SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Fiscal Period Ended: June 30, 1997
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to _________
Commission File No: 0-18833
Chester Valley Bancorp Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2598554
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 E. Lancaster Ave., Downingtown PA 19335
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 269-9700
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value Per Share
---------------------------------------
(Title of Class)
<PAGE>
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 (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $23,892,931
As of September 1, 1997, the aggregate value of the 1,757,559 shares of Common
Stock of the registrant which were issued and outstanding on such date,
excluding 301,821 shares held by all directors and officers of the registrant as
a group, was approximately $42.18 million. This figure is based on the closing
sales price of $24.00 per share of the registrant's Common Stock on September 1,
1997.
Number of shares of Common Stock outstanding as of September 1, 1997: 2,059,380
Transitional Small Business Disclosure Format. YES [ ] NO [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(1) Portions of the Annual Report to shareholders for the year ended June
30, 1997, are incorporated into Part II, Items 5 - 7 of this Form
10-KSB.
(2) Portions of the Definitive Proxy Statement for the 1997 annual meeting
of shareholders are incorporated into Part III, Items 9 - 12 of this
Form 10-KSB.
<PAGE>
PART I.
ITEM 1. BUSINESS
General
Chester Valley Bancorp Inc. (the "Company"), established in 1989, is a
Pennsylvania-chartered unitary thrift holding company, headquartered in
Downingtown, Pennsylvania. The business of the Company primarily consists of the
ownership of 100% of the outstanding capital stock of First Financial Bank
("First Financial" or the "Bank"), a Pennsylvania-chartered stock savings
association founded in 1922, which conducts operations through seven
full-service offices located in Downingtown, Exton, Frazer, Thorndale, Westtown,
Airport Village in Coatesville, and Brandywine Square between Downingtown and
Exton, Pennsylvania. The Bank has always emphasized a strong community
orientation and personalized customer service.
The Bank is primarily engaged in attracting deposits from the general
public and using such deposits, together with borrowings and other sources of
funds, to originate and purchase first mortgage loans as well as construction
loans secured by residential and commercial real estate, consumer loans, and
other non-mortgage loans.
Excluding the one-time Savings Institutions Insurance Fund ("SAIF")
special assessment, the Company had net income of $2.76 million for fiscal 1997,
as compared to $2.44 million in fiscal 1996. The pre-tax amount of the SAIF
assessment was $1.39 million, resulting in an after-tax charge to earnings of
approximately $832,000. After recognition of this assessment, the Company earned
net income of $1.93 million for fiscal 1997. The Company's operating results are
derived almost entirely from the Bank's results of operations.
The Company's earnings depend primarily on the difference between the
yield earned on its loan and investment securities portfolios and its cost of
funds, consisting primarily of the interest paid on deposits and, to a lesser
extent, on borrowings ("interest rate spread"). During fiscal year 1997 the
Company's interest rate spread averaged 3.38% compared to 3.21% and 3.19% in
fiscal years 1996 and 1995, respectively. Net interest income, on a fully tax
equivalent basis, increased 13.9%, or $1.39 million to $11.36 million in 1997
from $9.97 million in 1996, compared to a 6.6% increase of $613,000 from 1995 to
1996. Net interest margin, on a fully tax equivalent basis, was 4.03% for the
year ended 1997, compared to 3.86% in 1996 and 3.73% in 1995.
Total other income increased $201,000 or 17.9% to $1.32 million for the
year ended June 30, 1997, from fiscal 1996. An increase of $44,000 in service
charges and fees in fiscal 1997 as the result of an increase in commissions
earned on the sale of disability and life insurance to the Bank's loan
customers, an increase in the number of safe deposit boxes rented, and fees
earned on the Bank's debit card contributed to the increase in other income. The
Bank recognized a gain of $2,400 on the sale of real estate owned during fiscal
1997 compared to a loss of $52,000 during the prior fiscal year. In addition,
during fiscal 1997 the Bank purchased properties adjacent to its main office in
order to expand its facilities to accommodate its growth. The rental income from
these properties also contributed to the increase in other income during fiscal
1997.
Total other income increased $78,000 or 7.5% to $1.12 million for the
year ended June 30, 1996, as compared to fiscal 1995. During fiscal 1996 the
Company recognized gains on the sale of securities available for sale of
$148,000 compared to no such gains in fiscal 1995. However, this increase was
partially offset in fiscal 1996 by the recognition of a $52,000 loss on the sale
of two real estate owned properties. An increase of $86,000 in service charges
and fees in fiscal 1996 as the result of increased fees and the number of
deposit accounts also contributed to the increase in other income. Other income
in fiscal 1995 included a $100,000 gain on the sale of land held for
development.
Excluding the $1.39 million one-time SAIF assessment, operating
expenses totaled $7.80 million for fiscal year 1997, an increase of $800,000 or
11.4% over fiscal 1996. The one-time assessment was part of legislation adopted
to recapitalize the SAIF and required the Bank to pay 65.7 cents for every $100
of deposits. As a result of the special assessment, the Bank's federal insurance
premiums decreased from $0.23 per $100 of deposits to $0.06 per $100 of deposits
in the third fiscal quarter of 1997. The Bank anticipates paying this reduced
premium for the foreseeable future. This reduction in federal insurance premiums
will favorably impact expense for fiscal 1998. The increase in operating
expenses over the prior fiscal year was primarily due to a $489,000 or 15.0%
increase in salaries and employee benefits related to general salary increases
as well as the hiring of additional staff for the Bank's newest branch office,
Brandywine Square, and for the Bank's commercial loan department. Also
contributing to the increase in other operating expenses was a $196,000 or 15.1%
increase in occupancy and furniture and equipment costs associated with the
opening of the Brandywine Square branch in the first quarter of fiscal 1997.
Operating expenses totaled $7.00 million for the fiscal year 1996, an
increase of $383,000 or 5.8% over the prior fiscal year. The increase over the
prior fiscal year was primarily due to a $197,000 or 6.4% increase in salaries
and employee benefits related to general salary increases, increased benefit
costs, and a full year of expenses related to the staffing required for the
Company's Airport Village branch which opened during fiscal 1995. Also
contributing to the increase in other operating expenses was a $118,000 or 10.0%
increase in occupancy and furniture and equipment costs associated with
increased costs of maintenance contracts on computer equipment, the renovation
of one of the Bank's branches, and the purchase of software and equipment
related to the upgrade of the computer network for the operations department of
the Bank.
The Company's assets totaled $323.67 million at June 30, 1997, as
compared with $272.93 million as of June 30, 1996. This 18.6% increase in assets
was primarily funded by an increase in deposits of $32.54 million or 14.3% from
$228.21 million at June 30, 1996, to $260.75 million at June 30, 1997, and an
increase in Federal Home Loan Bank ("FHLB") advances of $16.23 million from
$13.97 million to $30.20 million at June 30, 1996 and 1997, respectively. The
increase in deposits and advances was used in part to fund loan originations
during the period, which contributed to an increase in net loans receivable and
loans held for sale from $223.96 million at June 30, 1996, to $257.15 million at
June 30, 1997. In addition, the Company's investment securities held to maturity
and available for sale along with its interest-bearing deposits increased in the
aggregate from $39.54 million to $53.88 million at June 30, 1996 and 1997,
respectively.
In September 1996 and 1995 the Company paid 5% common stock dividends
in the amounts of 77,731 and 74,110 shares, respectively, from authorized but
unissued common stock, with fractional shares paid in the form of cash. In March
1997 the Company paid a five-for-four stock split effected in the form of a
dividend in the amount of 414,188 shares, with fractional shares paid in the
form of cash.
The Bank's primary market area includes Chester County and sections of
the four contiguous counties (Delaware, Montgomery, Berks, and Lancaster) in
Pennsylvania. Chester County, in which all of the Bank's offices are located,
continues to grow in terms of economic development and population growth. In
1990 the population of Chester County was approximately 376,400, an 18.9%
increase from 1980, while by the end of 1996 it had further increased to
419,070.
Customer deposits with First Financial are insured to the maximum
extent provided by law by the Federal Deposit Insurance Corporation ("FDIC")
through the SAIF. The Bank is subject to examination and comprehensive
regulation by the FDIC, the Office of Thrift Supervision ("OTS"), and the
Pennsylvania Department of Banking ("Department"). It is a member of the FHLB of
Pittsburgh ("FHLBP"), which is one of the 12 regional banks comprising the FHLB
System. The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.
Lending Activities
Loan Portfolio Composition. The Company's net loan portfolio (net of
undisbursed proceeds, deferred fees and allowance for possible loan losses)
totaled $257.15 million at June 30, 1997, representing approximately 79.4% of
the Company's total assets of $323.67 million at that date.
<PAGE>
The following table presents information regarding the Company's loan portfolio
by type of loan indicated.
(Dollars in Thousands)
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------ ----------------- ----------------- ------------------
% of % of % of % of
Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans
------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family $158,537 58.4% $147,274 62.6% $150,639 66.0% $130,808 63.8%
Multi-family 893 0.3 1,256 0.5 1,359 0.6 1,562 0.8
Commercial 33,981 12.5 22,552 9.6 22,433 9.8 16,853 8.2
Construction and land
acquisition(1) 22,907 8.5 17,028 7.2 13,120 5.7 17,631 8.6
------------------- ------------------ ------------------ -------------------
Total real estate loans 216,318 79.7 188,110 79.9 187,551 82.1 166,854 81.4
Commercial business loans(2) 7,863 2.9 5,701 2.4 4,039 1.8 3,581 1.8
Consumer loans(3) 47,343 17.4 41,486 17.7 36,634 16.1 34,512 16.8
------------------- ------------------ ------------------ -------------------
Total loans receivable 271,524 100.0% 235,297 100.0% 228,224 100.0% 204,947 100.0%
===== ===== ===== =====
Less:
Loans in process (10,092) (7,134) (3,385) (6,941)
Allowance for possible
loan losses (2,855) (2,667) (2,449) (2,199)
Deferred fee income (1,537) (1,533) (1,574) (1,514)
--------- -------- -------- --------
Net loans receivable 257,040 223,963 220,816 194,293
Loans held for sale, single-family
residential mortgages 106 -- 142 --
--------- -------- -------- --------
Net loans receivable and
loans held for sale $257,146 $223,963 $220,958 $194,293
======== ======== ======== ========
</TABLE>
- ----------------
(1) Includes construction loans for both residential and commercial real
estate properties.
(2) Consists primarily of secured equipment loans.
(3) Consists primarily of home equity loans and lines of credit, home
improvement, automobile and other personal loans.
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-------------------
1993
------------------
% of
Total
Amount Loans
------- -----
<S> <C> <C>
Real estate loans:
Residential:
Single-family $113,860 60.7%
Multi-family 1,886 1.0
Commercial 14,679 7.8
Construction and land
acquisition(1) 17,390 9.3
-------------------
Total real estate loans 147,815 78.8
Commercial business loans(2) 4,008 2.1
Consumer loans(3) 35,892 19.1
-------------------
Total loans receivable 187,715 100.0%
=====
Less:
Loans in process (8,668)
Allowance for possible
loan losses (1,770)
Deferred fee income (1,236)
--------
Net loans receivable 176,041
Loans held for sale, single-family
residential mortgages --
--------
Net loans receivable and
loans held for sale $176,041
========
</TABLE>
- ----------------
(1) Includes construction loans for both residential and commercial real
estate properties.
(2) Consists primarily of secured equipment loans.
(3) Consists primarily of home equity loans and lines of credit, home
improvement, automobile and other personal loans.
<PAGE>
Contractual Maturities. The following table sets forth the contractual
principal repayments of the total loan portfolio, including loans in process, of
the Company as of June 30, 1997, by categories of loans. Adjustable, floating,
and fixed-rate loans are included in the period in which they mature.
<TABLE>
<CAPTION>
Principal Repayments
Contractually Due in Year(s) Ended June 30,
(In Thousands)
Total
Outstanding
at 2003
June 30, and
1997 1998 1999-2002 Thereafter
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Real estate loans:
Residential(1) ....................................... $159,430 $ 940 $ 5,943 $152,547
Commercial ........................................... 33,981 196 4,178 29,607
Construction and land acquisition(2) ................. 22,907 8,978 6,232 7,697
Commercial business loans(3) ........................... 7,863 2,949 3,251 1,663
Consumer loans(4) ...................................... 47,343 5,495 20,369 21,479
======== ======== ======== ========
Total loans .................................... $271,524 $ 18,558 $ 39,973 $212,993
======== ======== ======== ========
</TABLE>
(1) Includes mortgages on both single-family and multi-family (more than
four units) residential properties.
(2) Includes construction loans for both residential and commercial real
estate properties.
(3) Consists primarily of secured equipment loans.
(4) Consists primarily of home equity loans and lines of credit, home
improvement, automobile and other personal loans.
<PAGE>
The following table sets forth, as of June 30, 1997, the dollar amount of all
loans contractually due after June 30, 1998, which have fixed interest rates and
floating or adjustable rates.
<TABLE>
<CAPTION>
Contractual Obligations
Due After June 30, 1998
-------------------------------------------------
Floating/
Fixed Adjustable
Rates Rates
------------------------- ---------------------
(In Thousands)
<S> <C> <C>
Real estate loans:
Residential $ 68,214 $ 90,276
Commercial 3,548 30,237
Construction and land acquisition 3,144 10,785
Commercial business loans 3,201 1,713
Consumer loans 36,422 5,426
========================= =====================
Total loans $ 114,529 $ 138,437
========================= =====================
</TABLE>
Contractual principal repayments of loans do not necessarily reflect
the actual term of the Company's loan portfolio. The average life of mortgage
loans is substantially less than their contractual terms because of loan
prepayments and because of enforcement of due-on-sale clauses, which give the
Company the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates substantially exceed rates
on existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans substantially exceed current mortgage loan rates.
Origination, Purchase and Sale of Loans. As a Pennsylvania-chartered
savings institution, First Financial has general authority pursuant to the
Savings Association Code of 1967, as amended ("State Code"), to originate and
purchase loans secured by real estate located throughout the United States. Due
to the Company's strong community orientation, substantially all of the
Company's total mortgage loan portfolio is secured by real estate located in its
primary market area.
Residential and commercial real estate loans are originated directly by
the Company through salaried loan officers. In addition, from time to time the
Company utilizes third-party originators who use the same credit guidelines and
standards as the Company to originate residential loans. Residential and
commercial real estate loan originations are normally attributable to referrals
from real estate brokers and builders and other financial institutions, mortgage
brokers, depositors and walk-in customers. Consumer loan originations are
primarily attributable to existing customers and referrals, as well as third
party auto loans originated through dealers.
<PAGE>
The Company periodically identifies certain loans as held for sale at
the time of origination. These loans consist primarily of fixed-rate,
single-family residential mortgage loans which meet the underwriting
characteristics of certain government-sponsored enterprises (conforming loans).
The majority of conforming loans sold to date have consisted of sales to the
Federal Home Loan Mortgage Corporation ("FHLMC") of fixed-rate mortgage loans in
furtherance of the Company's goal of better matching the maturities and
interest-rate sensitivity of its assets and liabilities. In selling conforming
loans, the Company has retained the servicing thereon in order to increase its
non-interest income. At June 30, 1997, the Company serviced $24.89 million of
mortgage loans for others. Sales of loans produce future servicing income and
provide funds for additional lending and other purposes. The Company is a
qualified servicer for FHLMC, Federal National Mortgage Association ("FNMA"),
and Government National Mortgage Association ("GNMA"). In fiscal 1995 the
Company entered into an agreement with a third party to originate and sell jumbo
fixed-rate mortgage loans with servicing released upon sale of the loans. In
fiscal 1997 the Company had no jumbo fixed-rate loan originations or related
sales of such loans.
<PAGE>
The following table shows total loans and loans held for sale originated,
purchased, sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Total loans receivable and loans held for sale at
beginning of period ........................... $235,297 $228,366 $204,947
Real estate loan originations:
Residential ........................ 31,031 23,340 28,019
Commercial ......................... 10,018 3,674 8,144
Construction and land acquisition(1) 21,740 13,305 6,958
-------- -------- --------
Total real estate
loan originations ......... 62,789 40,319 43,121
Consumer loans(2) ....................... 19,163 19,044 12,004
Commercial business loans ............... 5,150 4,977 1,601
-------- -------- --------
Total loan
originations ............. 87,102 64,340 56,726
-------- -------- --------
Principal loan repayments ......................... 45,846 54,611 32,234
Sales of loans .................................... 4,923 2,798 1,073
-------- -------- --------
Total principal
repayments
and sales ............... 50,769 57,409 33,307
-------- -------- --------
Net increase in
loans and loans
held for sale ........... 36,333 6,931 23,419
-------- -------- --------
Total loans receivable and loans
held for sale at end of period ................ $271,630 $235,297 $228,366
======== ======== ========
</TABLE>
(1) Includes construction loans for both residential and commercial real
estate properties.
(2) Includes primarily home equity loans and lines of credit, home
improvement, automobile and other personal loans.
<PAGE>
Loans on Existing Residential Properties. The Company currently offers
adjustable-rate mortgages ("ARMs") which have up to 30-year terms and interest
rates which adjust either annually or every three years, or which are fixed
initially for the first three years, five years, seven years, or ten years, and
adjust annually thereafter, based upon changes in an index based on the weekly
average yield on United States Treasury securities adjusted to a constant
maturity of one year or three years, respectively, as made available by the
Federal Reserve Board plus a margin. In recent years, consumers have expressed
interest in ARMs which adjust on a three-year basis. The amount of any increase
or decrease in the interest rate for ARMs is limited to 2% or 3% per year and 6%
over the life of the loan. Although the Company has originated a small amount of
ARMs which include a conversion to a fixed-rate feature, substantially all of
the ARMs originated cannot be converted to fixed-rate loans. The Company does
not currently offer ARMs with negative amortization. The interest rates of ARMs
may not adjust as rapidly as changes in the Company's cost of funds.
Fixed-rate residential mortgage loans currently originated generally
have 30-year terms, although some have 15-year terms with commensurately lower
interest rates. Substantially all of the Company's long-term, fixed-rate
residential mortgage loans and ARMs include "due on sale" clauses. The Company
also offers a bi-weekly mortgage which is a fixed-rate loan with bi-weekly
payments. Based on current interest rates, it is repaid in approximately 22
years.
The Company also makes second mortgage loans and home equity loans. See
"Lending Activities - Consumer Loans."
Loans on Existing Commercial and Multi-Family Properties. During the
past several years, the Company has originated permanent loans secured by
multi-family and income-producing properties such as condominiums, apartment
buildings, office buildings and to a lesser extent, hotels and small shopping
centers. The Company intends to increase its emphasis on the origination of
commercial real estate loans and, as such, has increased its commercial lending
staff. The Company's Commercial Loan Department consists of four loan officers
with a combined total of 70 years of experience. The origination of multi-family
residential and commercial real estate loans has been used to shorten the
average maturity and increase the interest rate sensitivity of the Company's
loan portfolio as well as to generate increased fee income. All of the Company's
multi-family residential and commercial real estate loan portfolio is secured by
properties located in the Company's primary market area. As of June 30, 1997,
commercial and multi-family real estate loans, excluding construction loans for
such properties, amounted to $34.87 million, or 12.8% of the total loan
portfolio.
Commercial real estate loans have interest rates which adjust annually
after an initial three- or five-year term by a margin over the prime interest
rate as published in the money rates table of The Wall Street Journal on the
last business day of the month ("Prime Rate"). These loans typically have
amortization periods of up to 20 years, but occasionally provide that the loans
can be called prior to the end of the amortization period, generally at three,
five, seven or ten years after origination.
Commercial and multi-family residential real estate lending entails
significant additional risks as compared with single-family residential property
lending. Commercial and multi-family residential real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans is typically dependent on the successful
operation of the business or real estate project. The success of such projects
is sensitive to changes in supply and demand conditions in the market for
commercial and multi-family residential real estate as well as economic
conditions generally.
The Company seeks to ensure that the property securing these loans will
generate sufficient cash flow to adequately cover operating expenses and debt
service payments. To this end, permanent commercial and multi-family residential
real estate loans generally are made at a loan-to-value ratio of 75% or less. In
underwriting commercial and multi-family residential real estate loans,
consideration is given to the property's operating history, future operating
projections, current and projected occupancy, position in the local and regional
market, location and physical condition. The underwriting analysis also includes
credit checks and a review of the financial condition of the borrower. The
Company usually obtains full or partial loan guarantees from the principal(s)
involved.
Construction Loans. The Company also offers both fixed-rate and
adjustable-rate residential and commercial construction loans. Residential
construction loans are offered to individuals building their primary or
secondary residence as well as to selected local developers to construct one- to
four-family dwellings. Generally, loans for both residential and commercial
construction are made with terms that reflect the underlying cash flow of the
loan. However, extensions may be granted upon Board of Directors' approval after
additional underwriting procedures have been performed. Advances are made on a
percentage of completion basis, usually consisting of six draws. Residential
construction loans convert to permanent loans at the end of 12 months or upon
completion, whichever occurs first. The Company will only make construction
loans to a developer if 25% of the ground cost has been paid. At June 30, 1997,
$16.14 million or 5.9% of the Company's total loan portfolio consisted of
construction loans including loans in process. Loans in process related to such
loans totaled $8.93 million at June 30, 1997.
The Company has been active in construction lending for many years and
intends to continue its involvement in such lending in the future. Construction
lending is generally considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Risk of loss on
construction loans is dependent largely upon the accuracy of the initial
appraisal of the property's projected value at completion of construction as
well as the estimated cost, including interest, of construction. During the
construction phase, a number of factors could result in delays and cost
overruns. If either estimate proves to be inaccurate and the borrower is unable
to provide additional funds, the lender may be required to advance funds beyond
the amount originally committed to permit completion of the project and/or be
confronted at the maturity of the construction loan with a project whose value
is insufficient to assure full repayment.
Land Acquisition and Development Loans. The Company also offers land
acquisition and development loans. These types of loans are generally provided
only to local developers with strong financial positions and with whom the
Company is familiar. These loans typically have terms of one to three years and
carry a floating interest rate normally indexed to the Prime Rate. The Company
will lend up to 75% of the appraised value of the project. At June 30, 1997,
$6.76 million, or 2.5% of the Company's total loan portfolio consisted of land
acquisition and development loans, including loans in process. Loans in process
on such loans totaled $1.16 million at June 30, 1997. Like construction lending,
these loans generally are considered to involve a higher degree of risk of loss
than long-term financing on approved occupied real estate. The Company is
actively pursuing developers who can demonstrate the ability to meet cash flow
projections in order to repay the loan through a very strong financial position
and a reputation for successfully completing such projects in similar situations
with the Company.
Consumer Loans. The Company offers a wide variety of consumer loans,
including home equity loans, home improvement loans, equity lines of credit,
secured and unsecured personal loans and automobile loans. The Company has
aggressively marketed consumer loans in order to provide a wide range of
financial services to its customers and because of the shorter terms of and
normally higher interest rates on such loans. As of June 30, 1997, consumer
loans amounted to $47.34 million or 17.4% of the total loan portfolio.
The Company's home equity lines of credit currently provide for terms
of up to 10 years. The interest rate on the "Prime Line" adjusts monthly to the
Prime Rate. The loan has initial costs paid by the borrower. The regular equity
line of credit adjusts monthly at 1.50% above the Prime Rate. The limit of such
loan is the borrower's equity in his residence, subject to certain income
qualifications. The Company also makes fixed-rate, fixed-term home equity loans
on which it takes a first- or second-mortgage lien on the borrower's property.
These loans have terms of up to 15 years. The balance of the mortgages on the
properties cannot exceed 80% of the appraised value of the properties. Home
equity lines of credit and fixed-rate home equity loans amounted to $5.77
million and $35.49 million, respectively, as of June 30, 1997. The Company
originates fixed-rate bridge loans with loan-to-value ratios no greater than 80%
of the value of the secured real estate and at a maximum term of twelve months.
At June 30, 1997, the balance on these loans totaled $93,000. Unsecured personal
loans amounted to $671,500 at June 30, 1997, and consisted of fixed-rate loans
with maximum loan balances of $5,000 and terms no greater than 48 months. The
Company also originates fixed-rate loans on new and used automobiles. The terms
of such loans do not exceed 60 months on new cars and 48 months on used cars.
Automobile loans amounted to $4.61 million at June 30, 1997. The Company's
current line of credit provides for unsecured loans of up to $1,000 for terms of
up to 36 months with an interest rate set at 6.0% over the Prime Rate adjusted
monthly. Such loans have a floor of 10.0% and a ceiling of 18.0% and totaled
$341,000 at June 30, 1997. The Company originates Visa and MasterCard credit
card loans with up to $5,000 lines of credit and at an interest rate set at 6.0%
over the Prime Rate. At June 30, 1997, the Company had $356,000 in credit card
loans outstanding.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The Company
believes that the generally higher yields earned on consumer loans compensate
for the increased credit risk associated with such loans and that consumer loans
are important to its efforts to increase the interest rate sensitivity and
shorten the average maturity of its loan portfolio.
Commercial Business Loans. The Company has placed greater emphasis on
commercial business lending in an effort to better serve our community's needs,
obtain vital core non-interest bearing deposits, and increase the Company's
interest rate spread. A substantial majority of such loans are adjustable, being
tied to the Prime Rate. The Company will extend equipment loans, lines of
credit, letters of credit, and loans to purchase or start a business and will
normally obtain either full or partial personal guarantees from the principal(s)
involved. Such loans amounted to $7.86 million or 2.9% of the total loan
portfolio at June 30, 1997.
Regulatory Requirements and Underwriting Policies. At June 30, 1997,
pursuant to such provisions, the Bank was permitted to extend credit to any one
borrower totaling $4.44 million. Special rules applicable to savings
associations' provide authority to loan up to $500,000 to a single borrower for
any purpose and to develop domestic residential housing units up to the lesser
of 30% of the savings association's unimpaired capital and unimpaired surplus or
$30.0 million, if: (a) the purchase price of a single-family unit does not
exceed $500,000; (b) the savings association is in compliance with the fully
phased-in capital standards; (c) the OTS director, by order, authorizes the
higher limit; (d) the loans made to all borrowers in the aggregate do not exceed
150% of the savings association's unimpaired capital and unimpaired surplus; and
(e) all loans comply with applicable loan-to-value requirements.
Those loans to one borrower which were made prior to the enactment of
FIRREA and the OTS's final rule on loans to one borrower were limited by
previous regulations of the OTS to the lesser of 10% of the Bank's withdrawable
deposits or 100% of its regulatory capital. However, to the extent any such
loans exceed the limits imposed by FIRREA, the Bank cannot extend new funds and
must use its best efforts to reduce its interest in such loans. At June 30,
1997, the Bank's largest loan or group of loans to one borrower, including
related entities, aggregated $3.43 million, and is in conformity with the
current loans to one borrower regulations described above.
The Company is currently permitted to lend up to 100% of the appraised
value of the real property securing a loan; however, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
the Company is required by federal regulations, the State Code and Department
regulations to obtain private mortgage insurance on the portion of the principal
amount of the loan that exceeds 80% of the appraised value of the security
property. Pursuant to underwriting guidelines adopted by the Board of Directors,
private mortgage insurance must be obtained on all residential loans whose
loan-to-value ratios exceed 80%. The Company will generally lend up to 97% of
the appraised value of one-to four-family owner-occupied residential dwellings
when the required private mortgage insurance is obtained. The Company generally
originates loans of up to 75% of the appraised value of the properties securing
its commercial real estate and commercial business loans and 75% of the
appraised value upon completion or sale price, whichever is lower, for
construction loans. With respect to construction loans for owner-occupied
properties made in connection with the providing of the permanent financing, the
Company will lend up to 90% of the appraised value when the required private
mortgage insurance is obtained.
In the loan approval process, the Company assesses both the borrower's
ability to repay the loan and the adequacy of the proposed security. In
connection therewith, the Bank obtains an appraisal of the security property and
information concerning the income, financial condition, employment and credit
history of the applicant. Loans must be approved at various management levels,
including the Board of Directors, depending on the amount of the loan.
Residential mortgage loans in excess of $500,000, commercial business and
commercial real estate loans in excess of $450,000, and consumer loans in excess
of $250,000 require approval by the Board of Directors.
For mortgage loans the Company requires title insurance insuring the
priority of its lien, as well as fire and extended coverage casualty insurance,
in order to protect the properties securing its real estate loans. Borrowers
must also obtain flood insurance policies where the property is in a flood plain
as designated by the Federal Emergency Management Agency. Borrowers may be
required to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage loan account from which the Company makes
disbursements for items such as real estate taxes, hazard insurance premiums and
private mortgage insurance premiums as they fall due.
Loan Fee and Servicing Income. In addition to interest earned on loans,
the Company receives income through servicing of loans and fees in connection
with loan originations, loan modifications, late payments, prepayments,
repayments and changes of property ownership and for miscellaneous services
related to its loans. Income from these activities varies from period to period
with the volume and type of loans made.
Statement of Financial Accounting Standards ("SFAS") No. 91 requires
that loan origination fees and certain related direct loan origination costs be
offset and that the resulting net amount be deferred and amortized over the life
of the related loans as an adjustment to the yield of such related loans.
However, in the event the related loan is sold, any deferred loan fees or costs
remaining with respect to such loan should be taken into income. In following
the guidelines of the statement, all loan origination and commitment fees have
been deferred and direct costs of originating loans have been capitalized.
The Company currently charges loan origination fees which are
calculated as a percentage of the amount of the loan. The fees received in
connection with the origination of commercial real estate loans have generally
amounted to two points (one point being equivalent to 1% of the principal amount
of the loan). In addition, the Company typically receives fees from two to three
points in connection with the origination of new, conventional, one-to
four-family mortgages and 3.5 points in connection with the origination of
construction loans.
At June 30, 1997, the Company was servicing $24.89 million of loans for
others, substantially all of which were whole loans sold by the Company to the
FHLMC. The Company receives a servicing fee of approximately 1/4 or 3/8 of 1% on
such loans.
In June 1996 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and de-recognizes financial assets it
no longer controls and liabilities that have been extinguished. The approach
focuses on the assets and liabilities that exist after the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with pledge of collateral. The Company adopted SFAS 125
prospectively on January 1, 1997, and the impact on earnings, equity, and
financial condition was not material.
Non-Performing Loans and Real Estate Owned ("REO"). When a borrower
fails to make a required loan payment, the Company attempts to cause the default
to be cured by contacting the borrower. In general, contacts are made after a
payment is more than 15 days past due, at which time a late charge is assessed.
Defaults are cured promptly in most cases. If the delinquency on a mortgage loan
exceeds 90 days and is not cured through the Company's normal collection
procedures, or an acceptable arrangement is not worked out with the borrower,
the Company will institute measures to remedy the default, including commencing
a foreclosure action or, in special circumstances, accepting from the mortgagor
a voluntary deed of the secured property in lieu of foreclosure. The remedies
available to the Bank in the event of a default or delinquency with respect to
certain residential mortgage loans, and the procedures by which such remedies
may be exercised, are subject to Pennsylvania law and regulations. Under
Pennsylvania law, a lender is prohibited from accelerating the maturity of a
residential mortgage loan, commencing any legal action (including foreclosure
proceedings) to collect on such loan, or taking possession of any loan
collateral until the lender has first provided the delinquent borrower with at
least 30 days prior written notice specifying the nature of the delinquency and
the borrower's right to correct such delinquency. In addition, the lender's
ability to exercise any remedies it may have with respect to loans for one- or
two-family principal residences located in Pennsylvania is further restricted
(including the lender's right to foreclose on such property) until the lender
has provided the delinquent borrower with written notice detailing the
borrower's rights to seek consumer credit counseling and state financial
assistance and until the borrower has exhausted or failed to pursue such rights.
These provisions of Pennsylvania law may delay for several months the Bank's
ability to foreclose upon residential loans secured by real estate located in
the Commonwealth of Pennsylvania. In addition, the uniform FNMA/FHLMC lending
documents used by the Bank, as well as most other residential lenders in
Pennsylvania, requires notice and a right to cure similar to that provided under
Pennsylvania law.
Non-accrual loans are loans on which the accrual of interest ceases
when the collection of principal or interest payments is determined to be
doubtful by management. It is the policy of the Company to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days
or more (unless the loan principal and interest are determined by management to
be fully secured and in the process of collection), or earlier, if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the current loan term.
Interest income is not accrued until the financial condition and payment record
of the borrower once again demonstrate the ability to service the debt. When a
loan is placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income. Non-real estate consumer loans more than 120 days
delinquent are required to be written off in accordance with federal
regulations.
If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate property is then included in the Company's
"real estate owned" account until it is sold. When property is acquired, it is
recorded at the lower of carrying or fair value at the date of acquisition and
any write-down resulting therefrom is charged to the allowance for possible loan
losses. Interest accrual ceases on the date of acquisition and all costs
incurred in maintaining the property from that date forward are expensed. Costs
incurred for the improvement or development of such property are capitalized to
the extent they do not exceed the property's fair value. No loss reserves are
maintained on REO, and future write-downs for cost beyond the fair value are
expensed. The Company is permitted under Department and OTS regulations to
finance sales of REO by "loans to facilitate," which may involve more favorable
interest rates and terms than generally would be granted under the Bank's
underwriting guidelines. However, at June 30, 1997, the Company did not have any
loans to facilitate.
For purposes of applying the measurement criteria for impaired loans,
the Company excludes large groups of smaller-balance homogeneous loans,
primarily consisting of residential real estate loans and consumer loans as well
as commercial loans with balances of less than $100,000. For applicable loans,
the Company evaluates the need for impairment recognition when a loan becomes
non-accrual or earlier if, based on management's assessment of the relevant
facts and circumstances, it is probable that the Bank will be unable to collect
all proceeds due according to the contractual terms of the loan agreement. At
and during the twelve-month period ended June 30, 1997, the recorded investment
in impaired loans was not material. The Company's policy for the recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above. Impaired loans are charged off when the Company determines that
foreclosure is probable and the fair value of the collateral is less than the
recorded investment of the impaired loan.
<PAGE>
The following table sets forth information regarding non-accrual loans, loans
which are 90 days or more delinquent but on which the Company is accruing
interest and REO held by the Company at the dates indicated. The Company did not
have any loans which were classified as restructured troubled debt at any of the
dates presented.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Residential real estate loans:
Non-accrual loans $ 417 $1,166 $2,029 $1,552 $2,103
Accruing loans 90 days overdue -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total 417 1,166 2,029 1,552 2,103
------------ ------------ ------------ ------------ ------------
Commercial real estate loans:
Non-accrual loans -- -- 28 295 885
Accruing loans 90 days overdue -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total -- -- 28 295 885
------------ ------------ ------------ ------------ ------------
Construction and land loans
Non-accrual loans -- 737 294 354 534
Accruing loans 90 days overdue -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total -- 737 294 354 534
------------ ------------ ------------ ------------ ------------
Commercial business loans:
Non-accrual loans -- 18 10 63 249
Accruing loans 90 days overdue -- -- -- -- 113
------------ ------------ ------------ ------------ ------------
Total -- 18 10 63 362
------------ ------------ ------------ ------------ ------------
Consumer loans:
Non-accrual loans 331 297 549 358 455
Accruing loans 90 days overdue -- -- -- -- 57
------------ ------------ ------------ ------------ ------------
Total 331 297 549 358 512
------------ ------------ ------------ ------------ ------------
Total non-performing loans:
Non-accrual loans 748 2,218 2,910 2,622 4,226
Accruing loans 90 days overdue -- -- -- -- 170
------------ ------------ ------------ ------------ ------------
Total $ 748 $2,218 $2,910 $2,622 $4,396
============ ============ ============ ============ ============
Total non-performing loans to
total assets .23% .81% 1.11% 1.07% 1.98%
Total REO -- $121 $ 157 $ 885 $1,197
Total non-performing loans and
REO to total assets .23% .86% 1.17% 1.44% 2.52%
</TABLE>
<PAGE>
At June 30, 1997, non-accrual real estate loans included five
residential mortgage loans aggregating $417,000, all secured by single-family
residential properties.
At June 30, 1997, non-performing loans amounted to $748,000. If these
non-performing loans had been current in accordance with their original terms
and had been outstanding throughout the period, the gross interest income for
fiscal 1997 that would have been recorded for these loans was $71,400. Fiscal
1997 interest income recognized on these non-performing loans amounted to
$35,200.
Allowances for Losses on Loans and Classified Assets. An allowance for
loan losses is maintained at a level that management considers adequate to
provide for potential losses based upon an evaluation of known and inherent
risks in the loan portfolio. Management's evaluation is based upon an analysis
of the portfolio, past loss experience, current economic conditions and other
relevant factors. While management uses the best information available to make
such evaluations, such evaluations are highly subjective, and future adjustments
to the allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for losses on loans. Such agencies may require the
Company to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination. The allowance is
increased by the provision for loan losses which is charged to operations. Loan
losses are charged directly against the allowance and recoveries on previously
charged-off loans are generally added to the allowance. At June 30, 1997, the
Bank's allowance for loan losses was $2.86 million or 1.10% of net loans and
381.7% of total non-performing loans compared to $2.67 million or 1.18% of net
loans and 120.4% of total non-performing loans at June 30, 1996.
The Company monitors the quality of its assets on a regular basis.
Under regulations of the OTS, all of the Company's assets are subject to being
classified under a classification system that has three categories: (i)
substandard, (ii) doubtful, and (iii) loss. An asset may fall within more than
one category and a portion of the asset may remain unclassified. The Company is
required to review the classification of its assets on a regular basis. In
addition, in connection with the examinations of First Financial by the OTS, the
FDIC, and the Department, the examiners have the authority to identify problem
assets and, if appropriate, classify them and/or require adjustments to the
carrying value of such assets.
Assets classified substandard are considered inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Assets so classified must have a well-defined weakness or
weaknesses. They are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Assets classified doubtful are considered to have all the weaknesses
inherent in those classified substandard with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Assets classified loss are considered uncollectable and of such little
value that their continuance as assets without establishment of a specific
reserve is not warranted. This classification does not mean that an asset has
absolutely no recovery or salvage value, but rather, that it is not practical or
desirable to defer writing off a basically worthless asset even though partial
recovery may be affected in the future.
At June 30, 1997 and 1996, the Company's classified assets, which
consisted of assets classified as substandard, doubtful, loss, and REO, totaled
$1.40 million and $2.97 million, respectively. Included in the assets classified
substandard at June 30, 1997 and 1996, were all loans 90 days past due and loans
which are less than 90 days delinquent but inadequately protected by the current
paying capacity of the borrower or of the collateral pledged, as well as a
well-defined weakness that may jeopardize the liquidation of the debt. The
majority of loans which are classified but otherwise performing are residential
mortgage loans.
Other loans designated as special mention by the Company amounted to
$88,000 and $100,000 at June 30, 1997 and 1996, respectively. Although these
loans are not considered or classified as substandard, doubtful or loss, they do
have a potential weakness which may, if not corrected, result in increased risk
at some future date.
<PAGE>
The following table summarizes activity in the Company's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
As of June 30,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- -------------- -------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $2,667 $2,449 $2,199 $1,770 $1,186
Loans charged off against the allowance:
Residential real estate (117) (101) (54) -- (43)
Construction and land (177) -- (5) -- (12)
Commercial business (1) (2) (201) (160) (6)
Consumer (82) (43) (69) (85) (95)
------------- -------------- -------------- ------------ -------------
(377) (146) (329) (245) (156)
Recoveries:
Residential real estate 37 -- -- -- 4
Construction and land 4 16 -- -- --
Commercial business -- -- 93 -- --
Consumer 1 8 31 47 28
------------- -------------- -------------- ------------ -------------
42 24 124 47 32
Net charge-offs (335) (122) (205) (198) (124)
Provision for loan losses
charged to operating expenses 523 340 455 627 708
------------- -------------- -------------- ------------ -------------
Allowance at year end $2,855 $2,667 $2,449 $2,199 $1,770
============= ============== ============== ============ =============
Ratio of net charge-offs to
average loans outstanding .13% .05% .10% .11% .07%
============= ============== ============== ============ =============
Ratio of allowance to period-end
net loans 1.10% 1.18% 1.10% 1.12% 1.01%
============= ============== ============== ============ =============
</TABLE>
<PAGE>
The following table presents information regarding the Company's total
allowance for losses on loans as well as the allocation of such amounts to the
various categories of the loan portfolio. (Dollars in Thousands)
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ --------------------------
% of % of % of
Loans Loans Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans $ 778 58.7% $ 898 63.1% $ 1,077 66.6%
Commercial real estate loans 871 12.5 585 9.6 428 9.8
Construction and land loans 139 8.5 280 7.2 309 5.7
Commercial business loans 278 2.9 207 2.4 105 1.8
Consumer loans 789 17.4 697 17.7 530 16.1
--------------------- -------------------- -----------------------
Total allowance for loan losses $ 2,855 100.0% $ 2,667 100.0% $ 2,449 100.0%
===================== ==================== =======================
Total allowance for loan losses
to total non-performing loans 381.7% 120.2% 84.2%
===== ===== ====
Total non-performing loans $ 748 $2,218 $2,910
======== ====== ======
<PAGE>
<CAPTION>
At June 30,
--------------------------------------------------------
1994 1993
--------------------------- -------------------------
% of % of
Loans Loans
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Residential real estate loans $ 791 64.6% $ 706 61.7%
Commercial real estate loans 507 8.2 335 7.8
Construction and land loans 340 8.6 257 9.3
Commercial business loans 112 1.8 158 2.1
Consumer loans 449 16.8 314 19.1
----------------------- ---------------------
Total allowance for loan losses $ 2,199 100.0% $ 1,770 100.0%
======================= =====================
Total allowance for loan losses
to total non-performing loans 83.9% 40.3%
==== ====
Total non-performing loans $ 2,622 $ 4,396
======== ========
</TABLE>
<PAGE>
Investment Activities
Historically, interest and dividends on investments have provided the
Company with a significant source of revenue. At June 30, 1997, the Company's
investment securities, investment securities available for sale, and
interest-bearing deposits amounted to $53.88 million or 16.6% of its total
assets. First Financial's investments are used to meet certain federal liquidity
ratios. The liquidity ratios are met in part by investing in securities that
qualify as liquid assets under OTS regulations. (See "Regulation - Regulation of
the Bank Liquidity Requirements"). Such securities include obligations issued or
fully guaranteed by the United States Government, certain federal agency
obligations, certain time deposits and negotiable certificates of deposit issued
by commercial banks and other specified investments, including commercial paper
and other securities. Investment decisions are made by members of senior
management within guidelines approved by the Company's Board of Directors.
The Company divides its securities portfolio into three segments: (a)
held to maturity; (b) available for sale; and (c) trading. Securities in the
held to maturity category are accounted for at amortized cost. Trading
securities, if any, are accounted for at quoted market prices with changes in
market values being recorded as gain or loss in the income statement. All other
securities are included in the available for sale category and are accounted for
at fair value with unrealized gains or losses, net of tax, being reflected as
adjustments to equity. At June 30, 1997, the Company had a net unrealized gain
on securities available for sale, net of taxes, of $2,714.
<PAGE>
The following table sets forth the Company's investment portfolio and
other interest-earning assets at carrying value at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
---------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Interest-bearing deposits ........................ $ 6,844 $ 8,784 $ 5,808
Investment securities held to maturity:
U.S. Government and agency obligations ......... 5,500 5,500 5,189
Municipal notes and bonds ...................... 10,986 15,950 17,520
Mortgage-backed securities ..................... 1,473 1,729 2,092
Other .......................................... 1,510 1,414 1,484
------- ------- -------
Total investment securities held to maturity ... 19,469 24,593 26,285
------- ------- -------
Investment securities available for sale:
U.S. Government and agency obligations ......... 18,217 6,049 --
Municipal notes and bonds ...................... 4,128 81 --
Mortgage-backed securities ..................... 5,054 -- --
Equity securities .............................. 167 29 --
------- ------- -------
Total investment securities available for sale . 27,566 6,159 --
======= ======= =======
Total investments .......................... $53,879 $39,536 $32,093
======= ======= =======
</TABLE>
The contractual maturity or repricing characteristics of the Company's
investment portfolio is considerably more interest rate sensitive than that of
its loan portfolio. Consequently, the investment portfolio provides a
significant source of liquidity and protection against interest rate risk. The
weighted average term to maturity or repricing of the Company's investment
securities held to maturity was 5.6 years at June 30, 1997, and 5.9 years at
June 30, 1996. The Company has the intent and ability to hold these securities
to maturity.
<PAGE>
The amortized cost and estimated market value of investment securities at June
30, 1997 by contractual maturity, are shown below (Dollars in Thousands).
<TABLE>
<CAPTION>
Weighted
Amortized Estimated Average
Cost Market Value Yield
---------- ------------ --------
<S> <C> <C> <C>
Held to Maturity
Due in one year or less .............. $ 4,442 $ 4,450 6.15%
Due after one year through five years 7,025 7,059 6.39
Due after five years through ten years 2,100 2,047 6.61
Due after ten years .................. 4,392 4,326 7.08
No stated maturity ................... 1,510 1,511 6.38
------- -------
Total held to maturity ............... $19,469 $19,393 6.51%
======= ======= ====
Available for Sale
Due in one year or less .............. $ 45 45 6.87%
Due after one year through five years 9,631 9,633 7.43
Due after five years through ten years 6,813 6,773 7.29
Due after ten years .................. 10,937 10,948 7.87
No stated maturity ................... 136 167 3.31
------- -------
Total available for sale ............... $27,562 $27,566 7.55%
======= ======= ====
</TABLE>
The weighted average yield, based on amortized cost, is presented on a
taxable equivalent basis.
As of June 30, 1997 investments in the debt and/or equity securities of
any one issuer (excluding U.S. Government and federal agencies) did not exceed
10% of the Company's stockholders' equity.
<PAGE>
Sources of Funds
General. Deposits obtained through branch offices have traditionally
been the principal source of the Company's funds for use in lending and for
other general business purposes. The Company also derives funds from
amortization and prepayments of outstanding loans and sales of loans. From time
to time, the Company also may borrow funds from the FHLBP and other sources.
Borrowings generally may be used on a short-term basis to compensate for
seasonal or other reductions in deposits or other inflows at less than projected
levels, as well as on a longer term basis to support expanded lending and
investment activities.
Deposits. The Company obtains deposits primarily from residents of
Chester County, and to a lesser extent Berks, Delaware, Lancaster and Montgomery
Counties, Pennsylvania. Currently, the principal methods used by First Financial
to attract deposit accounts include the offering of services and accounts,
competitive interest rates, and convenient office locations and service hours.
Other than during times of inverse or flat yield curves, the Bank has adopted a
pricing program for its certificate accounts which provides for higher rates of
interest on its longer term certificates in order to encourage depositors to
invest in certificates with longer maturities, thus reducing the interest rate
sensitivity of the Company's deposit portfolio. First Financial also offers a
tiered money market account that pays higher interest on higher balances so as
to maintain a relatively stable core of deposits even when its certificate
accounts mature.
In recent years, First Financial has been required by market conditions
to rely increasingly on short-term certificate accounts and other deposit
alternatives that are more responsive to market interest rates than passbook
accounts and regulated fixed-rate, fixed-term certificates that were
historically the Company's primary sources of deposits. First Financial's
current deposit products include non-interest-bearing accounts,
passbook/statement savings accounts, NOW checking accounts, money market deposit
accounts, certificates of deposit ranging in terms from 30 days to five years
and certificates of deposit in denominations of $100,000 or more ("jumbo
certificates"). Included among these deposit products are individual retirement
account certificates ("IRA certificates") and Keogh accounts.
<PAGE>
The following table shows the balances of the Company's deposits as of the dates
indicated:
(Dollars in Thousands)
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ---------------------------- ---------------------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing accounts $ 21,493 8.2% $ 18,653 8.2% $ 14,394 6.6%
NOW checking accounts 27,625 10.6 22,332 9.8 20,770 9.5
Savings accounts 26,474 10.2 25,070 10.9 26,343 12.1
Money market accounts 29,887 11.5 23,856 10.5 26,464 12.2
Certificates of deposit less than
$100,000 124,636 47.8 116,158 50.9 106,649 48.9
Certificates of deposit with
$100,000 minimum balance 30,635 11.7 22,137 9.7 23,361 10.7
--------------------------- ---------------------------- ---------------------------
Total deposits $260,750 100.0% $228,206 100.0% $ 217,981 100.0%
=========================== ============================ ===========================
</TABLE>
The following table shows the weighted average interest rate of the
Company's deposits by type of account at June 30, 1997:
(Dollars in Thousands)
<TABLE>
<CAPTION>
Weighted
Amount Avg. Rate
-------- ---------
<S> <C> <C>
Non-interest-bearing accounts ................... $ 21,493 0.00%
NOW checking accounts ........................... 27,625 1.98
Savings accounts ................................ 26,474 2.90
Money market accounts ........................... 29,887 3.78
Certificates of deposit less than
$100,000 124,636 5.58
Certificates of deposit with
$100,000 minimum balance ...................... 30,635 5.73
--------
Total deposits ............................ $260,750 4.28%
======== ====
</TABLE>
<PAGE>
The following table sets forth the net deposit flows of the Company for the
periods indicated:
(In Thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Increase before interest credited ....... $23,848 $ 1,754 $ 5,990
Interest credited ....................... 8,696 8,471 7,189
------- ------- -------
Net deposit increase .............. $32,544 $10,225 $13,179
======= ======= =======
</TABLE>
The following table shows the balances of certificates of deposit with balances
of $100,000 or greater which mature during the periods indicated and the balance
at June 30, 1997.
(In Thousands)
<TABLE>
<CAPTION>
Balances at June 30, 1997, Maturing
========================================================================
At Within Three Six to After
June 30, Three to Six Twelve Twelve
1997 Months Months Months Months
============= ============ ========== ========== ===========
<S> <C> <C> <C> <C> <C>
Certificates of deposit with $100,000
minimum balance $ 30,635 $ 13,065 $ 8,031 $ 2,614 $ 6,925
============= ============ ========== ========== ===========
</TABLE>
At June 30, 1997, there were no other time deposits with balances of $100,000 or
greater other than certificates of deposit
<PAGE>
The following table presents the average balance by type of deposit and the
average rate paid by type of deposit for the periods indicated.
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- -------------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
NOW checking accounts $ 23,986 1.92% $ 20,464 2.20% $ 20,744 2.24%
Savings accounts 25,067 2.87 25,080 2.89 28,303 2.93
Money market accounts 26,084 3.42 24,638 3.35 36,235 3.29
Certificates of deposit
less than $100,000 119,679 5.81 112,745 5.86 91,927 5.24
Certificates of deposit with
$100,000 minimum balance 26,990 4.91 25,325 5.33 23,019 5.75
</TABLE>
The greater variety of deposit accounts offered by First Financial has
increased its ability to retain deposits and has allowed it to be more
competitive in obtaining new funds, although the threat of disintermediation
(the flow of funds away from savings institutions into direct investment
vehicles such as government and corporate securities) still exists. However, the
new types of accounts have been more costly than traditional accounts during
periods of high interest rates. In addition, First Financial has become much
more susceptible to short-term fluctuations in deposit flows, as customers have
become more rate conscious and willing to move funds into higher-yielding
accounts. Thus, the ability of First Financial to attract and maintain deposits
and First Financial's cost of funds have been, and will continue to be, affected
significantly by economic market conditions.
<PAGE>
In an effort to attract increasing amounts of non-interest-bearing
deposits, First Financial offers a basic checking account which features no-fee
checking with a minimum balance of $50. First Financial also offers a business
checking account which grants credits against service charges based on the
average daily balance. It is management's belief that such accounts represent an
excellent source of deposits that are not affected by interest rates.
First Financial attempts to control the flow of deposits by pricing its
accounts to remain generally competitive with other financial institutions in
its primary market area, but does not necessarily seek to match the highest
rates paid by competing institutions.
First Financial's deposits are obtained primarily from persons who are
residents of Pennsylvania. First Financial does not advertise for deposits
outside of Pennsylvania or accept brokered deposits, and management believes
that an insignificant amount of First Financial's deposits were held by
non-residents of Pennsylvania at June 30, 1997.
Borrowings. First Financial may obtain advances from the FHLBP upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans, provided certain standards related to credit worthiness have
been met. See "Regulation - Regulation of the Bank - Federal Home Loan Bank
System." Such advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. FHLBP advances
are generally available to meet seasonal and other withdrawals of deposit
accounts and to expand lending and investment activities, as well as to aid the
efforts of members of the FHLBP to establish better asset and liability
management through the extension of maturities of liabilities. At June 30, 1997,
the Company had $30.20 million in FHLBP advances outstanding. The Company has
available to it an annually renewable line of credit not to exceed 10% of the
Company's maximum borrowing capacity. The line of credit was $13.80 million at
the time the commitment was executed. The Company, from time to time, has used
the line of credit to meet liquidity needs. At June 30, 1997, there was no
balance outstanding on the line of credit.
<PAGE>
The following tables present certain information regarding short-term
borrowings, all of which consisted of borrowings from the FHLBP (borrowings with
a maturity of one year or less), for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Short-term borrowings:
Balance outstanding at end
of period ................ $18,325 $ 1,416 $ 3,300
Weighted average interest rate
at end of period ......... 5.91% 5.87% 5.47%
Average balance outstanding ....... $ 6,152 $ 3,562 $10,261
Maximum amount outstanding at
any month-end during the
period .................... $19,046 $ 5,716 $19,300
Weighted average interest rate
during the period ......... 5.97% 5.28% 5.54%
</TABLE>
The Bank did not use any other short-term borrowings from fiscal 1995 through
fiscal 1997, such as reverse repurchase agreements.
Yields Earned and Rates Paid
The largest components of the Company's total income and total expense
are interest income and interest expense. As a result, the Company's earnings
are dependent primarily upon net interest income, which is determined by the
Company's net interest rate spread (i.e., the difference between the yields
earned on interest-earning assets and the rates paid on interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities.
<PAGE>
Interest Income and Interest Spread Analysis
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; (v) net
interest-earning assets and their net yield; and (vi) weighted average yields
and rates at June 30, 1997. Average balances are determined on a monthly basis
which are representative of operations.
<TABLE>
<CAPTION>
At June Year Ended June 30,
30, ------------------------------------------------------------------------------
1997(3) 1997 1996
------- ------------------------------------ -------------------------------------
(Dollars in Thousands)
Yield/ Average Yield/ Average Yield/
Rate Balance Interest(1) Rate(1) Balance Interest(1) Rate(1)
---- ------- -------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans and loans held for sale(2) 8.08% $240,858 $20,452 8.49% $218,702 $18,368 8.40%
Investment securities and other
investments 7.08% 41,261 2,408 5.84% 39,434 2,478 6.28%
-------- ------- -------- -------
Total interest-earning assets 7.93% 282,119 $22,860 8.10% 258,136 $20,846 8.08%
---- ---- ----
Non-interest-earning assets 11,110 10,552
------ ------
Total assets $293,229 $268,688
======== ========
Liabilities and Stockholders' Equity:
Deposits and repurchase agreements 4.31% $223,048 $10,338 4.63% 207,978 $9,919 4.77%
FHLB advances and other borrowings 5.67% 20,651 1,165 5.64% 15,316 956 6.24%
-------- ------- -------- -------
Total interest-bearing liabilities 4.42% 243,699 $11,503 4.72% 223,294 $10,875 4.87%
---- ---- ----
Non-interest-bearing liabilities 23,535 20,651
Stockholders' equity 25,995 24,743
------ ------
Total liabilities and
stockholders' equity $293,229 $268,688
======== ========
Net interest income/interest rate spread 3.51% $11,357 3.38% $ 9,971 3.21%
==== ======= ==== ======= ====
Net interest-earning assets/net yield on
interest-earning assets $ 38,420 4.03% $ 34,842 3.86%
========= ==== ======== ====
Ratio of average interest-earning
assets to interest-bearing liabilities 116% 116%
=== ===
<PAGE>
<CAPTION>
---------------------------------------
1995
---------------------------------------
Average Yield/
Balance Interest(1) Rate(1)
-------- -------- ----
<S> <C> <C> <C>
Assets:
Loans and loans held for sale(2) $213,172 $17,010 7.98%
Investment securities and other
investments 37,927 2,178 5.74%
-------- -------
Total interest-earning assets 251,099 $19,188 7.64%
----
Non-interest-earning assets 9,999
-----
Total assets $261,098
========
Liabilities and Stockholders' Equity:
Deposits and repurchase agreements $200,163 $ 8,613 4.30%
FHLB advances and other borrowings 20,633 1,217 5.90%
-------- -------
Total interest-bearing liabilities 220,796 $9,830 4.45%
----
Non-interest-bearing liabilities 17,468
Stockholders' equity 22,834
------
Total liabilities and
stockholders' equity $261,098
========
Net interest income/interest rate spread $9,358 3.19%
====== ====
Net interest-earning assets/net yield on
interest-earning assets $ 30,303 3.73%
======== ====
Ratio of average interest-earning
assets to interest-bearing liabilities 114%
===
</TABLE>
(1) The indicated interest and annual yield and rate are presented on a
taxable equivalent basis using the Federal income tax marginal rate of
34% adjusted for the 20% interest expense disallowance (27.2%) for
1997, 1996, and 1995.
(2) Non-accruing loans are included in the average balance.
(3) Yields at June 30, 1997, do not reflect interest yield adjustments such
as amortization of deferred fees and interest penalty fees for
premature withdrawals.
<PAGE>
Rate/Volume Analysis
The following table presents certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
Interest income and the annual rate are calculated on a taxable equivalent basis
using the Federal income tax marginal rate of 34% adjusted for the 20% interest
expense disallowance (27.2%).
For each category of interest-earning assets and interest-bearing
liabilities, information is provided with respect to changes attributable to (1)
changes in volume (change in volume multiplied by old rate), (2) changes in rate
(change in rate multiplied by old volume) and (3) changes in rate/volume (change
in rate multiplied by change in volume).
<TABLE>
<CAPTION>
1997 Compared to 1996
Increase (Decrease) Due to
------------------------------------------------------
(Dollars in Thousands)
Rate/
Volume Rate Volume Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income on interest-earning
assets:
Loans and loans held for sale .. $ 1,861 $ 203 $ 21 $ 2,085
Investment securities and
other investments ............ 115 (177) (8) (70)
------- ------- ------- -------
Total interest income ...... $ 1,976 $ 26 $ 13 $ 2,015
------- ------- ------- -------
Interest expense on interest-bearing
liabilities:
Deposits and repurchase
agreements .................. $ 719 ($ 279) ($ 20) $ 420
FHLB advances and other
borrowed money .............. 333 (92) (32) 209
------- ------- ------- -------
Total interest expense .... $ 1,052 ($ 371) ($ 52) $ 629
------- ------- ------- -------
Net change in net interest
income ............................. $ 924 $ 397 $ 65 $ 1,386
======= ======= ======= =======
<PAGE>
<CAPTION>
1996 Compared to 1995
Increase (Decrease) Due to
------------------------------------------------------
(Dollars in Thousands)
Rate/
Volume Rate Volume Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income on interest-earning
assets:
Loans and loans held for sale .. $ 441 $ 894 $ 23 $ 1,358
Investment securities and
other investments ............ 87 205 8 300
------- ------- ------- -------
Total interest income ...... $ 528 $ 1,099 $ 31 $ 1,658
------- ------- ------- -------
Interest expense on interest-bearing
liabilities:
Deposits and repurchase
agreements .................. $ 336 $ 933 $ 36 $ 1,305
FHLB advances and other
borrowed money .............. (314) 71 (18) (261)
------- ------- ------- -------
Total interest expense .... $ 22 $ 1,004 $ 18 $ 1,044
------- ------- ------- -------
Net change in net interest
income ............................. $ 506 $ 95 $ 13 $ 614
======= ======= ======= =======
</TABLE>
<PAGE>
Ratios
The following table shows certain income and financial condition ratios
for the periods indicated. All averages are based on month-end balances.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Return on average assets (income
excluding the special SAIF
assessment of $832,000 net
of taxes divided by average
total assets) ...................... .94% .91% .82%
Return on average assets (income
divided by average total assets) ... .66% .91% .82%
Return on average equity (income
excluding the special SAIF
assessment of $832,000 net
of taxes divided by average equity) 10.61% 9.86% 9.43%
Return on average equity (income
divided by average equity) ......... 7.41% 9.86% 9.43%
Equity-to-assets ratio
(average equity divided by
average assets) ................... 8.87% 9.21% 8.75%
Dividend pay-out ratio ............... 39.39% 23.50% 21.89%
</TABLE>
Subsidiaries of First Financial
The Bank operates (as a wholly owned subsidiary) D & S Service
Corporation ("D & S Service"), which has participated in the development for
sale of residential properties, in particular condominium conversions, and also
the development of commercial properties in order for the Bank to expand its
facilities to accommodate its growth. All of such projects have either been
located in or within close proximity to the Bank's primary market area. D & S
Service operates two wholly owned subsidiaries: Wildman Projects and D & F
Projects, Inc.
At June 30, 1997, the Bank was permitted by regulations to invest up to
2% of assets in the capital stock of, and secured and unsecured loans to,
subsidiary corporations or service corporations and under certain circumstances
may make conforming loans to service corporations in greater amounts. As a
Pennsylvania-chartered savings institution, the Bank may diversify into any
business activity approved in advance by the Department. In addition, First
Financial could invest up to 30% of its assets in finance subsidiaries. Such
subsidiaries must be limited purpose subsidiaries whose sole purpose is to issue
debt or equity securities that the parent association is authorized to issue
directly and to remit the proceeds of such issuance to the parent association.
Effective with the enactment of FIRREA, state-chartered savings
institutions may not acquire any equity investment not permissible for
federally-chartered savings institutions. Divestiture was required by July 1,
1994. Under limited conditions, state-chartered savings institutions may
continue to have equity investments in service corporations engaged in
activities the FDIC determines pose no significant risk to its fund. The Bank
was not required to divest any of its equity investments due to this change in
regulations.
At June 30, 1997, the Bank was authorized to have a maximum investment
of $6.47 million in its one first-tier wholly-owned subsidiary, D & S Service.
As of such date, the Bank had invested $736,000 in this subsidiary.
Competition
First Financial encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from commercial banks, other
savings and loan associations, savings banks and credit unions conducting
business in its primary market area. The Bank also encounters competition for
deposits from money market funds, as well as corporate and government
securities. The principal methods used by the Bank to attract deposit accounts
include offering a variety of services and interest rates and providing
convenient office locations and expanded banking hours. The Bank's competition
for real estate and other loans comes principally from other savings
institutions, credit unions, commercial banks, mortgage banking companies,
insurance companies, and other institutional lenders. First Financial competes
for loans through interest rates, loan maturities, loan fees and the quality of
service extended to borrowers and real estate brokers.
Employees
The Company had 96 full-time employees and 27 part-time employees as of
June 30, 1997. None of these employees are represented by a collective
bargaining agent, and the Company believes that it enjoys good relations with
its personnel.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank as in effect as of
the date of this Annual Report on form 10-KSB. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
In recent periods there have been various legislative proposals in the
U.S. Congress to eliminate the thrift charter and the OTS. Although the Company
currently is unable to predict whether the existence of the thrift charter and
the OTS may be the subject of future legislation and, if so, what the final
contents of such legislation will be and their effects, if any, on the Company
and the Bank, such legislation could result in, among other things, the Company
becoming subject to the same regulatory capital requirements, activities
limitations and other requirements which are applicable to bank holding
companies under the Bank Holding Company Act of 1956 ("BHCA"). Unlike savings
and loan holding companies, bank holding companies are subject to regulatory
capital requirements, which generally are comparable to the regulatory capital
requirements which are applicable to the Bank, and unlike unitary savings and
loan holding companies such as the Company, which generally are not subject to
activities limitations, bank holding companies generally are prohibited from
engaging in activities or acquiring or controlling, directly or indirectly, the
voting securities or assets of any company engaged in any activity other than
banking, managing or controlling banks and bank subsidiaries or other activities
that the Federal Reserve Board has determined, by regulation or otherwise, to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.
Regulation of the Company
Federal Regulation-General. The Company is a registered savings and
loan holding company within the meaning of the Home Owners' Loan Act. As such,
the Company is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") test, then such unitary holding company shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association re-qualifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- Regulation of the
Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings associations) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings association shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof any business activity, upon prior
notice to, and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings association; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings association; (iv) holding
or managing properties used or occupied by a subsidiary savings association; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple savings and loan
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
Federal Limitations on Transactions with Affiliates. Transactions
between savings associations and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings association is any
company or entity which controls, is controlled by or is under common control
with the savings association. As a result, the Company is an affiliate of the
Bank. Generally, Sections 23A and 23B (i) limit the extent to which the savings
association or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such association's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Sections 22(g) and (h) of the Federal Reserve Act places
restrictions on loans by savings associations to executive officers, directors
and principal stockholders of the Company and the Bank. Under Section 22(h),
loans to a director, an executive officer and to a greater than 10% stockholder
of a savings association or the company that controls the savings association,
and certain affiliated interests of such insiders (i) may not exceed, together
with all other outstanding loans to such person and affiliated interests, the
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus) (ii) be made on terms
substantially the same as offered in comparable transactions to other persons,
provided the Bank is not prohibited from extending credit pursuant to a benefit
or compensation program widely available to employees of the Bank and the
Company and that does not give preference to any officer, director or principal
stockholder over other employees thereof, and (iii), in certain cases, require
prior board approval. In addition, the aggregate amount of extensions of credit
by a savings association to all insiders cannot exceed the association's
unimpaired capital and surplus. Furthermore, Section 22(g) places certain
additional restrictions on loans to executive officers. At June 30, 1997, the
Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987, (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA)", or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
Regulation of the Bank
General. The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS's enforcement authority over all savings associations and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
Insurance of Accounts. The deposits of the Bank are insured up to
$100,000 per depositor (as defined by law and regulation) by the SAIF, which is
administered by the FDIC, and are backed by the full faith and credit of the
United States Government. As insurer, the FDIC is authorized to conduct
examinations of, and to require reporting by, FDIC-insured institutions, such as
the Bank. It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to
the FDIC. The FDIC also has the authority to initiate enforcement actions where
the OTS has failed or declined to take such action after receiving a request to
do so from the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF.
Effective October 8, 1996, the FDIC imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996. The Bank's one-time
special assessment amounted to $1.39 million. Net of related tax benefits, the
one-time special assessment amounted to $832,000. The payment of the special
assessment reduced the Bank's capital by the amount of the assessment.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. Beginning October 1, 1996,
effective SAIF rates range from zero basis points to 27 basis points which is
the same range of premiums as paid by insured institutions insured by the Bank
Insurance Fund administered by the FDIC. From 1997 through 1999, FDIC-insured
institutions will pay 6.4 basis points of their SAIF-assessable deposits to fund
the Financing Corporation. Based upon the $259.39 million of SAIF-assessable
deposits at June 30, 1997, the Bank would expect to pay $41,000 in insurance
premiums per quarter during fiscal 1998.
Regulatory Capital Requirements - General. Federally insured savings
associations are required to maintain minimum levels of regulatory capital.
These standards generally must be no less stringent than the capital
requirements applicable to national banks. The OTS also is authorized to impose
capital requirements in excess of these standards on individual associations on
a case-by-case basis.
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total assets (as defined in the regulations), core capital equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to 8% of risk-weighted assets. For purposes of the regulation,
tangible capital is core capital less all intangibles other than qualifying
mortgage servicing rights, and any investment in non-permissible subsidiaries,
which are subsidiaries which are not engaged in permissible activities. Core
capital includes common stockholders' equity, non-cumulative perpetual preferred
stock and related surplus, minority interest in the equity accounts of fully
consolidated subsidiaries and certain non-withdrawable accounts and pledged
deposits. Core capital generally is reduced by the amount of a savings
association's intangible assets other than qualifying mortgage servicing rights.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt which meets specified
requirements and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items, are
multiplied by a risk-weight based on the risk inherent in the type of assets.
The risk weights assigned by the OTS for principal categories of assets
currently range from 0% to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax
assets under SFAS No. 109 that may be included in regulatory capital. (Net
deferred tax assets represent deferred tax assets, reduced by an valuation
allowances, in excess of deferred tax liabilities.) Application of the limit
depends on the possible sources of taxable income available to an institution to
realize deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited: taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and carryforwards),
or its tax-planning strategies, such deferred tax assets are limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year of the quarter-end report date or 10% of core capital. The
foregoing considerations did not affect the calculation of the Bank's regulatory
capital at June 30, 1997.
In August 1993 the OTS adopted a final rule incorporating an interest
rate risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. Although the final rule was
originally scheduled to be effective as of January 1994, in August 1995 the OTS
indefinitely delayed implementation of its interest rate risk component of its
risk-based capital requirement. Management of the Bank does not believe that the
OTS's adoption of an interest rate risk component to the risk-based capital
requirement will adversely affect the Bank if it becomes effective in its
current form.
In April 1991 the OTS proposed to modify the 3% of adjusted total
assets core capital requirement in the same manner as was done by the
Comptroller of the Currency for national banks. Under the OTS proposal, only
savings associations rated composite 1 under the CAMEL rating system will be
permitted to operate the regulatory minimum core capital ratio of 3%. For all
other savings associations, the minimum core capital ratio will be 3% plus at
least an additional 100 to 200 basis points, which thus will increase the core
capital ratio requirement to 4% to 5% of adjusted total assets or more. In
determining the amount of additional capital, the OTS will assess both the
quality of risk management systems and the level of overall risk in each
individual savings association through the supervisory process on a case-by-case
basis.
<PAGE>
The following table sets forth a reconciliation between the Bank's
stockholder's equity and each of its three capital requirements at June 30,
1997.
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital(1,2)
---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Total regulatory capital ..... $ 26,750 $ 26,750 $29,057
Minimum required regulatory
capital .................... 4,855 9,710 15,689
---------- ---------- -------
Excess regulatory capital .... $ 21,895 $ 17,040 $13,368
========== ========== =======
Regulatory capital as a
percentage of assets(2) .... 8.26% 8.26% 14,82%
Minimum capital required
as a percentage of assets(2) 1.50 3.00 8.00
---------- ---------- -------
Excess regulatory capital as
a percentage of assets ..... 6.76% 5.26% 6.82%
========== ========== =======
</TABLE>
(1) Does not reflect amendments to the risk-based capital requirement which
have been adopted but not implemented by the OTS, as discussed above.
(2) Tangible and core capital are computed as a percentage of adjusted
total assets of $323.67 million. Risk-based capital is computed as a
percentage of adjusted total risk-weighted assets of $196.11 million.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. See "- Prompt Corrective
Regulatory Action."
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. At June 30, 1997, the Bank's liquidity ratio was 12.68% and
its short-term liquidity ratio was 12.60%.
Real Estate Lending Standards. Effective March 19, 1993, all financial
institutions are required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the federal banking
agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set
forth, pursuant to the mandates of Federal Deposit Insurance Corporation
Improvement Act ("FDICIA"), uniform regulations prescribing standards for real
estate lending which is defined as extension of credit secured by liens on
interests in real estate or made for the purpose of financing the construction
of a building or other improvements to real estate, regardless of whether a lien
has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The Guidelines, among other things, establish the
following supervisory LTV limits: raw land (65%); land development (75%);
construction (commercial, multi-family and nonresidential) (80%); improved
property (85%) and one-to-four family residential (owner occupied) (no maximum
ratio, although any LTV ratio in excess of 90% should require appropriate
insurance or readily marketable collateral).
Certain institutions can make real estate loans that do not conform with
the established LTV ratio limits up to 100% of the institution's total capital.
Within this aggregate limit, total loans for all commercial, agricultural,
multi-family and other non-one-to-four family residential properties should not
exceed 30% of total capital. An institution will come under increased
supervisory scrutiny as the total of such loans approaches these levels. Certain
loans are exempt from the LTV ratios (e.g. those guaranteed by a government
agency, loans to facilitate the sale of real estate owned, loans renewed,
refinanced or restructured by the original lender(s) to the same borrower(s)
where there is no advancement of new funds, etc.).
Accounting Requirements. Applicable OTS accounting and reporting
requirements incorporates the following standards: (i) regulatory reports will
incorporate generally accepted accounting principles ("GAAP") when GAAP is used
by federal banking agencies; (ii) savings association transactions, financial
condition and regulatory capital must be reported and disclosed in accordance
with OTS regulatory reporting requirements that will be at least as stringent as
for national banks; and (iii) the director of the OTS may prescribe regulatory
reporting requirements more stringent than GAAP whenever the director determines
that such requirements are necessary to ensure the safe and sound reporting and
operation of savings associations.
In October 1995 the FASB issued SFAS No. 123, "Accounting for
Stock-based Compensation." This statement encourages the adoption of fair value
accounting for stock-based compensation issued to employees. Further, in the
event that fair value accounting is not adopted, the statement requires pro
forma disclosure of net income and earnings per share as if fair value
accounting had been adopted. The Company has not adopted the fair value
accounting provisions of SFAS 123 but has instead provided the required pro
forma disclosures, as permitted, in the current fiscal year.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and de-recognizes
financial assets it no longer controls and liabilities that have been
extinguished. The approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral. The
Company adopted SFAS 125 prospectively on January 1, 1997, and the impact on
earnings, equity, and financial condition was not material.
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. This statements simplifies the standards for computing earnings
per share previously found in APB Opinion No. 15, Earnings per Share, and makes
them comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This statement requires
restatement of all prior period EPS data presented. Had the Company adopted SFAS
No. 128 as of June 30, 1997, the basic earnings per share on a pro forma basis
would have been $.94, $1.19, and $1.05 for the fiscal years ended 1997, 1996 and
1995, respectively, rather than $.93, $1.18, and $1.04, respectively. Pro forma
disclosure of diluted earnings per share would have been $.93, $1.18, and $1.04
for the fiscal years ended 1997, 1996, and 1995, respectively, the same as
disclosed under the current accounting requirements.
In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Management has not
yet determined the impact, if any, of this statement on the Company.
In June 1997 the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. Management has not yet determined the impact, if any, of this
statement on the Company.
Prompt Corrective Regulatory Action. Under Section 38 of the FDIA, as
added by the FDICIA, each appropriate agency and the FDIC is required to take
prompt corrective action to resolve the problems of insured depository
institutions that do not meet minimum capital ratios. Such action must be
accomplished at the least possible long-term cost to the appropriate deposit
insurance fund.
The federal banking agencies, including the OTS, adopted substantially
similar regulations in order to implement Section 38 of the FDIA, which
regulations became effective in December 1992. Under the regulations, an
institution shall be deemed to be (i) "well capitalized" if it has total risk-
based capital of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or
more, has a Tier I leverage capital ratio of 5.0% or more and is not subject to
any order or final capital directive to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).
The Bank complies with the requirements to be classified as well
capitalized.
Safety and Soundness. On November 18, 1993, a joint notice of proposed
rule making was issued by the OTS, the FDIC, the Office of the Comptroller of
the Currency, and the Federal Reserve Board (collectively, the "agencies")
concerning standards for safety and soundness required to be prescribed by
regulation pursuant to the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and earnings; and (3)
compensation. Legislation enacted in 1994: (1) authorizes the agencies to
establish safety and soundness standards by regulation or guideline for all
insured depository institutions; (2) gives the agencies greater flexibility in
prescribing asset quality and earnings standards by eliminating the requirement
that agencies establish quantitative standards; and (3) eliminates the
requirement that the standards referenced above apply to depository institution
holding companies. The agencies have published a final rule and interagency
guidelines ("Guidelines") as well as proposed asset quality and earning
standards which will be added to the Guidelines when finalized. The final rule
and Guidelines became effective in August 1995.
Under the Guidelines and final rule of the OTS, if an insured savings
institution fails to meet any of the standards promulgated by Guidelines, then
the OTS may require such institution to submit a plan within 30 days (or such
different period specified by the OTS) specifying the steps it will take to
correct the deficiency. In the event that an institution fails to submit or
fails in any material respect to implement a compliance plan within the time
allowed by the OTS, the OTS must order the institution to correct the deficiency
and may (1) restrict asset growth; (2) require the institution to increase its
ratio of tangible equity to assets; (3) restrict the rates of interest that the
institution may pay; or (4) take any other action that would better carry out
the purpose of prompt corrective action. The Bank believes that it is in
compliance with each of the standards as adopted.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a QTL test to avoid certain restrictions on their
operations. Under FDICIA, a depository institution must have at least 65% of its
portfolio assets (which consist of total assets less intangibles, properties
used to conduct the savings association's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on a monthly
average basis in nine of every 12 months. Loans and mortgage-backed securities
secured by domestic residential housing, certain obligations of the FDIC and
certain other related entities, small business loans, credit card loans, student
loans, and loans for personal, family and household purposes, may be included in
qualifying thrift investments without limit. Certain other housing-related and
non-residential real estate loans and investments, including loans to develop
churches, nursing homes, hospitals and schools, and consumer loans and
investments in subsidiaries engaged in housing-related activities may also be
included. Qualifying assets for the QTL test include investments related to
domestic residential real estate or manufactured housing, the book value of
property used by an association or its subsidiaries for the conduct of its
business, an amount of residential mortgage loans that the association or its
subsidiaries sold within 90 days of origination, shares of stock issued by any
FHLB and shares of stock issued by the FHLMC or the FNMA. The Bank was in
compliance with the QTL test as of June 30, 1997, with 85.9% of its assets
invested in qualified thrift investments.
Restrictions on Capital Distributions. The OTS has adopted a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest payments
on certain convertible debt and other transactions charged to the capital
account of a savings association to make capital distributions. Generally, the
regulation creates a safe harbor for specified levels of capital distributions
from associations meeting at least their minimum capital requirements, so long
as such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings associations and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions. The Bank currently is a Tier 1 institution for purposes of the
regulator dealing with capital distributions.
Generally, Tier 1 associations, which are savings associations that
before and after the proposed distribution meet or exceed their fully phased-in
capital requirements, may make capital distributions during any calendar year
equal to the greater of 100% of net income for the calendar year-to-date plus
50% of its "surplus capital ratio" at the beginning of the calendar year or 75%
of net income over the most recent four quarter period. The "surplus capital
ratio" is defined to mean the percentage by which the association's ratio of
total capital to assets exceeds the ratio of its fully phased-in capital
requirement to assets, and "fully phased-in capital requirement" is defined to
mean an association's capital requirement under the statutory and regulatory
standards to be applicable on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirements imposed upon an association.
In December 1994 the OTS published a notice of proposed rule making to
amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined above under "Prompt Corrective Action." Because the
Bank is a subsidiary of a holding company, the proposal would require the Bank
to provide notice to the OTS of its intent to make a capital distribution. The
Bank does not believe that the proposal will adversely affect its ability to
make capital distributions if it is adopted substantially as proposed.
Federal Home Loan Bank System. The Bank is a member of the FHLBP, which
is one of 12 regional FHLBs that administers the home financing credit function
of savings associations and commercial banks. Each FHLB serves as a source of
liquidity for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by its Board of Directors. As of June 30, 1997, the
Bank's advances from the FHLBP amounted to $30.20 million.
As a member, the Bank is required to purchase and maintain stock in the
FHLBP in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At June 30, 1997, the Bank
had $1.51 million in FHLB stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future. For the year ended June 30,
1997, dividends paid by the FHLBP to the Bank totaled approximately $91,000.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and super NOW checking accounts) and non-personal time deposits.
At June 30, 1997, the Bank was in compliance with such requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
non-interest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an association's earning assets. The amount of
funds necessary to satisfy this requirement has not had a material affect on the
Bank's operations.
Interstate Acquisitions
The Commonwealth of Pennsylvania enacted legislation in 1986 regarding
the acquisition of commercial banks, bank holding companies, savings banks and
savings and loan associations located in Pennsylvania by institutions located
outside of Pennsylvania. The legislation dealing with savings institutions
authorizes (i) a saving bank, savings and loan association or holding company
thereof located in Delaware, the District of Columbia, Kentucky, Maryland, New
Jersey, Ohio, Virginia and West Virginia (collectively "regional institutions")
to acquire the voting stock of, merge or consolidate with, or purchase assets
and assume liabilities of, a Pennsylvania-chartered savings bank, savings and
loan association or holding company thereof (collectively, Pennsylvania
institutions") and (ii) the establishment of branches in Pennsylvania by
regional institutions, in each case subject to certain conditions including
reciprocal legislation in the state in which the regional institution seeking
entry into Pennsylvania is located permitting comparable entry by Pennsylvania
institutions and approval by the Pennsylvania Department of Banking. The
legislation also provides for nationwide branching by Pennsylvania-chartered
savings banks and savings and loan associations, subject to Department approval
and certain other conditions.
<PAGE>
TAXATION
Federal and State Taxation
General. The Company and the Bank are subject to the corporate tax provisions of
the Internal Revenue Code of 1986 (the "Code"), as well as certain additional
provisions of the Code which apply to thrift and other types of financial
institutions. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Company and the Bank. Beginning with July 1, 1993, the Company
and its subsidiaries elected to file its federal and state income tax returns on
a fiscal year basis.
Bad Debt Reserves. Legislation enacted under the Small Business Job Protection
Act of 1996 (the "Act") provided for the Bank to recapture into income, over a
six-year period, only the portion of its tax bad debt reserves as of June 30,
1996, that exceed its base year reserves (i.e., tax reserves for years beginning
before 1988). Under the Act, the amount of the excess base year reserves subject
to recapture would be suspended for each of two successive tax years beginning
July 1, 1996, in which the Bank originates a minimum amount of certain
residential loans based upon the average of the principal amounts of such loans
the Bank made during its six preceding tax years. The Bank's total tax bad debt
reserves at June 30, 1997, are approximately $3.14 million, of which $2.64
million represents the base year amount and $504,000 is subject to recapture.
The Company has previously recorded a deferred tax liability for the excess base
year reserves to be recaptured; therefore, this recapture will not impact the
statement of operations. The base year tax reserves, which may be subject to
recapture if the Bank ceases to qualify as a bank for federal income tax
purposes, are restricted to certain distributions. Under the provisions of the
Act, the Bank is considered a "small bank" (i.e., a bank that has total assets
under $500 million) and may claim its tax bad debt deductions for tax years
beginning after December 31, 1995, using a six-year average of its loan
charge-offs to total loans.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20% on a
base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of bad debt deduction allowable for a
taxable year over the amount allowable under the experience method. The other
items of tax preference that constitute AMTI include (a) tax-exempt interest on
a newly issued (generally, issued on or after August 8, 1986) privately activity
bonds other than certain qualified bonds and (b) for taxable years beginning
after 1989, 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses). Net operating losses
can offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years. In
addition, for taxable years after 1986 and beginning before January 1, 1996, the
Company is also subject to an environmental tax equal to 0.12% of the excess of
AMTI for the taxable year over $2.0 million.
Audit by IRS. The Company's consolidated federal income tax returns for taxable
years through June 30, 1993, have been closed for the purpose of examination by
the IRS.
State Taxation. The Company and its non-thrift Pennsylvania subsidiaries are
subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and
Franchise Tax. The Corporate Net Income Tax rate for 1997 is 9.99% and is
imposed on the Company's and its non-thrift subsidiaries' unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at the rate of 1.275% of a corporation's
capital stock value, which is determined in accordance with a fixed formula.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act (the
"MTIT"), as amended to include thrift institutions having capital stock.
Pursuant to the MTIT, the Company's tax rate is 11.5%. The MTIT exempts the
Company from all other taxes imposed by the Commonwealth of Pennsylvania for
state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principals ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on Pennsylvania and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the Company. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes.
<PAGE>
ITEM 2. PROPERTIES
Offices and Other Material Properties
At June 30, 1997, the Company conducted its business from its main
office in Downingtown, Pennsylvania and six full-service branch offices.
The following table sets forth certain information with respect to the
offices of the Company as of June 30, 1997:
<TABLE>
<CAPTION>
Net Book Value
of Property and
Lease Leasehold
Owned or Expiration Improvements at
Leased Date June 30, 1997 Deposits
-------- ---------- ---------------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office:
100 E. Lancaster Avenue
Downingtown PA 19335 Own -- $ 995 $74,794
Branch Offices:
Exton-Lionville
601 N. Pottstown Pike
Exton PA 19341 Own -- 436 54,153
Frazer-Malvern
200 W. Lancaster Avenue
Frazer PA 19355 Own -- 1,339 33,596
Thorndale
3909 Lincoln Highway
Downingtown PA 19335 Lease 9/30/2000 45 39,903
Westtown
1197 Wilmington Pike
West Chester PA 19382 Lease 10/31/99 116 40,642
Airport Village
102 Airport Road Own Building
Coatesville PA 19320 Lease Land 11/30/2004 356 9,308
Brandywine Square Lease 8/14/2011 100 8,354
82 Quarry Road
Downingtown PA 19335
------ --------
Total $3,387 $260,750
====== ========
</TABLE>
<PAGE>
In addition, the Company currently owns two developed properties
adjacent to its main office. These properties are being held for possible use as
future office facilities and expansion of the main office. One of the properties
is currently being leased to other users. The net book value of each of the two
parcels at June 30, 1997, was approximately $11,400 and $96,400.
In September 1989 the Bank entered into a 10-year operating lease for
the Bank's Westtown office. The lease contains two five-year options to renew.
In October 1990 the Bank entered into a 10-year lease agreement in
connection with the relocation of its existing branch in Thorndale to a new site
in the Thorndale area. The lease includes two five-year options to extend the
lease.
In May 1994 the Bank entered into a 10-year lease agreement for land in
connection with the construction of the Airport Village branch. The lease
includes three five-year options to extend the lease.
In April 1995 the Bank entered into a 15-year lease agreement for the
Bank's Brandywine Square office, which opened in August 1996.
First Financial operates and participates in the MAC(R) Money Access
Service shared Automated Teller Machine ("ATM") network system. In addition,
First Financial operates six office ATMs under the MAC(R) system.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine, non-material legal proceedings occurring in the ordinary course of
business which management believes will not have a material adverse effect on
the financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from
"Market Information" on pages 17 and 18 of the Company's 1997 Annual Report to
Stockholders included herein as Exhibit 13 hereto ("Annual Report").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required herein is incorporated by reference from pages
12 to 19 of the Annual Report.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data required herein are
incorporated by reference from pages 20 to 37 of the Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required herein is incorporated by reference from pages
2 to 7 of the Company's Definitive Proxy Statement which will be filed with the
SEC within 120 days of the end of the Company's fiscal year ("Definitive Proxy
Statement").
ITEM 10. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from pages
9 to 10 of the Company's Definitive Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from pages
1 to 7 of the Company's Definitive Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from page
13 of the Company's Definitive Proxy Statement.
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The following financial statements are incorporated by reference
into Item 8 hereof from pages 20 to 36 of the Annual Report,
Exhibit 13 hereto:
Consolidated Statements of Financial Condition at June 30, 1997
and 1996
Consolidated Statements of Operations for the Years Ended June
30, 1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended June
30, 1997, 1996, and 1995.
Notes to Consolidated Financial Statements.
(2) Financial statement schedules for which provision is made in the
applicable accounting regulations of the SEC are omitted because
of the absence of the conditions under which they are required or
because the required information is set forth in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K
None
<PAGE>
Index to Exhibits
<TABLE>
<CAPTION>
Number Description of Documents
- ------ ------------------------
<S> <C>
3a Restated Articles of Incorporation **
3b Bylaws, as amended ***
4 Specimen Stock Certificate *
10a Key Employee Stock Compensation Program, as amended **
10b Employee Stock Ownership Plan **
10c Employment Agreement By and Between the Company and Ellen Ann Roberts **
10d Employment Agreement By and Between the Company and Edward H. Plank **
10e Employment Agreement By and Between the Company and Colin N. Maropis *
10f Employment Agreement By and Between the Company and Anthony J. Biondi **
10h Amendment No. 1 to the Employment Agreement By and Between the Company and Ellen Ann Roberts ****
10i Amendment No. 1 to the Employment Agreement By and Between the Company and Edward H. Plank ****
10j Amendment No. 1 to the Employment Agreement By and Between the Company and Colin N. Maropis ****
10k Amendment No. 1 to the Employment Agreement By and Between the Company and Anthony J. Biondi ****
10l 1997 Stock Option Plan
11 Computation of Earnings Per Share
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant - Reference is made to Item, 1, Business - Subsidiaries," for the
required information
23 Consent of Independent Auditors
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-4 (33-30433) dated August 10, 1989.
(**) Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended
June 30, 1990.
(***) Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended
June 30, 1991.
(****) Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended
June 30, 1992.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CHESTER VALLEY BANCORP INC.
September 26, 1997 By: /s/ Ellen Ann Roberts
---------------------
Ellen Ann Roberts
Director, Chairman of the Board, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Ellen Ann Roberts September 26, 1997
- ---------------------------------------
Ellen Ann Roberts
Director, Chairman of the Board, and
Chief Executive Officer
/s/ Anthony J. Biondi September 26, 1997
- ----------------------------------------
Anthony J. Biondi
President and
Chief Operating Officer
/s/ Robert J. Bradbury September 26, 1997
- -----------------------------------------
Robert J. Bradbury
Director
/s/ Gerard F. Griesser September 26, 1997
- ----------------------------------------
Gerard F. Griesser
Director
<PAGE>
/s/ James E. McErlane September 26, 1997
- -----------------------------------------
James E. McErlane
Director and Secretary
/s/ Richard L. Radcliff September 26, 1997
- -----------------------------------------
Richard L. Radcliff
Director
/s/ Emory S. Todd September 26, 1997
- -----------------------------------------
Emory S. Todd
Director
/s/ Edward L. Towson September 26, 1997
- -----------------------------------------
Edward L. Towson
Director
/s/ William M. Wright September 26, 1997
- -----------------------------------------
William M. Wright
Director
CHESTER VALLEY BANCORP INC.
1997 STOCK OPTION PLAN
1. Definitions
As used in this Plan, the following definitions apply to the terms
indicated below:
A. "Board" means the Board of Directors of the Company.
B. "Committee" means the Compensation and Stock Option Committee
appointed by the Board from time to time. The Committee shall consist of at
least two persons, who shall be directors of the Company.
C. "Company" means Chester Valley Bancorp Inc., a Pennsylvania
corporation.
D. "Disinterested Director" means a director defined as a
"disinterested director" in Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Exchange Act, or in any successor rule or
regulation adopted by the Securities and Exchange Commission.
E. "Fair Market Value" of a Share on a given day means, if the Shares
are traded in a public market, the average of the last bid and asked prices of a
Share as reported on the principal securities exchange on which the Shares are
then listed or admitted to trading, or as reported on the National Association
of Securities Dealers Automated Quotation System on the business day immediately
preceding the date of grant. If the Shares shall not be so traded, the Fair
Market Value shall be determined by the Committee taking into account all
relevant facts and circumstances.
F. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
G. "Grantee" means a person who is either an Optionee or an
Optionee-Shareholder.
H. "Incentive Stock Option" means an option, whether granted under
this Plan or otherwise, that qualifies as an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code.
I. Non-qualified Option" means an Option that is not an Incentive
Stock Option.
J. "Option" means a right to purchase Shares under the terms and
conditions of this Plan.
K. "Optionee" means a person other than an Optionee-Shareholder to
whom an option is granted under this Plan.
L. "Optionee-Shareholder" means a person to whom an option is granted
under this Plan and who at the time such option is granted owns, actually or
constructively, stock of the Company or of a Parent or Subsidiary possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of such Parent or Subsidiary.
M. "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if, at the time of
granting an Option, each of the corporations in the unbroken chain (other than
the Company) owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in the chain.
N. "Plan" means this Chester Valley Bancorp Inc. 1997 Stock Option
Plan, including any amendments to the Plan.
O. "Share" means a share of the Company's common stock, par value
$1.00 per share, either now or hereafter owned by the Company as treasury stock
or authorized but unissued.
P. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
granting an Option, each of the corporations in the unbroken chain (other than
the last corporation in the chain) owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in the chain.
Q. Options shall be deemed "granted" under this Plan on the date on
which the Committee or the Board, by appropriate action, approves the grant of
an Option hereunder or on such subsequent date as the Committee or the Board may
designate.
R. As used herein, the masculine includes the feminine, the plural
includes the singular, and the singular includes the plural.
2. Purpose
The purposes of the Plan are as follows.
A. To secure for the Company and its shareholders the benefits arising
from share ownership by those directors, officers and key employees and
consultants of the Company and its Subsidiaries who will be responsible for the
Company's future growth and continued success. The Plan is intended to provide
an incentive to directors, officers and key employees and consultants by
providing them with an opportunity to acquire an equity interest or increase an
existing equity interest in the Company, thereby increasing their personal stake
in its continued success and progress.
B. To enable the Company and its Subsidiaries to obtain and retain the
services of directors and key employees and consultants, by providing such
directors and key employees and consultants with an opportunity to acquire
Shares under the terms and conditions and in the manner contemplated by this
Plan.
3. Plan Adoption and Term
A. This Plan shall become effective upon its adoption by the Board,
and Options may be issued upon such adoption and from time to time thereafter;
provided, however, that the Plan shall be submitted to the Company's
shareholders for their approval at the next annual meeting of shareholders, or
prior thereto at a special meeting of shareholders expressly called for such
purpose; and provided further, that the approval of the Company's shareholders
shall be obtained within 12 months of the date of adoption of the Plan. If the
Plan is not approved by the affirmative vote of the holders of a majority of all
shares present in person or by proxy, at a duly called shareholders' meeting at
which a quorum representing a majority of all voting stock is present in person
or by proxy and voting on this Plan, then this Plan and all Options then
outstanding under it shall forthwith automatically terminate and be of no force
and effect.
B. Subject to the provisions hereinafter contained relating to
amendment or discontinuance, this Plan shall continue to be in effect for ten
(10) years from the date of adoption of this Plan by the Board. No Options may
be granted hereunder except within such period of ten (10) years but Options
granted within such ten (10) year period may extend beyond the termination date
of this Plan.
4. Administration of Plan
A. This Plan shall be administered by the Board or, subject to
Paragraph 4.C below, the Committee. Except as otherwise expressly provided in
this Plan, the Board shall have authority to interpret the provisions of the
Plan, to construe the terms of any Option, to prescribe, amend and rescind rules
and regulations relating to the Plan, to determine the terms and provisions of
Options granted hereunder, and to make all other determinations in the judgment
of the Board necessary or desirable for the administration of the Plan. Without
limiting the foregoing, the Board shall, to the extent and in the manner
contemplated herein, exercise the discretion granted to it to determine to whom
Incentive Stock Options and Non-qualified Options shall be granted, how many
Shares shall be subject to each such Option, whether a Grantee shall be required
to surrender for cancellation an outstanding Option as a condition to the grant
of a new Option, and the prices at which Shares shall be sold to Grantees. The
Board may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any Option in the manner and to the extent it
shall deem expedient to carry the Plan into effect and shall be the sole and
final judge of such expediency.
B. No member of the Board shall be liable for any action taken or
omitted or any determination made by him in good faith relating to the Plan, and
the Company shall indemnify and hold harmless each member of the Board and each
other director or employee of the Company to whom any duty or power relating to
the administration or interpretation of the Plan has been delegated against any
cost or expense (including counsel fees) or liability (including any sum paid in
settlement of a claim with the approval of the Board) arising out of any act or
omission in connection with the Plan, unless arising out of such person's own
fault or bad faith.
C. The Board may (but is not required to) to appoint the Committee. If
all members of the Committee are Disinterested Directors, the Committee shall
have the authority to administer the Plan and exercise any power granted to the
Board in the Plan. If all members of the Committee are not Disinterested
Directors, the Committee shall have the authority solely to make recommendations
to the Board for the administration of the Plan.
5. Eligibility
Directors, officers, key employees and consultants of the Company and
its Subsidiaries shall be eligible for selection by the Board to be granted
Options. Consultants and directors who are not also employees of the Company or
a Subsidiary shall be eligible to be granted only Non-qualified Options. A
director, officer, employee or consultant who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options if
the Board shall so determine.
6. Options
A. Subject to adjustment as provided in Paragraph 13 hereof, Options
may be granted pursuant to the Plan for the purchase of not more than 150,000
Shares; provided, how ever, that if prior to the termination of the Plan, an
Option shall expire or terminate for any reason without having been exercised in
full, the unpurchased Shares subject thereto shall again be available for the
purposes of the Plan.
B. Each Option granted under the Plan shall be evidenced by an option
certificate or agreement for Shares in such form, not inconsistent with this
Plan, as the Board may adopt for general use or for specific cases from time to
time. Such option certificate shall designate each Option as an Incentive Stock
Option or a Non-qualified Option.
C. The aggregate Fair Market Value (determined as of the time Options
are granted) of the Shares with respect to which Incentive Stock Options may be
or become exercisable for the first time by a Grantee during any calendar year
(whether granted under this Plan or any other plan of the Company or any Parent
or Subsidiary corporation) shall not exceed $100,000. To the extent (and only to
the extent) that an Incentive Stock Option may be or become exercisable in
violation of this limitation, it shall be deemed to be a Non-qualified Option.
7. Option Price
A. The purchase price per Share deliverable upon the exercise of an
Option shall be determined by the Board, but in the case of an Incentive Stock
Option shall not be less than 100% of the Fair Market Value of a Share on the
date the Incentive Stock Option is granted to an Optionee and shall not be less
than 110% of the Fair Market Value of a Share on the date the Incentive Stock
Option is granted to an Optionee-Shareholder.
B. Payment for Shares purchased under an Option may be made (1) in
cash; (2) in Shares valued at their Fair Market Value on the date of exercise,
or (3) in a combination of cash and Shares.
8. Duration of Options
Each Option and all rights thereunder shall expire and the Option
shall no longer be exercisable on a date not later than ten (10) years from the
date on which the Option was granted. Options may expire and cease to be
exercisable on such earlier date as the Board may determine at the time of
grant. Options shall be subject to termination before their expiration date as
provided herein.
9. Conditions Relating to Exercise of Options
A. The Shares subject to any Option may be purchased at any time
during the term of the Option, unless, at the time an Option is granted, the
Board shall have fixed a specific period or periods required to have passed as a
condition to exercise of an option or a part thereof. To the extent an Option is
not exercised when it becomes initially exercisable, or is exercised only in
part, the Option or remaining part thereof shall not expire but shall be carried
forward and shall be exercisable until the expiration or termination of the
Option. Partial exercise as to whole Shares is permitted from time to time,
provided that no partial exercise of an Option shall be for a number of Shares
having a purchase price of less than $1,000 unless the Grantee represents to the
Company that he or she is purchasing the Shares for investment.
B. No Option shall be transferable by the Grantee thereof other than
by will or by the laws of descent and distribution, and Options shall be
exercisable during the lifetime of a Grantee only by such Grantee or, to the
extent that such exercise would not prevent an Option from qualifying as an
Incentive Stock Option under the Internal Revenue Code, by his or her guardian
or legal representative.
C. Certificates for Shares purchased upon exercise of Options shall be
issued either in the name of the Grantee or in the name of the Grantee and
another person jointly with the right of survivorship. Such certificates shall
be delivered as soon as practical following the date the Option is exercised.
D. An Option shall be exercised by the delivery to the Company at its
principal office, to the attention of its Chief Financial Officer, of written
notice of the number of Shares with respect to which the Option is being
exercised, and of the name or names in which the certificate for the Shares is
to be issued, and by paying the purchase price for the Shares in accordance with
paragraph 7 hereof. At the time of exercise of an Incentive Stock Option, the
Grantee also shall sign and deliver to the Company the Grantee's agreement to
notify the Company if the Grantee sells or otherwise disposes of any of the
Shares being purchased within two years after the date such Option was granted
or one year after the date of exercise.
E. Notwithstanding any other provision in this Plan, no Option may be
exercised unless and until (i) this Plan has been approved by the shareholders
of the Company, and (ii) the Shares to be issued upon the exercise thereof have
been registered under the Securities Act of 1933 and applicable state securities
laws, or are, in the opinion of counsel to the Company, exempt from such
registration. The Company shall not be under any obligation to register under
applicable Federal or state securities laws any Shares to be issued upon the
exercise of an Option granted hereunder, or to comply with an appropriate
exemption from registration under such laws in order to permit the exercise of
an Option or the issuance and sale of Shares subject to such Option. If the
Company chooses to comply with such an exemption from registration, the
certificates for Shares issued under the Plan, may, at the direction of the
Board, bear an appropriate restrictive legend restricting the transfer or pledge
of the Shares represented thereby, and the Board may also give appropriate
stop-transfer instructions to the transfer agent of the Company.
F. Any person exercising an Option or transferring or receiving Shares
shall comply with all regulations and requirements of any governmental authority
having jurisdiction over the issuance, transfer or sale of securities of the
Company or over the extension of credit for the purposes of purchasing or
carrying any margin securities, or the requirements of any stock exchange on
which the Shares may be listed, and as a condition to receiving any Shares,
shall execute all such instruments as the Board in its sole discretion may deem
necessary or advisable.
G. Each Option shall be subject to the requirement that if the Board
shall determine that the listing, registration or qualification of the Shares
subject to such Option upon any securities exchange or under any state or
Federal law, or the consent or approval of any governmental or regulatory body,
is necessary or desirable as a condition of, or in connection with, the granting
of such Option or the issuance or purchase of Shares thereunder, such Option may
not be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effective or obtained free of
any conditions not acceptable to the Board.
10. Effect of Termination of Employment or Death
A. In the event of termination of a Grantee's employment or status as
a director by reason of such Grantee's death, disability, or retirement with the
consent of the Board or in accordance with an applicable retirement plan, any
outstanding Option held by such Grantee shall, notwithstanding the extent to
which such Option was exercisable prior to termination of employment,
immediately become exercisable as to the total number of Shares purchasable
there- under. Any such Option shall remain so exercisable at any time prior to
its expiration date or, if earlier, the first anniversary of termination of the
Grantee's employment or status as a director. Grantees of Incentive Stock
Options shall be notified that certain Federal income tax provisions granting
favorable treatment to Incentive Stock Options will not apply if such Options
are not exercised within three months after the date of termination of
employment (twelve months if employment terminates as a result of total and
permanent disability as defined in Section 22(e)(3) of the Internal Revenue
Code).
B. In the event of termination of a Grantee's employment or status as
a director for any reason other than death, disability, or retirement with the
consent of the Board or in accordance with an applicable retirement plan, all
rights of any kind under any outstanding Incentive Stock Option held by such
Grantee shall immediately lapse and terminate, except that the Board may, in its
discretion, elect to permit exercise for a period ending on the earlier of the
expiration date of the Incentive Stock Option and a date thirty days after the
termination of employment or status as director as to the total number of Shares
purchasable under the Incentive Stock Option as of the date of the termination.
C. Whether an authorized leave of absence or absence in military or
government service shall constitute termination of employment or status as a
director shall be determined by the Board. Transfer of employment between the
Company and a Subsidiary corporation or between one Subsidiary corporation and
another shall not constitute termination of employment.
11. No Special Employment Rights
Nothing contained in the Plan or in any Option shall confer upon any
Grantee any right with respect to his or her status as a director or the
continuation of his or her employment by the Company or a Subsidiary or
interfere in any way with the right of the Company or a Subsidiary, subject to
the terms of any separate employment agreement to the contrary, at any time to
terminate such employment or to increase or decrease the compensation of the
Grantee from the rate in existence at the time of the grant of an Option.
12. Rights as a Shareholder
The Grantee of an Option shall have no rights as a shareholder with
respect to any Shares covered by an Option until the date of issuance of a
certificate to him for such Shares. Except as otherwise expressly provided in
the Plan, no adjustment shall be made for dividends or other rights for which
the record date occurs prior to the date of issuance of such certificate.
13. Anti-dilution Provision
A. In case the Company shall (i) declare a dividend or dividends on
its Shares payable in shares of its capital stock, (ii) subdivide its
outstanding Shares, (iii) combine its outstanding Shares into a smaller number
of Shares, or (iv) issue any shares of capital stock by reclassification of its
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing corporation), the number of
Shares authorized under the Plan will be adjusted proportionately. Similarly, in
any such event, there will be a proportionate adjustment in the number and to
the purchase price per Share of Shares subject to unexercised Options (but
without adjustment to the aggregate option price).
B. In the event of (i) any transaction which constitutes a change in
control of the Company, (ii) any transaction which results in the sale of at
least fifty percent (50%) or more of the business or assets of the Company
during a period of twelve consecutive months, or (iii) any transaction which
involves a merger or consolidation of the Company in which stockholders of the
Company before such merger or consolidation do not, as a result of the merger or
consolidation, own at least fifty percent (50%) of the outstanding voting power
of the surviving entity following such merger or consolidation, the Board shall
modify all outstanding Options so as to accelerate, as a consequence of or in
connection with such transaction, a Grantee's right to exercise any such Option.
C. The Board, in its sole discretion, may determine that, upon the
occurrence of a transaction described in Paragraph 13B, each Option outstanding
hereunder shall terminate within a specified number of days after notice to the
holder, and such holder shall receive, with respect to each Share subject to
such Option, an amount equal to the excess of the Fair Market Value of such
Shares immediately prior to the occurrence of such transaction over the exercise
price per Share of such Option; such amount shall be payable in cash, in one or
more of the kinds of property payable in such transaction, or in a combination
thereof, as the Board in its discretion shall determine. The provisions
contained in the preceding sentence shall be inapplicable to an Option granted
within six (6) months before the occurrence of such a transaction if the holder
of such Option is subject to the reporting requirements of Section 16(a) of the
Exchange Act and no exemption from liability under Section 16(b) is otherwise
available to such holder.
D. Each Grantee will be notified of any such adjustment and any such
adjustment, or the failure to make such adjustment, shall be binding on the
Grantee.
14. Withholding Taxes
Whenever an Option is to be exercised under the Plan, the Company
shall have the right to require the Grantee, as a condition of exercise of the
Option, to remit to the Company an amount sufficient to satisfy the Company's
(or a Subsidiary's) Federal, state and local withholding tax obligation, if any,
that will, in the sole opinion of the Board, result from the exercise. In
addition, the Board may permit a Grantee, to satisfy any such withholding tax
obligation by making an irrevocable election at least six (6) months prior to
exercise of an option to have the Company retain Shares issuable upon such
exercise having a Fair Market Value on the date of exercise equal to the amount
to be withheld.
15. Amendment of the Plan
The Board may at any time and from time to time terminate or modify or
amend the Plan in any respect, except that, without shareholder approval, the
Board may not (a) increase the number of Shares which may be issued under the
Plan or (b) modify the requirements as to eligibility for participation under
the Plan. The termination or modification or amendment of the Plan shall not,
without the consent of a Grantee, affect his or her rights under an Option
previously granted to him or her. With the consent of the Grantee, the Board may
amend outstanding Options in a manner not inconsistent with the Plan.
16. Miscellaneous
A. It is expressly understood that this Plan grants powers to the
Board but does not require their exercise; nor shall any person, by reason of
the adoption of this Plan, be deemed to be entitled to the grant of any Option;
nor shall any rights begin to accrue under the Plan except as Options may be
granted hereunder.
B. All expenses of the Plan, including the cost of maintaining
records, shall be borne by Company.
17. Governing Law
This Plan and all rights hereunder shall be governed by and
interpreted in accordance with the laws of the Commonwealth of Pennsylvania.
<PAGE>
CHESTER VALLEY BANCORP INC.
INCENTIVE STOCK OPTION CERTIFICATE
(Not Transferable)
THIS CERTIFIES THAT ___________________________ ("Optionee") has been granted an
INCENTIVE STOCK OPTION
to purchase ___________ shares of the common stock of CHESTER VALLEY BANCORP,
INC., a Pennsylvania corporation, at a price of $_________ per share, subject to
adjustment as provided in the CHESTER VALLEY BANCORP INC. 1997 Stock Option Plan
("Plan"). This option is granted under and pursuant to the Plan and is subject
to the conditions and limitations set forth in the Plan as the same may be
amended from time to time. All of the terms and provisions of the Plan, as
amended from time to time, are incorporated herein by reference and nothing
herein contained shall be deemed to vary or be given effect as modifying the
terms of the Plan.
SUBJECT TO THE FOREGOING, THIS OPTION MAY BE EXERCISED ONLY AS FOLLOWS:
THIS OPTION SHALL EXPIRE AND BE VOID AND SHALL NOT BE EXERCISABLE AFTER THE
EXPIRATION OF __________ YEARS FROM THE DATE HEREOF AND MAY BE EXERCISED ONLY IN
THE MANNER PROVIDED IN THE PLAN.
This option is not transferable except by will or the laws of descent and
distribution.
IN WITNESS WHEREOF, CHESTER VALLEY BANCORP INC. has caused this Stock
Option Certificate to be issued as of _______________, 19__ (the date of grant).
ATTEST: [Corporate Seal] CHESTER VALLEY BANCORP INC.
____________________________ ____________________________________
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
(Computation of Earnings Per Share)
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1997 1996 1995
--------- --------- ----------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Net income ............................. $ 1,926 $ 2,439 $ 2,153
========= ========= ==========
PRIMARY:
Weighted-average number of shares and
common equivalent shares outstanding 2,061,557 2,073,044 2,074,477
========= ========= ==========
Earnings per common and common
equivalent share ..................... $ 0.93 $ 1.18 $ 1.04
========= ========= ==========
FULLY DILUTED:
Weighted-average number of shares and
common equivalent shares outstanding 2,064,711 2,074,141 2,074,915
========= ========= ==========
Earnings per common and common
equivalent share ..................... $ 0.93 $ 1.18 $ 1.04
========= ========= ==========
</TABLE>
Note 1 - Earnings per share is based on the weighted-average number of shares
actually outstanding plus the shares that would be outstanding assuming the
exercise of dilutive stock options, all of which are considered to be common
stock equivalents. Shares outstanding for the 1996 and 1995 periods have been
adjusted to reflect 5% stock dividends paid during fiscal 1997 and 1996 and the
March 1997 five-for-four stock split effected in the form of a dividend.
INDEX
Corporate Profile 2
Five-Year Financial Highlights 3
Letter to Stockholders 4-5
Helping Business
is Our Business 6-11
Management's
Discussion
and Analysis 12-19
Consolidated Statements
of Financial Condition 20
Consolidated Statements
of Operations 21
Consolidated Statements
of Changes in
Stockholders' Equity 22
Consolidated Statements
of Cash Flows 23
Notes to Consolidated
Financial Statements 24-36
Independent Auditors'
Report 37
<PAGE>
CORPORATE PROFILE
Chester Valley Bancorp Inc. (the "Holding Company") was incorporated in August
1989 in the Commonwealth of Pennsylvania as a unitary thrift holding company.
The Holding Company's principal subsidiary is First Financial Bank ("First
Financial" or the "Bank"). As used in this Report, the term "Company" refers to
the Holding Company and its subsidiaries.
First Financial's headquarters, along with its six branch offices, are located
in scenic Chester County, Pennsylvania, an area which has seen extraordinary
growth over the last ten years. The Bank began its operations in 1922 as
Downingtown Building and Loan, a Pennsylvania-chartered mutual savings and loan
association, and eventually converted to a stock form of ownership in 1987. All
of our branches, including our headquarters, are full-service facilities and are
conveniently located in Downingtown, Exton, Frazer, Thorndale, Westtown, Airport
Village, and Brandywine Square.
Chester Valley's common stock is traded over the counter and is included in the
NASDAQ National Market System under the symbol "CVAL".
[GRAPHIC-PHOTOGRAPH]
FIRST FINANCIAL CELEBRATES ITS 75TH YEAR
First Financial Bank celebrated its 75th anniversary last year, a distinction
few companies can claim and a source of great pride to the more than 125 members
of our staff and management whose hard work produced the highest year-end
operating earnings in our history. We are very pleased to have been recognized
for this accomplishment in the form of a citation from the Commonwealth of
Pennsylvania, which was presented to us by Senator Robert J. Thompson. On behalf
of everyone at First Financial and Chester Valley, we extend our sincere thanks
to all those responsible for our continuing success.
[GRAPHIC-PHOTOGRAPH]
CHRISSY DULLINGER,
CHESTER VALLEY'S NEW CFO
Chrissy is the newest member of our Senior Management Team and has been a valued
member of our staff since she joined us in 1993. She was elected Treasurer in
1994 and Chief Financial Officer in October 1996. A graduate of the University
of Richmond with a B.S. in Accounting, Chrissy is a Certified Public Accountant.
She previously served as a Manager of Accounting and Auditing Services,
specializing in financial institutions, at KPMG Peat Marwick, one of the "big
six" public accounting firms.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
Selected Financial Condition Data
At June 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets ................................ $323,673 $272,932 $262,360 $244,071 $222,227
Net loans receivable ........................ 257,040 223,963 220,816 194,293 176,041
Deposits .................................... 260,750 228,206 217,981 204,802 191,484
Stockholders' equity ........................ 27,065 25,564 23,784 21,870 19,158
Book value per common share(1) .............. 13.15 12.42 11.57 10.71 9.70
<CAPTION>
Selected Operations Data
Year Ended June 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income ............................. $ 22,569 $ 20,566 $ 18,882 $ 16,514 $ 16,015
Interest expense ............................ 11,503 10,875 9,830 8,275 8,265
-------- -------- -------- -------- --------
Net interest income ......................... 11,066 9,691 9,052 8,239 7,750
Income before cumulative effect of a
change in accounting for income taxes(2) .. 1,926 2,439 2,153 1,921 1,814
Cumulative effect of a change in
accounting for income taxes ............... -- -- -- 540 --
-------- -------- -------- -------- --------
Net income(2) ............................... 1,926 2,439 2,153 2,461 1,814
Fully diluted earnings per share
before cumulative effect of a change in
accounting for income taxes (1) ........... .93 1.18 1.04 .94 .90
Dividend per share (1) ...................... .37 .28 .23 .21 .17
-------- -------- -------- -------- --------
Other Selected Data
(based on monthly balances)
Average interest rate spread ................ 3.38% 3.21% 3.19% 3.27% 3.45%
Net yield on average interest-earning assets 4.03% 3.86% 3.73% 3.75% 3.94%
Ratio of non-performing loans and real estate
owned to total assets at end of period .... .23% .86% 1.17% 1.44% 2.52%
Number of full-service
offices at end of period .................. 7 6 6 5 5
</TABLE>
(1) Adjusted to reflect 5% stock dividends paid in September 1996, 1995, 1994
and 1993 and the December 1993 and March 1997 five-for-four stock splits
effected in the form of dividends.
(2) Fiscal 1997 includes the one-time FDIC insurance assessment of $832,000 net
of taxes.
(3) Net operating income excludes the one-time FDIC insurance assessment of
$832,000 net of taxes.
[GRAPHIC-GRAPH NET OPERATING INCOME]
[GRAPHIC-TOTAL ASSETS]
[GRAPHIC-COMMERCIAL LOAN PORTFOLIO]
<PAGE>
TO OUR STOCKHOLDERS
[GRAPHIC-PHOTOGRAPH]
Anthony J. Biondi, Ellen Ann Roberts
It's hard to believe another year has gone by so quickly - and what a
year it's been for Chester Valley and its subsidiary, First Financial Bank.
Unprecedented growth in assets, deposits, loans, and profits has made this the
most successful year in our history and is reflected in the 46% increase in the
price of our stock during the past fiscal year - from $13.90 per share
(adjusted) to $20.25 per share.
The end of our fiscal year, June 30, 1997, saw assets at $323.67
million, up 18.6% from $272.93 million as of June 30, 1996; deposits grew to
$260.75 million, a 14.3% increase from $228.21 million at the same date in 1996.
Net loans topped off at $257.04 million, 14.8% higher than 1996's $223.96
million, and profits rose to $2.76 million (excluding the one-time Savings
Institutions Insurance Fund ["SAIF"] special assessment) - 13.1% over last
year's $2.44 million. Thanks to the diligence of our commercial loan staff, our
commercial portfolio has increased to $44.62 million - up 50% from $29.74
million in 1996.
Our desire to become a full-service community bank in every sense of
the word was exemplified when we changed our name to First Financial Bank, which
will better reflect the type of financial institution we are - one that provides
every banking need for current and potential customers.
In September 1996 we opened our seventh branch in Brandywine Square, a
multi-million dollar shopping center a few miles east of our main office in
Downingtown. While most of the "big banks" are closing branches, we have been
fortunate in having two very important factors in our favor. First is the
reputation we have earned, and which we continue to build upon, as a true
community bank. Being available for our neighbors and business associates has
given us the opportunity to expand our branch network and offer an extensive
array of products and
<PAGE>
services. Second is the loyalty we have received from our community for over
three-quarters of a century. We've gotten to know our customers and shareholders
personally, we've watched families grow and, in many cases, we've been part of
that growth.
Providing convenience for our customers has always been a priority at
First Financial and led to the opening of our "First Call Center," with a staff
to open accounts and accept loan applications over the phone. Additionally, our
Lending Department underwent a complete reorganization to expedite the
commitment of mortgage loans to less than 48 hours instead of the usual two to
four weeks.
Our First Choice Check Debit Card has become a popular alternative to
carrying cash or checks, and First Pay by Phone will allow banking from home
when it is introduced in the Fall of 1997. Commercial customers are reaping the
benefits of our Cash Management Sweep Account, and Imaging has produced a
hassle-free method of balancing checkbooks.
This Fall we will open our Investment Services and Trust Division. Under
the skillful management of David Summers, our new Vice President and Senior
Trust Officer who has over twenty years of local banking experience, we will
offer personal money management and investment services, and retirement and
estate planning to our individual and corporate customers.
First Financial Bank has pledged to keep its headquarters in
Downingtown, where it originated over 75 years ago. Through the purchase and
revitalization of properties surrounding our main office, we are working in
conjunction with the borough's Main Street Project to recapture the atmosphere
of America's small towns. This will also enable us to accommodate our growth, as
evidenced by our newly renovated Operations Center which houses our Checking and
Electronic Funds Departments, and our new imaging equipment.
We were put to the test many times during the past twelve months, and we
met our challenges head on with one objective in mind: keeping you, our
shareholders and customers, satisfied with your Company. As we bring one
successful year to a close and anticipate the one which lies ahead, we realize
that the good will of those we serve is the foundation of our success. Once
again we take this opportunity to say a heartfelt "thank you" to all who have
made it possible.
Sincerely,
/s/Ellen Ann Roberts
--------------------
Ellen Ann Roberts
Chairman and Chief Executive Officer
/s/Anthony J. Biondi
--------------------
Anthony J. Biondi
President and Chief Operating Officer
<PAGE>
The inception of First Financial's Preferred Realtor Program, coupled with
our creative and flexible lending plans, has encouraged Chester County builders,
developers and realtors to come to us for all their financing needs. As a
result, we have been able to assist with the construction of new houses and
office complexes throughout our community; we have helped families realize the
dream of owning their own homes; and we have been instrumental in aiding the
expansion of existing companies and the start-up of new ones. Much of this new
business has come to us as a result of referrals from people like Matt
DiDomenico, whose talents include those of builder, developer, and realtor. A
highly respected customer and member of our Frazer Advisory Board, Matt knows
it's critical to closely monitor the County's real estate market, and he gladly
shares his ideas and opinions with us. This is a perfect example of the
relationships we value and will continue to encourage.
[GRAPHIC-PHOTOGRAPH]
LENDING OFFICERS BILL EADS , PHILLIS WEIDENHAMMER, AND COLIN MAROPIS HAVE
DEVELOPED A SOLID WORKING RELATIONSHIP WITH DEVELOPER/REALTOR MATTHEW J.
DIDOMENICO, SR.
[GRAPHIC-PHOTOGRAPH]
FIRST FINANCIAL IS FORTUNATE TO HAVE ITS VERY OWN HIGH-TECH EXPERTS --PAM
COLLINS, KELLY LAURENTO, KAREN BROWN, AND KAY FALKOW -- TO KEEP UP WITH
UNFOLDING TECHNOLOGICAL ADVANCES.
Tracking loans from beginning to end requires infinite attention to detail
- - as does every other aspect of today's banking - through the use of the most
advanced technology. Keeping up with ever-changing and constantly evolving
technological innovations will be a never-ending process. At First Financial,
countless hours are spent learning what types of products consumers want and
need, then researching the most effective ways in which we can provide them at
the lowest cost. During fiscal 1997 we introduced several new features designed
to enhance day-to-day cash management and streamline our customers' banking and
record keeping.
Our First Choice Check Debit Card, valid wherever Visa is accepted, is a
safe alternative to carrying a checkbook or large amounts of cash. Bill Pay by
Phone,
<PAGE>
which will be in place this Fall, allows all banking transactions to be
performed by using a touch-tone phone. In the very near future we will introduce
PC Banking for those who prefer using their computers at home or at the office.
A Cash Management Sweep Account seemed the perfect solution for many of our
commercial checking customers, automatically "sweeping" any excess funds into an
interest-earning investment alternative account.
Check Imaging is one answer to the nightmare of balancing a checkbook.
Imaging not only makes checkbook maintenance easier and much faster, it
drastically reduces the amount of paper to be stored. Copies of canceled checks,
listed in numerical order with multiple copies to a page, are provided with
monthly statements. Everything is three-hole punched for convenient storage in
an attractive binder, which is supplied by the Bank.
First Financial has made great strides in the area of technology, but we
have much more to learn and even more to offer in the months ahead. One of the
keys to our success has been providing the kind of banking our customers have
come to expect from the "premier bank of Chester County."
The key to any organization's success, however, is good management: a
thorough knowledge of the business and the
[GRAPHIC-PHOTOGRAPH]
Carl K. Croft, President
Croft, Drozd, Barr & Company, P.C.
It wasn't easy finding a bank that took time to understand how a CPA
firm works, but that's just what First Financial did - they listened and asked
questions about our operations, with no pre-conceived notions. The Bank has
always met or exceeded our expectations, as well as those of the clients we've
referred to them. First Financial is easily accessible, they always respond in a
timely manner, and they never say "no" - they're always willing to try. That's
what being a hometown bank is all about.
<PAGE>
[GRAPHIC-PHOTOGRAPH]
Ed Herd, President
Payroll On-Line
We started our business in 1988 and quickly found that we needed a bank
that could handle electronic funds transfers. We had already gotten our mortgage
from First Financial, so we came to them for our EFT. They were able to develop
the process, which was costly in time and money for both of us at first, but
everything soon became automated and much easier to process. We eventually
brought all of our accounts to First Financial, and the relationship that
developed has made us stay. We've been working together ever since.
ability to work well with staff members and customers. In this respect, First
Financial Bank has a branch system that is second to none among its peers.
Administering the day-to-day operations of a busy branch office is not
easy, so it takes a special type of manager, a true professional with experience
and skill, to furnish the guidance that makes the office run smoothly and
efficiently. Handling the expected and anticipating the unexpected are only part
of what makes a good branch manager; knowing the Bank's products and getting to
know its customers is the other. Each of our seven branches is fortunate to have
such an individual at its helm.
Our managers have been employees of the Bank for many years; most of them
are lifelong residents of Chester County, giving them even more of a vested
interest in our community. They are very much involved in such civic
organizations as Chambers of Commerce, YMCAs, the March
<PAGE>
of Dimes and the United Way, and they have been recognized for their work with
these groups.
These branch managers have become key to the development of many of the
small business accounts on which we have been concentrating for the last several
years. They can answer questions and furnish counseling on investments; as
highly trained loan officers they are able to create financing packages for
nearly all types of loan and mortgage requirements. Having skilled managers who
are able to handle such an assortment of business and personal financial
arrangements is unique to First Financial - it is, quite literally, "one-stop
shopping."
First Financial demands a great deal from its managers, but we know our
confidence is not misplaced, and we are very proud of the outstanding job they
are doing.
[GRAPHIC-PHOTOGRAPH]
Steve Cunningham and Branch Managers Ronnie Gilken, Carol Reichard, Michelle
Guerrero, Anne Johnson, Celeste Moore, Vicki Banghart, and Paige Willover offer
our customers "banking - the way they want it."
[GRAPHIC-PHOTOGRAPH]
W. David Hager
Executive Director, Handi-Crafters, Inc.
We've come a long way since our organization was founded in 1961, but
there's still much more to be done. It took a long time to sort out just what we
wanted and needed from a lender, and when we were finally ready to begin
interviewing banks, First Financial turned out to be the best of the lot. They
were not only the most competitive, they were also the kindest and most
supportive of our organization. There's no doubt that the Bank has a real
commitment to our program.
<PAGE>
[GRAPHIC-PHOTOGRAPH]
Michael J. O'Neill, President
Brian O'Neill, V.P., Fabritech Inc.
When we decided to refinance our mortgage we tried working with another
local bank, but we felt they weren't interested because we're a small company.
Our accountant recommended that we call First Financial, and we're glad we did.
Everyone was so helpful and easy to work with, and they willingly accommodated
our financial needs. The transaction went smoothly, and we accomplished what we
wanted to do. Their Westtown Branch Manager even stops by occasionally to see
how we're doing and make sure we're not having any problems. It's nice to know
that First Financial really cares.
First Financial's "First Call Center" is our latest step toward
hassle-free banking. Officially in operation since August 4th, the Center is
staffed with skilled representatives who can quickly research accounts and
respond to inquiries - not only from customers, but from our branch office
personnel as well. They also have the capability of opening accounts and taking
loan applications over the telephone, so several banking transactions can be
combined and concluded with just one phone call. The Center has extended its
hours from 8 AM to 8 PM --a real benefit for those who can't call or come into
our offices during the normal working day. Banking shouldn't be thought of as a
time-consuming chore -- seeing that it isn't, is what the First Call Center is
all about.
"Helping business is our business" is not just the theme of this year's
Annual Report -- it has become our practice as we have channeled our efforts
toward working more closely with the business community throughout Chester
County. One such customer is the Coatesville Area School District. We were able
to present them with alternatives to some of their existing financial
arrangements and, thanks to our new Cash Management Sweep Account, eliminate
trips and telephone calls to the Bank in order to transfer funds.
<PAGE>
We have also been instrumental in the development of many new businesses
because of our ability to tailor financing packages to individual needs. We've
also helped long-established firms with their renovation or expansion plans.
Such has been the case of ECS Underwriting, Inc., a company that has
virtually led the way in specialized insurance programs since its inception in
1979. ECS is also the owner of four other businesses -- a copy center, a
security company, a warehouse, and a limousine service -- and was in need of a
facility to house them. They also had hopes of constructing a day care center
exclusively for use by their employees' families. Knowing this would take a
great deal of careful planning and customized
[GRAPHIC-PHOTOGRAPH]
YOU CAN JUST HEAR THE SMILES IN THE VOICES OF FIRST CALL CENTER STAFF JOANNE
BRESLIN, JACKIE PALMER, ROSEMARY BRADY, AND SUSAN ROSATO. THEY'RE PART OF THE
TEAM THAT MAKES BANKING AT FIRST FINANCIAL SUCH A PLEASANT EXPERIENCE.
[GRAPHIC-PHOTOGRAPH]
ED LAWRENCE AND WARD BRACELAND JOINED FORCES WITH ECS'S DAVID M. ROSENBERG, BILL
KRONENBERG, NAMED CEO OF THE YEAR BY THE CHESTER COUNTY CHAMBER OF BUSINESS AND
INDUSTRY, AND FRANK L. PILIERO.
financing, CEO William Kronenberg III and his partners turned to First
Financial. A respected, well-established company dedicated to preserving our
environment and a community bank with 36 consecutive five-star safety and
soundness ratings seemed the perfect combination to undertake such a project.
Turning dreams into reality is what First Financial does best. Our
commercial lending team will put forth their best efforts to develop products
that are best-suited to our customers' needs. Their experience and skill,
combined with the willingness to take time to listen and consider every option,
assure that our business will always have the same goal: helping your business.
<PAGE>
Management's Discussion
and Analysis of Financial Condition
and Results of Operations
General
The Company's income on a consolidated basis is derived substantially from
its investment in its subsidiary, the Bank. The largest components of the
Company's total income and total expenses are interest. Although the Company
continues to emphasize the development of non-interest income, such as service
charges and loan servicing fees, its earnings still remain largely dependent
upon its net interest income, which is determined principally by the Company's
interest rate spread (the difference between the yields earned on
interest-earning assets, primarily loans and securities, and the rates paid on
interest-bearing liabilities, primarily deposits and borrowings), and the
relative amounts of such assets and liabilities. During fiscal year 1997 the
Company's interest rate spread averaged 3.38% compared to 3.21% and 3.19% in
fiscal years 1996 and 1995, respectively. In fiscal 1997, the net yield on
interest-earning assets averaged 4.03% compared to 3.86% in 1996 and 3.73% in
1995. Fee income has also played an important part in the Company's profitable
operation. In fiscal 1997 service charges and fee income amounted to $977,100 as
compared to $933,000 in 1996 and $847,400 in 1995.
The Company offers residential and commercial real estate loans as well as
consumer and commercial business loans. The majority of these loans are to
customers within Chester County, Pennsylvania. The ability of such customers to
honor these obligations is dependent, to varying degrees, on the overall
economic performance of this diversified region. The Company considers its
current allowance for loan losses to be adequate.
Excluding the one-time Savings Institutions Insurance Fund ("SAIF") special
assessment, the Company had net income of $2.76 million for fiscal 1997, as
compared to $2.44 million in 1996 and $2.15 million in 1995. The pre-tax effect
of the SAIF assessment was $1.39 million, resulting in an after-tax charge to
earnings of approximately $832,000. After recognition of this assessment, the
Company earned net income of $1.93 million for fiscal 1997.
Asset and Liability Management
The principal objective of the Company's asset and liability management
function is to maximize the Company's net interest margin while maintaining an
appropriate level of risk given the Company's business focus, operating
environment, capital and liquidity requirements and performance objectives.
Through such management, the Company seeks to reduce the vulnerability of its
operations to changes in interest rates and to manage the ratio of interest
rate-sensitive assets to interest rate-sensitive liabilities within specified
maturities or repricing dates. The Company's actions in this regard are taken
under the guidance of the Asset-Liability Management Committee. Interest rate
risk is derived from timing differences in the repricing of assets and
liabilities, loan prepayments, deposit withdrawals, and differences in lending
and funding rates. One measure of interest rate risk is the gap ratio, which is
defined as the difference between the dollar volume of interest-earning assets
and interest-bearing liabilities maturing or repricing within a specified period
of time as a percentage of total assets.
<PAGE>
The Company's asset and liability management strategy currently is to
emphasize the origination of adjustable-rate mortgages, short-term consumer
loans, and floating-rate construction loans and commercial real estate loans.
This strategy has greatly reduced the Company's vulnerability to changes in
interest rates. As of June 30, 1997, $129.86 million, or 41.2% of the Company's
interest-sensitive assets are scheduled to reprice within a one-year period and
the Company's cumulative one-year interest rate gap was negative 9.6%. The table
on the following page summarizes the appropriate contractual maturities or
replacement periods of the Company's interest-earning assets and
interest-bearing liabilities as of June 30, 1997. Adjustable- and floating-rate
assets are included in the period in which interest rates are next scheduled to
adjust, rather than in the period for which they are due, and fixed-rate loans
are included in the periods in which they are anticipated to be repaid. The
analysis on the following page takes into consideration the timing of the
repricing but does not take into consideration any restrictions on the magnitude
of the repricing interest-sensitive assets.
Rates of interest paid on deposits are priced to be sufficiently
competitive in the Company's primary market area to meet its asset and liability
management objectives and requirements. In the past, the Company has generally
maintained a pricing program for its certificate accounts which entails paying
higher rates of interest on longer-term certificates to encourage customers to
invest in certificates of deposits for longer maturities. This strategy assisted
the Company in controlling its cost of funds and supported its goal of extending
the maturity of its liabilities.
12
<PAGE>
Operating Results
Interest Income (Taxable-Equivalent Basis)
Interest income is analyzed on a tax-equivalent basis, i.e., an adjustment
is made for analysis purposes only, to increase interest income by the amount of
savings of Federal income taxes, which the Company realizes by investing in
certain tax-free municipal securities and by making loans to certain tax-exempt
organizations. In this way, the ultimate economic impact of earnings from
various assets can be more readily compared.
Total interest income increased to $22.86 million during fiscal 1997, a
$2.01 million or 9.6% increase over the comparable prior period. This increase
was primarily due to a $22.16 million increase in the average balance of loans
coupled with a 9 basis-point increase in the yield earned on the loans. The
increase in the yield is the result of the Company's continual effort to focus
its originations on higher-yielding loan products. The increase in yield on the
loans was offset in part by a 44 basis-point decrease to 5.84% in the yield on
investment securities and other investments during fiscal 1997.
Total interest income increased to $20.84 million during fiscal 1996, a
$1.65 million or 8.6% increase over the comparable prior period. This increase
was primarily due to a 42 basis-point increase in the yield earned on the loan
portfolio to 8.40% and a corresponding increase of $5.53 million in the average
balance at June 30, 1996. The increase in the yield is the result of the
Company's efforts to focus its originations on higher-yielding commercial
mortgages, commercial business loans and consumer loans rather than the
lower-yielding residential mortgages. To a lesser extent, due to the smaller
balance, the increase in interest income during fiscal 1996 was due to the
increase in the yield on the Company's investment securities and other
investments by 54 basis points to 6.28% at June 30, 1996.
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at June 30, 1997
(Dollars in thousands)
More Than More Than More Than More Than
Three Months Six Months One Year Three Years
Three Months Through Through Through Through
or Less Six Months One Year Three Years Five Years
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans (1)
Adjustable and floating-rate
mortgages (2) ..................... $ 26,853 $ 23,190 $ 23,950 $ 20,447 $ 9,720
Balloons and fixed-rate mortgages (2) 4,436 2,509 4,908 23,282 23,972
Consumer (2)(3) ..................... 7,554 1,099 2,268 10,051 8,230
Commercial .......................... 4,631 131 262 1,014 970
Securities and interest-bearing
deposits (4) ....................... 20,883 3,942 3,240 9,439 3,065
--------- --------- --------- --------- ---------
Total interest-earning assets ......... $ 64,357 $ 30,871 $ 34,628 $ 64,233 $ 45,957
--------- --------- --------- --------- ---------
Interest-Bearing Liabilities
Savings accounts (5) .................. $ 999 $ 999 $ 2,002 $ -- $ --
NOW accounts (5) ...................... 900 900 1,800 -- --
Money market accounts ................. 29,887 -- -- -- --
Certificate accounts .................. 52,408 25,090 27,274 32,936 13,659
Securities sold under agreements
to repurchase ...................... 12 -- -- -- --
Borrowings ............................ 17,546 46 920 4,358 5,864
--------- --------- --------- --------- ---------
Total interest-bearing liabilities .... $ 101,752 $ 27,035 $ 31,996 $ 37,294 $ 19,523
--------- --------- --------- --------- ---------
Cumulative excess of interest-
earning assets to
interest-bearing liabilities .......... $ (37,395) $ (33,559) $ (30,927) $ (3,988) $ 22,446
========= ========= ========= ========= =========
Cumulative ratio of interest
rate-sensitive assets to
interest rate-sensitive liabilities ... 63% 74% 81% 98% 110%
========= ========= ========= ========= =========
Cumulative difference as a
percentage of total assets ............ (11.6%) (10.4%) (9.6%) (1.2%) 6.9%
========= ========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
More Than
Five Years Total
---------- -----
<S> <C> <C>
Interest-Earning Assets
Loans (1)
Adjustable and floating-rate
mortgages (2) ..................... $ -- $ 104,160
Balloons and fixed-rate mortgages (2) 42,959 102,066
Consumer (2)(3) ..................... 18,141 47,343
Commercial .......................... 855 7,863
Securities and interest-bearing
deposits (4) ....................... 13,310 53,879
--------- ---------
Total interest-earning assets ......... $ 75,265 $ 315,311
--------- ---------
Interest-Bearing Liabilities
Savings accounts (5) .................. $ 22,474 $ 26,474
NOW accounts (5) ...................... 24,025 27,625
Money market accounts ................. -- 29,887
Certificate accounts .................. 3,904 155,271
Securities sold under agreements
to repurchase ...................... -- 12
Borrowings ............................ 2,047 30,781
--------- ---------
Total interest-bearing liabilities .... $ 52,450 $ 270,050
--------- ---------
Cumulative excess of interest-
earning assets to
interest-bearing liabilities .......... $ 45,261 $ 45,261
========= =========
Cumulative ratio of interest
rate-sensitive assets to
interest rate-sensitive liabilities ... 117% 117%
========= =========
Cumulative difference as a
percentage of total assets ............ 14.0% 14.0%
========= =========
(1)Net of undisbursed loan proceeds.
(2)Assumes market prepayment rates.
(3)Includes home improvement, home equity, automobile and
other consumer loans.
(4)Includes investment securities, mortgage-backed securities and other
interest-bearing deposits.
(5)Balances distributed among the various repricing time intervals based on
historical and anticipated repricing patterns.
</TABLE>
13
<PAGE>
Interest Expense
Total interest expense increased to $11.50 million during fiscal 1997, a
$620,000 or 5.7% increase over the comparable prior period. The increase in
interest expense is principally attributable to a $15.07 million and $5.33
million increase in the average balances of deposits and Federal Home Loan Bank
("FHLB") advances to $223.05 million and $20.65 million, respectively, at June
30, 1997. Partially offsetting the effect of increases in the average balances
of interest-bearing liabilities were decreases in the average rate paid on such
liabilities to 4.72% from 4.87% for the fiscal year 1997 and 1996, respectively.
Such declines were due, in part, to the Bank lowering the rates paid on its
interest-bearing retail checking accounts combined with the Bank's successful
efforts in obtaining low-costing or no-cost deposits in the form of commercial
business accounts. In addition, during fiscal 1997 the Bank shortened the
average maturity of its FHLB advance portfolio which consequently reduced the
average rate paid.
Total interest expense increased to $10.88 million during fiscal 1996, a
$1.05 million or 10.7% increase over the comparable prior period. The increase
in interest expense is principally attributable to a 46 basis-point increase in
the average rate paid on the portfolio to 4.76%, and, to a lesser extent, an
$8.27 million increase in the average balance of deposits to $208.43 million at
June 30, 1996. The increase in the rate paid on deposits was the result of the
upward trend in market interest rates in the latter half of fiscal 1995 and
early part of fiscal 1996 which prompted depositors to lock into longer-term
time deposits. In addition, there was a continual shift in the deposit mix from
lower-costing money market and savings accounts to higher-costing time deposits.
Partially offsetting the increase in interest expense was the decrease of $5.31
million at June 30, 1996, over the comparable period in the average balance of
FHLB advances and other borrowings. The rate paid on the borrowings increased 34
basis points to 6.24% at June 30, 1996.
Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income, on a fully tax equivalent basis, increased 13.9%, or $1.39
million to $11.36 million in 1997 from $9.97 million in 1996, compared to a 6.6%
increase of $613,000 from 1995 to 1996. Net interest margin, on a fully tax
equivalent basis, was 4.03% for the year ended 1997, compared to 3.86% in 1996
and 3.73% in 1995. The increase in net interest margin from 1996 to 1997
reflects a greater increase in the yield earned on loans and securities than the
rates paid on deposits and borrowings.
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $523,413, $339,800,
and $454,700 during the respective periods of 1997 through 1995. These
provisions have been added to the Company's allowance for possible loan losses
due to general economic conditions, loan growth, and management's assessment of
the inherent risk of loss existing in the loan portfolio. At June 30, 1997, the
allowance for possible loan losses was $2.86 million or 1.10% of net loans
compared to $2.67 million or 1.18% of net loans at June 30, 1996.
<PAGE>
The Company establishes provisions for possible loan losses, which are
charged to operations, in order to maintain the allowance for loan losses at a
level which is deemed to be appropriate based upon, among other things,
delinquency trends, the volume of non-performing loans, prior loss experience of
the portfolio, current economic conditions, and other relevant factors. Although
management believes it has used the best information available to it in making
such determinations, and that the present allowance for possible loan losses is
adequate, future adjustments to the allowance may be necessary, and net income
may be adversely affected if the circumstances differ substantially from the
assumptions used in determining the level of the allowance for possible loan
losses. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for possible
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination.
Other Operating Income
Total other income increased $201,000 or 17.9% to $1.32 million for the
year ended June 30, 1997, from the comparable prior period. An increase of
$44,000 in service charges and fees in fiscal 1997 as the result of an increase
in commissions earned on the sale of disability and life insurance to the Bank's
loan customers, an increase in the number of safe deposit boxes rented, and fees
earned on the Bank's debit card contributed to the increase in other income. The
Bank recognized a gain of $2,400 on the sale of real estate owned during fiscal
1997 compared to a loss of $52,000 during the prior fiscal year. In addition,
during fiscal 1997 the Bank purchased properties surrounding its main office in
order to expand its facilities to accommodate its growth. The rental income from
14
<PAGE>
these properties has contributed to the increase in other income during fiscal
1997.
Total other income increased $78,000 or 7.5% to $1.12 million for the year
ended June 30, 1996, from the comparable prior period. During fiscal 1996 the
Company recognized gains on the sale of securities available for sale of
$148,000 compared to no such gains in fiscal 1995. However, this increase was
partially offset in fiscal 1996 by the recognition of a $52,000 loss on the sale
of two real estate owned properties. An increase of $86,000 in service charges
and fees in fiscal 1996 as the result of increased fees and accounts contributed
to the increase in other income. Other income in fiscal 1995 included a $100,000
gain on the sale of land held for development.
Other Operating Expenses
Excluding the $1.39 million one-time SAIF assessment, operating expenses
totaled $7.80 million for the fiscal year 1997, an increase of $800,000 or 11.4%
over the prior comparable period. The one-time assessment was part of
legislation adopted to recapitalize the Savings Association Insurance Fund and
required the Bank to pay 65.7 cents for every $100 of deposits. As a result of
the special assessment, the Bank's federal insurance premiums decreased from
$0.23 per $100 of deposits to $0.06 per $100 of deposits in the third fiscal
quarter of 1997. The Bank anticipates paying this reduced premium for the
foreseeable future. This reduction in federal insurance premiums will favorably
impact expense for fiscal 1998. The increase in operating expenses over the
prior fiscal year was primarily due to a $489,000 or 15.0% increase in salaries
and employee benefits related to general salary increases, additional staff for
the Bank's newest branch office, Brandywine Square, and additional staff for the
Bank's commercial loan department. Also contributing to the increase in other
operating expenses was a $196,000 or 15.1% increase in occupancy and furniture
and equipment costs associated with the opening of the Brandywine Square branch
in the first quarter of fiscal 1997.
Operating expenses totaled $7.00 million for the fiscal year 1996, an
increase of $383,000 or 5.8% over the prior comparable period. The increase over
the prior fiscal year was primarily due to a $197,000 or 6.4% increase in
salaries and employee benefits related to general salary increases, increased
benefit costs, and a full year of expenses related to the staffing required for
the Company's Airport Village branch which opened during fiscal 1995. Also
contributing to the increase in other operating expenses was a $118,000 or 10.0%
increase in occupancy and furniture and equipment costs associated with
increased costs of maintenance contracts on computer equipment, the renovation
of one of the Bank's branches, and the purchase of software and equipment
related to the upgrade of the computer network for the operations department of
the Bank.
Income Taxes
The Company incurred income tax expense of $757,400 during the year ended
June 30, 1997, compared to $1.03 million during fiscal 1996. The primary reason
for the $274,700 decrease was due to reduced pre-tax earnings for fiscal 1997 as
the result of the one-time SAIF special assessment.
<PAGE>
The Company incurred income tax expense of $1.03
million during the year ended June 30, 1996, compared to $869,000 during fiscal
1995. The primary reasons for the increase in income tax expense was due to the
increase in income before taxes in fiscal 1996 and due to the recognition in
fiscal 1995 of an $82,000 Pennsylvania tax credit related to the Company's
investment in its Airport Village branch. The branch is located in the Greater
Coatesville Area Industrial Corridor and Enterprise Zone, which is an area that
has been designated as part of a state program in which investment, promotion of
jobs, and economic revitalization are encouraged.
Capital Resources
The Company's assets totaled $323.67 million at June 30, 1997, as compared
with $272.93 million as of June 30, 1996. This 18.6% increase in assets was
primarily funded by an increase in deposits of $32.54 million or 14.3% from
$228.21 million at June 30, 1996, to $260.75 million at June 30, 1997, and an
increase in Federal Home Loan Bank advances of $16.23 million from $13.97
million to $30.20 million at June 30, 1996 and 1997, respectively. The increase
in deposits and advances was used in part to fund loan originations during the
period, which contributed to an increase in net loans receivable from $223.96
million at June 30, 1996, to $257.04 million at June 30, 1997. In addition, the
Company's investment securities held to maturity and available for sale along
with its interest-bearing deposits increased from $39.54 million to $53.88
million at June 30, 1996 and 1997, respectively.
Stockholders' equity increased to $27.06 million at June 30, 1997, from
$25.56 million at June 30, 1996, as a result of net income earned of $1.93
million during fiscal 1997, the reduction in the principal balance of the
Employee Stock
15
<PAGE>
Ownership Plan ("ESOP") debt by $177,250 (See Note 13 of the Notes to the
Consolidated Financial Statements), proceeds from stock options exercised during
the 1997 period of $337,000, proceeds totaling $85,400 from the sale of common
stock in connection with the Company's Dividend Reinvestment Plan, and the
recognition of a net unrealized gain on securities available for sale, net of
taxes, of $99,900. The increase in stockholders' equity was offset in part by
the payment of cash dividends of $760,500 and the repurchase of $348,700 of
common stock, as well as the payment of $15,900 in lieu of fractional shares in
connection with the 5% stock dividend and five-for-four stock split paid during
fiscal 1997.
Asset Quality
Non-performing assets are comprised of non-performing loans and REO and
totaled $748,000 at June 30, 1997, compared to $2.34 million at June 30, 1996.
Non-accrual loans are loans on which the accrual of interest ceases when
the collection of principal or interest payments is determined to be doubtful by
management. It is the policy of the Company to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days or more
(unless the loan principal and interest are determined by management to be fully
secured and in the process of collection), or earlier, if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the current loan term.
Interest income is not accrued until the financial condition and payment record
of the borrower once again demonstrate the ability to service the debt.
Non-performing assets to total assets and non-performing loans to total assets
were .23% at June 30, 1997, compared to .86% and .81% at June 30, 1996.
Management's commitment to improving asset quality through increased collection
efforts has contributed to the decrease in non-performing loans. Non-performing
loans of $748,000 at June 30, 1997, consisted of five residential mortgage loans
in the amount of $417,000 and $331,000 in consumer loans.
At June 30, 1997 and 1996, the Company's classified assets, which consisted
of assets classified as substandard, doubtful, loss, and REO, totaled $1.40
million and $2.97 million, respectively. Included in the assets classified
substandard at June 30, 1997, were all loans 90 days past due and loans which
are less than 90 days delinquent but inadequately protected by the current
paying capacity of the borrower or of the collateral pledged, as well as a
well-defined weakness that may jeopardize the liquidation of the debt.
[GRAPHIC-GRAPH NON-PERFORMING ASSETS AS A PERCENT OF TOTAL ASSETS]
Liquidity and Committed Resources
The Company's primary sources of funds are deposits, borrowings,
repayments, prepayments and maturities of outstanding loans and mortgage-backed
securities, sales of assets available for sale, maturities of investment
securities and other short-term investments, and funds provided from operations.
While scheduled loan and mortgage-backed securities repayments and maturing
investment securities and short-term investments are relatively predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by
the movement of interest rates in general, economic conditions and competition.
The Company manages the pricing of its deposits to maintain a deposit balance
deemed appropriate and desirable. Although the Company's deposits represent the
majority of its total liabilities, the Company has also utilized other borrowing
sources, namely FHLB advances. In addition to its ability to obtain advances
from the FHLB under several different credit programs, the Company has
established a line of credit with the FHLB, in an amount not to exceed 10% of
the Company's maximum borrowing capacity, which was $13.80 million at the time
the commitment was executed, and subject to certain conditions, including the
holding of a pre-determined amount of FHLB stock as collateral. This line of
credit is used from time to time for liquidity purposes. At June 30, 1997 and
1996, there were no balances outstanding on the line of credit.
<PAGE>
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as FHLB overnight
deposits. On a longer-term basis, the Company maintains a strategy of investing
in various lending and investment securities products. During the year ended
June 30, 1997, the Company used its sources
16
<PAGE>
of funds to primarily fund loan commitments and maintain a substantial portfolio
of investment securities, and to meet its ongoing commitments to pay maturing
savings certificates and savings withdrawals. As of June 30, 1997, the Company
had $5.81 million in commitments to fund loan originations. The majority of
these commitments are anticipated to be funded by December 31, 1997. In
addition, as of June 30, 1997, the Company had undisbursed loans in process for
construction loans of $10.09 million and $14.23 million in undisbursed lines of
credit. In addition, the Company has issued $71,000 in commercial letters of
credit fully secured by deposit accounts or real estate. The management of the
Company believes that the Company has adequate resources, including principal
prepayments and repayments of loans and investment securities and borrowing
capacity, to fund all of its commitments to the extent required.
For regulatory purposes, liquidity is defined as a ratio of cash and
certain marketable securities that can be readily converted into cash to total
deposits and short-term borrowings. At June 30, 1997, liquidity for the Bank as
defined under these guidelines was 12.68%, which exceeded the regulatory minimum
requirement of 5.0%.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Related Notes presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP") which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. Unlike many
industrial companies, substantially all of the assets and liabilities of the
Company on a consolidated basis are monetary in nature. As a result, interest
rates have a more significant impact on the Company's performance than the
general level of inflation. Over a short period of time, interest rates may not
necessarily move in the same direction or with the same magnitude of inflation.
Other Information
Description of Stock
The holders of the Common Stock of the Holding Company possess exclusive
voting rights in the corporation. Each holder of shares of Common Stock is
entitled to one vote for each share held, in accordance with the charter and
bylaws, including voting on the election of directors. Of the 15.63 million
shares of Common Stock authorized by the Holding Company, 13.55 million shares
remain unissued. In addition, none of the 5.00 million shares of Preferred Stock
authorized has been issued.
Dividend Policy
The Board of Directors of Chester Valley Bancorp Inc. intends to continue
the policy of paying dividends when the directors deem it prudent to do so. The
Board of Directors will consider payment of dividends on a quarterly basis,
after giving consideration to the level of the profit for the prior quarter and
other relevant aspects. On August 20, 1997, the Board of Directors of the
Holding Company declared an $.11 per share cash dividend and a 5% stock dividend
based on the financial results of the quarter ended June 30, 1997. The cash
dividend will be calculated on shares held before the issuance of the stock
dividend. During fiscal 1997 and 1996 the Holding Company paid a total of
$760,465 and $573,030, respectively, in cash dividends and a 5% stock dividend
in each year, along with a five-for-four stock split effected in the form of a
<PAGE>
dividend in fiscal 1997. Cash dividends from the Holding Company are dependent
upon dividends paid to it by First Financial, which, in turn, are subject to
certain restrictions established by federal regulators and Pennsylvania law.
(See Note 10 to Notes to Consolidated Financial Statements.)
Market Information
As of August 1, 1997, the Holding Company's Common Stock was held by
approximately 1,600 shareholders, including shares held in nominee name. Any
broker or any NASDAQ member can be contacted for the latest quotations of the
Holding Company's Common Stock. Upon the reorganization into a holding company
structure in May 1990, the stock of the Holding Company was approved for
inclusion in NASDAQ's National Market System. The Holding Company's NASDAQ
symbol is "CVAL". The transfer agent for the stock is American Stock Transfer
and Trust Company, New York, New York. During fiscal 1997 and 1996 the Holding
Company paid dividends of $.37 and $.28 per share, respectively, adjusted for
stock dividends and stock splits during those periods.
The following table (on the next page) sets forth the high and low closing
prices for the periods described. For comparability purposes, the closing prices
shown below have been adjusted to reflect the 5% stock dividends paid in fiscal
1997 and 1996 and the five-for-four stock split paid in fiscal 1997.
17
<PAGE>
Fiscal 1997 Low High
- --------------------------------------------------------------------------------
First Quarter $ 13.71 $ 16.00
Second Quarter 14.60 16.00
Third Quarter 16.50 17.40
Fourth Quarter 16.50 21.75
Fiscal 1996 Low High
- --------------------------------------------------------------------------------
First Quarter $ 14.48 $ 15.60
Second Quarter 13.90 15.24
Third Quarter 13.90 15.24
Fourth Quarter 13.90 14.48
[GRAPHIC-GRAPH CVAL 5 YEAR PRICE HISTORY]
Recent Accounting Pronouncements
In October 1995 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-based Compensation." This statement encourages the adoption of fair value
accounting for stock-based compensation issued to employees. Further, in the
event that fair value accounting is not adopted, the statement requires pro
forma disclosure of net income and earnings per share as if fair value
accounting had been adopted. The Company has not adopted the fair value
accounting provisions of SFAS 123 but has instead provided the required pro
forma disclosures, as permitted, in the current fiscal year.
In June 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and de-recognizes
financial assets it no longer controls and liabilities that have been
extinguished. The approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral. The
Company adopted SFAS 125 prospectively on January 1, 1997, and the impact on
earnings, equity, and financial condition was not material.
<PAGE>
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share." This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This statement requires
restatement of all prior period EPS data presented. Had the Company adopted SFAS
No. 128 as of June 30, 1997, the basic earnings per share on a pro forma basis
would have been $.94, $1.19, and $1.05 for the fiscal years ended 1997, 1996 and
1995, respectively. Pro forma disclosure of diluted earnings per share would
have been $.93, $1.18, and $1.04 for the fiscal years ended 1997, 1996, and
1995, respectively.
18
<PAGE>
In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Management has not
yet determined the impact, if any, of this statement on the Company.
In June 1997 the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. Management has not yet determined the impact, if any, of this
statement on the Company.
Summarized Quarterly Financial Data For Fiscal 1997 and 1996 (Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------- -------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income .............. $ 5,379 $ 5,606 $ 5,570 $ 6,014 $ 5,043 $ 5,155 $ 5,188 $ 5,180
Interest expense ............. 2,745 2,852 2,864 3,042 2,701 2,736 2,756 2,682
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .......... 2,634 2,754 2,706 2,972 2,342 2,419 2,432 2,498
Provision for possible loan
losses .................. 96 164 97 166 92 93 62 93
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for possible
loan losses ............. 2,538 2,590 2,609 2,806 2,250 2,326 2,370 2,405
Other income ................. 369 307 296 352 333 288 233 269
Operating expenses (1) ....... 3,335 1,963 1,901 1,985 1,723 1,746 1,723 1,811
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ... (428) 934 1,004 1,173 860 868 880 863
Income tax expense ........... (227) 276 275 433 264 267 239 262
------- ------- ------- ------- ------- ------- ------- -------
Net income ................... $ (201) $ 658 $ 729 $ 740 $ 596 $ 601 $ 641 $ 601
======= ======= ======= ======= ======= ======= ======= =======
Earnings per common share (2):
Primary ................... $ (0.10) $ 0.32 $ 0.35 $ 0.36 $ 0.29 $ 0.29 $ 0.31 $ 0.29
======= ======= ======= ======= ======= ======= ======= =======
Fully diluted ................ $ (0.10) $ 0.32 $ 0.35 $ 0.36 $ 0.29 $ 0.29 $ 0.31 $ 0.29
======= ======= ======= ======= ======= ======= ======= =======
<PAGE>
(1) The first quarter of fiscal 1997 includes the one-time FDIC insurance
assessment of $1.39 million.
(2) Earnings per share have been restated to reflect the effects of the 5% stock
dividend paid in September 1996 and the March 1997 five-for-four stock split
effected in the form of a dividend.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Financial Condition
At June 30,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Assets
Cash in banks ........................................................... $ 2,609,904 $ 1,527,934
Interest-bearing deposits ............................................... 6,843,952 8,784,471
Investment securities available for sale ................................ 27,566,134 6,159,310
Investment securities (market value June 30, 1997, $19,392,778
June 30, 1996, $24,246,313) .......................................... 19,468,945 24,593,285
Loans receivable, less allowance for possible loan
losses of $2,855,003 and $2,667,104 at June 30,
1997 and 1996,respectively ........................................... 257,040,006 223,963,171
Loans held for sale ..................................................... 105,888 ---
Accrued interest receivable ............................................. 2,107,567 1,615,579
Real estate owned ....................................................... -- 121,000
Property and equipment - net ............................................ 4,723,882 4,322,657
Other assets ............................................................ 3,206,534 1,844,522
------------- -------------
Total Assets ......................................................... $ 323,672,812 $ 272,931,929
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits ................................................................ $ 260,750,311 $ 228,205,557
Securities sold under agreements to repurchase .......................... 12,086 ---
Advance payments by borrowers for
taxes and insurance .................................................. 2,998,681 3,015,094
Employee Stock Ownership Plan
("ESOP") debt ........................................................ 333,490 510,740
Federal Home Loan Bank advances ......................................... 30,198,247 13,972,277
Other borrowings ........................................................ 249,165 ---
Accrued interest payable ................................................ 788,259 653,358
Other liabilities ....................................................... 1,277,962 1,010,508
------------- -------------
Total Liabilities .................................................... 296,608,201 247,367,534
Commitments and contingencies (Note 8)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' Equity:
Preferred stock - $1.00 par value; 5,000,000 shares
authorized; none issued
Common stock - $1.00 par value; 15,625,000 shares
authorized; 2,072,083 and 1,994,352 shares issued at
June 30, 1997 and June 30, 1996, respectively ........................ 2,072,083 1,994,352
Additional paid-in capital .............................................. 12,772,488 11,261,628
Common stock acquired by ESOP ........................................... (333,490) (510,740)
Retained earnings - partially restricted ................................ 12,749,503 13,109,850
Net unrealized gain (loss) on securities available for sale, net of taxes 2,714 (97,222)
------------- -------------
27,263,298 25,757,868
Treasury stock, at cost (13,213 and 14,555 shares at
June 30, 1997 and June 30, 1996, respectively) .......................... (198,687) (193,473)
------------- -------------
Total Stockholders' Equity ........................................... 27,064,611 25,564,395
------------- -------------
Total Liabilities and Stockholders' Equity ........................... $ 323,672,812 $ 272,931,929
============= =============
</TABLE>
Chester Valley Bancorp Inc. and Subsidiary
See accompanying notes to consolidated financial statements
20
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Operations
Year Ended June 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income:
Loans .......................................... $20,388,526 $18,317,741 $16,979,158
Mortgage-backed securities ..................... 227,293 142,163 145,681
Interest-bearing deposits ...................... 238,251 340,944 155,121
Investment securities
Taxable ..................................... 1,104,410 1,151,633 865,539
Non-taxable ................................. 610,382 613,661 736,507
----------- ----------- -----------
Total interest income ....................... 22,568,862 20,566,142 18,882,006
----------- ----------- -----------
Interest Expense:
Deposits ....................................... 10,285,725 9,918,713 8,613,137
Securities sold under agreements to repurchase . 51,801 -- --
Short-term borrowings .......................... 382,962 199,252 598,477
Long-term borrowings ........................... 782,218 757,481 618,088
----------- ----------- -----------
Total interest expense ...................... 11,502,706 10,875,446 9,829,702
----------- ----------- -----------
Net interest income .............................. 11,066,156 9,690,696 9,052,304
Provision for possible loan losses ............... 523,413 339,800 454,700
----------- ----------- -----------
Net interest income after
provision for possible loan losses ............. 10,542,743 9,350,896 8,597,604
----------- ----------- -----------
Other Income:
Service charges and fees ....................... 977,145 932,986 847,427
Gain (loss) on sale of loans ................... 2,445 21,541 (1,147)
Gain on sale of securities available for sale .. 156,451 147,978 --
Gain (loss) on sale of real estate owned ....... 2,407 (51,554) 12,809
Other .......................................... 185,621 72,234 185,737
----------- ----------- -----------
Total other income .......................... 1,324,069 1,123,185 1,044,826
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Operating Expenses:
Salaries and employee benefits ................. 3,740,854 3,252,029 3,054,973
Occupancy ...................................... 877,793 737,670 684,264
Furniture and equipment ........................ 616,645 560,362 495,450
Data processing ................................ 605,149 532,136 544,939
SAIF special assessment ........................ 1,386,516 -- --
Deposd insurance premiums ...................... 309,689 501,231 473,269
Other .......................................... 1,647,072 1,419,703 1,367,431
----------- ----------- -----------
Total operating expenses .................... 9,183,718 7,003,131 6,620,326
----------- ----------- -----------
Income before income taxes ..................... 2,683,094 3,470,950 3,022,104
Income tax expense ............................. 757,434 1,032,104 869,158
----------- ----------- -----------
Net Income .................................. $ 1,925,660 $ 2,438,846 $ 2,152,946
=========== =========== ===========
Earnings per common share (1):
Primary ........................................ $ 0.93 $ 1.18 $ 1.04
Fully diluted .................................. $ 0.93 $ 1.18 $ 1.04
Weighted average number of shares outstanding (1):
Primary ........................................ 2,061,557 2,073,044 2,074,477
Fully diluted .................................. 2,064,711 2,074,141 2,074,915
</TABLE>
(1) Earnings per share and weighted average shares outstanding have been
restated to reflect the effects of the 5% stock dividends paid in September 1996
and 1995, and the March 1997 five-for-four stock split effected in the form of a
dividend.
Chester Valley Bancorp Inc. and Subsidiary
See accompanying notes to consolidated financial statements.
21
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Common Gain (Loss)
Additional Stock on Securities Total
Common Paid-in Acquired Retained Available Treasury Stockholders'
Stock Capital by ESOP Earnings for Sale Stock Equity
----- ------- ------- -------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1994 ......... $1,851,980 $ 8,587,046 $ (859,812) $ 12,477,409 $ -- $(186,595) $ 21,870,028
Net income .............. 2,152,946 2,152,946
Cash dividends paid ..... (471,346) (471,346)
Pnncipal payments
on ESOP debt .......... 167,901 167,901
Issuance of stock
dividend .............. 51,527 1,301,493 (1,476,489) 123,469 --
Cash payment for
fractional shares ..... (10,027) (10,027)
Stock options
exercised ............. 4,489 (20,733) 133,351 117,107
Sale of common stock
under the dividend
reinvestment plan ..... 5,450 129,815 64,678 199,943
Stock repurchased as
treasury stock ........ (242,140) (242,140)
---------- ------------ ---------- ------------ -------- --------- -----------
Balance at
June 30, 1995 ......... 1,913,446 9,997,621 (691,911) 12,672,493 -- (107,237) 23,784,412
Net income .............. 2,438,846 2,438,846
Cash dividends paid ..... (573,030) (573,030)
Pnncipal payments
on ESOP debt .......... 181,171 181,171
Issuance of stock
dividend .............. 74,110 1,343,244 (1,417,354) --
Cash payment for
fractional shares ..... (11,105) (11,105)
Stock options
exercised ............. 4,342 (110,681) 201,675 95,336
Sale of common stock
under the dividend
reinvestment plan ..... 2,454 31,444 213,l15 247,013
Stock repurchased as
treasury stock ........ (501,026) (501,026)
Change in unrealized gain
(loss) on securities
available for sale .... (97,222) (97,222)
---------- ------------ ---------- ------------ -------- --------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1996 ......... 1,994,352 11,261,628 (510,740) 13,109,850 (97,222) (193,473) 25,564,395
Net income .............. 1,925,660 1,925,660
Cash dividends paid ..... (760,465) (760,465)
Principal payments
on ESOP debt .......... 177,250 177,250
Issuance of stock
dividend .............. 77,731 1,438,024 (1,515,755) --
Cash payment for
fractional shares ..... (6,140) (9,787) (15,927)
Stock options
exercised ............ 78,958 258,083 337,041
Sale of common stock
under the dividend
reinvestment plan ..... 18 85,382 85,400
Stock repurchased as
treasury stock ........ (348,679) (348,679)
Change in unrealized gain
(loss) on securities
available for sale .... 99,936 99,936
---------- ------------ ---------- ------------ -------- --------- -----------
Balance at
June 30, 1997 ......... $2,072,083 $ 12,772,488 $ (333,490) $ 12,749,503 $ 2,714 $(198,687) $ 27,064,611
========== ============ ========== ============ ======== ========= ============
Chester Valley Bancorp Inc. and Subsidiary
See accompanying notes to consolidated financial statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Cash Flows
Year Ended June 30,
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activties:
Net income ..................................................................... $ 1 ,925,660 $ 2,438,846 $ 2,152,946
Add (deduct) items not affecting cash flows from operating activities
Depreciation .................................................................. 567,589 548,367 504,372
Provision for possible loan losses ............................................ 523,413 339,800 454,700
Increase in deferred income taxes ............................................. (140,485) (84,385) (35,373)
Gain on sale of securities available for sale ................................. (156,451) (147,978) --
Loss(gain)on sale of loans .................................................... (2,445) (21,541) 1,147
Loss (gain) on sale of real estate owned ...................................... (2,407) 51,554 (12,809)
Gain on sale of land held for development ..................................... -- -- (100,000)
Gain on disposal of property and equipment .................................... -- -- (10,786)
Amortization of net deferred loan fees ........................................ (537,548) (530,570) (629,686)
Amortization of discounts and premiums ........................................ 6,742 3,474 21,441
Increase in accrued interest receivable ....................................... (491,988) (143,137) (211,162)
Increase in other assets ...................................................... (1,221,527) (178,794) (94,811)
Increase in other liabilities ................................................. 267,454 71,010 203,769
Increase (decrease) in accrued interest payable ............................... 134,901 (38,852) 147,403
------------ ------------ ------------
Net cash flows from operating activities ....................................... 872,908 2,307,794 2,391,151
------------ ------------ ------------
Cash flows from investment activities:
Capital expenditures .......................................................... (968,814) (408,052) (631,903)
Proceeds from sale of property and equipment .................................. -- -- 145,736
Net increase in loans ......................................................... (34,923,710) (5,937,167) (27,959,616)
Proceeds from sale of loans ................................................... 1,257,348 2,866,072 1,072,988
Principal receipts on mortgage-backed securities .............................. 269,641 362,721 273,942
Proceeds from real estate owned ............................................... 571,834 312,121 1,150,793
Disbursements for real estate owned ........................................... -- -- (14,089)
Increase in investment-land held for development .............................. -- -- (18,831)
Purchase of investment securities ............................................. (115,645) (7,013,176) (19,718,522)
Proceeds from maturities and calls of investment securities ................... 4,968,273 5,144,040 25,213,205
Purchase of securities available for sale ..................................... (124,134,642) (84,940,233) --
Proceeds from sale of securities available for sale ........................... 103,031,326 81,976,223 --
Decrease in securities purchased under agreements to resell, net .............. -- -- 12,216
------------ ------------ ------------
Net cash flows in investment activities ........................................ (50,044,389) (7,637,451) (20,474,081)
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits before interest credited ............................. 23,847,975 1,753,642 5,989,372
Interest credited to deposits ................................................. 8,696,779 8,471,186 7,189,084
Proceeds from securities sold under agreements to repurchase .................. 12,086 -- --
Proceeds from FHLB advances ................................................... 29,914,500 2,247,800 7,753,364
Repayments of FHLB advances ................................................... (13,688,530) (3,372,897) (5,022,195)
Proceeds from other borrowings ................................................ 249,165 -- --
Net increase (decrease) in advance payments by borrowers for
taxes and insurance ......................................................... (16,413) (159,026) 401,177
Cash dividends on common stock ................................................ (760,465) (573,030) (471,346)
Repayments of principal on ESOP debt .......................................... (177,250) (181,171) (167,901)
Stock repurchased as treasury stock ........................................... (348,679) (501,026) (242,140)
Payment for fractional shares ................................................. (15,927) (11,105) (10,027)
Stock options exercised ....................................................... 337,041 95,336 117,107
Reduction of common stock acquired by ESOP .................................... 177,250 181,171 167,901
Sale of common stock under the dividend reinvestment plan ..................... 85,400 247,013 199,943
------------ ------------ ------------
Net cash flows from financing activities ....................................... 48,312,932 8,197,893 15,904,339
------------ ------------ ------------
Net increase (decrease) in cash (858,549) 2,868,236 (2,178,591)
Cash and cash equivalents:
Beginning of period ........................................................... 10,312,405 7,444,169 9,622,760
------------ ------------ ------------
End of period ................................................................. $ 9,453,856 $ 10,312,405 $ 7,444,169
============= ============= =============
Supplemental disclosures:
Cash payments during the year for
Taxes ........................................................................ $ 757,000 $ 1,196,000 $ 640,000
============= ============= =============
Interest ..................................................................... $ 11,367,805 $ 10,919,771 $ 9,682,299
============= ============= =============
Non cash items:
Acquistion of real estate in settlement of loans ............................... $ 448,427 $ 328,000 $ 396,000
============= ============= =============
Stock dividend issued .......................................................... $ 1,515,755 $ 1,417,354 $ 1,476,489
============= ============= =============
Transfer of investment securities to investment securities available for sale .. $ -- $ 3,191,864 $ --
============= ============= =============
Net unrealized gain (loss) on investment securities available for sale ......... $ 151,721 $ (147,307) $ --
============= ============= =============
Tax effect on unrealized gain (loss) on investment securities available for sale $ 51,791 $ (50,085) $ --
============= ============= =============
</TABLE>
Chester Valley Bancorp Inc. and Subsidiary
See accompanying notes to consolidated financial statements.
23
<PAGE>
Notes To Consolidated Financial Statements
1 - Summary of Significant Accounting Policies
Business
Chester Valley Bancorp Inc. (the "Holding Company") is a unitary thrift
holding company, incorporated in the Commonwealth of Pennsylvania in August
1989. The business of Chester Valley Bancorp Inc. and its subsidiary (the
"Company") consists of the operations of First Financial Bank ("First Financial"
or the "Bank"), a Pennsylvania-chartered stock savings and loan association
founded in 1922. The Bank provides a wide range of banking services to
individual and corporate customers through its branch banks in Chester County,
Pennsylvania. All of the branches are full service and offer commercial and
retail products. These products include checking accounts (non-interest and
interest-bearing), savings accounts, certificates of deposit, commercial and
installment loans, real estate mortgages, and home equity loans. The Bank also
offers ancillary services that complement these products. The Bank is subject to
competition from other financial institutions and other companies that provide
financial services. The Company is subject to the regulations of certain federal
and state agencies and undergoes periodic examinations by those regulatory
authorities.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of
Chester Valley Bancorp Inc., its wholly-owned subsidiary, First Financial Bank
and its wholly-owned subsidiary, D&S Service Corp., which owns D&F Projects and
Wildman Projects, Inc., both of which are wholly-owned subsidiaries. All
material inter-company balances and transactions have been eliminated in
consolidation. Prior period amounts are reclassified when necessary to conform
with the current year's presentation.
The Company follows accounting principles and reporting practices which
are in accordance with generally accepted accounting principles. In preparing
the consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate owned. Management believes that the allowance for
loan losses and the valuation of real estate owned are adequate. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and valuations of
real estate owned. Such agencies may require the Bank to recognize additions to
the allowance or adjustments to the valuations based on their judgments about
information available to them at the time of their examination.
Cash and Cash Equivalents
For the purpose of the consolidated statements of cash flows, cash and
cash equivalents include cash and interest-bearing deposits with an original
maturity of generally three months or less.
<PAGE>
Investment Securities
The Company divides its securities portfolio into three segments: (a) held
to maturity; (b) available for sale; and (c) trading. Securities in the held to
maturity category are accounted for at amortized cost. Trading securities, if
any, are accounted for at quoted market prices with changes in market values
being recorded as gain or loss in the income statement. All other securities are
included in the available for sale category and are accounted for at fair value
with unrealized gains or losses, net of taxes, being reflected as adjustments to
equity.
Investment securities held for investment are carried at cost, adjusted
for amortization of premiums and accretion of discounts using a method which
approximates a level yield, based on the Company's intent and ability to hold
the securities until maturity. At the time of purchase, the Company makes a
determination on whether or not it will hold the investments to maturity, based
upon an evaluation of the probability of the occurrence of future events.
Investment securities which the Company believes may be involved in interest
rate risk, liquidity, or other asset/liability management decisions which might
reasonably result in such securities not being held until maturity, are
classified as available for sale. If investment securities are sold, any gain or
loss is determined by specific identification and reflected in the operating
results for the period.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level that
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the loan portfolio. Management's
evaluation is based upon an analysis of the portfolio, past loss experience,
current economic conditions and other relevant factors. While management uses
the best information available to make such evaluations, such evaluations are
highly subjective, and future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination. The allowance is increased by the provision for
possible loan losses which is charged to operations. Loan losses are charged
directly against the allowance and recoveries on previously charged-off loans
are added to the allowance.
24
<PAGE>
For purposes of applying the measurement criteria for impaired loans, the
Company excludes large groups of smaller-balance homogeneous loans, primarily
consisting of residential real estate loans and consumer loans as well as
commercial loans with balances of less than $100,000. For applicable loans, the
Company evaluates the need for impairment recognition when a loan becomes
non-accrual or earlier if, based on management's assessment of the relevant
facts and circumstances, it is probable that the Bank will be unable to collect
all proceeds due according to the contractual terms of the loan agreement. At
and during the twelve-month periods ended June 30, 1997 and 1996, the recorded
investment in impaired loans was not material. The Company's policy for the
recognition of interest income on impaired loans is the same as for non-accrual
loans discussed below. Impaired loans are charged off when the Company
determines that foreclosure is probable and the fair value of the collateral is
less than the recorded investment of the impaired loan.
Loans, Loan Origination Fees and Uncollected Interest
Loans (other than loans held for sale) are recorded at cost net of
unearned discounts, deferred fees and allowances. Discounts and premiums on
purchased loans are amortized using the interest method over the remaining
contractual life of the portfolio, adjusted for actual prepayments. Loan
origination fees and certain direct origination costs are deferred and amortized
over the life of the related loans as an adjustment of the yield on the loans.
Uncollected interest receivable on loans is accrued to income as earned.
Non-accrual loans are loans on which the accrual of interest has ceased because
the collection of principal or interest payments is determined to be doubtful by
management. It is the policy of the Company to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days or more
(unless the loan principal and interest are determined by management to be fully
secured and in the process of collection), or earlier if the financial condition
of the borrower raises significant concern with regard to the ability of the
borrower to service the debt in accordance with the current loan term. Interest
income on such loans is not accrued until the financial condition and payment
record of the borrower once again demonstrate the ability to service the debt.
Loans Held for Sale
The Company periodically identifies certain loans as held for sale at the
time of origination. These loans consist primarily of fixed-rate, single-family
residential mortgage loans which meet the underwriting characteristics of
certain government-sponsored enterprises (conforming loans). Loans held for sale
are carried at the lower of aggregate cost or fair value, with any resulting
unrealized loss included in other income for the period. Realized gains or
losses are included in other income for the period.
Real Estate Owned ("REO")
Real estate acquired through foreclosure or by deed in lieu of foreclosure
is classified as REO. REO is carried at the lower of cost (lesser of carrying
value of the loan or fair value of the property at date of acquisition) or fair
value less selling expenses. Costs relating to the development or improvement of
the property are capitalized; holding costs are charged to expense.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. When assets are retired or otherwise disposed of,
<PAGE>
the cost and related accumulated depreciation are removed from the accounts. The
cost of maintenance and repairs is charged to expense as incurred and renewals
and betterments are capitalized.
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Common Share and Common Equivalent Share
Earnings per share have been calculated based on the weighted average
number of shares of common and common equivalent shares outstanding for the
respective periods. Stock options are considered common stock equivalents and
are included in the computation of the number of outstanding shares using the
treasury stock method. Earnings per share and weighted average shares
outstanding have been adjusted to reflect the effects of the 5% stock dividends
paid in September 1996 and 1995 and the March 1997 five-for-four stock split,
effected in the form of a dividend.
25
<PAGE>
2 - Investment Securities
Investment secunties are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------------------------
1997 1996
---------------------------------------------------- ---------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
U.S. Government
agency notes
and bonds .......... $ 5,500,000 $ 9,426 $(148,931) $ 5,360,495 $ 5,500,000 $ 7,500 $ (352,500) $ 5,165,000
Federal Home
Loan Bank
of Pittsburgh stock 1,510,000 -- -- 1,510,000 1,414,100 -- -- 1,414,100
Municipal notes
and bonds .......... 10,986,072 66,856 (44,250) 11,008,678 15,950,020 70,816 (109,448) 15,911,388
Mortgage-Backed
securities ........ 1,472,841 40,240 -- 1,513,081 1,729,133 26,290 -- 1,755,423
Other ................ 32 492 -- 524 32 370 -- 402
------------ -------- --------- ------------ ------------- -------- ---------- -----------
Total held to maturity $ 19,468,945 $117,014 $(193,181) $ 19,392,778 $ 24,593,285 $114,976 $ (461,948) $24,246,313
============ ======== ========= ============ ============ ======== ========== ===========
Available for sale
U.S. Government agency
notes and bonds ..... $ 18,286,172 $ 17,839 $ (87,210) $ 18,216,801 $ 6,194,593 $ 39,505 $ (184,898) $ 6,049,200
Municipal notes
and bonds ........... 4,119,956 19,995 (11,988) 4,127,963 82,274 -- (1,524) 8O,750
Mortgage-Backed
securities .......... 5,019,306 34,925 -- 5,054,231 -- -- -- --
Equity securities .... 136,280 30,859 -- 167,139 29,750 -- (390) 29,360
------------ -------- --------- ------------ ------------- -------- ---------- -----------
Total available
for sale ........... $ 27,561,714 $103,618 $ (99,198) $ 27,566,134 $ 6,306,617 $ 39,505 $ (186,812) $ 6,159,310
============ ======== ========= ============ ============ ======== ========== ===========
</TABLE>
<PAGE>
The amortized cost and estimated market value of investment securities at June
30, 1997, by contractual maturity, are shown below
<TABLE>
<CAPTION>
Estimated Weighted
Amortized Market Average
Cost Value Yield
---- ----- -----
<S> <C> <C> <C>
Held to Maturity
Due in one year or less .............. $ 4,441,422 $ 4,449,782 6.15 %
Due afte one year through five years . 7,025,180 7,059,239 6.39
Due after five years through ten years 2,100,000 2,046,903 6.61
Due after ten years .................. 4,392,311 4,326,330 7.08
No stated maturity ................... 1,510,032 1,510,524 6.38
----------- ----------- ----
Total held to maturity ................ $19,468,945 $19,392,778 6.51%
=========== =========== ====
Available for Sale
Due in one year or less .............. $ 45,000 $ 45,116 6.87 %
Due after one year through five years 9,631,085 9,632,881 7.43
Due after five years through ten years 6,812,708 6,772,735 7.29
Due after ten years .................. 10,936,641 10,948,263 7.87
No stated maturity ................... 136,280 167,139 3.31
----------- ----------- ----
Total available for sale .............. $27,561,714 $27,566,134 7.55%
=========== =========== ====
</TABLE>
Expected maturities may differ from contractual maturities because borrowers
generally have the right to call or prepay obligations without prepayment
penalties.
The weighted average yield, based on amortized cost, is presented on a
taxable equivalent basis using the Federal marginal rate of 34% adjusted for the
20% interest expense disallowance (27.2%).
In December 1995 the Company transferred $3.19 million of held-to-maturity
securities to available for sale, resulting in an increase in stockholders'
equity at such date for the unrealized gain on securities available for sale,
net of taxes, of $50,000. This transfer was in accordance with a special
reassessment provision contained within a Special Report issued by the Financial
Accounting Standards Board ("FASB").
Proceeds from sales of investment securities available for sale during
fiscal 1997 were $103.03 million. Gross gains of $162,284 and gross losses of
$5,833 were realized on those sales.
Proceeds from sales of investment securities available for sale during
fiscal 1996 were $81.98 million. Gross gains of $148,437 and gross losses of
$459 were realized on those sales. There were no sales of investment securities
during fiscal 1995.
Accrued interest receivable on investments amounted to $719,746 and
$404,050 at June 30, 1997 and 1996, respectively. At June 30, 1997, $22.43
million of investment securities were held in safekeeping as security in a
public funds pool and pledged as collateral for Municipal savings deposits with
the Bank.
26
<PAGE>
3 - Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
1997 1996
------------- -------------
<S> <C> <C>
First mortgage loans:
Residential ......................... $ 159,430,494 $ 148,530,238
Construction-residential ............ 9,872,749 9,494,481
Land acquisition and development ... 6,763,084 5,120,837
Commercial .......................... 33,981,099 22,552,425
Construction-commercial ............. 6,271,147 2,412,535
Commercial business....................... 7,863,000 5,700,921
Consumer ................................. 47,343,185 41,486,173
------------- -------------
Total loans .............................. 271,524,758 235,297,610
Less:
Undisbursed loan proceeds:
Construction-residential .......... (6,598,504) (6,211,241)
Construction-commercial ........... (3,493,774) (922,721)
Deferred loan fees .................. (1,537,471) (1,533,373)
Allowance for possible loan losses .. (2,855,003) (2,667,104)
------------- -------------
$ 257,040,006 $ 223,963,171
============= =============
</TABLE>
Accrued interest receivable on loans amounted to $1,387,821 and $1,199,865
at June 30, 1997 and 1996, respectively. At June 30, 1997, 1996, and 1995, the
Company serviced loans for others of $24.89 million, $22.21 million, and $21.84
million, respectively.
The aggregate amount of loans by the Company to its directors and
executive officers was $438,300 and $494,800 at June 30, 1997 and 1996,
respectively. These loans were made in the ordinary course of business at
substantially the same terms and conditions as those with other borrowers.
The total amount of non-performing loans at June 30, 1997, was $748,000
compared to $2.22 million at June 30, 1996. If these non-performing loans had
been current in accordance with their original terms and had been outstanding
throughout the period, the gross interest income for fiscal 1997 and 1996 that
would have been recorded for these loans was $71,400 and $210,400. Interest
income on these non-performing loans included in income for fiscal 1997 and 1996
amounted to $35,200 and $91,900, respectively. At June 30, 1997, and throughout
fiscal 1997, there were no loans for which impairment was required to be
recognized.
<PAGE>
The activity in the allowance for possible loan losses was as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period ...... $ 2,667,104 $ 2,448,510 $ 2,199,004
Provision for possible loan losses 523,413 339,800 454,700
Loans charged off ................. (377,923) (146,097) (328,896)
Recoveries ........................ 42,409 24,891 123,702
----------- ----------- -----------
Balance, end of period ............ $ 2,855,003 $ 2,667,104 $ 2,448,510
=========== =========== ===========
</TABLE>
27
<PAGE>
4 - Property And Equipment
Property and equipment by major classification are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land ..................................... $ 772,826 $ 772,826
Buildings and Improvements ............... 4,040,882 3,699,684
Furniture, Fixtures and Equipment ........ 2,875,806 2,292,652
----------- -----------
Total .................................... 7,689,514 6,765,162
Less Accumulated Depreciation ............ (2,965,632) (2,442,505)
----------- -----------
Net ...................................... $ 4,723,882 $ 4,322,657
=========== ===========
</TABLE>
5 - Deposits
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------
1997 1996
--------------------------------------- --------------------------------------
Weighted Percent Weighted Percent
Average Of Average Of
Rate Amount Total Rate Amount Total
---- ------ ----- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing ............... --% $ 21,493,230 8.2% --% $ 18,652,563 8.2%
Interest-bearing:
NOW checking accounts ........... 1.98 27,624,884 10.6 1.82 22,331,663 9.8
Money market deposit accounts ... 3.78 29,886,639 11.5 3.33 23,856,479 10.5
Savings accounts ................ 2.90 26,473,939 10.2 2.90 25,070,311 10.9
Certificates less than $100,000 . 5.58 124,636,389 47.8 5.57 116,157,982 50.9
Certificates $100,000 and greater 5.73 30,635,230 11.7 5.72 22,136,559 9.7
----- ------------ ----- ---- ------------ -----
Total interest-bearing .......... 4.66 239,257,081 91.8 4.61 209,552,994 91.8
----- ------------ ----- ---- ------------ -----
Total deposits ..................... 4.28% $260,750,311 100.0% 4.24% $228,205,557 100.0%
===== ============ ===== ==== ============ =====
</TABLE>
<PAGE>
While the certificates frequently are renewed at maturity rather than paid out,
a summary of certificates by contractual maturity at June 30, 1997 is as
follows:
<TABLE>
<CAPTION>
Years Ending June 30, Amount
--------------------- ------
<S> <C>
1998 $ 104,191,001
1999 17,505,120
2000 15,307,646
2001 6,493,981
2002 7,226,634
2003 and thereafter 4,547,237
--------------
$ 155,271,619
==============
</TABLE>
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NOW Checking Accounts .......... $ 461,510 $ 449,329 $ 465,476
Money Market Deposit Accounts .. 875,546 814,901 1,173,848
Savings Accounts ............... 719,751 724,771 828,844
Certificates Less than $100,000 6,639,858 6,307,763 4,821,032
Certificates $100,000 & Greater 1,589,060 1,621,949 1,323,937
----------- ----------- -----------
Total .......................... $10,285,725 $ 9,918,713 $ 8,613,137
=========== =========== ===========
</TABLE>
28
<PAGE>
6 - Advances From Federal Home Loan Bank Of Pittsburgh ("FHLBP")
Under terms of its collateral agreement with the FHLBP, the Company
maintains otherwise unencumbered qualifying assets (principally 1-4-family
residential mortgage loans and U.S. Government & Agency notes and bonds) in the
amount of at least as much as its advances from the FHLBP. The Company's FHLBP
stock is also pledged to secure these advances. At June 30, 1997 and 1996, such
advances mature as follows:
<TABLE>
<CAPTION>
Weighted
Average June 30,
Due by June 30, Rate 1997
- --------------- ---- ----
<S> <C> <C>
1998 5.92% $18,386,650
1999 5.63 2,646,595
2000 7.28 1,531,147
2001 5.80 4,026,281
2002 6.09 1,816,269
Thereafter 6.23 1,791,306
---- -----------
Total FHLBP advances 5.97% $30,198,247
==== ===========
<CAPTION>
Weighted
Average June 30,
Due by June 30, Rate 1996
- --------------- ---- ----
<S> <C> <C>
1997 6.13% $ 2,088,530
1998 6.07 1,886,651
1999 5.63 2,646,594
2000 7.28 1,531,147
2001 5.80 4,026,281
Thereafter 6.22 1,793,074
---- -----------
Total FHLBP advances 6.07% $13,972,277
==== ===========
</TABLE>
The Company has available an annually renewable line of credit not to
exceed 10% of the Company's maximum borrowing capacity which was $13.80 million
at the time the commitment was executed. The Company, from time to time, has
used the line of credit to meet liquidity needs. At June 30, 1997 and 1996,
there were no balances outstanding on the line of credit.
<PAGE>
7 - Income Taxes
The provision (and benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal ...................................... $ 753,774 $ 918,389 $ 792,135
State ........................................ 144,145 198,100 112,396
Deferred - Federal ................................ (140,485) (84,385) (35,373)
----------- ----------- -----------
Total ............................................. $ 757,434 $ 1,032,104 $ 869,158
=========== =========== ===========
</TABLE>
The provision for income taxes differs from the statutory rate due to the
following:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes at statutory rate ............ $ 912,252 $ 1,180,123 $ 1,027,515
Tax exempt interest, net .......................... (222,162) (211,440) (247,977)
State taxes net of Federal benefit ................ 95,136 130,746 74,181
Other, net ........................................ (27,792) (67,325) 15,439
----------- ----------- -----------
Total ............................................. $ 757,434 $ 1,032,104 $ 869,158
=========== =========== ===========
</TABLE>
29
<PAGE>
The deferred tax assets and liabilities at June 30, 1997 and 1996, consisted of
the following:
<TABLE>
<CAPTION>
At June 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses ...... $ 970,701 $ 906,815
Deferred loan fees ...................... 102,487 82,968
Net unrealized loss on securities
available for sale ................... -- 50,085
Uncollected interest .................... 69,275 61,510
Other ................................... 13,245 38,268
---------- ----------
Gross deferred tax assets .................... 1,155,708 1,139,646
Deferred tax liabilities:
Tax bad debt reserves ................... 171,302 218,101
Loan discount ........................... 143,441 157,295
Depreciation ............................ 30,890 44,575
Net unrealized gain on securities
available for sale .................... 1,706 --
---------- ----------
Gross deferred tax liabilities ............... 347,339 419,971
---------- ----------
Net deferred tax assets ...................... $ 808,369 $ 719,675
========== ==========
</TABLE>
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that the Company will realize the benefits of these
deferred tax assets.
The Small Business Job Protection Act of 1996 ("Act"), enacted on August
20, 1996, provides for the repeal of the tax bad debt deduction computed under
the percentage of taxable income method. The repeal of the use of this method is
effective for tax years beginning after December 31, 1995. Prior to the change
in law, the Bank had qualified under the provisions of the Internal Revenue Code
which permitted it to deduct from taxable income an allowance for bad debts
based on 8% of taxable income.
Upon repeal, the Bank is required to recapture into income, over a
six-year period, the portion of its tax bad debt reserves that exceed its base
year reserves (i.e., tax reserves for tax years beginning before 1988). The base
year tax reserves, which may be subject to recapture if the Bank ceases to
qualify as a bank for federal income tax purposes, are restricted with respect
to certain distributions. The Bank's total tax bad debt reserves at June 30,
<PAGE>
1997, are approximately $3.14 million, of which $2.64 million represents the
base year amount and $504,000 is subject to recapture. The Company has
previously recorded a deferred tax liability for the excess base year reserves
to be recaptured; therefore, this recapture will not impact the statement of
operations.
8- Commitments And Contingencies
Financial instruments with off-balance-sheet risk:
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
Commitments to originate loans amounted to $5.81 million as of June 30, 1997, of
which $3.43 million was for variable-rate loans. The balance of the commitments
represent fixed-rate loans with interest rates ranging from 6.825% to 10.375%.
At June 30, 1997, the Company had undisbursed loans in process for construction
loans of $10.09 million and $14.23 million in undisbursed lines of credit. In
addition, the Company has issued $71,000 in commercial letters of credit fully
secured by deposit accounts or real estate.
Concentration of credit risk:
The Company is principally a local lender and therefore has a significant
concentration of residential and commercial real estate loans as well as
consumer and commercial business loans to borrowers who reside in and/or which
are collateralized by real estate located primarily in Chester County,
Pennsylvania. The ability of such customers to honor these obligations is
dependent, to varying degrees, on the overall economic performance of this
diversified region.
Other commitments:
The Bank has entered into operating leases for several of its branch
facilities. The minimum annual rental payments under these leases at June 30,
1997, are as follows:
<TABLE>
<CAPTION>
Year Minimum Lease Payments
---- ----------------------
<S> <C>
1998 $ 341,969
1999 341,969
2000 231,613
2001 163,608
2002 153,335
2003 and after 1,232,501
</TABLE>
Rent expense under these leases for each of the years ended June 30,
1997, 1996, and 1995, was $383,476, $285,259, and $263,026, respectively.
30
<PAGE>
9 - Affiliated Transactions
During fiscal 1997, 1996 and 1995 the Company entered into separate
agreements with two directors of the Company for the improvement and renovation
of certain of the Bank's offices, for the inspection services performed in
connection with loans and for the review of appraisals. The Company also
contracted with one of these directors during fiscal 1997, 1996 and 1995 for
performance of routine maintenance and repair at all of the Bank's offices. The
Board of Directors approved the agreements with both directors, one a general
contractor and the other an architect. The total paid was $26,638 in 1997,
$78,695 in 1996, and $42,080 in 1995.
A director of the Company is a principal in a law firm which the Company
retained during fiscal years 1997, 1996, and 1995, and which the Company intends
to retain during fiscal year 1998. During the year ended December 31, 1996, the
amount of legal fees paid to the law firm did not exceed 5% of that firm's gross
revenues for such fiscal year.
A director of the Company is an executive officer, director, and principal
of an investment banking firm from which the Company purchased investment
securities during fiscal years 1997, 1996, and 1995. The Company intends to
continue the business relationship during fiscal 1998. During fiscal 1997, 1996,
and 1995, the purchases of investment securities from the investment banking
firm amounted to $119.11 million, $83.19 million, and $28.34 million,
respectively, and were purchased at market rates and on terms no more favorable
to the investment banking firm than those obtainable on an arm's-length basis.
A director of the Company is a director and president of a mortgage
banking firm from which the Company purchased single-family residential mortgage
loans during fiscal years 1997, 1996, and 1995, and the Company intends to
continue the business relationship during fiscal year 1998. During fiscal 1997,
1996, and 1995, the purchases of loans from the mortgage banking firm amounted
to $16.32 million, $3.61 million, and $7.50 million, respectively, with fees of
$135,061, $49,543, and $114,600, respectively, paid to the firm. The loans were
purchased at market rates and terms no more favorable to the mortgage banking
firm than those obtainable on an arm's-length basis.
10 - Stockholders' Equity
At the time of its conversion from a state-chartered mutual association to
a state-chartered capital stock association, the Bank established a liquidation
account in an amount equal to $4,845,000 at September 30, 1986. The liquidation
account is maintained for the benefit of eligible savings account holders who
have maintained their savings account in the Bank after conversion. In the
unlikely event of a complete liquidation, each eligible savings account holder
will be entitled to receive a liquidation distribution from the liquidation
account, in the amount of the then current adjusted sub-account balance for
savings accounts held, before any liquidation distribution may be made with
respect to capital stock.
Except for the repurchase of stock and payment of dividends by the Bank,
the existence of the liquidation account does not restrict the use or
application of such net worth. The Company may not declare or pay a cash
dividend on, or repurchase, any of its common stock if the effect thereof would
cause the net worth of the Bank to be reduced below either the amount required
for the liquidation account or the net worth requirements imposed by the Office
of Thrift Supervision.
<PAGE>
In September 1996 and 1995 the Company paid 5% common stock dividends in
the amounts of 77,731 and 74,110 shares, respectively, from authorized but
unissued common stock with fractional shares paid in the form of cash. In March
1997 the Company paid a five-for-four stock split effected in the form of a
dividend in the amount of 414,188 shares, with fractional shares paid in the
form of cash.
In fiscal 1997 and 1996 the Company repurchased 18,885 and 26,942 shares,
respectively, of its common stock at a cost of $348,679 and $501,026,
respectively, and designated the repurchased stock as treasury stock.
31
<PAGE>
11 - Regulatory Capital
The Bank is required by regulations of the Office of Thrift Supervision
("OTS") to maintain minimum levels of capital as measured by three ratios.
Savings institutions are currently required to maintain a minimum regulatory
tangible capital equal to 1.5% of adjusted total assets, minimum core capital of
3% of adjusted total assets, and risk-based capital equal to 8% of total
risk-weighted assets. At June 30, 1997 and 1996, the Bank exceeded all
regulatory capital requirements. The following sets forth the reconciliation of
the Bank's compliance with each of the regualtory capital requirements (in
thousands):
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------------------------- -------------------------------------------
Tangible Core Risk-based Tangible Core Risk-based
Capital Capital Capital Capital Capital Capital
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Total Regulatory Capital .......... $ 26,750 $ 26,750 $ 29,057 $ 25,301 $ 25,301 $ 27,348
Minimum Required Regulatory Capital 4,855 9,710 15,689 4,095 8,191 13,243
---------- ---------- ---------- ---------- ---------- ----------
Excess Regulatory Capital ......... $ 21,895 $ 17,040 $ 13,368 $ 21,206 $ 17,110 $ 14,105
========== ========== ========== ========== ========== ==========
Regulatory Capital as a
Percentage of Assets ........... 8.26% 8.26% 14.82% 9.27% 9.27% 16.52%
Minimum Capital Required as a
Percentage of Assets ........... 1.50 3.00 8.00 1.50 3.00 8.00
---------- ---------- ---------- ---------- ---------- ----------
Excess Regulatory Capital as a
Percentage of Assets ........... 6.76% 5.26% 6.82% 7.77% 6.27% 8.52%
========== ========== ========== ========== ========== ==========
</TABLE>
The Bank is not under any agreement with the regulatory authorities nor is
it aware of any current recommendations by the regulatory authorities which, if
they were to be implemented, would have a material effect on liquidity, capital
resources or operations of the Company.
12- Fair Value Of Financial Instruments
The Company is required to disclose estimated fair values for its
financial instruments.
Limitations
Estimates of fair value are made at a specific point in time, based upon,
where available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
<PAGE>
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparts, future expected loss
experience and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and therefore
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies are likely to result in significantly different
fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking, or other businesses, existing
customer relationships, extensive branch banking network, property, equipment,
goodwill or certain tax implications related to the realization of unrealized
gains or losses. Also, the fair value of non-interest bearing demand deposits,
savings and NOW accounts and money market deposit accounts is equal to the
carrying amount because these deposits have no stated maturity. Obviously, this
approach to estimating fair value excludes the significant benefit that results
from the low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of individual
assets and liabilities may not be reflective of the fair value of a banking
organization that is a going concern.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at June 30, 1997 and 1996:
Cash and cash equivalents:
Current carrying amounts approximate estimated fair value.
Investment securities and securities available for sale:
Current quoted market prices were used to determine fair value.
32
<PAGE>
12- Fair Value Of Financial Instruments (continued)
Loans:
Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type, and each loan category was
further segmented by fixed- and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
through the estimated maturity and prepayment speeds while using estimated
market discount rates that reflected credit and interest risk inherent in the
loans. The estimate of the maturities and prepayment speeds was based on the
Company's historical experience. Cash flows were discounted using market rates
adjusted for portfolio differences.
Investment in Federal Home Loan Bank:
Current carrying amounts approximate estimated fair value.
Interest receivable:
Current carrying amounts approximate estimated fair value.
Deposits with no stated maturity which consist of NOW, money market and saving
accounts:
Current carrying amounts approximate estimated fair value.
Certificates:
Fair value was estimated by discounting the contractual cash flows using
current market rates offered in the Company's market area for deposits with
comparable terms and maturities.
Borrowed Funds:
The fair value of borrowings was estimated using rates currently available
to the Company for debt with similar terms and remaining maturities.
Interest payable:
Current carrying amounts approximate estimated fair value.
Commitments to extend credit:
The majority of the Company's commitments to extend credit carry current
market interest rates if converted to loans. Because commitments to extend
credit are generally unassignable by either the Company or the borrower, they
only have value to the Company and the borrower. The estimated fair value
approximates the recorded deferred fee amounts.
<PAGE>
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1997 1996
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Financial Assets: ......................
Cash and cash equivalents .............. $ 9,454 $ 9,454 $ 10,312 $ 10,312
Investment securities available for sale 27,566 27,566 6,159 6,159
Investment securities .................. 17,959 17,883 23,179 22,832
Loans receivable, net .................. 257,146 257,708 223,963 224,867
Investment in Federal Home Loan Bank ... 1,510 1,510 1,414 1,414
Interest receivable..................... 2,108 2,108 1,616 1,616
-------- -------- -------- --------
Total financial assets $315,743 $316,229 $266,643 $267,200
======== ======== ======== ========
Financial Liabilities:
Deposits with no stated maturity
which consist of Non-interest
Checking, NOW, Money Market and
Savings Accounts .................... $105,479 $105,479 $ 89,911 $ 89,911
Certificates ........................... 155,271 156,215 138,295 138,816
Borrowed funds.......................... 30,793 30,693 14,483 14,178
Interest payable ....................... 788 788 653 653
-------- -------- -------- --------
Total financial liabilities........ $292,331 $293,175 $243,342 $243,558
======== ======== ======== ========
</TABLE>
33
<PAGE>
13 - Employee Benefits
Stock Compensation Program
In October 1993 a previous stock compensation program (the "Program") was
discontinued and was replaced by the Company's 1993 Stock Option Plan (the
"Plan"). No further options, stock appreciation rights or performance share
awards may be granted under the Program; however, outstanding options previously
granted under the Program have not been affected. An aggregate of 108,527
authorized but unissued shares of common stock of the Company, adjusted for the
5% stock dividends in September 1996, 1995 and 1994, and the March 1997
five-for-four stock split, were reserved for issuance under the Plan. Under both
the Program and the Plan, the option price per share for incentive options
granted may not be less than the fair market value of the common stock on the
date of grant. All options that had been granted under the Program have either
been exercised or have lapsed. Options may be granted under the Plan during the
ten year period ending 2003 and options granted under the Plan are exercisable
up to ten years from the date of grant. Rights to exercise options under the
Plan may be limited by imposition of vesting schedules at the time the options
are granted.
The following table is a summary of option transactions since June 30,
1994. These options and option prices for the years 1995, 1996, and 1997 have
been adjusted to reflect the stock dividends in fiscal 1995, 1996, and 1997 and
the stock split in fiscal 1997:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------
1997 1996 1995
------------------------- --------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 83,854 $12.40 95,892 $10.64 58,971 $ 5.23
Granted 12,538 14.07 10,749 14.70 62,229 14.13
Exercised (17,709) 5.61 (19,809) 4.81 (21,691) 5.40
Forfeited (7,821) 14.29 (2,978) 14.38 (3,617) 14.17
------- ------- -------
Outstanding at end of year 70,862 14.19 83,854 12.40 95,892 10.64
Exercisable at end of year 32,042 27,938 32,401
Weighted-average fair value
of options granted during fiscal 1997 $4.69
</TABLE>
The Black-Scholes option-pricing model was used to determine the
grant-date fair-value of options in fiscal 1997. Significant assumptions used in
the model included a weighted average risk free rate of return of 6.49%;
expected option life of 6 years; expected stock price volatility of 28.86% and
expected dividends of 2.10%.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation". This statement encourages, but does not require, the adoption of
fair-value accounting for stock-based compensation to employees. The Company, as
permitted, has elected not to adopt the fair value accounting provisions of SFAS
123, and has instead continued to apply APB Opinion 25 and related
Interpretations in accounting for plans and provide the required proforma
disclosures of SFAS 123. Had the grant-date fair-value provisions of SFAS 123
<PAGE>
been adopted, the Company would have recognized $22,400 in compensation expense
related to its Option Plan in fiscal 1997. As a result, proforma net income of
the Company would have been $1,903,260 and proforma earnings per share would
have been $.92 for the year ended June 30, 1997.
The effects on proforma net income and EPS of applying the disclosure
requirement of SFAS 123 in fiscal 1997 may not be representative of the future
proforma effects on net income and EPS due to the vesting provisions of the
options and future awards that are available to be granted.
Employee Stock Ownership Plan
The Bank established an ESOP for all employees of the Bank with at least
one year of credited service. Benefits become 20% vested after three years of
service, increasing to 100% after seven years. Forfeitures are reallocated among
remaining participating employees. Vested benefits are generally payable upon
retirement, disability or separation from service. The ESOP is subject to the
requirements of the Employee Retirement Income Security Act of 1974, as amended,
and the regulations of the Internal Revenue Service and the Department of Labor.
The ESOP is funded by the Bank's contributions, and all contributions to date
have been used to pay principal, interest and other fees associated with the
ESOP's loan referred to below. Benefits to participants are normally paid in
whole shares of common stock.
The ESOP borrowed funds to acquire the initial 78,125 shares of common
stock at $5.76 per share, adjusted for the subsequent stock splits effected in
the form of dividends. The ESOP purchased an additional 101,544 shares of the
common stock at a weighted average price of $8.69 per share, also adjusted for
the subsequent stock splits effected in the form of dividends. Funds necessary
to purchase such shares were borrowed from an independent third-party lender.
The Company has not guaranteed the debt but anticipates contributing sufficient
funds to the ESOP
34
<PAGE>
to enable it to meet its debt service requirements. The outstanding loan balance
has been reflected as a liability and a reduction of stockholders' equity in the
consolidated statements of financial condition. Shares purchased with such loan
proceeds are held in a suspense account for allocation among members as the loan
is repaid. Contributions to the ESOP and shares released from the suspense
account are allocated among members on the basis of compensation and years of
service. A total of 17,732, 19,974, and 17,884 shares were allocated in fiscal
1997, 1996, and 1995, respectively.
Contributions by the Bank to the ESOP in fiscal 1997, 1996 and 1995
amounted to $181,240, $194,039 and $195,543, respectively, and are included in
the accompanying consolidated statements of operations in salaries and employee
benefits. Interest expense paid during 1997, 1996 and 1995 by the ESOP for the
loan amounted to $34,298, $46,693, and $58,056, respectively.
The interest rate on the ESOP loan is fixed at 7.50% until maturity with
interest expense being computed on the unpaid principal balance. As principal
payments are made by the ESOP, the corresponding liability is reduced and
stockholders' equity is increased. Principal payments and cash dividends paid on
the common stock held by the ESOP in fiscal 1997 amounted to $177,250, and
remaining principal payments are scheduled as follows:
Fiscal Year Amount
----------- ------
1998 $186,872
1999 146,618
--------
Total $333,490
At June 30, 1997, the ESOP had pledged 94,117 shares of unallocated
Company stock held by it as collateral for the debt.
Incentive Compensation Program
The Company currently maintains an incentive compensation program for its
officers and key employees. The incentive program provides cash awards to
members of the management group based upon an individual's base salary and
success in reaching specified pre-established objectives during the fiscal year,
provided the Company reaches a certain base amount in net income. During fiscal
1997, 1996 and 1995, $79,380, $29,175 and $6,000 were expensed for this purpose.
Pension Plan
The Company has a noncontributory defined benefit pension plan which is
fully funded through a multi-employer investment trust covering qualified
salaried employees. Costs recognized for the years ended June 30, 1997, 1996 and
1995, totaled $4,953, $34,124, and $67,249, respectively. Information relative
to the financial status of the Company's portion of the Plan is not currently
available.
<PAGE>
14 - Recent Accounting Pronouncements
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share." This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This statement requires
restatement of all prior period EPS data presented. Had the Company adopted SFAS
No. 128 as of June 30, 1997, the basic earnings per share on a pro forma basis
would have been $.94, $1.19, and $1.05 for the fiscal years ended 1997, 1996 and
1995, respectively. Pro forma disclosure of diluted earnings per share would
have been $.93, $1.18, and $1.04 for the fiscal years ended 1997, 1996, and
1995, respectively.
In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Management has not
yet determined the impact, if any, of this statement on the Company.
In June 1997 the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. Management has not yet determined the impact, if any, of this
statement on the Company.
35
<PAGE>
15 - Parent Company Financial Information
Financial information of Chester Valley Bancorp Inc. (parent company only) as
follows:
<TABLE>
<CAPTION>
Statements of Financial Condition
At June 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Assets
On deposit with subsidiary .................... $ 309,154 $ 354,777
Investment in subsidiary ...................... 27,085,593 25,717,004
Other assets .................................. 3,354 3,354
------------ ------------
Total Assets ............................. $ 27,398,101 $ 26,075,135
============ ============
Liabilities
ESOP debt ..................................... $ 333,490 $ 510,740
------------ ------------
Total Liabilities ........................ 333,490 510,740
Stockholders' Equity ............................... 27,064,611 25,564,395
------------ ------------
Total Liabilities and Stockholders' Equity $ 27,398,101 $ 26,075,135
============ ============
<CAPTION>
Statements of Operations Year Ended June 30,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income
Distributed income from subsidiary ............ $ 750,000 $ 900,000 $ --
Interest income ............................... 16,598 10,500 16,922
Equity in undistributed income of subsidiaries 1,176,407 1,534,100 2,144,978
------------ ------------ ------------
Expense
Other Expense ................................. 17,345 5,754 8,954
------------ ------------ ------------
Net Income ................................ $ 1,925,660 $ 2,438,846 $ 2,152,946
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows Year Ended June 30,
------------------------------------------------
1997 1996 1995
Operating activities: ------------ ------------ ------------
<S> <C> <C> <C>
Net income ....................................... $ 1,925,660 $ 2,438,846 $ 2,152,946
Add (deduct) items not affecting cash flows
from operating activities:
Equity in undistributed income of subsidiary .. (1,176,407) (1,534,100) (2,144,978)
Decrease in other liabilities ................. -- (10) --
Reduction of common stock acquired by ESOP .... 177,250 181,171 167,901
------------ ------------ ------------
Net cash flows from operating activities ......... 926,503 1,085,907 175,869
------------ ------------ ------------
Financing activities:
Income tax benefit on exercise of stock options (92,246) -- --
Cash dividends on common stock ................ (760,465) (573,030) (471,346)
Payment for fractional shares ................. (15,927) (11,105) (10,027)
Stock repurchased as treasury stock ........... (348,679) (501,026) (242,140)
Repayments of principal on ESOP debt .......... (177,250) (181,171) (167,901)
Proceeds from exercise of stock options ....... 337,041 95,336 117,107
Proceeds from sale of common stock under
the dividend reinvestment plan ............ 85,400 247,013 199,943
------------ ------------ ------------
Net cash flows used in financing activities ... (972,126) (923,983) (574,364)
------------ ------------ ------------
Net increase (decrease) in cash .................... (45,623) 161,924 (398,495)
Cash and cash equivalents:
Beginning of period ........................... 354,777 192,853 591,348
------------ ------------ ------------
End of period ................................. $ 309,154 $ 354,777 $ 192,853
============ ============ ============
Non-cash items:
Net unrealized gain (loss) on investment
securities available for sale,
net of taxes .............................. $ 99,936 $ (97,222) $ --
============ ============ ============
</TABLE>
36
<PAGE>
Independent Auditors' Report
{GRAPHIC-LOGO] Peat Marwick LLP
To the Board of Directors and Stockholders of
Chester Valley Bancorp Inc:
We have audited the accompanying consolidated statements of financial
condition of Chester Valley Bancorp Inc. and subsidiary as of June 30, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chester
Valley Bancorp Inc. and subsidiary as of June 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
- ------------------------
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
July 25, 1997
37
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Chester Valley Bancorp Inc:
We consent to incorporation by reference in the registration statements No.
33-50032 on Form S-8 and No. 33-72210 on Form S-3 of Chester Valley Bancorp Inc.
of our report dated July 25, 1997, relating to the consolidated statements of
financial condition of Chester Valley Bancorp Inc. and subsidiary as of June 30,
1997 and 1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1997, which appears in the June 30, 1997 annual report on
Form 10-KSB of Chester Valley Bancorp Inc.
/s/KPMG Peat Marwick LLP
Philadelphia PA
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,609,904
<INT-BEARING-DEPOSITS> 6,843,952
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,566,134
<INVESTMENTS-CARRYING> 19,468,945
<INVESTMENTS-MARKET> 19,392,778
<LOANS> 259,895,009
<ALLOWANCE> 2,855,003
<TOTAL-ASSETS> 323,672,812
<DEPOSITS> 260,750,311
<SHORT-TERM> 18,573,522
<LIABILITIES-OTHER> 5,076,938
<LONG-TERM> 12,207,380
0
0
<COMMON> 2,072,083
<OTHER-SE> 24,992,528
<TOTAL-LIABILITIES-AND-EQUITY> 323,672,812
<INTEREST-LOAN> 20,388,526
<INTEREST-INVEST> 1,942,085
<INTEREST-OTHER> 238,251
<INTEREST-TOTAL> 22,568,862
<INTEREST-DEPOSIT> 10,285,725
<INTEREST-EXPENSE> 11,502,706
<INTEREST-INCOME-NET> 11,066,156
<LOAN-LOSSES> 523,413
<SECURITIES-GAINS> 156,451
<EXPENSE-OTHER> 9,183,718
<INCOME-PRETAX> 2,683,094
<INCOME-PRE-EXTRAORDINARY> 2,683,094
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,925,660
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
<YIELD-ACTUAL> 4.03
<LOANS-NON> 748,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,395,840
<ALLOWANCE-OPEN> 2,667,104
<CHARGE-OFFS> 377,923
<RECOVERIES> 42,409
<ALLOWANCE-CLOSE> 2,855,003
<ALLOWANCE-DOMESTIC> 1,222,854
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,632,149
</TABLE>
