SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999
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) 3,699,087
------------------------------ ---------
(Title of Each Class) (Number of Shares Outstanding
as of May 1, 1999)
<PAGE>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 1999 and June 30, 1998 (Unaudited) 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998 (Unaudited) 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 1999 and 1998 (Unaudited) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1999 and 1998 (Unaudited) 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7-14
Item 2 .MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15-25
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 26-28
PART 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 29
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29
Item 3. DEFAULTS UPON SENIOR SECURITIES 29
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
Item 5. OTHER INFORMATION 29
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURES 30
<PAGE>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------------ ---------------
<S> <C> <C>
ASSETS:
Cash in banks $ 6,646 $ 4,044
Interest-bearing deposits 7,993 11,861
Trading account securities 16,316 20,352
Securities available for sale 88,082 38,303
Securities held to maturity (market value - March 31,
$8,652; June 30, $15,672) 8,641 15,600
Loans receivable, less allowance for
loan losses of $3,403 and $3,414 284,709 273,128
Loans held for sale -- 1,101
Accrued interest receivable 2,706 2,486
Property and equipment - net 8,271 7,094
Other assets 4,702 3,043
------------------ ---------------
Total Assets $ 428,066 $ 377,012
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 333,727 $ 298,191
Securities sold under agreements to repurchase 40 144
Advance payments by borrowers for taxes and insurance 2,248 2,963
Employee Stock Ownership Plan ("ESOP") debt -- 147
Federal Home Loan Bank advances 51,610 40,936
Other borrowings 525 708
Accrued interest payable 1,144 969
Other liabilities 4,086 1,105
------------------ ---------------
Total Liabilities 393,380 345,163
------------------ ---------------
Stockholders' Equity:
Preferred stock - $1.00 par value;
5,000,000 shares authorized; none issued -- --
Common stock - $1.00 par value; 10,000,000 shares authorized;
3,697,245 and 3,664,914 shares issued at March 31
and June 30, respectively 3,697 3,665
Additional paid-in capital 17,736 17,288
Common stock acquired by ESOP -- (147)
Retained earnings - partially restricted 13,200 10,751
Accumulated other comprehensive income 53 292
------------------ ---------------
Total Stockholders' Equity 34,686 31,849
------------------ ---------------
Total Liabilities and Stockholders' Equity $ 428,066 $ 377,012
================== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
INTEREST INCOME:
Loans $ 5,656 $ 5,557
Investment securities and interest-bearing deposits 1,698 847
----------------- -----------------
Total interest income 7,354 6,404
----------------- ----------------
INTEREST EXPENSE:
Deposits 3,140 2,794
Securities sold under agreements to repurchase 2 3
Short-term borrowings 263 192
Long-term borrowings 504 289
----------------- ----------------
Total interest expense 3,909 3,278
----------------- ----------------
NET INTEREST INCOME 3,445 3,126
Provision for loan losses 45 201
----------------- ----------------
Net interest income after provision for loan losses 3,400 2,925
----------------- ----------------
OTHER INCOME:
Investment services income, net 871 782
Service charges and fees 370 266
Gain (loss) on trading account securities (133) 1
Gain on sale of assets available for sale 20 240
Other 42 51
----------------- ----------------
Total other income 1,170 1,340
(continued) ----------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
OPERATING EXPENSES:
Salaries and employee benefits 1,790 1,536
Occupancy and equipment 541 472
Data processing 195 195
Deposit insurance premiums 44 41
Other 693 617
----------------- ----------------
Total operating expenses 3,263 2,861
----------------- ----------------
Income before income taxes 1,307 1,404
Income tax expense 288 346
----------------- ----------------
NET INCOME $ 1,019 $ 1,058
================= ================
EARNINGS PER SHARE (1):
Basic $ 0.28 $ 0.29
================= ================
Diluted $ 0.27 $ 0.29
================= ================
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ 0.08 $ 0.07
================= ================
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 3,687,572 3,641,248
================= ================
Diluted 3,725,221 3,695,369
================= ================
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 1,019 $ 1,058
Net unrealized holding gains (losses) on securities
available for sale during the period (245) 161
Less reclassification adjustment
for gains included in net income 12 142
================= ================
COMPREHENSIVE INCOME $ 762 $ 1,077
================= ================
</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 1998 and the three-for-two stock split
effected in the form of dividend in December 1998.
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------------------
1999 1998
----------- ----------
<S> <C> <C>
INTEREST INCOME:
Loans $ 17,083 $ 16,628
Investment securities and interest-bearing deposits 4,433 2,463
----------- ----------
Total interest income 21,516 19,091
----------- ----------
INTEREST EXPENSE:
Deposits 9,281 8,518
Securities sold under agreements to repurchase 9 6
Short-term borrowings 721 740
Long-term borrowings 1,452 636
----------- ----------
Total interest expense 11,463 9,900
----------- ----------
NET INTEREST INCOME 10,053 9,191
Provision for loan losses 135 441
----------- ----------
Net interest income after provision for loan losses 9,918 8,750
----------- ----------
OTHER INCOME:
Investment services income, net 2,359 2,061
Service charges and fees 1,099 849
Gain on trading account securities 247 6
Gain on sale of assets available for sale 98 406
Other 140 136
----------- ----------
Total other income 3,943 3,458
----------- ----------
OPERATING EXPENSES:
Salaries and employee benefits 5,082 4,358
Occupancy and equipment 1,540 1,378
Data processing 580 538
Deposit insurance premiums 129 120
Other 1,949 1,800
----------- ----------
Total operating expenses 9,280 8,194
----------- ----------
Income before income taxes 4,581 4,014
Income tax expense 1,295 1,043
----------- ----------
NET INCOME $ 3,286 $ 2,971
=========== ==========
(continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------------------
1999 1998
----------- ----------
<S> <C> <C>
EARNINGS PER SHARE (1):
Basic $ 0.89 $ 0.82
=========== ==========
Diluted $ 0.88 $ 0.81
=========== ==========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ 0.22 $ 0.21
=========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 3,676,548 3,624,404
=========== ==========
Diluted 3,717,015 3,674,870
=========== ==========
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 3,286 $ 2,971
Net unrealized holding gains (losses) on securities
available for sale during the period (191) 558
Less reclassification adjustment
for gains included in net income 48 243
----------- ----------
COMPREHENSIVE INCOME $ 3,047 $ 3,286
=========== ==========
</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 1998 and the three-for-two stock split effected
in the form of dividend in December 1998.
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
--------------------------
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income
Add (deduct) items not affecting cash flows from operating activities: $ 3,286 $ 2,971
Depreciation
Provision for loan losses 638 516
Gain on trading account securities 135 441
Gain on sale of loans held for sale (247) (6)
Gain on sale of securities available for sale (20) (9)
Amortization of deferred loan fees, discounts and premiums (78) (397)
Decrease (increase) in trading account securities (657) (422)
Decrease (increase) in accrued interest receivable 4,283 (42)
Increase in other assets (220) 48
Increase (decrease) in other liabilities (1,659) (275)
Increase in accrued interest payable 2,981 (91)
175 144
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 8,617 2,878
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investment activities:
Capital expenditures (1,815) (2,043)
Net increase in loans and loans held for sale (11,317) (11,585)
Proceeds from sale of loans held for sale 1,457 4,099
Purchase of securities held to maturity (1,198) (533)
Proceeds from maturities, payments and calls of securities held to maturity 8,154 4,431
Purchase of securities available for sale (75,596) (243,340)
Proceeds from sales and calls of securities available for sale 25,581 230,263
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investment activities (54,734) (18,708)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities:
Net increase in deposits before interest credited 27,293 10,335
Interest credited to deposits 8,243 7,285
Increase (decrease) in securities sold under agreements to repurchase (104) 185
Proceeds from FHLB advances 13,599 21,275
Repayments of FHLB advances (2,925) (20,806)
Decrease in advance payments by borrowers for taxes and insurance (715) (732)
Net increase (decrease) in other borrowings (183) 101
Cash dividends on common stock (822) (893)
Repayments of principal on ESOP debt (147) (138)
Common stock issued 392 436
Payment for fractional shares (15) (7)
Stock options exercised 88 268
Reduction of common stock acquired by ESOP 147 138
Common stock repurchased -- (275)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 44,851 17,172
- ------------------------------------------------------------------------------------------------------------------------------------
(continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended March 31,
--------------------------
1999 1998
-------- ---------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents (1,266) 1,342
Cash and cash equivalents:
Beginning of period 15,905 10,550
-------- ---------
End of period $ 14,639 $ 11,892
======== =========
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 1,347 $ 1,081
Interest $ 11,288 $ 9,756
Non-cash items:
Net unrealized gain (loss) on securities available for sale $ (389) $ 513
Tax effect of unrealized gain (loss) on securities available for sale $ (150) $ 199
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
CHESTER VALLEY BANCORP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Chester Valley Bancorp Inc. (the "Company") is a unitary thrift holding company,
incorporated in the Commonwealth of Pennsylvania in 1989. The Company is subject
to the regulations of certain federal and state banking agencies and undergoes
periodic examinations by those regulatory authorities. The business of the
Company and its subsidiaries primarily consists of the operations of First
Financial Bank ("First Financial" or the "Bank"), a Pennsylvania-chartered stock
savings and loan association founded in 1922, and Philadelphia Corporation for
Investment Services ("PCIS"), a full service investment advisory and securities
brokerage firm. 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 deposit and loan 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 extensive competition from other financial institutions and other
companies that provide financial services. PCIS is registered as a broker/dealer
in all 50 states and Washington, DC and it is also registered as an investment
advisor with the Securities and Exchange Commission. PCIS provides many
additional services, including self-directed and managed retirement accounts,
safekeeping, daily sweep money market funds, portfolio and estate valuations,
life insurance and annuities, and margin accounts, to individuals and small
businesses.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Bank and PCIS. The accounts of
the Bank include its wholly-owned subsidiary, D & S Service Corp., which owns D
& FProjects 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.
7
<PAGE>
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q. 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- and nine-month periods ended March 31,
1999, are not necessarily indicative of the results to be expected for the
fiscal year ending June 30, 1999. The consolidated financial statements
presented herein should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 1998.
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
generally of three months or less.
Securities
The Company divides its securities portfolio into three segments: (a) held to
maturity; (b) available for sale; and (c) trading. 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
certain future events. Securities classified as held to maturity are accounted
for at amortized 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. Trading
securities are accounted for at quoted market prices with changes in market
values thereof being recorded as gain or loss in the income statement. All other
securities, including 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 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. 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 the sale occurs.
8
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management considers
adequate to provide for estimated losses based upon an evaluation of known and
inherent risks in the loan portfolio. Management's evaluation is 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 allowance for loan
losses at March 31, 1999 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
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, 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 principal 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 under the contractual terms of the loan
agreement. At and during the three- and nine-month periods ended March 31, 1999,
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.
9
<PAGE>
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 borrower's ability to
service the debt.
Loans Held for Sale
The Company periodically identifies certain loans as held for sale at the time
of their 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
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.
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.
10
<PAGE>
Deferred tax assets and liabilities are measured using the 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 Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. "Earnings per
Share," which was required to be adopted in both interim and annual financial
statements for periods ending after December 15, 1997. Accordingly, the Company
has changed its methodology for computing earnings per share and restated all
prior period amounts. SFAS 128 replaced "primary" and "fully" diluted earnings
per share with "basic" and "diluted" earnings per share. The dilutive effect of
stock options is excluded from basic earnings per share but included in the
computation of diluted earnings per share. Earnings per share and weighted
average shares outstanding for the periods presented herein have been adjusted
to reflect the effects of the 5% stock dividend paid in September 1998 and the
three-for-two stock split effected in the form of a dividend in December 1998.
11
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---------- ---------- ---------- ----------
Numerator:
Net income $ 1,019 $ 1,058 $ 3,286 $ 2,971
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted average
shares 3,687,572 3,641,248 3,676,548 3,624,404
Effect of dilutive securities:
Stock options 37,649 54,121 40,467 50,466
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 3,725,221 3,695,369 3,717,015 3,674,870
========== ========== ========== ==========
Basic earnings per share $ .28 $ .29 $ .89 $ .82
========== ========== ========== ==========
Diluted earnings per share $ .27 $ .29 $ .88 $ .81
========== ========== ========== ==========
</TABLE>
12
<PAGE>
NOTE 2 - LOANS RECEIVABLE
Loans receivable are summarized as follows (loans held for sale are not
included):
<TABLE>
<CAPTION>
At March 31, At June 30,
1999 1998
--------------------------- ------------------------------
(Dollars in Thousands)
<S> <C> <C>
First mortgage loans:
Residential $157,953 $155,628
Construction-residential 12,893 13,502
Land acquisition and
development 5,346 6,529
Commercial 49,827 41,002
Construction-commercial 8,134 10,614
Commercial business 15,718 11,437
Consumer 50,563 51,829
--------------------------- ------------------------------
Total loans 300,434 290,541
--------------------------- ------------------------------
Less:
Undisbursed loan proceeds:
Construction-residential (7,533) (7,915)
Construction-commercial (3,202) (4,464)
Deferred loan fees - net (1,587) (1,620)
Allowance for loan losses (3,403) (3,414)
--------------------------- ------------------------------
Net loans $284,709 $273,128
=========================== ==============================
</TABLE>
NOTE 3 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $3.54 million as of
March 31, 1999, of which $945,000 was for variable-rate loans. The balance of
the commitments represents $2.60 million of fixed-rate loans (primarily
consisting of single-family residential mortgages) bearing interest rates of
between 5.75% and 9.00%. At March 31, 1999, the Company had $10.74 million of
undisbursed construction loan funds as well as $16.49 million of undisbursed
remaining consumer and commercial line balances.
13
<PAGE>
NOTE 4 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). At March 31, 1999 and June 30, 1998 the Bank was in
compliance with all such requirements and is deemed a "well-capitalized"
institution for regulatory purposes. There are no conditions or events since
March 31, 1999 that management believes have changed the institution's category.
The Bank's regulatory capital amounts and ratios are presented in the table as
follows (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Porposes Action Provisions
------------------------- ------------------------ ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital
(to Risk Weighted Assets) $33,100 13.04% $20,302 8.00% $25,378 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $29,925 11.79% $10,151 4.00% $15,227 6.00%
Tier 1 Capital
(to Average Assets) $29,925 7.06% $16,952 4.00% $21,190 5.00%
As of June 30, 1998:
Total Capital
(to Risk Weighted Assets) $31,328 14.18% $17,678 8.00% $22,098 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $28,560 12.92% $ 8,839 4.00% $13,259 6.00%
Tier 1 Capital
(to Average Assets) $28,560 7.64% $14,945 4.00% $18,682 5.00%
</TABLE>
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
In this Report, the Company has included certain "forward looking statements"
concerning the future operations of the Company. It is management's desire to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing the Company of the protections of such safe harbor with respect to all
"forward looking statements" contained in this Report. The Company has used
"forward looking statements" to describe the future plans and strategies
including management's expectations of the Company's Year 2000 readiness and
future financial results. Management's ability to predict the results or the
effect of future plans and strategy is inherently uncertain. Factors that could
affect results include interest rate trends, competition, the general economic
climate in Chester County, the mid-Atlantic region and the United States as a
whole, loan delinquency rates, changes in federal and state regulation, Year
2000 uncertainties and other uncertainties described in the Company's filings
with the Securities and Exchange Commission. These factors should be considered
in evaluating the "forward looking statements" and undue reliance should not be
placed on such statements.
FINANCIAL CONDITION
The Company's total assets increased to $428.07 million at March 31, 1999, from
$377.01 million at June 30, 1998, principally due to a $38.79 million aggregate
increase in trading account securities, investment securities available for sale
and investment securities to $113.04 million from $74.25 million at June 30,
1998. Such increases were funded in large part by increases in deposits and
Federal Home Loan Bank ("FHLB") advances from $298.19 million and $40.94 million
at June 30, 1998, to $333.73 million and $51.61 million at March 31, 1999,
respectively.
Stockholders' equity increased to $34.69 million at March 31, 1999 from $31.85
million at June 30, 1998, as a result of net income of $3.29 million, the sale
of $392,200 of Common stock in connection with the Company's dividend
reinvestment plan, $87,700 received as a result of the exercise of stock
options, and the reduction in the principal balance of the ESOP debt by
$146,600. The increase in stockholders' equity was partially offset by the
payment during the period of cash dividends totaling $836,300 and the
recognition of a decrease in net unrealized gains on securities available for
sale, net of taxes, of $239,800.
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RESULTS OF OPERATIONS
Net interest income, on a fully tax equivalent basis, increased 12.4% to $3.64
million for the three-month period ended March 31, 1999, and 10.3% to $10.50
million for the nine-month period ended March 31, 1999, compared to $3.24
million and $9.52 million, respectively, for the same periods in 1998. Total
interest income, on a fully tax equivalent basis, increased to $7.55 million and
$21.96 million for the three- and nine-month periods ended March 31, 1999, from
$6.52 million and $19.42 million for the same periods in 1998, primarily as a
result of the effect of an increase in the average balance of interest-earning
assets.
The average balance of interest-earning assets increased to $398.35 million and
$381.59 million for the three- and nine-month periods ended March 31, 1999,
respectively, from $319.99 million and $316.53 million, respectively, for the
same periods in 1998. Part of the growth in the average balance of
interest-earning assets is the result of the Company's business strategy to
expand its commercial lending. The origination of commercial real estate and
commercial business loans has resulted in the shortening of the average maturity
and an increase in the interest rate sensitivity of the Bank's loan portfolio as
well as to generate increased fee income. Partially offsetting the effect on
interest income of the increases in the average balances was the 57 basis-point
and 51 basis-point decreases in the yield to 7.58% and 7.67% on interest-earning
assets for the three- and nine-month periods ended March 31, 1999, respectively,
as the result of declining general market rates of interest. Due to the
declining interest rate environment and leveling of the yield curve, the Bank
has experienced significant refinancing of its adjustable rate portfolio into
its fixed rate product at lower interest rates.
Total interest expense increased to $3.91 million and $11.46 million from $3.28
million and $9.90 million for the respective three- and nine-month periods in
fiscal 1999 and fiscal 1998, largely as the result of the increase in the
average balance of interest-bearing liabilities to $348.49 million and $329.56
million for the three- and nine-month periods ended March 31, 1999,
respectively, as compared to $276.19 million and $272.69 million for the same
periods in 1998. Partially offsetting the increase in interest expense was a
decrease in the average rate paid on such liabilities to 4.49% and 4.64% for the
three- and nine-month periods ended March 31, 1999, respectively, from 4.75% and
4.84% for the same periods in 1998, primarily as a result of declining general
market rates of interest during the fiscal 1999 periods as well as management's
continued efforts to focus its liability growth in the areas of low-cost or
no-cost deposits.
The tax equivalent interest rate spread decreased to 3.03% from 3.34%, and the
average tax equivalent net yield on interest-earning assets decreased to 3.67%
from 4.01% for the nine-month periods ended March 31, 1999 and 1998,
respectively, due to the reasons discussed above.
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Provision for Loan Losses
The Company provided $45,000 and $135,000 for loan losses during the three- and
nine-month periods ended March 31, 1999, respectively, as compared to $201,000
and $441,000, respectively, for the same periods in 1998. These provisions have
been added to the Company's allowance for loan losses due to current economic
conditions and management's assessment of the inherent risk of loss existing in
the loan portfolio. At March 31, 1999, the allowance for loan losses totaled
$3.40 million or 1.18% of net loans (before allowance), compared to $3.41
million or 1.23% of net loans and $3.25 million or 1.22% of net loans at June
30, 1998, and March 31, 1998, respectively. As a percentage of non-performing
assets, the allowance for loan losses was 446% at March 31, 1999, compared to
274% at June 30, 1998, and further compared to 390% at March 31, 1998.
Other Income
Total other income decreased to $1.17 million during the three-month period
ended March 31, 1999 and increased to $3.94 during the nine-month period ended
March 31, 1999, as compared to $1.34 million and $3.46 million during the same
respective periods in 1998. Investment services income increased 11.4% and 14.5%
during the three- and nine-month periods ended March 31, 1999, respectively,
compared to the same periods
in 1998 as the result of PCIS' increased commission income reflecting increased
activity and increased money market fund fees due to increases in customer
account balances. In addition, PCIS' advisory fee income increased due to
implementation of its strategic plan to focus on advisory services as such
services provide a more stable revenue tream for PCIS and stabilizes expenses
for the customer. Investment services income also increased as the result of the
opening of the Bank's Investment Services and Trust Division (the "Trust
Division") in the second quarter of fiscal 1998. The Trust Division offers both
individual and corporate clients an array of money management, trust and
investment services including portfolio management, estate and retirement
planning, and self directed individual retirement accounts. An increase in
checking account fees, as the result of an increased number of accounts, and an
increase in the fees earned on the Bank's debit card, due to both increased
usage and an increased number of cardholders, contributed to the increase of
$104,000 and $250,000 in service charges and fees during the three- and
nine-month periods ended March 31, 1999, respectively. The Company recognized a
loss on trading account securities and sales of assets available for sale of
$113,000 during the three-month period ended March 31, 1999 and a gain of
$345,000 during the nine-month period ended March 31, 1999, compared to gains of
$241,000 and $412,000 during the same periods in 1998. The $113,000 loss
incurred during the three-month period ended March 31, 1999 was comprised of a
$20,000 gain on the sale of assets available for sale, a $50,000 gain on the
sale of trading account securities, and a $183,000 market value loss adjustment
on the trading account securities portfolio.
17
<PAGE>
Operating Expenses
Total operating expenses increased $402,000 or 14.1% and $1.09 million or 13.3%
to $3.26 million and $9.28 million, respectively, for the three- and nine-month
periods ended March 31, 1999 as compared to the same periods in 1998. The
increase in operating expenses for the three- and nine-month periods in fiscal
1999 was due to (i) normal salary increases combined with benefits expense; (ii)
the increased number of staff associated with the addition of the Bank's Trust
Division combined with the expansion of the Bank's Commercial Loan Department;
(iii) an increase in occupancy and equipment expenses related to renovations
required to provide accommodations for the Bank's Trust Division; and (iv) an
increase in occupancy and equipment expenses related to the Company's conversion
of its data service processing system and its computer hardware and software
upgrades as the result of the Company's technology strategic plan and the Year
2000 issues (see " Year 2000 Issues" herein).
Income Tax Expense
Income tax expense was $288,000 and $1.30 million for the three- and nine-month
periods ended March 31, 1999, respectively, as compared to $346,000 and $1.04
million for the same periods in 1998. The reduction in the effective tax rate
for the three-month period ended March 31, 1999 as compared to the same period
in 1998 is the result of tax exempt income representing a higher percentage of
income before taxes during the three-month period ended March 31, 1999. For
periods ending prior to May 29, 1998, no provision has been made for income
taxes for PCIS since PCIS (prior to its acquisition by the Comapny) had elected
to be taxed under the provisions of Subchapter S of the Internal Revenue Code
and similar state provisions which treat S Corporations in a manner similar to
partnerships. Under these provisions, PCIS did not pay income taxes on its
taxable income. Instead the former stockholders of PCIS were liable for
individual income taxes based on their respective shares of PCIS's taxable
income. As a result of all of PCIS's stock being purchased by the Company on May
29, 1998, PCIS is no longer eligible to be taxed under the provisions of
Subchapter S of the Internal Revenue Code.
ASSET QUALITY
Non-performing assets are comprised of non-accrual loans and REO and totaled
$764,000, $1.25 million and $833,000 at March 31, 1999, June 30, 1998 and March
31, 1998, 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
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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 borrower's ability to service the debt. At March 31, 1999,
the Company had loans amounting to $2,000 that were greater than 90 days
delinquent and accruing interest. Non-performing assets to total assets and
non-performing loans to total assets were .18% at March 31, 1999, compared to
.33% at June 30, 1998, and .24% at March 31, 1998. Non-performing loans, which
totaled $764,000 at March 31, 1999 consisted of 6 single-family residential
mortgage loans aggregating $640,000 and consumer loans totaling $124,000.
At March 31, 1999, the Company's classified assets, which consisted of assets
classified as substandard, doubtful or loss, as well as REO, totaled $1.30
million compared to $1.47 million at June 30, 1998, and further compared to
$1.24 million at March 31, 1998. Included in assets classified substandard at
March 31, 1999 and 1998, and at June 30, 1998, were all loans 90 days past due
and loans which were 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 one or more well-defined weaknesses which may jeopardize
the satisfaction of the debt.
LIQUIDITY AND CAPITAL RESOURCES
Management monitors liquidity daily and maintains funding sources to meet
unforseen changes in cash requirements. 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, primarily FHLB advances.
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. The Company uses its sources 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. At
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March 31, 1999, the Company had $3.54 million in commitments to fund loan
originations. In addition, at such date the Company had $10.74 million of
undisbursed construction loan funds as well as $16.49 million in undisbursed
lines of credit. 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.
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 February 17, 1999, the Board of Directors
declared a quarterly cash dividend of $.11 per share, which was paid on March
19, 1999, to stockholders of record as of March 5, 1999.
The Bank 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 4% of its net withdrawable accounts plus short-term
borrowings. 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 March 31, 1999 was 22.16%.
<PAGE>
YEAR 2000 ISSUES
In order to be ready for the year 2000 (the "Year 2000 Issue"), the Company has
developed a Year 2000 Action Plan (the "Action Plan") which was presented and
approved by the Company's Board of Directors in December 1998. The Action Plan
was developed using both the guidelines outlined in the Federal Financial
Institutions Examination Council's ("FFIEC") "The Effect of 2000 on Computer
Systems" as well as guidance provided by the Securities and Exchange Commission
(the "SEC"). The Company's Board of Directors assigned responsibility for the
Action Plan to the Year 2000 Project Team chaired by the Company's President and
Chief Operating Officer who reports to the Board of Directors with respect to
the status of the implementation of the Action Plan on a monthly basis. The
Action Plan recognizes that the Company's operating, processing and accounting
operations are computer reliant and could be significantly affected by the Year
2000 Issue. The Company is primarily reliant on third party vendors for its
computer output and processing, as well as other significant functions and
services ( i.e., securities transactional and safekeeping services, securities
pricing information, etc.). The Year 2000 Project Team is currently working with
these third party vendors to assess their Year 2000 readiness and are performing
Year 2000 testing as required. Based on an ongoing assessment, management
presently believes
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that with planned modifications to existing software and hardware and recent
conversions to new software and hardware, including a conversion by the Bank to
a new core data processing system in October 1998, the Company's third party
vendors are taking the appropriate steps to ensure critical systems will
function properly.
The Bank has identified five mission critical systems (without which the Bank
cannot operate) and critical applications (necessary applications but the
Company can function for a moderate amount of time without such applications
being Year 2000 compliant) operated or supported by third party vendors. These
five mission critical systems include: 1) the core data service processing
system for deposit, loan and general ledger account processing; 2) the
Electronic Network which controls the Bank's ATMs and telephone voice response
units, as well as processes its ATM cards and debit cards; 3) the equipment and
software that processes the Bank's item processing and check inclearing; 4) the
Wide Area Network ("WAN") which facilitates electronic communications between
the Bank's branches and its core processor; and 5) the software that processes
the backroom statement operations for the Bank's Trust Department. Of such
mission critical systems and critical applications, the Company has been
informed by a substantial majority of its vendors that they are either Year 2000
compliant or that they will be compliant and are in the process of revising and
testing their systems for Year 2000 compliance. The most critical system for the
Bank is its core data processing service which is provided by a third party
vendor ("DPS Provider"). The DPS Provider services over 1,000 banks nationally.
In May 1998, the Bank entered into an agreement with the DPS Provider whereby
the DPS Provider warranted certain conditions regarding Year 2000 compliance.
The DPS Provider has informed the Bank that it has completed the majority of its
testing of its systems. The Bank has received and will continue to receive and
review carefully the results of the DPS Provider testing. Phase I and Phase II
of testing of the DPS Provider system was completed in July 1998 and December
1998, respectively, with substantially all such systems evidencing Year 2000
compliance.
<PAGE>
Substantially all of the Company's vendors of its mission critical systems and
critical applications have provided written assurances that their products and
services will be Year 2000 compliant. As of April 17, 1999, the Company
successfully completed the majority of its mission critical modifications and
conversions and related testing of such systems with the remaining non-mission
critical systems expected to be completed by June 30, 1999.
The Year 2000 issues also affect certain of the Bank's customers, particularly
in the areas of access to funds and additional expenditures to achieve
compliance. As of September 30, 1998, Bank personnel had contacted all
commercial credit customers regarding the customers' awareness of the Year 2000
Issue. At that time the Bank adopted the FFIEC Millennium Risk Evaluation
Package ("FFIEC Package") as the standard for evaluating the Bank risk in
relation to Year 2000 issues. From the customer responses, the Bank
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identified 42 potential risk customers whose operations were considered to be
heavy users of computer based systems or considered a risk either by virtue of
their business complexity or the complexity of their borrowings. The officer of
record was given the responsibility of determining the risk level that each
client posed using the FFIEC Package. The risk level was considered to be low on
all but three of these clients and these three were considered to have medium
risk. Those identified to be anything but low risk will be monitored quarterly
by the officer of record. While no assurance can be given that its customers
will be Year 2000 compliant, management believes, based on representations of
such customers and reviews of their operations (including assessments of the
borrowers' level of sophistication and data and record keeping requirements),
that the customers are either addressing the appropriate issues to insure
compliance or that they are not faced with material Year 2000 issues. The
respondents stated that they were, at the very least, sufficiently compliant to
avoid disruption of the cash flow stream necessary to service debt. In addition,
in substantially all cases the credit extended to such borrowers is
collateralized by real estate or business assets which inherently minimizes the
Bank's exposure in the event that such borrowers do experience problems or
delays becoming Year 2000 compliant.
PCIS, pursuant to Section 240.17a-5(e)(5)(iii) of the Securities Exchange Act of
1934, filed Part I and Part II of Form BD-Y2K with the SEC which applies to
brokers with minimum net capital of $100,000 or more. Part I and Part II of Form
BD-Y2K was filed in August 1998 and included PCIS's Year 2000 Action Plan,
including contingency planning and timeline. Part I and Part II of Form BD-Y2K
were also required to be filed with the SEC by April 30, 1999 and included an
update for PCIS's Year 2000 planning as of March 15, 1999. PCIS has identified
three mission critical systems within its operations. These three mission
critical systems include: 1) clearing brokerage service, client account
statement production and client account maintenance; 2) investment market
services including stock and bond quote information as well as newswire
informational service; and 3) the internal personal computer Local Area Network
("LAN") system. The two vendors which provide the clearing brokerage services
and the investment market services have upgraded to Year 2000 certified software
which PCIS installed during the first quarter of calendar 1999. The contracts
signed with both vendors include Year 2000 compliance assurances. Industry
related testing has begun, and PCIS testing will begin once installation is
completed. The LAN networks are also being replaced with software that is
assured to be Year 2000 compliant. Virtually all the personal computer equipment
was replaced as a result of the new specification requirements dictated by the
clearing brokerage and investment market service vendors, and is Year 2000
compliant certified. PCIS is a member of the National Association of Securities
Dealers, Inc. (the "NASD") and as such is required to report to the NASD on a
regular basis. This reporting process is done electronically through software
that the NASD provides. PCIS has been informed by the NASD that the software is
Year 2000 compliant.
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While the Company has received assurances from such vendors as to compliance,
such assurances are not guarantees and may not be enforceable. The Company's
existing older contracts with such vendors do not include Year 2000
certifications or warranties. Thus, in the event such vendors' products and/or
services are not Year 2000 compliant, the Company's recourse in the event of
such failure may be limited. If the required modifications and conversions are
not made, or are not completed on a timely basis, the Year 2000 Issue could have
a material impact on the operations of the Company. There can be no assurance
that potential systems interruptions or unanticipated additional expense
incurred to obtain Year 2000 compliance would not have a material adverse effect
on the Company's business, financial condition, results of operations and
business prospects. Nevertheless, the Company does not believe that the cost of
addressing the Year 2000 issues will be a material event or uncertainty that
would cause reported financial information not to be necessarily indicative of
future operating results or financial conditions, nor does it believe that the
costs or the consequences of incomplete or untimely resolution of its Year 2000
issues represent a known material event or uncertainty that is reasonably likely
to affect its future financial results, or cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition.
<PAGE>
The Company's Year 2000 Action Plan included its own company-wide Year 2000
contingency plan. Individual contingency plans concerning specific software and
hardware issues and operational plans for continuing operations were completed
for a substantial majority of its mission critical hardware and software
applications as of December 31, 1998, with the remainder completed by March 31,
1999. The Year 2000 Project Team is reviewing substantially all mission critical
test plans and contingency plans to ensure the reasonableness of the plans. The
Company's contingency plans also include plans which address operational
policies and procedures in the event of data processing, electric power supply
and/or telephone service failures associated with the Year 2000. Such
contingency plans provide, to the best of the Company's ability, documented
actions to allow the Company to maintain and/or resume normal operations in the
event of the failure of mission critical and critical applications. Such plans
identify participants, processes and equipment that will be necessary to permit
the Company to continue operations on a limited basis. Such plans may include
providing off-line system processing, back-up electrical and telephone systems
and other methods to ensure the Company's ability to continue to operate.
The costs of modifications to the existing software is being primarily absorbed
by the third party vendors. However, the Company recognizes that the need exists
to purchase new hardware and software. Based upon current estimates, the Company
has identified approximately $649,000 in total costs, including hardware,
software, and other items, expected to be or already incurred in order to
complete the Year 2000 project. The
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Company anticipates spending substantially all of this amount during the fiscal
year ended June 30, 1999. Expenditures for software are typically depreciated
over three years while expenditures for hardware are typically depreciated over
five years. Of the estimated $649,000 in total Year 2000 expenditures, $585,000
is associated with the replacement of systems that were not Year 2000 compliant,
but would have been replaced anyway as a result of the Company's aggressive
Strategic Technology Plan which is designed to maintain competitiveness within
the industry and to increase the efficiency of the Company's operations. The
remaining $64,000 will be expensed as incurred for matters directly related to
the Year 2000 issue, including promotional material for consumer and employee
awareness and replacement of non-compliant Year 2000 software and hardware.
<PAGE>
RECENT ACCOUNTING ANNOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
According to the statement, all items of "comprehensive income" are to be
reported in a "financial statement that is displayed with the same prominence as
other financial statements". Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Along with net income, examples
of comprehensive income include foreign currency translation adjustments,
unrealized holding gains and losses on securities available-for-sale, changes in
the market value of a futures contract that qualifies as a hedge of an asset
reported at fair value, and minimum pension liability adjustments. This
statement is effective for fiscal years beginning after December 15, 1997.
Accordingly all disclosures within this report are in compliance in all material
respects with SFAS No. 130.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This statement, which supersedes SFAS No.
14, requires public companies to report financial and descriptive information
about their reportable operating segments on both an annual and interim basis.
SFAS No. 131 mandates disclosure of a measure of segment profit/loss, certain
revenue and expense items and segment assets. In addition, the statement
requires reporting information on the entity's products and services, countries
in which the entity earns revenues and holds assets, and major customers. This
statement requires changes in disclosures only and would not affect the
financial condition, equity or operating results of the Company. This statement
is effective for fiscal years beginning after December 15, 1997. The disclosures
are not required for interim financial statements in the initial year of its
application.
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In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures About
Pensions and Other Postretirement Benefits." This statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions", were issued. This statement
simply requires changes in disclosures and does not affect the financial
condition, equity or operating results of the Corporation. This statement is
effective for fiscal years beginning after December 15, 1997. No additional
disclosures were required by the Company.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of certain foreign currency exposures. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company has not yet determined the impact, if any, of this statement, including
its provisions for the potential reclassifications of investments securities, on
the Company's operations, financial condition or equity.
<PAGE>
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". This statement requires that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify any retained mortgage-backed securities based on the
ability and intent to sell or hold those investments, except that a mortgage
banking enterprise must classify as trading any retained mortgage-backed
securities that it commits to sell before or during the securitization process.
This statement is effective for the first fiscal quarter beginning after January
30, 1999 with earlier adoption permitted. This statement provides a one-time
opportunity for an enterprise to reclassify, based on the ability and intent on
the date
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<PAGE>
of adoption of this statement, mortgage-backed securities and other beneficial
interests retained after securitization of mortgage loans held for sale from the
trading category, except for those with commitments in place. The Company has
not yet determined the impact, if any, of this statement, including, if
applicable, its provisions for the potential reclassifications of certain
investment securities, on operations, financial condition or equity.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The primary asset/liability management goal of the Company is to manage and
control its interest rate risk, thereby reducing its exposure to fluctuations in
interest rates, and achieving sustainable growth in net interest income over the
long term. Other objectives of asset/liability management include: (1) ensuring
adequate liquidity and funding, (2) maintaining a strong capital base and (3)
maximizing net interest income opportunities.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Company's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by management.
Changing the relative proportions of fixed-rate and adjustable-rate assets and
liabilities is one of the primary strategies utilized by the Company to
accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
To provide a more accurate one-year gap position of the Company, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that 52%
of its money market and NOW accounts are sensitive to interest rate changes and
that 7% of its savings deposits are sensitive to interest rate changes.
Accordingly, these interest sensitive portions of such liabilities are
classified in the less than one year categories with the remainder placed in the
over five years category. Deposit products with interest rates based on a
particular
26
<PAGE>
index are classified according to the specific repricing characteristic of the
index. Deposit rates other than time deposit rates are variable, and changes in
deposit rates are typically subject to local market conditions and management's
discretion and are not indexed to any particular rate.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates.
Even assets and liabilities which contractually reprice within the same period
may not, in fact, reprice at the same price or the same time or with the same
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as the Company adjusts its interest
sensitivity position throughout the year. For a discussion of the potential
impact of interest rate changes upon the market value of the Company's portfolio
equity, see "Market Risk" in the Company's Annual Report on Form 10-K for the
year ended June 30, 1998. There has been no material change in the Company's
market value of portfolio equity since June 30, 1998.
The Company periodically identifies certain loans as held for sale at the time
of origination, primarily consisting 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 March 31, 1999, the Company serviced $19.76 million
of mortgage loans for others. Loan sales produce future servicing income (when
servicing is retained) and provide funds for additional lending and other
purposes.
27
<PAGE>
Interest Rate Sensitivity Analysis at March 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
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> <C>
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) $24,466 $17,526 $35,322 $70,459
Commercial business 8,921 998 2,435 2,726
Consumer 7,824 2,028 3,621 12,818
Securities and interest-bearing deposits 49,884 5,928 9,110 7,238
---------------- --------------- ----------------- ---------------
Total interest-earning assets $91,095 $26,480 $50,488 $93,241
---------------- --------------- ----------------- ---------------
INTEREST-BEARING LIABILITIES:
Savings accounts $501 $501 $998 --
NOW accounts 450 450 900 --
Money market accounts 35,599 -- -- --
Certificate accounts 64,517 22,184 42,301 63,678
Securities sold under agreements to
repurchase 40 -- -- --
Borrowings 4,516 616 35 12,432
---------------- --------------- ----------------- ---------------
Total interest-bearing liabilities $105,623 $23,751 $44,234 $76,110
---------------- --------------- ----------------- ---------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities ($14,528) ($11,799) ($5,545) $11,586
========= ========= ======== =======
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 86.2% 90.9% 96.8% 104.6%
===== ===== ===== ======
Cumulative difference as a percentage of
total assets (3.4%) (2.8%) (1.3%) 2.7%
====== ====== ====== ====
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
More Than
Three Years
Through More Than
Five Years Five Years Total
------------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) $39,666 $35,979 $223,418
Commercial business 598 40 15,718
Consumer 8,410 15,862 50,563
Securities and interest-bearing deposits 16,544 32,328 121,032
------------- --------------- -------------
Total interest-earning assets $65,218 $84,209 $410,731
------------- --------------- -------------
INTEREST-BEARING LIABILITIES:
Savings accounts -- $26,935 $28,935
NOW accounts -- 33,927 35,727
Money market accounts -- -- 35,599
Certificate accounts 10,247 2,311 205,238
Securities sold under agreements to
repurchase -- -- 40
Borrowings 13,301 21,235 52,135
------------- --------------- -------------
Total interest-bearing liabilities $23,548 $84,408 $357,674
------------- --------------- -------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities $53,256 $53,057 $53,057
======= ======= =======
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 119.5% 114.8% 114.8%
====== ====== ======
Cumulative difference as a percentage of
total assets 12.4% 12.4% 12.4%
===== ===== =====
</TABLE>
(1) Net of undisbursed loan proceeds.
(2) Includes commercial mortgage loans.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
No Current Reports on Form 8-K were filed
during the three- months ended March 31,
1999
Exhibit 27 Financial Data Schedule
29
<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 5-14-99 /s/ Ellen Ann Roberts
---------------------
Ellen Ann Roberts
Chairman and Chief Executive Officer
Date 5-14-99 /s/ Christine N. Dullinger
--------------------------
Christine N. Dullinger
Treasurer and Chief Financial Officer
30
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,646
<INT-BEARING-DEPOSITS> 7,993
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 16,316
<INVESTMENTS-HELD-FOR-SALE> 88,082
<INVESTMENTS-CARRYING> 8,641
<INVESTMENTS-MARKET> 8,652
<LOANS> 288,112
<ALLOWANCE> 3,403
<TOTAL-ASSETS> 428,066
<DEPOSITS> 333,727
<SHORT-TERM> 18,348
<LIABILITIES-OTHER> 7,518
<LONG-TERM> 33,797
0
0
<COMMON> 3,697
<OTHER-SE> 30,989
<TOTAL-LIABILITIES-AND-EQUITY> 428,066
<INTEREST-LOAN> 17,083
<INTEREST-INVEST> 4,433
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,516
<INTEREST-DEPOSIT> 9,281
<INTEREST-EXPENSE> 11,463
<INTEREST-INCOME-NET> 10,053
<LOAN-LOSSES> 135
<SECURITIES-GAINS> (345)
<EXPENSE-OTHER> 9,280
<INCOME-PRETAX> 4,581
<INCOME-PRE-EXTRAORDINARY> 4,581
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,286
<EPS-PRIMARY> .89
<EPS-DILUTED> .88
<YIELD-ACTUAL> 3.67
<LOANS-NON> 764
<LOANS-PAST> 2
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,302
<ALLOWANCE-OPEN> 3,432
<CHARGE-OFFS> 83
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 3,403
<ALLOWANCE-DOMESTIC> 1,436
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,967
</TABLE>
