paid from
2.39% in 2009 to 1.78% in 2010 and a decrease in average deposits and borrowings of $46.0 million
or 2.6%.
Net Interest Income:
Net interest income was $18.1 million for the six months ended December 31, 2010 compared to $18.4
million for the six months ended December 31, 2009. The $337,000 or 1.8% decrease is attributable
to a decrease of $61.4 million or 127.3% in net average interest-earning assets, offset by a 16
basis point increase in the average interest rate spread from 1.99% in 2009 to 2.15% in 2010.
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Provision for Loan Losses:
Provision for loan losses decreased by $1.6 million or 44.4% from the six-month period ended
December 31, 2009 to the six months ended December 31, 2010 based upon an analysis of credit
factors, which include the internal loan classifications and past due analysis related to the
Banks portfolio and related reserve levels as of December 31, 2010. Aggregate valuation allowances
were 1.89% of gross loans at December 31, 2010, 1.83% of gross loans at June 30, 2010 and 1.76% of
gross loans at December 31, 2009. Total loan loss reserves at December 31, 2010 were $19.6 million.
Noninterest Income:
Noninterest income increased by $1.2 million or 32.2% for the six months ended December 31, 2010
from the six months ended December 31, 2009 primarily due to lower levels of writedowns of
investment securities. The net impairment loss recognized in earnings during the current six month
period was $1.9 million compared to $3.5 million for the six months ended December 31, 2009, which
related to continuing deterioration, deferrals and defaults by issuers in our pooled trust
preferred securities in both periods. The gain on sale of assets decreased by $839,000 or 38%
during the six months ended December 31, 2010 compared to the prior year period. Service charges
on deposits increased by $157,000 or 4.8%. Other fees and service charges increased by $36,000 or
5.0% for all types of products. Other income increased by $238,000 or 22.6%. Annuity fee and
commission income was $551,000 for the six months ended December 31, 2010 compared to $421,000 for
the six months ended December 31, 2009.
Noninterest Expense:
Noninterest expenses increased by $796,000 or 5.3% for the six month period ended December 31, 2010
from the comparable period in 2009. The increase in noninterest expense is primarily attributable
to an increase in FDIC insurance expense of $585,000 or 48.2% due to a higher premium rate charged
by the FDIC in 2010. Other expense increased $240,000 or 8.1% primarily due to increased costs
associated with maintaining foreclosed real estate. Annualized noninterest expenses as a percentage
of average assets were 1.71% for the six months ended December 31, 2010 compared to 1.56% for the
six months ended December 31, 2009.
Income Tax Expense:
Income tax expense increased by $914,000 in the six months ended December 31, 2010 compared to the
six months ended December 2009, due to an increase in taxable income in the current six months,
compounded by a higher level of tax valuation allowance reversals in fiscal 2010. The lower level
of taxable income in the six months ended December 31, 2009 was primarily due to writedowns of
securities. The effective tax rates were 22.2% and 6.9% for the six months ended December 31, 2010
and 2009, respectively. The effective tax rate in the first half of fiscal 2011 is lower than the
statutory rate of 35% due to a tax refund, a reversal of tax valuation allowance from the sale of
equity securities, and the tax benefits resulting from tax-exempt instruments. The effective tax
rate in the first half of fiscal 2010 was lower than the statutory rate of 35% primarily due to the
reversal of a $734,000 tax valuation allowance upon the sale of preferred stock investments,
combined with the tax benefits from tax-exempt instruments.
Impact of Inflation and Changing Prices:
The financial statements and related data presented herein have been prepared in accordance with
U.S. GAAP, which requires 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 institutions 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are presented at June 30, 2010 in
Item 7A of Parkvale Financial Corporations Form 10-K, filed with the SEC on September 13,
2010, as amended on November 12, 2010.
Item 4. Controls and Procedures
Disclosure controls and procedures are monitored and supervised by Parkvales management,
including the CEO and Chief Financial Officer, regarding the effectiveness of the design and
operation of Parkvales disclosure controls and procedures. Parkvales management, including
the CEO and Chief Financial Officer, concluded that Parkvales disclosure controls and
procedures were effective as of December 31, 2010. There have been no changes in Parkvales
internal controls or in other factors that materially affected, or that are reasonably
likely to materially affect, Parkvales internal controls.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
Risk factor disclosures are presented at June 30, 2010 in Item 1A of the Corporations Form
10-K, filed with the SEC on September 13, 2010, as amended on November 12, 2010. Management
believes that there have been no material changes in Parkvales risk factors since June 30,
2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | On December 31, 2010, Parkvale Financial Corporation (the Corporation) sold 46,468 shares of its common stock, par value $1.00 per share, out of treasury to the Parkvale Financial Corporation Employee Stock Ownership Plan (the ESOP) at the December 30, 2010 closing price of $9.08 per share. No underwriting discounts or brokerage commissions were paid. The gross sales proceeds aggregated $421,929.40 and will be used by the Corporation for general business purposes. | |
(b) | Not applicable | |
(c) | Not applicable |
Item 3. Defaults Upon Senior Securities
None
Item 4. Reserved
N/A
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. |
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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: February 14, 2011 | By: | /s/ Gilbert A. Riazzi | ||
Gilbert A. Riazzi | ||||
Vice President and Chief Financial Officer |
||||
DATE: February 14, 2011 | By: | /s/ Robert J. McCarthy, Jr. | ||
Robert J. McCarthy, Jr. | ||||
President and Chief Executive Officer |
||||
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