SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-QSB
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 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 (I.R.S. 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
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 [ ]
Transitional Small Business Disclosure Format. YES [ ] NO [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($1.00 par value) 2,162,520
------------------------------ ----------
(Title of Each Class) (Number of Shares Outstanding
as of November 1, 1997)
<PAGE>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and June 30, 1997 (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996 (Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1997 and 1996 (Unaudited)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES
Item 3. DEFAULTS UPON SENIOR SECURITIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
September 30, June 30,
1997 1997
--------- ---------
<S> <C> <C>
ASSETS:
Cash in banks ................................................................ $ 3,642 $ 2,610
Interest-bearing deposits .................................................... 4,133 6,844
Investment securities available for sale ..................................... 22,545 27,566
Investment securities (market value - September 30, $18,926; June 30, $19,393) 18,901 19,469
Accrued interest receivable .................................................. 1,886 2,108
Loans held for sale .......................................................... 175 106
Loans receivable, less allowance for possible loan losses of $2,976 and $2,855 262,641 257,040
Property and equipment ....................................................... 4,908 4,724
Other assets ................................................................. 3,490 3,206
--------- ---------
Total Assets............................................................. $ 322,321 $ 323,673
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposit accounts ............................................................. $ 262,049 $ 260,750
Securities sold under agreements to repurchase ............................... 167 12
Advance payments by borrowers for taxes and insurance ........................ 984 2,999
Employee Stock Ownership Plan ("ESOP") debt .................................. 287 333
Federal Home Loan Bank advances .............................................. 28,580 30,198
Other borrowings ............................................................. 309 249
Accrued interest payable ..................................................... 871 788
Other liabilities ............................................................ 1,157 1,279
--------- ---------
294,404 296,608
Total Liabilities ....................................................... --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(continued)
September 30, June 30,
1997 1997
--------- ---------
<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; 2,174,689 and
2,072,083 shares issued at September 30 and June 30, respectively .......... 2,175 2,072
Additional paid-in capital ................................................... 14,854 12,772
Common stock acquired by ESOP ................................................ (287) (333)
Retained earnings - partially restricted ..................................... 11,213 12,750
Net unrealized gain on securities available for sale, net of taxes ........... 104 3
--------- ---------
Subtotal ................................................................... 28,059 27,264
Treasury stock, at cost (8,957 shares and 13,213 shares at September 30 and
June 30, respectively) ..................................................... (142) (199)
--------- ---------
Total Stockholders' Equity .............................................. 27,917 27,065
--------- ---------
Total Liabilities and Stockholders' Equity .............................. $ 322,321 $ 323,673
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
Three Months Ended
September,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans .......................................................... $ 5,502 $ 4,855
Investment securities and interest-bearing deposits ............ 793 524
----------- -----------
Total interest income ....................................... 6,295 5,379
----------- -----------
INTEREST EXPENSE:
Deposits ....................................................... 2,841 2,464
Securities sold under agreements to repurchase ................. 1 27
Short-term borrowings .......................................... 244 72
Long-term borrowings ........................................... 182 182
----------- -----------
Total interest expense ...................................... 3,268 2,745
----------- -----------
NET INTEREST INCOME .............................................. 3,027 2,634
Provision for possible loan losses ............................. 120 96
----------- -----------
Net interest income after provision for possible loan losses 2,907 2,538
----------- -----------
OTHER INCOME:
Service charges and fees ....................................... 301 272
Gain on sale of loans held for sale ............................ 1 3
Gain on sale of securities available for sale .................. 87 48
Other .......................................................... 45 46
----------- -----------
Total other income .......................................... 434 369
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
Three Months Ended
September,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING EXPENSES:
Salaries and employee benefits ................................. 1,015 917
Occupancy and equipment ........................................ 424 359
Data processing ................................................ 166 150
SAIF special assessment ........................................ -- 1,387
Deposit insurance premiums ..................................... 38 130
Other .......................................................... 486 392
----------- -----------
Total operating expenses .................................... 2,129 3,335
----------- -----------
Income (loss) before income taxes .............................. 1,212 (428)
Income tax expense (benefit) ................................... 359 (227)
----------- -----------
NET INCOME (LOSS) ................................................ $ 853 $ (201)
=========== ===========
EARNINGS PER SHARE (1):
Primary ........................................................ $ 0.39 $ (0.09)
=========== ===========
Fully Diluted .................................................. $ 0.39 $ (0.09)
=========== ===========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) ....................... $ 0.10 $ 0.08
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Primary ........................................................ 2,189,381 2,163,096
=========== ===========
Fully Diluted .................................................. 2,192,089 2,166,200
=========== ===========
</TABLE>
(1) Earnings per share, dividends per share and weighted average shares
outstanding have been restated to reflect the effects of the 5% stock
dividend paid in September 1997 and the March 1997 five-for-four stock
split effected in the form of a dividend.
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended
September 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ 853 $ (201)
Add (deduct) items not affecting cash flows from operating activities:
Depreciation ........................................................ 161 140
Provision for possible losses on loans .............................. 120 96
Gain on sale of loans held for sale ................................. (1) (3)
Gain on sale of securities available for sale ....................... (87) (48)
Amortization of deferred loan fees, discounts and premiums .......... (145) (100)
Decrease (increase) in accrued interest receivable .................. 222 (32)
Increase in other assets ............................................ (284) (417)
Increase (decrease) in other liabilities ............................ (122) 1,452
Increase in accrued interest payable ................................ 83 74
-------- --------
Net cash flows from operating activities ............................... 800 961
-------- --------
Cash flows from (used in) investment activities:
Capital expenditures ................................................ (345) (185)
Net increase in loans and loans held for sale ....................... (6,198) (14,749)
Proceeds from sale of loans held for sale ........................... 486 --
Proceeds from maturities, payments and calls of investment securities 565 1,105
Purchase of investment securities ................................... -- (19)
Purchase of securities available for sale ........................... (51,634) (12,147)
Proceeds from sale of securities available for sale ................. 56,914 13,132
-------- --------
Net cash flows used in investment activities ........................... (212) (12,863)
-------- --------
Cash flows from (used in) financing activities:
Net increase (decrease) in deposits before interest credited ........ (1,090) 2,114
Interest credited to deposits ....................................... 2,389 2,059
Proceeds under securities sold under agreements to repurchase ....... 155 8,503
Proceeds from FHLB advances ......................................... 10,400 --
Repayments of FHLB advances ......................................... (12,018) (435)
Decrease in advance payments by borrowers for taxes and insurance ... (2,015) (1,827)
Proceeds from other borrowings ...................................... 60 --
Cash dividends on common stock ...................................... (226) (172)
Repayments of principal on ESOP debt ................................ (46) (44)
Sale of common stock under the dividend reinvestment plan ........... 112 --
Payment for fractional shares ....................................... (8) (10)
Stock options exercised ............................................. 7 216
Reduction of common stock acquired by ESOP .......................... 46 44
Stock repurchased as treasury stock ................................. (33) (287)
-------- --------
Net cash flows from (used in) financing activities ..................... (2,267) 10,161
-------- --------
Decrease in cash and cash equivalents .................................. (1,679) (1,741)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(continued)
Three Months Ended
September 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents:
Beginning of period ................................................. 9,454 10,312
======== ========
End of period ....................................................... $ 7,775 $ 8,571
======== ========
Supplemental disclosures:
Cash payments during the year for:
Taxes ............................................................ $ 250 $ 275
Interest ......................................................... $ 3,185 $ 2,669
Non-cash items:
Stock dividend issued ............................................... $ 2,155 $ 1,516
Net unrealized gain (loss) on investment securities
available for sale .............................................. $ 165 $ (49)
Tax effect on unrealized gain (loss) on investment
securities available for sale ................................... $ 64 $ (17)
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
CHESTER VALLEY BANCORP INC.
AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial
statements. However, such information reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of
results for the unaudited interim periods.
The results of operations for the three-month period ended September
30, 1997, are not necessarily indicative of the results to be expected
for the fiscal year ending June 30, 1998. The consolidated financial
statements presented herein should be read in conjunction with the
audited consolidated financial statements and the notes thereto
included in Chester Valley Bancorp Inc.'s Annual Report to Stockholders
for the fiscal year ended June 30, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Chester Valley Bancorp Inc. (the "Company" or "Chester Valley"), its
wholly-owned subsidiary, First Financial Bank (the "Bank" or "First
Financial"), a Pennsylvania-chartered stock savings association, and
the Bank's wholly-owned subsidiary, D & S Service Corp., which owns D &
F Projects and Wildman Projects, Inc., both of which are wholly-owned
subsidiaries thereof. All material inter-company balances and
transactions have been eliminated in consolidation. Prior period
amounts are reclassified when necessary to conform with the current
period's presentation.
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.
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.
<PAGE>
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
investment securities to maturity, based upon an evaluation of the
probability of the occurrence of certain 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 in
which such sale occurs.
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, other than those incurred on loans held for
sale, are charged directly against the allowance and recoveries on
previously charged-off loans are generally added to the allowance.
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 business 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 Company will be unable to
collect all proceeds due according to the contractual terms of the loan
agreement. At and during the three-month period ended September 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 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.
<PAGE>
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 terms. 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 the resulting gain or 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, 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.
<PAGE>
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 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. See "Recent
Accounting Pronouncements" on page 17.
Earnings per share and weighted average shares outstanding have been
adjusted to reflect the effects of the 5% stock dividend paid in
September 1997 and the March 1997 five-for-four stock split effected in
the form of a dividend.
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
At September 30, At June 30,
1997 1997
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
First mortgage loans:
Residential ............... $ 160,150 $ 159,431
Construction-residential .. 11,338 9,873
Land acquisition and
development ............ 7,840 6,763
Commercial ................ 33,813 33,981
Construction-commercial ... 8,190 6,271
Commercial business .......... 9,888 7,863
Consumer ..................... 48,211 47,343
--------- ---------
Total loans .................. 279,430 271,525
--------- ---------
Less:
Undisbursed loan proceeds:
Construction-residential (7,712) (6,599)
Construction-commercial (4,537) (3,494)
Deferred loan fees - net .. (1,564) (1,537)
Allowance for loan losses . (2,976) (2,855)
--------- ---------
Net loans .................... $ 262,641 $ 257,040
========= =========
</TABLE>
<PAGE>
NOTE 4 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $4.57
million as of September 30, 1997, of which $2.16 million was for
variable-rate loans. The balance of the commitments represents $2.41
million of fixed-rate loans bearing interest rates of between 6.50% and
7.575%. At September 30, 1997, the Company had $12.25 million of
undisbursed construction loan funds as well as $14.37 million of
undisbursed remaining credit line balances.
NOTE 5 - 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 total assets, minimum core capital of 3% of
total assets, and risk-based capital equal to 8% of total
risk-weighted assets. At September 30, 1997, and June 30,
1997, the Bank exceeded all regulatory capital requirements.
The following sets forth the reconciliation of the Bank's
compliance with each of the regulatory capital requirements
(dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
--------------------------------------------- --------------------------------------------
Tangible Core Risk-based Tangible Core Risk-based
Capital Capital Capital Capital Capital Capital
------------- ------------- ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Total Regulatory Capital $ 27,653 $ 27,653 $ 29,966 $ 26,750 $ 26,750 $ 29,057
Minimum Required Regulatory
Capital 4,832 9,663 16,229 4,855 9,710 15,689
---------- ----------- ------------ ----------- ---------- -----------
Excess Regulatory Capital $ 22,821 $ 17,990 $ 13,737 $ 21,895 $ 17,040 $ 13,363
========== =========== ============ =========== ========== ===========
Regulatory Capital as a
Percentage of Assets 8.59% 8.59% 14.77% 8.26% 8.26% 14.82%
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 7.09% 5.59% 6.77% 6.76% 5.26% 6.82%
========== =========== ============ =========== ========== ===========
</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 the liquidity,
capital resources or operations of the Company.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FINANCIAL CONDITION
The Company's total assets decreased to $322.32 million at September 30, 1997,
from $323.67 million at June 30, 1997, largely as the result of the decrease in
investment securities available for sale to $22.55 million at September 30,
1997, from $27.57 million at June 30, 1997. Deposit accounts increased to
$262.05 million and Federal Home Loan Bank advances decreased to $28.58 million
at September 30, 1997, from $260.75 million and $30.20 million at June 30, 1997,
respectively.
Stockholders' equity increased to $27.92 million at September 30, 1997, from
$27.07 million at June 30, 1997, primarily a result of net income of $853,000,
the recognition of net unrealized gains on securities available for sale, net of
taxes, of $101,000, the sale of $112,000 of common stock in connection with the
Company's dividend reinvestment plan, and the reduction in the principal balance
of the ESOP debt by $46,000. The increase in stockholders' equity was offset, in
large part, by the payment of cash dividends totaling $226,500, and the
repurchase of $33,000 of common stock during the three-month period ended
September 30, 1997.
RESULTS OF OPERATIONS
Net interest income, on a fully tax equivalent basis, increased 15.9% to $3.13
million for the three-month period ended September 30, 1997, compared to $2.70
million for the same period in 1996. Total interest income, on a fully tax
equivalent basis, increased to $6.40 million during the three-month period ended
September 30, 1997, a $.96 million or 17.7% increase over the comparable prior
period. This increase was primarily due to a $42.13 million increase in the
average balance of interest-earning assets coupled with a 14 basis point
increase in the yield earned on the assets. The increase in the yield is the
result of the Company's continual effort to focus its loan origination
activities on higher-yielding loan products, in particular commercial loans.
Total interest expense increased to $3.27 million from $2.75 million for the
three-month periods ended September 30, 1997 and 1996, respectively. This
increase was primarily due to a $38.43 million increase in the average balance
of interest-bearing liabilities to $269.86 million combined with an 11 basis
point increase in the average rate paid on such liabilities to 4.85% at
September 30, 1997.
Provision for Possible Loan Losses
The Company provided $120,000 and $96,000 for possible loan losses during the
three-month periods ended September 30, 1997, respectively. These provisions
were added to the Company's allowance for possible loan losses due to the
current economic conditions and management's assessment of the inherent risk of
loss existing in the loan portfolio. At September 30, 1997, the allowance for
possible loan losses totaled $2.98 million or 1.13% of net loans, compared to
$2.86 million or 1.10% of net loans and $2.75 million or 1.15% of net loans at
June 30, 1997, and September 30, 1996, respectively. As a percentage of
non-performing loans, the allowance for possible loan losses was 173.1% at
September 30, 1997, compared to 381.7% at June 30, 1997, and further compared to
134.8% at September 30, 1996.
<PAGE>
Provisions for possible loan losses which are added to the allowance for
possible loan losses are 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 circumstances differ substantially from the assumptions used in
determining the level of the allowance. 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 Income
Total other income increased 17.6% to $434,000 during the three-month period
ended September 30, 1997, as compared to $369,000 during the same period in
1996. Service charges and fees increased to $301,000 from $272,000 for the three
months ended September 30, 1997 and 1996, respectively, as the result of the
fees earned on an increased number of checking accounts and the fees earned on
the Bank's debit card. In addition, other income included a gain on the sale of
securities available for sale of $87,000 compared to a gain of $48,000 during
the three months ended September 30, 1997 and 1996, respectively.
Operating Expenses
Total operating expenses were $2.13 million and $3.34 million for the three
months ended September 30, 1997 and 1996, respectively. Operating expenses for
the three months ended September 30, 1996, included $1.39 million attributable
to the payment of the one-time Savings Institutions Insurance Fund ("SAIF")
special assessment. 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 of March 31, 1995. 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 beginning in the third fiscal quarter of 1997.
Excluding the $1.39 million one-time SAIF assessment, the increase in operating
expenses for the three-month period ended September 30, 1997, was due to (i)
normal salary increases combined with benefits expense and increased number of
staff, (ii) an increase in data processing expenses related to an increased
number of accounts and usage, and (iii) an increase in occupancy and equipment
expenses related to the refurbishment of the Bank's operations center and the
purchase of imaging equipment used for the processing of customer statements.
Income Tax Expense
Income tax expense was $359,000 for the three-month period ended September 30,
1997 as compared to a benefit of $201,000 for the same period in 1996. The
income tax benefit for the three-month period ended September 30, 1996, was the
result of the $1.39 million one-time SAIF assessment which resulted in a
$428,000 pre-tax loss for the period.
<PAGE>
ASSET QUALITY
Non-performing assets are comprised of non-performing loans and REO and totaled
$1.72 million and $ 748,000 at September 30, 1997, and June 30, 1997,
respectively. 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 terms.
Interest income is not accrued until the financial condition and payment record
of the borrower once again demonstrate the ability to service the debt. At
September 30, 1997, the Company did not have any loans greater than 90 days
delinquent which were accruing interest. Non-performing assets to total assets
and non-performing loans to total assets were .53% at September 30, 1997,
compared to .23% at June 30, 1997, and .76% and .72%, respectively, at September
30, 1996. Non-performing loans, which totaled $1.72 million at September 30,
1997, consisted of seven residential mortgage loans aggregating $492,000, one
construction loan totaling $55,000, one commercial mortgage totaling $958,000,
and $214,000 in consumer and commercial business loans. The commercial mortgage
is paying in accordance with the current loan terms but management has deemed
the loan nonperforming due to management's concern with the borrower's future
ability to continue to pay in accordance with the current loan terms.
At September 30, 1997, the Company's classified assets, which consisted of
assets classified as substandard, doubtful, loss, and REO, totaled $1.56 million
compared to $1.40 million at June 30, 1997, and further compared to $2.16
million at September 30, 1996. Included in the assets classified substandard at
September 30, 1997 and 1996, and 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, or
which were subject to a well-defined weakness which may jeopardize the
liquidation of the debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds have historically consisted of deposits,
regular principal payments and prepayments of outstanding loans, and borrowings
from the Federal Home Loan Bank of Pittsburgh and other sources. During the
first three months of fiscal 1998, the Company used its capital resources
primarily to meet its ongoing commitments to fund maturing savings certificates
and savings withdrawals, fund existing and continuing loan commitments, and
maintain its liquidity. At September 30, 1997, the total of approved mortgage
loan commitments amounted to $4.57 million. In addition, at such date the
Company had $12.25 million of undisbursed construction loan funds and $14.37
million of undisbursed remaining credit line balances. Certificates of deposit
totaling $108.58 million are scheduled to mature during the remainder of fiscal
1998, the majority of which the Company believes, on the basis of prior
experience, will be reinvested with the Company.
<PAGE>
The Company's current dividend policy is to declare a regular quarterly dividend
with the intent that the level of the dividend per share be reviewed by the
Board of Directors on a quarterly basis. Dividends will be in the form of cash
and/or stock after giving consideration to all aspects of the Company's
performance for the quarter. On August 20, 1997, the Board of Directors declared
a 5% stock dividend and a quarterly cash dividend of $.11 per share, both of
which were paid on September 18, 1997, to stockholders of record as of September
4, 1997.
The Bank, which is the Company's wholly-owned subsidiary, is required, under
applicable federal regulations, to maintain specified levels of liquid
investments and qualifying types of United States Treasury, federal agency and
other investments having maturities of five years or less. Regulations currently
in effect require the Bank to maintain a liquid asset ratio of not less than 5%
of its net withdrawable accounts plus short-term borrowings, of which short-term
liquid assets must amount to not less than 1%. These levels are changed from
time to time by the OTS to reflect economic conditions. First Financial's
average regulatory liquidity ratio for the month ended September 30, 1997 was
9.34%.
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 the same
specified period of time expressed as a percentage of total assets.
The Company's asset and liability management strategy currently is to emphasize
the origination of adjustable-rate mortgages, short-term consumer and commercial
business loans, and floating-rate construction loans and commercial real estate
loans. As of September 30, 1997, $121.75 million, or 38.9% of the Company's
interest-sensitive assets were scheduled to reprice within a one-year period,
and the Company's cumulative one-year interest rate GAP was negative 11.9%. The
table on page 18 summarizes the contractual maturities or replacement periods of
the Company's interest-earning assets and interest-bearing liabilities as of
September 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 contractually due. Fixed-rate loans are included in
the periods in which they are anticipated to be repaid. The analysis on page 18
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.
<PAGE>
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. The Company generally maintains 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
deposit for longer maturities. This strategy has assisted the Company in
controlling its cost of funds and supported its goal of extending the maturity
of its liabilities.
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 Company
regularly re-evaluates its policy and revises it as deemed necessary. The
majority of loans sold to date have consisted of sales to Freddie Mac of whole
loans and 95% participation interests in long-term, fixed-rate, single-family
residential mortgage loans in furtherance of the Company's goal of better
matching the maturities and interest-rate sensitivity of its assets and
liabilities. When selling loans, the Company has generally retained servicing in
order to increase its non-interest income. At September 30, 1997, the Company
serviced $25.18 million of mortgage loans for others. Sales of loans produce
future servicing income and provide funds for additional lending and other
purposes.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board ("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 September 30, 1997, pro
forma basic and diluted earnings (loss) per share would have been $0.39 and
$(.09) for the three months ended September 30, 1997 and 1996, 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.
<PAGE>
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.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at September 30, 1997
(Dollars in thousands)
More Than More Than More Than
Three Months Six Months One Year
Three Months Through Through Through
or Less Six Months One Year Three Years
------- ---------- -------- -----------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1)
Adjustable- and floating-rate mortgages (2) $ 32,475 $ 14,853 $ 27,051 $ 18,738
Balloon and fixed-rate mortgages (2) ...... 6,055 3,225 6,360 28,019
Consumer (2) (3) .......................... 7,649 1,133 2,337 10,361
Commercial business ....................... 5,459 188 374 1,456
Securities and interest-bearing deposits (4) .. 9,720 1,623 3,252 8,789
-------- -------- -------- --------
Total interest-earning assets ................. $ 61,357 $ 21,022 $ 39,374 $ 67,363
-------- -------- -------- ---------
INTEREST-BEARING LIABILITIES:
Savings accounts (5) .......................... $ 999 $ 999 $ 2,002 --
NOW accounts (5) .............................. 900 900 1,800 --
Money market accounts (5) ..................... 26,631 -- -- --
Certificate accounts .......................... 50,252 26,897 30,504 34,881
Securities sold under agreements to repurchase 167 -- -- --
Borrowings .................................... 15,946 396 1,769 4,595
-------- -------- -------- --------
Total interest-bearing liabilities ............ $ 94,895 $ 29,192 $ 36,075 $ 39,476
-------- -------- -------- --------
Cumulative excess of interest-earning assets
to interest-bearing liabilities ............... ($33,538) ($41,708) ($38,409) ($10,522)
======== ======== ======== ========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities . 65% 66% 76% 95%
======== ======== ======== ========
Cumulative difference as a percentage of
total assets .................................. (10.4%) (12.9%) (11.9%) (3.3%)
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
More Than
Three Years
Through More Than
Five Years Five Years Total
---------- ---------- -----
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1)
Adjustable- and floating-rate mortgages (2) $ 6,375 $ 746 $100,237
Balloon and fixed-rate mortgages (2) ...... 21,518 43,669 108,845
Consumer (2) (3) .......................... 8,661 18,070 48,211
Commercial business ....................... 1,398 1,013 9,888
Securities and interest-bearing deposits (4) .. 3,147 19,048 45,579
-------- -------- --------
Total interest-earning assets ................. $ 41,098 $ 82,546 $312,760
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Savings accounts (5) .......................... -- $ 21,085 $ 25,085
NOW accounts (5) .............................. -- 24,419 28,019
Money market accounts (5) ..................... -- -- 26,631
Certificate accounts .......................... 14,154 3,694 160,382
Securities sold under agreements to repurchase -- -- 167
Borrowings .................................... 4,470 2,000 29,176
-------- -------- --------
Total interest-bearing liabilities ............ $ 18,624 $ 51,198 $269,460
Cumulative excess of interest-earning assets
to interest-bearing liabilities ............... $ 11,952 $ 43,300 $ 43,300
======== ======== ========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities . 105% 116% 116%
======== ======== ========
Cumulative difference as a percentage of
total assets .................................. 3.7% 13.4% 13.4%
======== ======== ========
</TABLE>
(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
interest-bearing deposits.
(5) Balances distributed among the various repricing time intervals based on
historical and anticipated repricing patterns.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders
was held on October 22, 1997. The following
matters were presented for shareholder
action at such meeting:
(1) To elect two directors for a term of three years
or until their successors have been elected and
qualified:
Name Votes For Votes Withheld
---- --------- --------------
Robert J. Bradbury 1,793,981 10,833
James E. McErlane 1,802,539 2,270
(2) To approve the Company's 1997 Stock Option Plan:
Broker Votes
Votes For Votes Against Votes Abstained Withheld
--------- ------------- --------------- --------
1,493,157 31,419 19,188 261,050
(3) To ratify the appointment of KPMG Peat Marwick
LLP as the Company's independent auditors for
the fiscal year ending June 30, 1998:
Votes For Votes Against Votes Abstained
1,798,714 1,219 4,588
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chester Valley Bancorp Inc.
Date 11-12-97 /s/Ellen Ann Roberts
--------------------
Ellen Ann Roberts
Chairman and Chief Executive Officer
Date 11-12-97 /s/Christine N. Dullinger
-------------------------
Christine N. Dullinger
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 3,642
<INT-BEARING-DEPOSITS> 4,133
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,545
<INVESTMENTS-CARRYING> 18,901
<INVESTMENTS-MARKET> 18,926
<LOANS> 265,617
<ALLOWANCE> 2,976
<TOTAL-ASSETS> 322,321
<DEPOSITS> 262,049
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,179
<LONG-TERM> 29,176
0
0
<COMMON> 2,175
<OTHER-SE> 25,742
<TOTAL-LIABILITIES-AND-EQUITY> 322,321
<INTEREST-LOAN> 5,502
<INTEREST-INVEST> 793
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,295
<INTEREST-DEPOSIT> 2,841
<INTEREST-EXPENSE> 3,268
<INTEREST-INCOME-NET> 3,027
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 87
<EXPENSE-OTHER> 2,129
<INCOME-PRETAX> 1,212
<INCOME-PRE-EXTRAORDINARY> 1,212
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 853
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
<YIELD-ACTUAL> 4.02
<LOANS-NON> 1,719
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,556
<ALLOWANCE-OPEN> 2,855
<CHARGE-OFFS> 24
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 2,976
<ALLOWANCE-DOMESTIC> 1,315
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,661
</TABLE>
