SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Fiscal Period Ended: June 30, 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
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
<PAGE>
As of September 1, 1999, the aggregate value of the 3,033,917 shares of Common
Stock of the registrant which were issued and outstanding on such date,
excluding 673,822 shares held by all directors and officers of the registrant as
a group, was approximately $50.82 million. This figure is based on the closing
sales price of $16.75 per share of the registrant's Common Stock on September 1,
1999.
Number of shares of Common Stock outstanding as of September 1, 1999: 3,707,739
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(1) Portions of the Annual Report to shareholders for the year ended June
30, 1999, are incorporated into Part II, Items 5 - 8 of this Form 10-K.
(2) Portions of the Definitive Proxy Statement for the 1999 annual meeting
of shareholders are incorporated into Part III, Items 10-13 of this Form
10-K.
<PAGE>
PART I.
ITEM 1. BUSINESS
- -----------------
Forward Looking Statements
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 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 country 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, including its Form 10-K for the
year ended June 30, 1999. These factors should be considered in evaluating the
"forward looking statements", and undue reliance should not be placed on such
statements.
General
Chester Valley Bancorp Inc. (the "Holding Company") is a unitary thrift
holding company, incorporated in the Commonwealth of Pennsylvania in August
1989. The business of the Holding Company and its subsidiaries (the "Company")
consists of the operations of First Financial Bank ("First Financial" or the
"Bank"), a Pennsylvania-chartered stock savings and loan association founded in
1922 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
eight branch banks in Chester County, Pennsylvania. The Bank provides
residential real estate, commercial real estate, commercial and consumer lending
services and funds these activities primarily with retail deposits and
borrowings. PCIS is a registered 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 smaller corporate accounts. PCIS' offices
are located in Wayne and Philadelphia, Pennsylvania.
The Company experienced substantially increased net income of $4.21
million, or $1.13 per diluted share, for the fiscal year ended June 30, 1999,
compared to $3.63 million or $.98 per diluted share for fiscal 1998. This
represents a 16.0% increase in net income.
<PAGE>
The Company's earnings depend primarily on the difference between the
yield earned on its loan and securities portfolios and its cost of funds,
consisting primarily of the interest paid on deposits and, to a lesser extent,
on borrowings ("interest rate spread"). During fiscal year 1999 the Company's
interest rate spread averaged 3.03% compared to 3.28% and 3.37% in fiscal years
1998 and 1997, respectively. Net interest income, on a fully tax equivalent
basis, increased 12.0% or $1.54 million to $14.33 million in fiscal 1999 from
$12.80 million in 1998, compared to a 12.1% or $1.39 million increase from
fiscal 1997 to fiscal 1998. Net interest margin, on a fully tax equivalent
basis, was 3.64% for the fiscal year ended June 30, 1999, compared to 3.94% in
fiscal 1998 and 4.03% in fiscal 1997.
Total other income increased $579,000 or 12.5% to $5.20 million for the
year ended June 30, 1999 as compared to fiscal 1998. Investment services income
increased $460,000 or 16.5% to $3.26 million as the result of PCIS' increased
commission income due to the increase in the stock market activity, an increase
in advisory fee income due to the strategic plan of PCIS to focus on advisory
services as it provides a more stable revenue stream for PCIS and stabilizes
expenses for the customer, and an increase in money market fund fees due to an
increase in customer balances. The growth in the Bank's Investment Services and
Trust Division (the "Trust Division") also contributed to the increase in
investment services income for fiscal 1999. 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 $354,000 or
31.7% in service charges and fees in fiscal 1999. The Company recognized gains
on trading account securities of $171,000 during fiscal 1999 compared to
$338,000 during fiscal 1998.
Total other income increased $968,800 or 26.6% to $4.62 million for the
year ended June 30, 1998 as compared to fiscal 1997. Investment services income
increased $488,400 or 21.2% to $2.80 million as the result of increases in
revenue generated by PCIS and the Trust Division. Service charges and fees
increased $139,700 in fiscal 1998. The Company recognized gains on trading
account securities or $337,500 during fiscal 1998 compared to $15,700 during
fiscal 1997.
Total operating expenses increased $1.09 million or 9.4% to $12.73
million for the year ended June 30, 1999 as compared to fiscal 1998. The
increase in operating expenses over the prior fiscal year was primarily due to a
$1.04 million or 17.6% increase in salaries and employee benefits related to
general salary increases and increased number of staff associated with the
Bank's Call Center and its Trust Division established during the Summer and Fall
of 1997, respectively. Also, in the winter of 1999, the Bank opened its eighth
branch office in Devon, Pennsylvania which further contributed to an increase in
operating expenses. Occupancy and equipment expenses increased $190,000 or 10.1%
to $2.08 million for the year ended June 30, 1999, compared to the same period
in 1998 as a result of the opening of the Banks branch office in Devon and
capital expenditures associated with technology upgrades and enhancements.
During fiscal 1998, the Bank made a $291,000 donation in connection with a
project located in Honey Brook, PA to provide low income housing for the
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<PAGE>
elderly. As an offset to the donation, the Bank received a state tax credit in
the amount of $146,000 through the Neighborhood Assistance Act which was
recorded as a reduction to income tax expense in fiscal 1998.
Total operating expenses increased $1.78 million or 18.1% to $11.64
million for the year ended June 30, 1998 from the comparable prior period,
excluding the $1.39 million one-time SAIF assessment levied in fiscal 1997. The
increase in operating expenses over the fiscal 1997 year was primarily due to a
$632,500 or 12.0% increase in salaries and employee benefits related to general
salary increases and increased number of staff associated with the addition of
the Bank's new Call Center and its new Investment Services and Trust Division.
In addition, occupancy and equipment expenses increased $246,900 or 15.1% to
$1.89 million for the year ended June 30, 1998, from the comparable prior period
related to the refurbishment of the Bank's new Call Center and Trust Department.
Also contributing to the increase in operating expenses during fiscal 1998 was
the previously mentioned $291,000 donation to a project to provide low income
housing for the elderly.
The Company's assets totaled $451.16 million at June 30, 1999, as
compared with $377.01 million at June 30, 1998. This 19.7% increase in assets
was primarily funded by an increase in deposits of $61.32 million or 20.6% from
$298.19 million at June 30, 1998, to $359.51 million at June 30, 1999, and an
increase in Federal Home Loan Bank ("FHLB") advances of $9.44 million from
$40.94 million to $50.38 million at June 30, 1998 and 1999, respectively. The
increase in deposits and advances was used in part to fund loan originations
during the period, which contributed to an increase in net loans receivable from
$273.13 million at June 30, 1998, to $291.39 million at June 30, 1999. In
addition, the Company's securities portfolios along with its interest-bearing
deposits increased, in the aggregate, from $86.12 million to $140.03 million at
June 30, 1998 and 1999, respectively.
In September 1998 and 1997 the Company paid 5% common stock dividends
in the amounts of 116,034 and 102,606 shares, respectively, from authorized but
unissued common stock, with fractional shares paid in the form of cash. In
December 1998 and March 1997 the Company paid a three-for-two and five-for-four
stock split, effected in the form of a dividend in the amount of 1,224,980 and
414,188 shares, respectively. Fractional shares were paid in the form of cash.
The Bank's primary market area includes Chester County and sections of
the four contiguous counties (Delaware, Montgomery, Berks, and Lancaster) in
Pennsylvania. Chester County, in which all of the Bank's offices are located,
continues to grow in terms of economic development and population growth.
Customer deposits with First Financial are insured to the maximum
extent provided by law by the Federal Deposit Insurance Corporation ("FDIC")
through the SAIF. The Bank is subject to examination and comprehensive
regulation by the FDIC, the Office of Thrift Supervision ("OTS"), and the
Pennsylvania Department of Banking ("Department"). It is a member of the FHLB of
Pittsburgh ("FHLBP"), which is one of the 12 regional banks comprising the FHLB
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System. The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.
Lending Activities
Loan Portfolio Composition. The Company's net loan portfolio (net of
undisbursed proceeds, deferred fees and allowance for loan losses) totaled
$291.39 million at June 30, 1999, representing approximately 64.6% of the
Company's total assets of $451.16 million at that date.
4
<PAGE>
The following table presents information regarding the Company's loan portfolio
by type of loan indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands)
At June 30,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------- ------------------- ------------------- --------------------
% of % of % of % of
Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans
-------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential:
Single-family $156,514 50.8% $154,755 53.3% $158,537 58.4% $147,274 62.6%
Multi-family 828 .3 873 0.3 893 0.3 1,256 0.5
Commercial 55,197 17.9 41,002 14.1 33,981 12.5 22,552 9.6
Construction and land
acquisition(1) 29,339 9.5 30,646 10.5 22,907 8.5 17,028 7.2
-------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 241,878 78.5 227,276 78.2 216,318 79.7 188,110 79.9
Commercial business loans(2) 14,708 4.8 11,437 3.9 7,863 2.9 5,701 2.4
Consumer loans(3) 51,416 16.7 51,829 17.9 47,343 17.4 41,486 17.7
-------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable 308,002 100.0% 290,542 100.0% 271,524 100.0% 235,297 100.0%
===== ===== ===== =====
Less:
Loans in process (11,393) (12,380) (10,092) (7,134)
Allowance for loan losses (3,651) (3,414) (2,855) (2,667)
Deferred loan fees (1,571) (1,620) (1,537) (1,533)
-------- -------- -------- --------
Net loans receivable 291,388 273,128 257,040 223,963
Loans held for sale, single-family
residential mortgages -- 1,101 106 --
-------- -------- -------- --------
Net loans receivable and loans held
for sale $291,388 $274,229 $257,146 $223,963
======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------
1995
--------------------
% of
Total
Amount Loans
-------- -----
<S> <C> <C>
Real estate loans:
Residential:
Single-family $150,639 66.0%
Multi-family 1,359 0.6
Commercial 22,433 9.8
Construction and land
acquisition(1) 13,120 5.7
-------- -----
Total real estate loans 187,551 82.1
Commercial business loans(2) 4,039 1.8
Consumer loans(3) 36,634 16.1
-------- -----
Total loans receivable 228,224 100.0%
=====
Less:
Loans in process (3,385)
Allowance for loan losses (2,449)
Deferred loan fees (1,574)
--------
Net loans receivable 220,816
Loans held for sale, single-family
residential mortgages 142
--------
Net loans receivable and loans held
for sale $220,958
========
</TABLE>
(1) Includes construction loans for both residential and commercial real
estate properties.
(2) Consists primarily of secured equipment
loans.
(3) Consists primarily of home equity loans and lines of credit, home
improvement, automobile and other personal loans.
5
<PAGE>
Contractual Maturities. The following table sets forth the contractual
principal repayments of the total loan portfolio, including loans in process, of
the Company as of June 30, 1999, by categories of loans. All loans are included
in the period in which they mature. Loans held for sale are not included.
<TABLE>
<CAPTION>
Principal Repayments
Contractually Due in Year(s) Ended
June 30,
-----------------------------------
(Dollars in Thousands)
Total
Outstanding
at 2005
June 30, 2001- and
1999 2000 2004 Thereafter
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Real estate loans:
Residential(1) $157,342 $24,456 $27,434 $105,452
Commercial 55,197 5,190 37,299 12,708
Construction and land acquisition 29,339 16,368 7,957 5,014
Commercial business loans 14,708 9,416 4,448 844
Consumer loans 51,416 7,300 16,018 28,098
-------- ------- ------- --------
Total loans $308,002 $62,730 $93,156 $152,116
======== ======= ======= ========
</TABLE>
(1) Includes mortgages on both single-family and multi-family (more than four
units) residential properties.
6
<PAGE>
The following table sets forth, as of June 30, 1999, the dollar amount of all
loans contractually due after June 30, 2000, which have fixed interest rates and
floating or adjustable rates.
<TABLE>
<CAPTION>
Contractual Obligations
Due After June 30, 2000
---------------------------
Floating/
Fixed Adjustable
Rates Rates
-------- -------
(Dollars in Thousands)
<S> <C> <C>
Real estate loans:
Residential $100,976 $31,910
Commercial 10,142 39,865
Construction and land acquisition 3,506 9,465
Commercial business loans 4,923 369
Consumer loans 44,099 17
-------- -------
Total loans $163,646 $81,626
======== =======
</TABLE>
Contractual principal repayments of loans do not necessarily reflect
the actual term of the Company's loan portfolio. The average life of mortgage
loans is substantially less than their contractual terms because of loan
prepayments and because of enforcement of due-on-sale clauses, which give the
Company the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates substantially exceed rates
on existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans substantially exceed current mortgage loan rates. The Company
experienced significant refinancings of its loan portfolio during fiscal 1999
due to the declining interest rate environment and leveling of the yield curve.
Origination, Purchase and Sale of Loans. As a Pennsylvania-chartered
savings institution, First Financial has general authority pursuant to the
Savings Association Code of 1967, as amended ("State Code"), to originate and
purchase loans secured by real estate located throughout the United States. Due
to the Company's strong community orientation, substantially all of the
Company's total mortgage loan portfolio is secured by real estate located in its
primary market area.
Residential and commercial real estate loans are originated directly by
the Bank through salaried loan officers. In addition, from time to time the Bank
utilizes third-party originators who use the same credit guidelines and
standards as the Bank to originate residential loans. Residential and commercial
real estate loan originations are normally attributable to referrals from real
estate brokers and builders and other financial institutions, mortgage brokers,
depositors and walk-in customers. Consumer loan originations are primarily
attributable to existing customers and referrals, as well as third party auto
loans originated through dealers.
7
<PAGE>
The Bank periodically identifies certain loans as held for sale at the
time of origination. These loans consist primarily of fixed-rate, single-family
residential mortgage loans which meet the underwriting characteristics of
certain government-sponsored enterprises (conforming loans). The majority of
conforming loans sold to date have consisted of sales to Freddie Mac ("FHLMC")
of fixed-rate mortgage loans in furtherance of the Company's goal of better
matching the maturities and interest-rate sensitivity of its assets and
liabilities. In selling conforming loans, the Bank has retained the servicing
thereon in order to increase its non-interest income. At June 30, 1999, the Bank
serviced $26.74 million of mortgage loans for others. Sales of loans produce
future servicing income and provide funds for additional lending and other
purposes. The Bank is a qualified servicer for FHLMC, Fannie Mae ("FNMA"), and
Ginnie Mae ("GNMA").
The following table shows total loans and loans held for sale originated,
purchased, sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Total loans receivable and loans held for sale
at beginning of period $291,643 $271,630 $235,297
Real estate loan originations:
Residential(1) 31,705 39,329 31,031
Commercial 18,914 9,398 10,018
Construction and land acquisition(2) 21,852 21,057 21,740
-------- -------- --------
Total real estate
loan originations 72,471 69,784 62,789
Consumer loans(2) 24,540 24,771 19,163
Commercial business loans 17,312 11,896 5,150
-------- -------- --------
Total loan
originations 114,323 106,451 87,102
-------- -------- --------
Principal loan repayments 96,487 77,481 45,846
Sales of loans 1,477 8,957 4,923
-------- -------- --------
Total principal
repayments
and sales 97,964 86,438 50,769
-------- -------- --------
Net increase in
loans and loans
held for sale 16,359 20,013 36,333
-------- -------- --------
Total loans receivable and loans
held for sale at end of period $308,002 $291,643 $271,630
======== ======== ========
</TABLE>
(1) Includes both single-family and multi-family residential loans.
(2) Includes construction loans for both residential and commercial real estate
properties.
8
<PAGE>
Loans on Existing Single-Family Residential Properties. The Bank
currently offers adjustable-rate mortgages ("ARMs") which have up to 30-year
terms and interest rates which adjust either annually or every three years, or
which are fixed initially for the first three years, five years, seven years, or
ten years, and adjust annually thereafter, based upon changes in an index based
on the weekly average yield on United States Treasury securities adjusted to a
constant maturity of one year or three years, respectively, as made available by
the Federal Reserve Board plus a margin. The amount of any increase or decrease
in the interest rate for ARMs is limited to 1% or 2% per year and 6% over the
life of the loan. Although the Bank has originated a small amount of ARMs which
include the ability to be converted to a fixed-rate loan, substantially all of
the ARMs originated cannot be converted to fixed-rate loans. The interest rates
of ARMs may not adjust as rapidly as changes in the Company's cost of funds. In
order to minimize risk, ARM borrowers are qualified at the rate which would be
in effect after the first interest rate adjustment, if that rate is higher than
the initial rate. The Bank's adjustable rate loans require that any payment
adjustment resulting from a change in the interest rate of an adjustable-rate
loan be sufficient to result in full amortization of the loan by the end of the
loan term and, thus, do not permit any of the increased payment to be added to
the principal amount of the loan, or so-called negative amortization. Due to the
declining interest rate environment and leveling of the yield curve, the Bank
experienced significant refinancings of its adjustable rate portfolio into its
fixed rate mortgage products.
Fixed-rate residential mortgage loans currently originated generally
have 30-year terms, although some have 15-year terms with commensurately lower
interest rates. The Bank also offers a bi-weekly mortgage which is a fixed-rate
loan with bi-weekly payments. Based on current interest rates, it is repaid in
approximately 22 years. Substantially all of the Bank's long-term, fixed-rate
residential mortgage loans and ARMs include "due on sale" clauses.
The Bank also makes second mortgage loans and home equity loans. See
"Lending Activities - Consumer Loans."
Loans on Existing Commercial and Multi-Family Properties. During the
past several years, the Bank has originated permanent loans secured by
multi-family and income-producing properties such as condominiums, apartment
buildings, office buildings and, to a lesser extent, hotels and small shopping
centers. The Bank intends to increase its emphasis on the origination of
commercial real estate loans and, accordingly, has increased its commercial
lending staff. The Bank's Commercial Loan Department consists of seven loan
officers, all but one of whom joined the Bank's staff with substantial prior
commercial lending experience. The origination of multi-family residential and
commercial real estate 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 generated increased fee income. All of the Bank's
multi-family residential and commercial real estate loan portfolio is secured by
properties located in the Company's primary market area. As of June 30, 1999,
commercial and multi-family real estate loans, excluding construction loans for
such properties, amounted to $56.03 million, or 18.2% of the total loan
portfolio.
9
<PAGE>
A substantial majority of commercial real estate loans have interest
rates which adjust annually after an initial three- or five-year term by a
margin over the corresponding United States Treasury yield for securities with
the same term. These loans typically have amortization periods of up to 20
years, but occasionally provide that the loans can be called by the Bank prior
to the end of the amortization period, generally at three, five, seven or ten
years after origination.
Commercial and multi-family residential real estate lending entails
significant additional risks as compared with single-family residential property
lending. Commercial and multi-family residential real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans is typically dependent on the successful
operation of the business or real estate project. The success of such projects
is sensitive to changes in supply and demand conditions in the market for
commercial and multi-family residential real estate as well as economic
conditions generally.
The Bank seeks to ensure that the property securing these loans will
generate sufficient cash flow to adequately cover operating expenses and debt
service payments. To this end, permanent commercial and multi-family residential
real estate loans generally are made with a loan-to-value ratio of 75% or less.
In underwriting commercial and multi-family residential real estate loans,
consideration is given to the property's operating history, future operating
projections, current and projected occupancy, position in the local and regional
market, location and physical condition. The underwriting analysis also includes
credit checks and a review of the financial condition of the borrower. The Bank
usually obtains full or partial loan guarantees from the principal(s) involved.
Construction Loans. The Bank also offers both fixed-rate and
adjustable-rate residential and commercial construction loans. Residential
construction loans are offered to individuals building their primary or
secondary residence as well as to selected local developers to construct up to
four-family dwellings. Advances are made on a percentage of completion basis,
usually consisting of six draws. Residential construction loans convert to
permanent loans at the end of 12 months or upon completion of construction,
whichever occurs first. At June 30, 1999, $24.26 million or 7.9% of the
Company's total loan portfolio consisted of construction loans including loans
in process. Loans in process related to such loans totaled $10.75 million at
June 30, 1999.
The Bank has been active in construction lending for many years and
intends to continue its involvement in such lending in the future. Construction
lending is generally considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Risk of loss on
construction loans is dependent largely upon the accuracy of the initial
appraisal of the property's projected value at completion of construction as
well as the estimated cost, including interest, of construction. During the
construction phase, a number of factors could result in delays and cost
overruns. If either estimate proves to be inaccurate and the borrower is unable
to provide additional funds, the lender may be required to advance funds
10
<PAGE>
beyond the amount originally committed to permit completion of the project
and/or be confronted at the maturity of the construction loan with a project
whose value is insufficient to assure full repayment.
Land Acquisition and Development Loans. The Bank also offers land
acquisition and development loans. These types of loans are generally provided
only to local developers with strong financial positions and with whom the Bank
is familiar. These loans typically have terms of one to three years and carry a
floating interest rate normally indexed to the Wall Street Journal Prime. The
Bank will lend up to 75% of the appraised value of the project. At June 30,
1999, $5.08 million, or 1.6% of the Company's total loan portfolio consisted of
land acquisition and development loans, including loans in process. Loans in
process on such loans totaled $627,000 at June 30, 1999. Like construction
lending, these loans generally are considered to involve a higher degree of risk
of loss than long-term financing on approved occupied real estate. The Bank is
actively pursuing developers who can both demonstrate the ability to meet cash
flow projections in order to repay loans through a very strong financial
position and have a reputation for successfully completing such projects in
similar situations with the Bank.
Consumer Loans. The Bank offers a wide variety of consumer loans,
including home equity loans, home improvement loans, equity lines of credit,
secured and unsecured personal loans and automobile loans. The Bank has
aggressively marketed consumer loans in order to provide a wider range of
financial services to its customers and because of the shorter terms and
normally higher interest rates on such loans. As of June 30, 1999, consumer
loans amounted to $51.42 million or 16.7% of the total loan portfolio.
The Bank's home equity lines of credit currently provide for terms of
up to 10 years. The interest rate on the "Prime Line" adjusts monthly to the
Prime Rate. The regular equity line of credit adjusts monthly at 1.50% above the
Prime Rate. The limit of such loan is the borrower's equity in his residence,
subject to certain income qualifications. The Bank also makes fixed-rate,
fixed-term home equity loans on which it takes a first- or second-mortgage lien
on the borrower's property. These loans have terms of up to 15 years. The
balance of the fixed-rate mortgages on the properties cannot exceed in the
aggregate 80% of the appraised value of the properties. Home equity lines of
credit and fixed-rate home equity loans amounted to $5.51 million and $40.05
million, respectively, as of June 30, 1999. The Bank also originates fixed-rate
bridge loans with loan-to-value ratios of no greater than 80% of the value of
the secured real estate and at a maximum term of twelve months. At June 30,
1999, the balance on these loans totaled $455,000.
At June 30, 1999, the balance was $487,700 for fixed-rate loans
secured by certificates of deposit or marketable securities. Unsecured personal
loans amounted to $443,400 at June 30, 1999 and consisted of fixed-rate loans
with maximum loan balances of $5,000 and terms no greater than 48 months. The
Bank also originates fixed-rate loans on new and used automobiles. The terms of
such loans do not exceed 60 months on new cars and 48 months on used cars.
Automobile loans amounted to $3.43 million at June 30, 1999. The Bank's current
line of credit
11
<PAGE>
provides for unsecured loans of up to $1,000 for terms of up to 36 months with
an interest rate set at 6.0% over the Prime Rate adjusted monthly. Such loans
have a floor of 10.0% and a ceiling of 18.0% and totaled $238,000 at June 30,
1999. In addition, the Bank originates Visa and MasterCard credit card loans
with up to $5,000 lines of credit and at an interest rate set at 6.0% over the
Prime Rate. At June 30, 1999, the Company had $365,900 in credit card loans
outstanding.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The Bank believes
that the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans and that consumer loans are
important to its efforts to increase the interest rate sensitivity and shorten
the average maturity of its loan portfolio.
Commercial Business Loans. The Bank makes commercial business loans
directly to businesses located in its market area. The Bank targets small and
medium sized businesses with the majority of the loans being less than $750,000.
Applications for commercial business loans are obtained primarily from existing
customers, branch referrals and direct inquiry. As of June 30, 1999, commercial
business loans totaled $14.71 million or 4.8% of the total loan portfolio.
Commercial business loans originated by the Bank generally have terms
of five years or less and fixed interest rates or adjustable interest rates tied
to the Wall Street Journal Prime plus a margin. Such loans are generally secured
by real estate, receivables, equipment, or inventory and are generally backed by
the personal guarantees of the principals of the borrower. Commercial business
loans generally have shorter terms to maturity and provide higher yields than
residential mortgage loans. Although commercial business loans generally are
considered to involve greater credit risk than certain other types of loans,
management intends to continue to offer commercial business loans to small
medium sized businesses in an effort to better serve our community's needs,
obtain core non-interest bearing deposits, and increase the Company's interest
rate spread.
Regulatory Requirements and Underwriting Policies. Under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and
pursuant to the parity provisions of the State Code, the aggregate loans that
the Company may make to any borrower and its affiliates is limited to 15% of
unimpaired capital for unsecured loans and 25% of capital for loans secured by
readily marketable collateral. At June 30, 1999, pursuant to such provisions,
the Bank was permitted to extend credit to any one borrower totaling $4.94
million. Special rules applicable to savings associations' provide authority to
develop domestic residential
12
<PAGE>
housing units up to the lesser of 30% of the savings association's unimpaired
capital and unimpaired surplus or $30.0 million, if: (a) the purchase price of a
single-family unit does not exceed $500,000; (b) the savings association is in
compliance with the fully phased-in capital standards; (c) the OTS director, by
order, authorizes the higher limit; (d) the loans made to all borrowers in the
aggregate do not exceed 150% of the savings association's unimpaired capital and
unimpaired surplus; and (e) all loans comply with applicable loan-to-value
requirements. At June 30, 1999, the Bank's largest loan or group of loans to one
borrower, including related entities, aggregated $4.50 million, and is in
conformity with the current loans to one borrower regulations described above.
The Bank is currently permitted to lend up to 100% of the appraised
value of the real property securing a loan; however, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
the Bank is required by federal regulations, the State Code and Department
regulations to obtain private mortgage insurance on the portion of the principal
amount of the loan that exceeds 80% of the appraised value of the security
property. Pursuant to underwriting guidelines adopted by the Board of Directors,
private mortgage insurance must be obtained on all residential loans whose
loan-to-value ratios exceed 80%. The Bank will generally lend up to 97% of the
appraised value of one-to four-family owner-occupied residential dwellings when
the required private mortgage insurance is obtained. The Bank generally
originates loans of up to 75% of the appraised value of the properties securing
its commercial real estate and commercial business loans and 75% of the
appraised value upon completion or sale price, whichever is lower, for
construction loans. With respect to construction loans for owner-occupied
properties made in connection with the providing of the permanent financing, the
Bank will lend up to 90% of the appraised value when the required private
mortgage insurance is obtained.
In the loan approval process, the Bank assesses both the borrower's
ability to repay the loan and the adequacy of the proposed security. In
connection therewith, the Bank obtains an appraisal of the security property and
information concerning the income, financial condition, employment and credit
history of the applicant. Loans must be approved at various management levels,
including the Board of Directors, depending on the amount of the loan.
Residential mortgage loans, commercial business and commercial real estate
loans, and consumer loans in excess of $1.00 million require approval by the
Board of Directors. In addition, any loan in excess of $500,000 which exhibits
certain characteristics concerning the borrower or the project requires approval
by the Board of Directors.
For mortgage loans the Bank requires title insurance insuring the
priority of its lien, as well as fire and extended coverage casualty insurance,
in order to protect the properties securing its real estate loans. Borrowers
must also obtain flood insurance policies where the property is in a flood plain
as designated by the Federal Emergency Management Agency. Borrowers may be
required to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage loan account from which the Company makes
disbursements for items such as real estate taxes, hazard insurance premiums and
private mortgage insurance premiums as they fall due.
13
<PAGE>
Loan Fee and Servicing Income. In addition to interest earned on loans,
the Bank receives income through servicing of loans and fees in connection with
loan originations, loan modifications, late payments, prepayments, repayments
and changes of property ownership and for miscellaneous services related to its
loans. Income from these activities varies from period to period with the volume
and type of loans made.
Loan origination fees and certain related direct loan origination costs
are offset and the resulting net amount is deferred and amortized over the life
of the related loans as an adjustment to the yield of such related loans.
However, in the event the related loan is sold, any deferred loan fees or costs
remaining with respect to such loan should be taken into income.
The Bank currently charges loan origination fees which are calculated
as a percentage of the amount of the loan. The fees received in connection with
the origination of commercial real estate loans have generally amounted to two
points (one point being equivalent to 1% of the principal amount of the loan).
In addition, the Bank typically receives fees from two to three points in
connection with the origination of new, conventional, one-to four-family
mortgages and 3.5 points in connection with the origination of construction
loans.
At June 30, 1999, the Bank was servicing $26.74 million of loans for
others, substantially all of which were whole loans sold by the Bank to the
FHLMC. The Bank receives a servicing fee of approximately 1/4 or 3/8 of 1% on
such loans.
Non-Performing Loans and Real Estate Owned ("REO"). When a borrower
fails to make a required loan payment, the Bank attempts to cause the default to
be cured by contacting the borrower. In general, contacts are made after a
payment is more than 15 days past due, at which time a late charge is assessed.
Defaults are cured promptly in most cases. If the delinquency on a mortgage loan
exceeds 90 days and is not cured through the Bank's normal collection
procedures, or an acceptable arrangement is not worked out with the borrower,
the Company will institute measures to remedy the default, including commencing
a foreclosure action or, in special circumstances, accepting from the mortgagor
a voluntary deed of the secured property in lieu of foreclosure. The remedies
available to the Bank in the event of a default or delinquency with respect to
certain residential mortgage loans, and the procedures by which such remedies
may be exercised, are subject to Pennsylvania law and regulations. Under
Pennsylvania law, a lender is prohibited from accelerating the maturity of a
residential mortgage loan, commencing any legal action (including foreclosure
proceedings) to collect on such loan, or taking possession of any loan
collateral until the lender has first provided the delinquent borrower with at
least 30 days prior written notice specifying the nature of the delinquency and
the borrower's right to correct such delinquency. In addition, the lender's
ability to exercise any remedies it may have with respect to loans for one- or
two-family principal residences located in Pennsylvania is further restricted
(including the lender's right to foreclose on such property) until the lender
has provided the delinquent borrower with written notice detailing the
borrower's rights to seek consumer credit counseling and state financial
assistance and until the borrower has
14
<PAGE>
exhausted or failed to pursue such rights. These provisions of Pennsylvania law
may delay for several months the Bank's ability to foreclose upon residential
loans secured by real estate located in the Commonwealth of Pennsylvania. In
addition, the uniform FNMA/FHLMC lending documents used by the Bank, as well as
most other residential lenders in Pennsylvania, requires notice and a right to
cure similar to that provided under Pennsylvania law.
Non-accrual loans are loans on which the accrual of interest ceases
when the collection of principal or interest payments is determined to be
doubtful by management. It is the policy of the Company to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days
or more (unless the loan principal and interest are determined by management to
be fully secured and in the process of collection), or earlier, if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the current loan term.
Interest income is not accrued until the financial condition and payment record
of the borrower once again demonstrate the ability to service the debt. When a
loan is placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income. Non-real estate consumer loans more than 120 days
delinquent are required to be written off in accordance with federal
regulations.
If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate property is then included in the Company's
"real estate owned" account until it is sold. When property is acquired, it is
recorded at the lower of carrying or fair value at the date of acquisition and
any write-down resulting therefrom is charged to the allowance for loan losses.
Interest accrual ceases on the date of acquisition and all costs incurred in
maintaining the property from that date forward are expensed. Costs incurred for
the improvement or development of such property are capitalized to the extent
they do not exceed the property's fair value. No loss reserves are maintained on
REO and future write-downs for cost beyond the fair value are expensed. The
Company is permitted under Department and OTS regulations to finance sales of
REO by "loans to facilitate," which may involve more favorable interest rates
and terms than generally would be granted under the Bank's underwriting
guidelines. However, at June 30, 1999, the Company did not have any loans to
facilitate.
For purposes of applying the measurement criteria for impaired loans,
the Company excludes large groups of smaller-balance homogeneous loans,
primarily consisting of residential real estate loans and consumer loans as well
as commercial loans with balances of less than $100,000. For applicable loans,
the Company evaluates the need for impairment recognition when a loan becomes
non-accrual or earlier if, based on management's assessment of the relevant
facts and circumstances, it is probable that the Company will be unable to
collect all proceeds due according to the contractual terms of the loan
agreement. At and during the year ended June 30, 1999, the average recorded
investment in impaired loans was $262,000. If these impaired loans had been
current in accordance with their original terms and had been outstanding
throughout the period, the gross interest income for fiscal 1999 that would have
been recorded for these loans was $13,000. Interest income on these impaired
loans included in income for
15
<PAGE>
fiscal 1999 amounted to $3,000. The Company's policy for the recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above. Impaired loans are charged off when the Company determines that
foreclosure is probable and the fair value of the collateral is less than the
recorded investment of the impaired loan.
The following table sets forth information regarding non-accrual loans and REO
held by the Company at the dates indicated. The Company did not have any (i)
loans which are 90 days or more delinquent but on which interest is being
accrued or (ii) loans which were classified as restructured troubled debt at any
of the dates presented.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------
1999 1998 1997 1996 1995
---- ------ ---- ------ ------
(Dollars In Thousands)
Non-accrual loans:
<S> <C> <C> <C> <C> <C>
Residential real estate loans $568 $ 771 $417 $1,166 $2,029
Commercial real estate loans -- -- -- -- 28
Construction and land loans -- 55 -- 737 294
Commercial business loans 258 -- -- 18 10
Consumer loans 107 420 331 297 549
---- ------ ---- ------ ------
Total non-accrual loans $933 $1,246 $748 $2,218 $2,910
==== ====== ==== ====== ======
Total non-accrual loans
to total assets .21% .33% .23% .81% 1.10%
Total REO -- -- -- $ 121 $ 157
Total non-accrual loans and
REO to total assets .21% .33% .23% .85% 1.16%
</TABLE>
At June 30, 1999, non-accrual real estate loans included six
residential mortgage loans aggregating $568,000, all secured by single-family
residential properties.
The total amount of non-performing loans was $933,000, $1.25 million
and $748,000 at June 30, 1999, 1998 and 1997, respectively. If these
non-performing loans had been current in accordance with their original terms
and had been outstanding throughout the period, the gross amount of interest
income for fiscal 1999, 1998, and 1997 that would have been recorded for these
loans was $75,200, $111,800, and $71,400. Interest income on these
non-performing loans included in income for fiscal 1999, 1998, and 1997 amounted
to $26,100, $57,560, and $35,200, respectively.
Allowances for Losses on Loans and Classified Assets. The allowance for
loan losses is maintained at a level that management considers adequate to
provide for potential losses based upon an evaluation of known and inherent
risks in the loan portfolio. Management's evaluation
16
<PAGE>
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
present allowance for 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. Management may in the future further increase the level
of its allowance for loan losses as a percentage of total loans and
non-performing loans in the event the level of multi-family residential and
commercial real estate loans (which generally are considered to have a greater
risk of loss than single-family residential mortgage loans) as a percentage of
its total loan portfolio continues to increase. 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. At June 30, 1999, the Bank's allowance for
loan losses was $3.65 million or 1.24% of total net loans receivable and 391.3%
of total non-performing loans compared to $3.41 million or 1.23% of net loans
and 274.0% of total non-performing loans at June 30, 1998.
The Company monitors the quality of its assets on a regular basis.
Under regulations of the OTS, all of the Company's assets are subject to being
classified under a classification system that has three categories: (i)
substandard, (ii) doubtful and (iii) loss. An asset may fall within more than
one category and a portion of the asset may remain unclassified. The Company is
required to review the classification of its assets on a regular basis. In
addition, in connection with the examinations of First Financial by the OTS, the
FDIC, and the Department, the examiners have the authority to identify problem
assets and, if appropriate, classify them and/or require adjustments to the
carrying value of such assets.
Assets classified substandard are considered inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Assets so classified must have a well-defined weakness or
weaknesses. They are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Assets classified doubtful are considered to have all the weaknesses
inherent in those classified substandard with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Assets classified loss are considered uncollectable and of such little
value that their continuance as assets without establishment of a specific
reserve is not warranted. This classification does not mean that an asset has
absolutely no recovery or salvage value, but rather,
17
<PAGE>
that it is not practical or desirable to defer writing off a basically worthless
asset even though partial recovery may be affected in the future.
At June 30, 1999 and 1998, the Company's classified assets, which
consisted of assets classified as substandard or doubtful, totaled $1.24 million
and $1.47 million, respectively. The Company did not have any REO at June 30,
1999 and 1998. Included in the assets classified substandard at June 30, 1999
and 1998, 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, and have a well-defined weakness that may
jeopardize the liquidation of the debt. The majority of loans which are
classified but otherwise performing are residential mortgage loans.
Other loans designated as special mention by the Company amounted to
$4.37 million and $971,700 at June 30, 1999 and 1998, respectively. Included in
the special mention category at June 30, 1999 was one loan with a balance of
$4.37 million to an extended term healthcare provider which was performing in
accordance with the terms and conditions of the loan but had characteristics
which warranted management to classify it special mention. Although these loans
are not considered or classified as substandard, doubtful or loss, they do have
a potential weakness which may, if not corrected, result in increased risk at
some future date.
18
<PAGE>
The following table summarizes activity in the Company's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
As of June 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $ 3,414 $ 2,855 $ 2,667 $ 2,449 $ 2,199
Loans charged off against the allowance:
Residential real estate (58) (12) (117) (101) (54)
Construction and land -- -- (177) -- (5)
Commercial business -- -- (1) (2) (201)
Consumer (119) (69) (82) (43) (69)
------- ------- ------- ------- -------
(177) (81) (377) (146) (329)
Recoveries:
Residential real estate -- 21 37 -- --
Construction and land -- -- 4 16 --
Commercial business -- -- -- -- 93
Consumer 24 13 1 8 31
------- ------- ------- ------- -------
24 34 42 24 124
Net charge-offs (153) (47) (335) (122) (205)
Provision for loan losses
charged to operating expenses 390 606 523 340 455
------- ------- ------- ------- -------
Allowance at year end $3,651 $ 3,414 $ 2,855 $ 2,667 $ 2,449
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding .05% .02% .13% .05% .10%
======= ======= ======= ======= =======
Ratio of allowance to period-end
net loans 1.24% 1.23% 1.10% 1.18% 1.10%
======= ======= ======= ======= =======
</TABLE>
19
<PAGE>
The following table presents information regarding the Company's total allowance
for losses on loans as well as the allocation of such amounts to the various
categories of the loan portfolio.
<TABLE>
<CAPTION>
(Dollars in Thousands)
At June 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- --------------- ---------------- ---------------- -----------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
to Total to Total to Total to Total to Total
-------- -------- -------- -------- --------
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans $ 638 51.1% $ 789 53.6% $ 778 58.7% $ 898 63.1% $1,077 66.6%
Commercial real estate loans 1,415 17.9 1,050 14.1 871 12.5 585 9.6 428 9.8
Construction and land loans 194 9.5 201 10.5 139 8.5 280 7.2 309 5.7
Commercial business loans 726 4.8 357 3.9 278 2.9 207 2.4 105 1.8
Consumer loans 678 16.7 1,017 17.9 789 17.4 697 17.7 530 16.1
Total allowance for loan losses $3,651 100.0% $3,414 100.0% $2,855 100.0% $2,667 100.0% $2,449 100.0%
Total allowance for loan losses
to total non-performing loans 391.3% 274.0% 381.7% 120.2% 84.2%
===== ===== ===== ===== ====
Total non-performing loans $ 933 $1,246 $ 748 $2,218 $2,910
====== ====== ====== ====== ======
</TABLE>
20
<PAGE>
Securities Activities
Historically, interest and dividends on securities have provided the
Company with a significant source of revenue. At June 30, 1999, the Company's
securities portfolio and interest-bearing deposits aggregated $140.03 million or
31.04% of its total assets. First Financial's securities and interest-bearing
deposits are used to meet certain federal liquidity ratios. The liquidity ratios
are met in part by investing in securities that qualify as liquid assets under
OTS regulations. (See "Regulation - Regulation of the Bank - Liquidity
Requirements"). Such securities include obligations issued or fully guaranteed
by the United States Government, certain federal agency obligations, certain
time deposits and negotiable certificates of deposit issued by commercial banks
and other specified investments, including commercial paper and other
securities. Investment decisions are made by members of senior management within
guidelines approved by the Company's Board of Directors.
The Company divides its securities portfolio into three segments: (a)
held to maturity; (b) available for sale; and (c) trading. Securities in the
held to maturity category are accounted for at amortized cost. Trading
securities 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. At June 30, 1999, the Company had a net unrealized loss
on securities available for sale, net of taxes, of $1.55 million.
21
<PAGE>
The following table sets forth the Company's securities portfolio and
interest-earning deposits at carrying value at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------
1999 1998 1997
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-bearing deposits $ 13,409 $11,861 $ 7,901
Trading account securities 9,221 20,352 252
Investment securities held to maturity:
U.S. Government and agency obligations -- 4,500 5,500
Municipal notes and bonds 3,229 7,394 10,986
Mortgage-backed securities 791 1,123 1,473
Other 3,781 2,583 1,510
-------- ------- -------
Total investment securities held to
maturity 7,801 15,600 19,469
-------- ------- -------
Investment securities available for sale:
U.S. Government and agency obligations 47,242 12,296 18,217
Municipal notes and bonds 27,378 15,173 4,128
Mortgage-backed securities 15,817 9,431 5,054
Equity securities 1,336 1,096 167
Debt securities 15,430 307 --
Other 2,397 -- --
-------- ------- -------
Total investment securities available for sale 109,600 38,303 27,566
======== ======= =======
Total securities and interest-bearing
deposits $140,031 $86,116 $55,188
======== ======= =======
</TABLE>
The contractual maturity or repricing characteristics of the Company's
investment portfolio is considerably more interest rate sensitive than that of
its loan portfolio. Consequently, the investment portfolio provides a
significant source of liquidity and protection against interest rate risk. The
weighted average term to maturity or repricing of the Company's investment
securities held to maturity was 3.1 years at June 30, 1999 and 5.5 years at June
30, 1998.
22
<PAGE>
The amortized cost and estimated fair value of investment securities at June 30,
1999, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Estimated Weighted
Amortized Fair Average
Cost Value Yield
-------- -------- ------
(Dollars in Thousands)
Held to Maturity
<S> <C> <C> <C>
Due in one year or less $ 1,840 $ 1,848 7.22%
Due after one year through five years 1,087 1,088 6.27
Due after five years through ten years -- -- --
Due after ten years 1,093 1,098 6.96
No stated maturity 3,781 3,782 6.50
-------- -------- ----
Total held to maturity $ 7,801 $ 7,816 6.70%
======== ======== ====
Available for Sale
Due in one year or less $ 340 $ 341 5.52%
Due after one year through five years 25,805 25,528 6.28
Due after five years through ten years 27,983 27,313 6.36
Due after ten years 56,551 55,081 6.97
No stated maturity 1,450 1,337 2.46
-------- -------- ----
Total available for sale $112,129 $109,600 6.60%
======== ======== ====
</TABLE>
The weighted average yield, based on amortized cost, is presented on a
taxable equivalent basis.
As of June 30, 1999, investments in the debt and/or equity securities
of any one issuer (excluding U.S. Government and federal agencies) did not
exceed 10% of the Company's stockholders' equity.
Sources of Funds
General. Deposits obtained through branch offices have traditionally
been the principal source of the Company's funds for use in lending and for
other general business purposes. The Company also derives funds from
amortization and prepayments of outstanding loans and sales of loans. From time
to time, the Company also may borrow funds from the FHLBP and other sources.
Borrowings may be used on a short-term basis to compensate for seasonal or other
reductions in deposits or other inflows at less than projected levels, as well
as on a longer term basis to support expanded lending and investment activities.
Deposits. The Company obtains deposits primarily from residents of
Chester County, and to a lesser extent Berks, Delaware, Lancaster and Montgomery
Counties, Pennsylvania. Currently, the principal methods used by First Financial
to attract deposit accounts include the offering of services and accounts,
competitive interest rates, and convenient office locations and service hours.
Other than during times of inverse or flat yield curves, the Bank has adopted a
pricing program for its certificate accounts which provides for higher rates of
interest on its
23
<PAGE>
longer term certificates in order to encourage depositors to invest in
certificates with longer maturities, thus reducing the interest rate sensitivity
of the Company's deposit portfolio. First Financial also offers a tiered money
market account that pays higher interest on higher balances so as to maintain a
relatively stable core of deposits even when its certificate accounts mature.
Market conditions have caused First Financial to rely primarily on
short-term certificate accounts and other deposit alternatives that are more
responsive to market interest rates than passbook accounts and regulated
fixed-rate, fixed-term certificates that were historically the Company's primary
sources of deposits. First Financial's current deposit products include
non-interest-bearing accounts, passbook/statement savings accounts, NOW checking
accounts, money market deposit accounts, certificates of deposit ranging in
terms from 30 days to five years and certificates of deposit in denominations of
$100,000 or more ("jumbo certificates"). Included among these deposit products
are individual retirement account certificates ("IRA certificates") and Keogh
accounts.
24
<PAGE>
The following table shows the balances of the Company's deposits as of the dates
indicated:
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ------------------------
(Dollars in Thousands)
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing accounts $ 33,007 9.2% $ 32,361 10.9% $ 21,493 8.2%
NOW checking accounts 36,011 10.0 31,770 10.6 27,625 10.6
Savings accounts 29,033 8.1 27,164 9.1 29,887 10.2
Money market accounts 47,464 13.2 35,610 11.9 26,474 11.5
Certificates of deposit less than
$100,000 137,559 38.2 133,801 44.9 124,636 47.8
Certificates of deposit with
$100,000 minimum balance 76,439 21.3 37,485 12.6 30,635 11.7
-------- ----- -------- ----- -------- -----
Total deposits $359,513 100.0% $298,191 100.0% $260,750 100.0%
======== ===== ======== ===== ======== ======
</TABLE>
The following table shows the weighted average interest rate of the Company's
deposits by type of account at June 30, 1999:
<TABLE>
<CAPTION>
Weighted
Amount Avg. Rate
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
Non-interest-bearing accounts $ 33,007 0.00%
NOW checking accounts 36,011 1.47
Savings accounts 29,033 1.87
Money market accounts 47,464 3.82
Certificates of deposit less than
$100,000 137,559 5.36
Certificates of deposit with
$100,000 minimum balance 76,439 5.07
-------- ----
Total deposits $359,513 3.93%
======== ====
</TABLE>
<PAGE>
The following table sets forth the net deposit flows of the Company for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Increase before interest credited $50,465 $27,568 $23,848
Interest credited
10,857 9,873 8,696
------- ------- -------
Net deposit increase $61,322 $37,441 $32,544
======= ======= =======
</TABLE>
25
<PAGE>
The following table shows the balances of certificates of deposit with balances
of $100,000 or greater which mature during the periods indicated and the balance
at June 30, 1999.
<TABLE>
<CAPTION>
Balances at June 30, 1999, Maturing
----------------------------------------------------
(Dollars in Thousands)
At Within Three Six to After
June 30, Three to Six Twelve Twelve
1999 Months Months Months Months
---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Certificates of deposit with $100,000
minimum balance $76,439 $17,994 $8,270 $7,184 $42,991
======= ======= ====== ====== =======
</TABLE>
The following table presents the average balance by type of deposit and the
average rate paid by type of deposit for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------
1999 1998 1997
------------------------- ----------------------- -----------------------
(Dollars in Thousands)
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
NOW checking accounts $ 33,278 1.48% $ 29,328 1.81% $ 23,986 1.92%
Savings accounts 31,392 1.81 25,991 2.67 25,067 2.87
Money market accounts 43,147 3.65 29,847 3.57 26,084 3.42
Certificates of deposit
less than $100,000 149,713 5.55 126,286 5.90 119,679 5.81
Certificates of deposit with
$100,000 minimum balance 52,917 5.17 35,725 4.94 26,990 4.91
</TABLE>
The greater variety of deposit accounts offered by First Financial has
increased its ability to retain deposits and has allowed it to be more
competitive in obtaining new funds, although the threat of disintermediation
(the flow of funds away from savings institutions into direct investment
vehicles such as government and corporate securities) still exists. However,
these types of accounts have been and continue to be more costly than
traditional accounts during periods of high interest rates. In addition, First
Financial has become much more susceptible to short-term fluctuations in deposit
flows, as customers have become more rate conscious and willing to move funds
into higher-yielding accounts. Thus, both the ability of First Financial to
attract and maintain deposits as well as its cost of funds have been, and will
continue to be, affected significantly by economic market conditions.
In an effort to attract increasing amounts of non-interest-bearing
deposits, First Financial offers a basic checking account which features no-fee
checking with a minimum balance of $50.
26
<PAGE>
First Financial also offers a business checking account which grants
credits against service charges based on the average daily balance. It is
management's belief that such accounts represent an excellent source of deposits
that are not affected by interest rates.
First Financial attempts to control the flow of deposits by pricing its
accounts to remain generally competitive with other financial institutions in
its primary market area, but does not necessarily seek to match the highest
rates paid by competing institutions.
First Financial's deposits are obtained primarily from persons who are
residents of Pennsylvania. First Financial does not advertise for deposits
outside of Pennsylvania or accept brokered deposits, and management believes
that an insignificant amount of First Financial's deposits were held by
non-residents of Pennsylvania at June 30, 1999.
Borrowings. First Financial may obtain advances from the FHLBP upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans, provided certain standards related to credit worthiness have
been met. See "Regulation - Regulation of the Bank - Federal Home Loan Bank
System." Such advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. FHLBP advances
are generally available to meet seasonal and other withdrawals of deposit
accounts and to expand lending and investment activities, as well as to aid the
efforts of members to establish better asset and liability management through
the extension of maturities of liabilities. At June 30, 1999, the Company had
$50.38 million in FHLBP advances outstanding. The Company has available to it
from an unaffiliated financial institution an annually renewable line of credit
not to exceed 10% of the Company's maximum borrowing capacity. The line of
credit was $13.13 million at the time the commitment was executed. The Company,
from time to time, has used the line of credit to meet liquidity needs. At June
30, 1999, there was no balance outstanding on the line of credit.
27
<PAGE>
The following tables present certain information regarding short-term
borrowings (borrowings with a maturity of one year or less) for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Short-term borrowings:
Balance outstanding at end
of period $16,731 $17,601 $18,325
Weighted average interest rate
at end of period 5.43% 5.28% 5.91%
Average balance outstanding $18,596 $16,417 $6,152
Maximum amount outstanding
at any month-end
during the period $35,320 $25,323 $19,046
Weighted average interest rate
during the period 5.51% 5.58% 5.97%
</TABLE>
Yields Earned and Rates Paid
The largest components of the Company's total income and total expense
are interest income and interest expense. As a result, the Company's earnings
are dependent primarily upon net interest income, which is determined by the
Company's net interest rate spread (i.e., the difference between the yields
earned on interest-earning assets and the rates paid on interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities.
28
<PAGE>
Interest Income and Interest Spread Analysis
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
interest-earning assets and their net yield.
Average balances are determined on a monthly basis which are representative of
operations.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------
1999 1998
-------------------------------------- ---------------------------------------
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance(2) Interest(1) Rate(1) Balance(2) Interest(1) Rate(1)
---------- ----------- ------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans and loans
held for sale $280,544 $22,875 8.15% $264,106 $22,298 8.44%
Securities and
other investments $113,110 $ 7,137 6.31% $ 60,777 $ 3,906 6.43%
-------- ------- -------- -------
Total interest-
earning assets $393,654 $30,012 7.62% $324,883 $26,204 8.07%
Non-interest earning assets $ 18,092 $ 15,141
Total assets $411,746 $340,024
======== ========
Liabilities and Stockholders' Equity:
Deposits and repurchase agreements $287,627 $12,711 4.42% $247,903 $11,476 4.63%
FHLB advances and
other borrowings $ 53,595 $ 2,971 5.54% $ 31,813 $ 1,933 6.08%
-------- ------- -------- -------
Total interest-
bearing liabilities $341,222 $15,682 $279,716 $13,409 4.79%
Non-interest-bearing liabilities $ 36,962 4.60% $ 30,167
Stockholders' equity $ 33,562 $ 30,141
Total liabilities and stockholders' equity $411,746 $340,024
======== ========
Net interest income/interest rate spread $14,330 3.03% $12,795 3.28%
======= ==== ======= ====
Net interest-earning assets/net yield on
interest-earning assets $ 52,432 3.64% $ 45,167 3.94%
======== ==== ======== ====
Ratio of average interest-earning assets to
interest-bearing liabilities 115% 116%
=== ===
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1997
--------------------------------------
Average Yield/
Balance(2) Interes(1) Rate(1)
<S> <C> <C> <C>
Assets:
Loans and loans
held for sale $240,858 $20,452 8.49%
Securities and
other investments $ 42,566 $ 2,465 5.79%
-------- -------
Total interest-
earning assets $283,424 $22,917 8.09%
Non-interest earning assets $ 11,388
Total assets $294,812
========
Liabilities and Stockholders' Equity:
Deposits and repurchase agreements $223,048 $10,338 4.63%
FHLB advances and
other borrowings $ 20,942 $ 1,169 5.58%
-------- -------
Total interest-
bearing liabilities $243,990 $11,507 4.72%
Non-interest-bearing liabilities $ 23,603
Stockholders' equity $ 27,219
Total liabilities and stockholders' equity $294,812
========
Net interest income/interest rate spread $11,410 3.37%
======= ====
Net interest-earning assets/net yield on
interest-earning assets $ 39,434 4.03%
======== ====
Ratio of average interest-earning assets to
interest-bearing liabilities 116%
=========
</TABLE>
(1) The indicated interest and annual yield and rate are presented on a taxable
equivalent basis using the Federal marginal income tax rate of 34% adjusted
for the 20% interest expense disallowance (27.2%) for 1999, 1998, and 1997.
(2) Non-accruing loans are included in the average balance.
29
<PAGE>
Rate/Volume Analysis
- --------------------
The following table presents certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
Interest income and the annual rate are calculated on a taxable equivalent basis
using the Federal marginal income tax rate of 34% adjusted for the 20% interest
expense disallowance (27.2%). For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in volume (change in volume multiplied by old rate),
(2) changes in rate (change in rate multiplied by old volume) and (3) changes in
rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------- ---------------------------------------
(Dollars in Thousands)
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ----- ----- ------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on interest-
earning assets:
Loans and loans
held for sale $1,387 ($765) ($ 48) $ 574 $1,974 ($117) ($ 11) $1,846
Securities and
other investments $3,365 ($ 73) ($ 63) $3,229 $1,055 $ 271 $ 115 $1,441
------ ----- ----- ------ ------ ----- ----- ------
Total interest income $4,752 ($838) ($111) $3,803 $3,029 $ 154 $ 104 $3,287
------ ----- ----- ------ ------ ----- ----- ------
Interest expense on interest-
bearing liabilities:
Deposits and repurchase
agreements $1,839 ($521) ($ 84) $1,234 $1,152 ($ 13) ($ 1) $1,138
FHLB advances and other
borrowings $1,324 ($172) ($118) $1,034 $ 607 $ 103 $ 54 $ 764
------ ----- ----- ------ ------ ----- ----- ------
Total interest expense $3,163 ($693) ($202) $2,268 $1,759 $ 90 $ 53 $1,902
----- ----- ------
Net change in net interest
income $1,589 ($145) $ 91 $1,535 $$1,270 $ 64 $ 51 $1,385
====== ===== ===== ====== ======= ===== ===== ======
</TABLE>
30
<PAGE>
Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from the interest rate
risk inherent in its lending and deposit taking activities. To that end,
management actively monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest
rates. A sudden and substantial change in interest rates may adversely impact
the Company's earnings to the extent that the yields on interest-sensitive
assets and interest-sensitive liabilities do not change at the same speed, to
the same extent, or on the same basis. The Company monitors the impact of
changes in interest rates between assets and liabilities as discussed in the
Company's Interest Rate Sensitivity Analysis under the Asset/Liability
Management caption in the Company's 1999 Annual Report (see Exhibit 13 hereto).
Although interest rate sensitivity gap analysis is a useful measurement tool and
contributes towards effective asset liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. An
alternative methodology is to estimate the impact on net interest income and on
net portfolio value of an immediate change in interest rates in 100 basis point
increments. Net portfolio value ("NPV") is defined as the net present value of
assets, liabilities, and off-balance sheet contracts. The chart below is the
estimated effect of immediate changes in interest rates at the specified levels
at June 30, 1999, calculated in compliance with Thrift Bulletin No. 13:
<TABLE>
<CAPTION>
Change in Interest Estimate Net Market Value
Rates in Basis Points of Portfolio Equity NPV as % of PV of Average Assets
--------------------- -------------------- ---------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change
------------ ------ -------- -------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
300 $11,975 $(27,443) (70)% 2.86% (580)
200 20,823 (18,595) (47) 4.83 (382)
100 30,107 (9,331) (24) 6.80 (186)
Static 39,418 -- 8.66 --
--
(100) 48,191 8,773 22 10.31 166
(200) 56,700 17,282 44 11.83 318
(300) 66,518 27,100 69 13.51 485
</TABLE>
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV table presented above assumes that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV table provides an indication of the
Company's interest rate risk exposure at a particular point in
31
<PAGE>
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income and will differ from actual results.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset/liability
structure to obtain the maximum yield/cost spread on that structure. The Company
relies primarily on its asset/liability structure to control interest rate risk.
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost-effective
and, therefore, has focused its efforts on increasing the Company's yield/cost
spread through wholesale and retail opportunities.
32
<PAGE>
Ratios
The following table shows certain income and financial condition ratios
for the periods indicated. All averages are based on month-end balances.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Return on average assets (income
excluding the special SAIF
assessment of $832,000 in fiscal
1997 net of taxes divided by
average total assets) 1.02% 1.07% 1.04%
Return on average assets
(income divided by average
total assets) 1.02% 1.07% .76%
Return on average equity
(income excluding the special
SAIF assessment of $832,000
in fiscal 1997 net of taxes divided
by average equity) 12.55% 12.03% 11.28%
Return on average equity
(income divided by average equity) 12.55% 12.03% 8.22%
Equity-to-assets ratio
(average equity divided by
average assets) 8.15% 8.86% 9.23%
Dividend pay-out ratio 27.39% 33.90% 47.46%
</TABLE>
Subsidiaries of First Financial
At June 30, 1999, the Bank was permitted by regulations to invest up to
2% of assets in the capital stock of, and secured and unsecured loans to,
subsidiary corporations or service corporations and under certain circumstances
may make conforming loans to service corporations in greater amounts. As a
Pennsylvania-chartered savings institution, the Bank may diversify into any
business activity approved in advance by the Department. In addition, First
Financial could invest up to 30% of its assets in finance subsidiaries. Such
subsidiaries must be limited purpose subsidiaries whose sole purpose is to issue
debt or equity securities that the parent association is authorized to issue
directly and to remit the proceeds of such issuance to the parent association.
The Bank operates (as a wholly owned subsidiary) D & S Service
Corporation ("D & S Service"), which has participated in the development for
sale of residential properties, in particular condominium conversions and also
the development of commercial properties in order for the Bank to expand its
facilities to accommodate its growth. All of such projects have either been
located in or within close proximity to the Bank's primary market area. D & S
Service operates two wholly owned subsidiaries: Wildman Projects and D & F
Projects, Inc.
33
<PAGE>
At June 30, 1999, the Bank was authorized to have a maximum investment
of $8.93 million in its one first-tier wholly-owned subsidiary, D & S Service.
As of such date, the Bank had invested $1.19 million in this subsidiary.
Acquisition
On May 29, 1998, the Company acquired Philadelphia Corporation for
Investment Services, a full service investment advisory and securities brokerage
firm. The transaction was accounted for as a pooling of interests and the
shareholders of PCIS received 23.4239 shares of Chester Valley Bancorp Inc.
stock for each share of PCIS stock. Approximately 134,000 shares of CVAL stock
were issued in the exchange.
Competition
First Financial encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from commercial banks, other
savings and loan associations, savings banks and credit unions conducting
business in its primary market area. The Bank also encounters competition for
deposits from money market and other mutual funds, as well as corporate and
government securities and insurance companies. The principal methods used by the
Bank to attract deposit accounts include offering a variety of services and
interest rates and providing convenient office locations and expanded banking
hours. The Bank's competition for real estate and other loans comes principally
from other savings institutions, credit unions, commercial banks, mortgage
banking companies, insurance companies, and other institutional lenders. First
Financial competes for loans through interest rates, loan maturities, loan fees
and the quality of service extended to borrowers and real estate brokers.
Employees
The Company had 142 full-time employees and 30 part-time employees as
of June 30, 1999. None of these employees are represented by a collective
bargaining agent and the Company believes that it enjoys good relations with its
personnel.
34
<PAGE>
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank as in effect as of
the date of this Annual Report on Form 10-K. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
In recent periods there have been various legislative proposals in the
U.S. Congress to eliminate the thrift charter and the OTS. Although the Company
currently is unable to predict whether the existence of the thrift charter and
the OTS may be the subject of future legislation and, if so, what the final
contents of such legislation will be and their effects, if any, on the Company
and the Bank, such legislation could result in, among other things, the Company
becoming subject to the same regulatory capital requirements, activities
limitations and other requirements which are applicable to bank holding
companies under the Bank Holding Company Act of 1956 ("BHCA"). Unlike savings
and loan holding companies, bank holding companies are subject to regulatory
capital requirements, which generally are comparable to the regulatory capital
requirements which are applicable to the Bank, and unlike unitary savings and
loan holding companies such as the Company, which generally are not subject to
activities limitations, bank holding companies generally are prohibited from
engaging in activities or acquiring or controlling, directly or indirectly, the
voting securities or assets of any company engaged in any activity other than
banking, managing or controlling banks and bank subsidiaries or other activities
that the Federal Reserve Board has determined, by regulation or otherwise, to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.
Regulation of the Company
Federal Regulation-General. The Company is a registered savings and
loan holding company within the meaning of the Home Owners' Loan Act. As such,
the Company is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and
35
<PAGE>
loan holding companies, if the savings association subsidiary of such a holding
company fails to meet the Qualified Thrift Lender ("QTL") test, then such
unitary holding company shall become subject to the activities restrictions
applicable to multiple savings and loan holding companies and, unless the
savings association re-qualifies as a QTL within one year thereafter, shall
register as, and become subject to the restrictions applicable to, a bank
holding company. See "-Regulation of the Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings associations) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings association shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof any business activity, upon prior
notice to, and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings association; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings association; (iv) holding
or managing properties used or occupied by a subsidiary savings association; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple savings and loan
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
Federal Limitations on Transactions with Affiliates. Transactions
between savings associations and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings association is any
company or entity which controls, is controlled by or is under common control
with the savings association. As a result, the Company and PCIS are affiliates
of the Bank. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
36
<PAGE>
In addition, Sections 22(g) and (h) of the Federal Reserve Act places
restrictions on loans by savings associations to executive officers, directors
and principal stockholders of the Company and the Bank. Under Section 22(h),
loans to a director, an executive officer and to a greater than 10% stockholder
of a savings association or the company that controls the savings association,
and certain affiliated interests of such insiders (i) may not exceed, together
with all other outstanding loans to such person and affiliated interests, the
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus) (ii) must be made on terms
substantially the same as offered in comparable transactions to other persons,
provided the Bank is not prohibited from extending credit pursuant to a benefit
or compensation program widely available to employees of the Bank and the
Company and that does not give preference to any officer, director or principal
stockholder over other employees thereof, and (iii) may in certain cases,
require prior board approval. In addition, the aggregate amount of extensions of
credit by a savings association to all insiders cannot exceed the association's
unimpaired capital and surplus. Furthermore, Section 22(g) places certain
additional restrictions on loans to executive officers. At June 30, 1999, the
Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987, (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA)", or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
Regulation of PCIS
General. In the United States, a number of federal regulatory agencies
are charged with safeguarding the integrity of the securities and other
financial markets and with protecting the interest of customers participating in
those markets. The SEC is the federal agency that is primarily responsible for
the regulation of broker-dealers and investment advisers doing business in the
United States, and the Federal Reserve Board promulgates regulations applicable
to
37
<PAGE>
securities credit transactions involving broker-dealers and certain other
institutions in the Unites States. Much of the regulation of broker-dealers,
however, has been delegated to self-regulatory organizations ("SROs"),
principally the National Association of Securities Dealers, Inc. ("NASD") (and
its subsidiaries NASD Regulation, Inc. and the Nasdaq Stock Market), and the
national securities exchanges. These SROs and exchanges adopt rules (which are
subject to approval by the SEC) that govern the industry, monitor daily activity
and conduct periodic examinations of member broker-dealers. While PCIS is not a
member of the New York Stock Exchange (the "NYSE"), PCIS' business is impacted
by the NYSE rules.
Securities firms are also subject to regulation by state securities
commissions in the states in which they are required to be registered. PCIS is
registered as a broker-dealer with the SEC and in all 50 states and in the
District of Columbia, and is a member of, and subject to regulation by, a number
of SROs, including the NASD.
As a result of federal and state registration and SRO memberships, PCIS
is subject to overlapping schemes of regulation which cover all aspects of its
securities business. Such regulations cover matters including capital
requirements, uses and safe-keeping of clients' funds, conduct of directors,
officers and employees, record-keeping and reporting requirements, supervisory
and organizational procedures intended to assure compliance with securities laws
and to prevent improper trading on material nonpublic information,
employee-related matters, including qualification and licensing of supervisory
and sales personnel, limitations on extensions of credit in securities
transactions, clearance and settlement procedures, requirements for the
registration, underwriting, sale and distribution of securities, and rules of
the SROs designed to promote high standards of commercial honor and just and
equitable principles of trade. A particular focus of the applicable regulations
concerns the relationship between broker-dealers and their customers. As a
result, the many aspects of the broker-dealer customer relationship are subject
to regulation including, in some instances, "suitability" determinations as to
certain customer transactions, limitations on the amounts that may be charged to
customers, timing of proprietary trading in relation to customers' trades and
disclosures to customers.
PCIS also is subject to "Risk Assessment Rules" imposed by the SEC
which require, among other things, that certain broker-dealers maintain and
preserve certain information, describe risk management policies and procedures
and report on the financial condition of certain affiliates whose financial and
securities activities are reasonably likely to have a material impact on the
financial and operational condition of the broker-dealers. Certain "Material
Associated Persons" (as defined in the Risk Assessment Rules) of the
broker-dealers and the activities conducted by such Material Associated Persons
may also be subject to regulation by the SEC.
PCIS is registered as an investment adviser with the SEC. As an
investment adviser registered with the SEC, it is subject to the requirements of
the Investment Advisers Act of 1940 and the SEC's regulations thereunder, as
well as certain state securities laws and regulations. Such requirements relate
to, among other things, limitations on the ability of an investment adviser to
charge performance-based or non-refundable fees to clients, record-keeping and
reporting requirements, disclosure requirements, limitations on principal
transactions between an adviser or its affiliates and advisory clients, as well
as general anti-fraud prohibitions. The
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state securities law requirements applicable to registered investment advisers
are in certain cases more comprehensive than those imposed under the federal
securities laws.
In the event of non-compliance with an applicable regulation,
governmental regulators and the NASD may institute administrative or judicial
proceedings that may result in censure, fine, civil penalties (including treble
damages in the case of insider trading violations), the issuance of
cease-and-desist orders, the deregistration or suspension of the non-compliant
broker-dealer or investment adviser, the suspension or disqualification of the
broker-dealer's officers or employees or other adverse consequences. The
imposition of any such penalties or orders on PCIS could have a material adverse
effect on PCIS' (and thus the Company's) operating results and financial
condition.
Net Capital Requirements. As a broker-dealer registered with the SEC
and as a member firm of the NASD, PCIS is subject to the capital requirements of
the SEC and the NASD. These capital requirements specify minimum levels of
capital, computed in accordance with regulatory requirements, that PCIS is
required to maintain and also limit the amount of leverage that each firm is
able to obtain in its respective business.
"Net capital" is essentially defined as net worth (assets minus
liabilities, as determined under generally accepted accounting principles), plus
qualifying subordinated borrowings, less the value of all of a broker-dealer's
assets that are not readily convertible into cash (such as goodwill, furniture,
prepaid expenses and unsecured receivable), and further reduced by certain
percentages (commonly called "haircuts") of the market value of a
broker-dealer's positions in securities and other financial instruments.
Compliance with regulatory net capital requirements could limit those operations
that require the intensive use of capital, such as underwriting and trading
activities.
The SEC's capital rules also (i) require that broker-dealers notify it,
in writing, two business days prior to making withdrawals or other distributions
of equity capital or lending money to certain related persons if those
withdrawals would exceed, in any 30-day period, 30% of the broker-dealer's
excess net capital, and that they provide such notice within two business days
after any such withdrawal or loan that would exceed, in any 30-day period, 20%
of the broker-dealer's excess net capital, (ii) prohibit a broker-dealer from
withdrawing or otherwise distributing equity capital or making related party
loans if after such distribution or loan, the broker-dealer has net capital of
less than $300,000 or if the aggregate indebtedness of the broker-dealer's
consolidated entities would exceed 1,000% of the broker-dealer's net capital and
in certain other circumstances, and (iii) provide that the SEC may, by order,
prohibit withdrawals of capital from a broker-dealer for a period of up to 20
business days, if the withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer's excess net capital and if the SEC believes such withdrawals
would be detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer's ability to pay its customer claims or other
liabilities.
As of June 30, 1999, PCIS was required to maintain minimum net capital,
in accordance with SEC rules, of $250,000 and had total net capital of $1.53
million, or $1.28 million in excess of the minimum amount required. PCIS is
required to maintain a net capital ratio, in
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accordance with SEC rules, not to exceed 15 to 1. At June 30, 1999 PCIS' net
capital ratio was .05 to 1.
A failure of a broker-dealer to maintain its minimum required net
capital or net capital ratio would require it to cease executing customer
transactions until it came back into compliance, and could cause it to lose its
NASD membership, its registration with the SEC or require its liquidation.
Further, the decline in a broker-dealer's net capital below certain "early
warning levels," even though above minimum net capital requirements, could cause
material adverse consequences to the broker-dealer.
PCIS is a member of the Securities Investor Protection Corporation
("SIPC") which is a non-profit corporation that was created by the United States
Congress under the Securities Protection Act of 1970. SIPC protects customers of
member broker-dealers against losses caused by the financial failure of the
broker-dealer but not against a change in the market value of securities in
customers' accounts at the broker-dealer. In the event of the inability of a
member broker-dealer to satisfy the claims of its customers in the event of its
failure, the SIPC's funds are available to satisfy the remaining claims up to
maximum of $500,000 per customer, including up to $100,000 on claims for cash.
In addition, PCIS' clearing broker carries private insurance which provides
similar coverage up to $25 million per customer.
Regulation of the Bank
General. The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS's enforcement authority over all savings associations and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
Insurance of Accounts. The deposits of the Bank are insured up to
$100,000 per depositor (as defined by law and regulation) by the SAIF, which is
administered by the FDIC, and are backed by the full faith and credit of the
United States Government. As insurer, the FDIC is authorized to conduct
examinations of, and to require reporting by, FDIC-insured institutions, such as
the Bank. It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to
the FDIC. The FDIC also has the authority to initiate enforcement actions where
the OTS has failed or declined to take such action after receiving a request to
do so from the FDIC.
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The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF.
Effective October 8, 1996, the FDIC imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996. The Bank's one-time
special assessment amounted to $1.39 million. Net of related tax benefits, the
one-time special assessment amounted to $832,000. The payment of the special
assessment reduced the Bank's capital by the amount of the assessment.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by Bank Insurance Fund ("BIF") and SAIF members. Beginning
October 1, 1996, effective SAIF rates range from zero basis points to 27 basis
points which is the same range of premiums as paid by insured institutions
insured by the BIF administered by the FDIC. From 1997 through 1999,
SAIF-insured institutions will pay 6.4 basis points of their SAIF-assessable
deposits to fund the Financing Corporation.
Regulatory Capital Requirements - General. Federally insured savings
associations are required to maintain minimum levels of regulatory capital.
These standards generally must be no less stringent than the capital
requirements applicable to national banks. The OTS also is authorized to impose
capital requirements in excess of these standards on individual associations on
a case-by-case basis.
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total assets (as defined in the regulations), core capital equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to
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8% of risk-weighted assets. For purposes of the regulation, tangible capital is
core capital less all intangibles other than qualifying mortgage servicing
rights, and any investment in non-permissible subsidiaries, which are
subsidiaries which are not engaged in permissible activities. Core capital
includes common stockholders' equity, non-cumulative perpetual preferred stock
and related surplus, minority interest in the equity accounts of fully
consolidated subsidiaries and certain non-withdrawable accounts and pledged
deposits. Core capital generally is reduced by the amount of a savings
association's intangible assets other than qualifying mortgage servicing rights.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt which meets specified
requirements and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items, are
multiplied by a risk-weight based on the risk inherent in the type of assets.
The risk weights assigned by the OTS for principal categories of assets
currently range from 0% to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax
assets under SFAS No. 109 that may be included in regulatory capital. (Net
deferred tax assets represent deferred tax assets, reduced by an valuation
allowances, in excess of deferred tax liabilities.) Application of the limit
depends on the possible sources of taxable income available to an institution to
realize deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited: taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and carryforwards),
or its tax-planning strategies, such deferred tax assets are limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year of the quarter-end report date or 10% of core capital. The
foregoing considerations did not affect the calculation of the Bank's regulatory
capital at June 30, 1999.
In April 1991 the OTS proposed to modify the 3% of adjusted total
assets core capital requirement in the same manner as was done by the
Comptroller of the Currency for national banks. Under the OTS proposal, only
savings associations rated composite 1 under the CAMEL rating system will be
permitted to operate the regulatory minimum core capital ratio of 3%. For all
other savings associations, the minimum core capital ratio will be 3% plus at
least an additional 100 to 200 basis points, which thus will increase the core
capital ratio requirement to 4% to 5% of adjusted total assets or more. In
determining the amount of additional capital, the OTS will assess both the
quality of risk management systems and the level of overall risk in each
individual savings association through the supervisory process on a case-by-case
basis.
In August 1993, the OTS adopted a final rule incorporating an
inters-rate risk component into the risk-based capital regulation. Under the
rule, an institution with greater that "normal"
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interest rate risk will be subject to a deduction of its interest rate risk
component from total capital for purposes of calculating its risk-based capital.
As a result, such an institution will be required to maintain additional capital
in order to comply with the risk-based capital requirement. An institution has
greater than "normal" interest rate risk if it would suffer a loss of net
portfolio value exceeding 2.0% of the estimated market value of its assets in
the event of a 200 basis point increase or decrease in interest rates. The
interest rate risk component will be calculated, on a quarterly basis, as
one-half of the difference between an institution's measured interest rate risk
and 2.0% multiplied by the market value of its assets. The rule also authorizes
the OTS to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994
the OTS indicated that it would waive the capital deductions for institutions
with greater than "normal" risk until the OTS published an appeals process. On
August 21, 1995, the OTS established (1) an appeals process to handle "requests
for adjustments" to the interest rate risk component and (2) a process by which
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to determine their interest rate risk component. The
OTS also indicated that it would continue to delay the implementation of the
capital deduction for interest rate risk pending the testing of the appeals
process.
The following table sets forth a reconciliation between the Bank's
stockholder's equity and each of its three capital requirements at June 30,
1999.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital
(to Risk Weighted Assets) $34,005 13.05% $20,848 8.00% $26,060 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $30,768 11.81% $10,424 4.00% $15,636 6.00%
Tier 1 Capital
(to Average Assets) $30,768 6.86% $17,934 3.00% $22,418 5.00%
</TABLE>
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. See "- Prompt Corrective
Regulatory Action."
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Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 4%. At June 30, 1999, the Bank's liquidity ratio was 18.34% and
its short-term liquidity ratio was 18.34%.
Real Estate Lending Standards. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the federal banking
agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set
forth, pursuant to the mandates of the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA"), uniform regulations prescribing standards for real
estate lending which is defined as extension of credit secured by liens on
interests in real estate or made for the purpose of financing the construction
of a building or other improvements to real estate, regardless of whether a lien
has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The Guidelines, among other things, establish the
following supervisory LTV limits: raw land (65%); land development (75%);
construction (commercial, multi-family and nonresidential) (80%); improved
property (85%) and one-to-four family residential (owner occupied) (no maximum
ratio, although any LTV ratio in excess of 90% should require appropriate
insurance or readily marketable collateral).
Certain institutions can make real estate loans that do not conform with
the established LTV ratio limits up to 100% of the institution's total capital.
Within this aggregate limit, total loans for all commercial, agricultural,
multi-family and other non-one-to-four family residential properties should not
exceed 30% of total capital. An institution will come under increased
supervisory scrutiny as the total of such loans approaches these levels. Certain
loans are exempt from the LTV ratios (e.g. those guaranteed by a government
agency, loans to facilitate the sale of REO, loans renewed, refinanced or
restructured by the original lender(s) to the same borrower(s) where there is no
advancement of new funds, etc.).
Accounting Requirements. Applicable OTS accounting and reporting
requirements incorporates the following standards: (i) regulatory reports will
incorporate generally accepted accounting principles ("GAAP") when GAAP is used
by federal banking agencies; (ii) savings association transactions, financial
condition and regulatory capital must be reported and disclosed in accordance
with OTS regulatory reporting requirements
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that will be at least as stringent as for national banks; and (iii) the director
of the OTS may prescribe regulatory reporting requirements more stringent than
GAAP whenever the director determines that such requirements are necessary to
ensure the safe and sound reporting and operation of savings association.
Prompt Corrective Regulatory Action. Under Section 38 of the FDIA, as
added by FDICIA, each appropriate agency and the FDIC is required to take prompt
corrective action to resolve the problems of insured depository institutions
that do not meet minimum capital ratios. Such action must be accomplished at the
least possible long-term cost to the appropriate deposit insurance fund.
The federal banking agencies, including the OTS, adopted substantially
similar regulations in order to implement Section 38 of the FDIA, which
regulations became effective in December 1992. Under the regulations, an
institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).
The Bank complies with the requirements to be classified as well
capitalized.
Safety and Soundness. On November 18, 1993, a joint notice of proposed
rule making was issued by the OTS, the FDIC, the Office of the Comptroller of
the Currency, and the Federal Reserve Board (collectively, the "agencies")
concerning standards for safety and soundness required to be prescribed by
regulation pursuant to the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and earnings; and (3)
compensation. Legislation enacted in 1994: (1) authorizes the agencies to
establish safety and soundness standards by regulation or guideline for all
insured depository institutions; (2) gives the agencies greater flexibility in
prescribing asset quality and earnings standards by eliminating the requirement
that agencies establish quantitative standards; and (3) eliminates the
requirement that the standards referenced above apply to depository institution
holding companies. The agencies have published a final rule and interagency
guidelines ("Guidelines") as well as proposed asset quality and earning
standards which will be added to the Guidelines when finalized. The final rule
and Guidelines became effective in August 1995.
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Under the Guidelines and final rule of the OTS, if an insured savings
institution fails to meet any of the standards promulgated by Guidelines, then
the OTS may require such institution to submit a plan within 30 days (or such
different period specified by the OTS) specifying the steps it will take to
correct the deficiency. In the event that an institution fails to submit or
fails in any material respect to implement a compliance plan within the time
allowed by the OTS, the OTS must order the institution to correct the deficiency
and may (1) restrict asset growth; (2) require the institution to increase its
ratio of tangible equity to assets; (3) restrict the rates of interest that the
institution may pay; or (4) take any other action that would better carry out
the purpose of prompt corrective action. The Bank believes that it is in
compliance with each of the standards as adopted.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association." The
Bank is a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assents, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and education loans)
are now included without limit with other assets that, in the aggregate, may
account for up to 20% of total assets. At June 30, 1999, under the expanded QTL
test, approximately 79.6% of the Bank's portfolio assets were qualified thrift
investments.
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings institutions, which include cash dividends, stock
repurchases and other transactions charged to the capital account of a savings
institution to make capital distributions. Under new regulations effective April
1, 1999, a savings institution must file an application for OTS approval of the
capital distribution if either (1) the total capital distributions for the
applicable calendar year exceed the sum of the institution's net income for that
year to date plus the institution's retained net income for the preceding two
years, (2) the institution would not be at least adequately capitalized
following the distribution, (3) the distribution would violate any applicable
statute, regulation, agreement or OTS-imposed condition, or (4) the institution
is not eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
company (as well as certain other institutions)
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must still file a notice with the OTS at least 30 days before the board of
directors declares a dividend or approved a capital distribution.
Federal Home Loan Bank System. The Bank is a member of the FHLBP, which
is one of 12 regional FHLBs that administers the home financing credit function
of savings associations and commercial banks. Each FHLB serves as a source of
liquidity for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by its Board of Directors. As of June 30, 1999, the
Bank's advances from the FHLBP amounted to $50.38 million.
As a member, the Bank is required to purchase and maintain stock in the
FHLBP in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At June 30, 1999, the Bank
had $3.78 million in FHLB stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future. For the year ended June 30,
1999, dividends paid by the FHLBP to the Bank totaled approximately $208,200.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and super NOW checking accounts) and non-personal time deposits.
At June 30, 1999, the Bank was in compliance with such requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
non-interest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an association's earning assets. The amount of
funds necessary to satisfy this requirement has not had a material affect on the
Bank's operations.
Interstate Acquisitions
The Commonwealth of Pennsylvania adopted legislation on 1986 ("1986
Act") regarding the acquisition of financial institutions located in
Pennsylvania by institutions located outside of Pennsylvania. The 1986 Act: (1)
permits federal or state savings and loan associations, federal savings banks
and bank or savings and loan holding companies (collectively, "Thrift Entities")
that are "located" (as defined below) in a state that offers reciprocal rights
to similar Thrift Entities located in Pennsylvania, to acquire 5% or more of a
Pennsylvania Thrift Entity's voting
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stock, merge or consolidate with a Pennsylvania Thrift Entity or purchase the
assets and assume the liabilities of the Pennsylvania Thrift Entity and (2)
permits a federal or state savings and loan association or federal savings bank
to establish and maintain branches in Pennsylvania, provided that the state
where such foreign Thrift Entity is located offers reciprocal rights to similar
entities located in Pennsylvania and provided that each state where any bank
holding company or savings and loan holding company owning or controlling 5% or
more of the foreign Thrift Entity's shares is also located in a state that
offers reciprocal rights. Under the Pennsylvania Act, a depository is "located"
where its deposits are largest and a holding company is generally "located"
where the aggregate deposits of its subsidiaries are largest. Whether a foreign
state's laws are "reciprocal" is determined by the Pennsylvania Department,
which may impose limitations and conditions on the branching and acquisition
activities of a Thrift Entity located in a foreign state in order to make the
laws of such state reciprocal to Pennsylvania law with respect to the type of
transaction at issue.
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TAXATION
Federal and State Taxation
General. The Company and the Bank are subject to the corporate tax
provisions of the Internal Revenue Code of 1986 (the "Code"), as well as certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of tax matters is intended only
as a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Company and the Bank.
Bad Debt Reserves. Legislation enacted under the Small Business Job
Protection Act of 1996 (the "Act") provided for the Bank to recapture into
income, over a six-year period, only the portion of its tax bad debt reserves as
of June 30, 1996, that exceed its base year reserves (i.e., tax reserves for
years beginning before 1988). Under the Act, the amount of the excess base year
reserves subject to recapture would be suspended for each of two successive tax
years beginning July 1, 1996, in which the Bank originates a minimum amount of
certain residential loans based upon the average of the principal amounts of
such loans the Bank made during its six preceding tax years. The Bank's total
tax bad debt reserves at June 30, 1999, are approximately $3.04 million, of
which $2.64 million represents the base year amount and $407,000 is subject to
recapture. The Company has previously recorded a deferred tax liability for the
excess base year reserves to be recaptured; therefore, this recapture will not
impact the statement of operations. The base year tax reserves, which may be
subject to recapture if the Bank ceases to qualify as a bank for federal income
tax purposes, are restricted to certain distributions. Under the provisions of
the Act, the Bank is considered a "small bank" (i.e., a bank that has total
assets under $500 million) and may claim its tax bad debt for tax years
beginning after December 31, 1995, using a six-year average of its loan
charge-offs to total loans.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The alternative minimum tax is
payable to the extent such AMTI is in excess of an exemption amount. The Code
provides that an item of tax preference is the excess of bad debt deduction
allowable for a taxable year over the amount allowable under the experience
method. The other items of tax preference that constitute AMTI include (a)
tax-exempt interest on a newly issued (generally, issued on or after August 8,
1986) private activity bonds other than certain qualified bonds and (b) for
taxable years beginning after 1989, 75% of the excess (if any) of (i) adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses). Net
operating losses can offset no more than 90% of AMTI. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. In addition, for taxable years after 1986 and beginning before
January 1, 1996, the Company is also subject to an environmental tax equal to
0.12% of the excess of AMTI for the taxable year over $2.0 million.
IRS Examinations. The Company's consolidated federal income tax returns
for taxable years through June 30, 1995, have been closed for the purposes of
examination by the IRS.
49
<PAGE>
State Taxation. The Company and its non-thrift Pennsylvania subsidiaries
are subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and
Franchise Tax. The Corporate Net Income Tax rate for 1998 is 9.99% and is
imposed on the Company's and its non-thrift subsidiaries' unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at the rate of 1.275% of a corporation's
capital stock value, which is determined in accordance with a fixed formula.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax
Act (the "MTIT"), as amended to include thrift institutions having capital
stock. Pursuant to the MTIT, the Company's tax rate is 11.5%. The MTIT exempts
the Company from all other taxes imposed by the Commonwealth of Pennsylvania for
state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principals ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on Pennsylvania and
federal obligations, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those obligations to
the overall interest income of the Company. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes.
50
<PAGE>
ITEM 2. PROPERTIES
- -------------------
Offices and Other Material Properties
At June 30, 1999, the Bank conducted its business from its main office
in Downingtown, Pennsylvania and eight full-service branch offices. PCIS
conducts its business from two offices.
The following table sets forth certain information with respect to the
offices of the Company as of June 30, 1999:
<TABLE>
<CAPTION>
Net Book Value of
Lease Property and Leasehold
Owned or Expiration Improvements at
Leased Date June 30, 1999 Deposits
------ ---- ------------- --------
<S> <C> <C> <C> <C>
First Financial Bank:
Main Office:
100 E. Lancaster Avenue
Downingtown PA 19335 Own -- $ 986 $112,752
Branch Offices:
Exton-Lionville
601 N. Pottstown Pike
Exton PA 19341 Own -- 402 63,082
Frazer-Malvern
200 W. Lancaster Avenue
Frazer PA 19355 Own -- 1,303 39,211
Thorndale
3909 Lincoln Highway
Downingtown PA 19335 Lease 9/30/2000 42 44,142
Westtown
1197 Wilmington Pike
West Chester PA 19382 Lease 10/31/99 120 52,080
Airport Village
102 Airport Road Own Bldg.
Coatesville PA 19320 Lease Land 11/30/04 324 17,371
Brandywine Square
82 Quarry Road
Downingtown PA 19335 Lease 8/14/11 90 25,568
Devon
414 Lancaster Avenue
Devon PA 19333 Own -- 1,449 5,308
------ --------
Total $4,716 $359,514
====== ========
PCIS:
Philadelphia
One Liberty Place, Suite 3050
1650 Market Street,
Philadelphia PA 19103 Lease 5/31/04
Wayne
485 Devon Park Dr. Suite 109
Wayne PA 19087 Lease 11/30/02
</TABLE>
In addition, the Company currently owns two developed properties
adjacent to its main office. These properties are being held for possible use as
future office facilities and expansion
51
<PAGE>
of the main office. One of the properties is currently being leased to other
users. The net book value of each of the two parcels at June 30, 1999 was
approximately $10,800 and $86,300.
In September 1989, the Bank entered into a 10-year operating lease for
the Bank's Westtown office. The lease contains two five-year options to renew.
In October 1990, the Bank entered into a 10-year lease agreement in
connection with the relocation of its existing branch in Thorndale to a new site
in the Thorndale area. The lease includes two five-year options to extend the
lease.
In May 1994, the Bank entered into a 10-year lease agreement for land in
connection with the construction of the Airport Village branch. The lease
includes three five-year options to extend the lease.
In April 1995, the Bank entered into a 15-year lease agreement for the
Bank's Brandywine Square office.
In December 1997, PCIS entered into a 5-year lease agreement for PCIS's
Wayne office.
In June 1999, PCIS entered into a 5-year lease agreement for PCIS's
Philadelphia office.
First Financial operates and participates in the MAC(R) Money Access
Service shared Automated Teller Machine ("ATM") network system. In addition,
First Financial operates seven office ATMs under the MAC(R) system.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not involved in any pending legal proceedings other than
routine, non-material legal proceedings occurring in the ordinary course of
business which management believes will not have a material adverse effect on
the financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The information required herein is incorporated by reference from
"Market Information" on page 23 of the Company's 1999 Annual Report to
Stockholders included herein as Exhibit 13 hereto ("Annual Report").
52
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required herein is incorporated by reference from page 3
of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The information required herein is incorporated by reference from pages
16 to 23 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information required herein can be found on pages 28 to 29 of this
10K document.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements and supplementary data required herein are
incorporated by reference from pages 24 to 40 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required herein is incorporated by reference from pages
2 to 7 of the Company's Definitive Proxy Statement which will be filed with the
SEC within 120 days of the end of the Company's fiscal year ("Definitive Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required herein is incorporated by reference on pages 9
and 10 of the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required herein is incorporated by reference from pages
1 to 9 of the Company's Definitive Proxy Statement.
53
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
The information required herein is incorporated by reference to page 18
of the Definitive proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) The following financial statements are incorporated by reference
into Item 8 hereof from pages 24 to 40 of the Annual Report,
Exhibit 13 hereto:
Consolidated Statements of Financial Condition at June 30, 1999
and 1998 Consolidated Statements of Operations for the Years
Ended June 30, 1999, 1998, and 1997 Consolidated Statements of
Stockholders' Equity for the Years Ended June 30, 1999, 1998, and
1997 Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(2) Financial statement schedules for which provision is made in the
applicable accounting regulations of the SEC are omitted because
of the absence of the conditions under which they are required or
because the required information is set forth in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K
None
54
<PAGE>
(c) The following exhibits are filed as a part of this form 10-K and this list
includes the Index to Exhibits.
Index to Exhibits
Number Description of Documents
- ------ ------------------------
3a Restated Articles of Incorporation**
3b Bylaws, as amended
4 Specimen Stock Certificate*
10a Key Employee Stock Compensation Program, as amended**
10b Employee Stock Ownership Plan**
10c Employment Agreement By and Between the Holding Company, the Bank
and Ellen Ann Roberts**
10e Employment Agreement By and Between the Holding Company, the Bank
and Colin N. Maropis**
10f Employment Agreement By and Between the Holding Company, the Bank
and Anthony J. Biondi**
10h Amendment No. 1 to the Employment Agreement By and Between the
Holding Company, the Bank and Ellen Ann Roberts***
10j Amendment No. 1 to the Employment Agreement By and Between the
Holding Company, the Bank and Colin N. Maropis ***
10k Amendment No. 1 to the Employment Agreement By and Between the
Holding Company, the Bank and Anthony J. Biondi***
101 1997 Stock Option Plan****
10m 1993 Stock Option Plan as Amended
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant - Reference is made to Item, 1,
Business - Subsidiaries," for the required information
23 Consent of Independent Auditors
27 Financial Statement Schedule
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-4 (33-30433) dated August 10, 1989
(**) Incorporated herein by reference from the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1990
(***) Incorporated herein by reference from the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1992
(****) Incorporated herein by reference from the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1997
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CHESTER VALLEY BANCORP INC.
September 28, 1999 By: /s/ Ellen Ann Roberts
---------------------
Ellen Ann Roberts
Director, Chairman of the Board
and Chief Executive Officer
56
<PAGE>
/s/ Anthony J. Biondi September 28, 1999
- ---------------------
Anthony J. Biondi
Director
/s/ Robert J. Bradbury September 28, 1999
- ----------------------
Robert J. Bradbury
Director
/s/ Edward T. Borer September 28, 1999
- -------------------
Edward T. Borer
Director
/s/ John J. Cunningham, III September 28, 1999
- ---------------------------
John J. Cunningham, III
Director
/s/ Gerard F. Griesser September 28, 1999
- -----------------------
Gerard F. Griesser
Director
/s/ James E. McErlane September 28, 1999
- ----------------------
James E. McErlane
Director and Secretary
/s/ Richard L. Radcliff September 28, 1999
- ------------------------
Richard L. Radcliff
Director
/s/ Emory S. Todd September 28, 1999
- ------------------
Emory S. Todd
Director
/s/ William M. Wright September 28, 1999
- ----------------------
William M. Wright
Director
/s/ Anthony J. Biondi September 28, 1999
- ---------------------
Anthony J. Biondi
President, COO and
Acting Chief Financial Officer
57
BYLAWS
OF
CHESTER VALLEY BANCORP INC.
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of Chester Valley Bancorp
Inc. (the "Corporation") shall be located in the Commonwealth of Pennsylvania at
such place as may be fixed from time to time by the Board of Directors upon
filing of such notices as may be required by law.
1.2 Other Offices. The Corporation may have other offices within or
outside the Commonwealth of Pennsylvania at such place or places as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
STOCKHOLDERS' MEETINGS
2.1 Meeting Place. All meetings of the stockholders of the Corporation
shall be held at the principal place of business of the Corporation, or at such
other place within or without the Commonwealth of Pennsylvania as shall be
determined from time to time by the Board of Directors, and the place at which
any such meeting shall be held shall be stated in the notice of the meeting.
2.2 Annual Meeting. An annual meeting of the stock-holders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held at such date and time as may be
determined by the Board of Directors and stated in the notice of such meeting.
2.3 Organization. Each meeting of the stockholders shall be presided
over by the Chairman of the Board or by the President, or if neither the
Chairman nor the president is present, by any Executive or Senior Vice
President. The Secretary, or in his or her absence an Assistant Secretary, shall
act as secretary of each meeting of the stockholders. In the absence of the
Secretary and any Assistant Secretary, the chairman of the meeting may appoint
any person present to act as secretary of the meeting. The chairman of any
meeting of the stockholders, unless prescribed by law or regulation or unless
the Chairman of the Board has otherwise determined, shall determine the order of
the business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussions as seem to him or her in order.
1
<PAGE>
2.4 Special Meetings. Special meetings of the stockholders may be
called at any time by the Chairman, the President, or a majority of the Board of
Directors.
2.5 Notice of Meetings. Written notice of every meeting of the
stockholders shall be given by or at the direction of the person or persons
authorized to call the meeting to each stockholder of record entitled to vote at
the meeting at least ten (10) days prior to the date named for the meeting,
unless a greater period of notice is required by law in a particular case. Such
notice need not be given to stockholders not entitled to vote at the meeting
unless such stockholders are entitled by law to such notice in a particular
case. Notice shall be deemed to have been properly given to a stockholder when
delivered to such stockholder personally, or when deposited in the United States
mail with first-class postage prepaid or when deposited in a telegraph office,
charges prepaid, and directed to the address of such stockholder appearing on
the books of the Corporation or supplied by such stockholder to the Corporation
for the purpose of notice; and a certificate or affidavit by the Secretary or an
Assistant Secretary or a transfer agent shall be conclusive evidence of the
giving of any notice required by these By-Laws. If the notice is sent by mail or
by telegraph, it shall be deemed to have been given to the person entitled
thereto when deposited in the United States mail or with the telegraph office
for transmission to such person. Such notice shall specify the place, day and
hour of the meeting, and shall state the nature of the business to be transacted
to the extent required by law.
2.6 Notice of Adjournments. Upon adjournment of an annual or special
meeting of stockholders, it shall not be necessary to give any notice of the
adjourned meeting or of the business to be transacted thereat, other than by
announcement of the meeting at which such adjournment is taken. At any
adjournment meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting
originally called.
2.7 Voting Record. The Corporation shall make a complete record of the
stockholders entitled to vote at each meeting of the stockholders of the
Corporation, or any adjournment thereof, arranged in alphabetical order, with
the address of and number of shares held by each. The record shall be kept open
at the time and place of such meeting for inspection by any stockholder.
2.8 Quorum. Except as otherwise provided in the Articles of
Incorporation or these Bylaws or provided by statute, a quorum at any annual or
special meeting of stockholders shall consist of stockholders representing
either in person or by proxy, a majority of the votes that all stockholders are
entitled to cast on a particular matter for purposes of action on the matter.
2
<PAGE>
2.9 Voting of Shares. Except as otherwise provided in the Articles of
Incorporation or these Bylaws or provided by statute, each stockholder shall
have one vote for each share of stock having voting power registered in the
stockholder's name on the books of the Corporation and the acts at a duly
organized meeting of the stockholders present, in person or by proxy, entitled
to cast at least a majority of the votes that all stockholders present in person
or by proxy are entitled to cast shall be the acts of the stockholders. Except
as otherwise provided by statute, in connection with the election of directors
at a duly organized meeting of stockholders, the nominees receiving the highest
number of votes from each class or group of classes, if any, entitled to elect
directors separately, up to the number of directors to be elected by the class
or group of classes, shall be elected. Stockholders shall not be permitted to
cumulate their votes for the election of directors.
2.10 Stockholders May Vote in Person or by Proxy. Every stockholder
entitled to vote may vote either in person or by proxy. Every proxy shall be
executed in writing by a stockholder or by his duly authorized attorney-in-fact
and filed with the Secretary of the Corporation. A proxy, unless coupled with an
interest, shall be revocable at will, notwithstanding any other agreement or any
provision in the proxy to the contrary, but the revocation of a proxy shall not
be effective until notice thereof has been given to the Secretary of the
Corporation. No unrevoked proxy shall be valid after eleven (11) months from the
date of its execution, unless a longer time is expressly provided therein, but
in no event shall a proxy, unless coupled with an interest, be voted on or after
three (3) years from the date of its execution. A proxy shall not be revoked by
the death or incapacity of the maker, unless, before the vote is counted or the
authority is exercised, written notice of such death or incapacity is given to
the Secretary of the Corporation.
2.11 Judges of Election. For each meeting of stockholders, the Board of
Directors may appoint one or three judges of election. If for any meeting the
judge(s) appointed by the Board of Directors shall be unable to act or the Board
of Directors shall fail to appoint any judge, one or three judge(s) may, and on
the request of any stockholder or his or her proxy shall, be appointed at the
meeting by the chairman thereof. The judges shall do all such acts as may be
proper to ascertain the existence of a quorum and the number of votes cast, and
to conduct the election or vote with fairness to all stockholders. They shall,
if requested by the chairman of the meeting or any stockholder or his or her
proxy, make a written report of any matter determined by them and execute a
certificate of any fact found by them. If there be three judges, the decision,
act, or certificate of a majority shall be effective in all respects as a
decision, act or certificate of all. Judges need not be
3
<PAGE>
stockholders, but no person who is a candidate for office shall act as a judge.
2.12 Stockholder Proposals. Any stockholder proposal to be considered
at the annual meeting, including any proposal to amend these bylaws or to change
any action of the Board of Directors with respect thereto, shall be stated in
writing and filed with the Secretary at least 45 days before the month and day
in the year of annual meeting which corresponds to month and day in the
immediately preceding year on which the Corporation first mailed its proxy
materials for the prior year's annual meeting of shareholders, except that, if
the date of the annual meeting changes more than 30 days from the prior year, or
if during the prior year the Corporation did not hold an annual meeting, then in
order to be considered at the annual meeting, the proposal must be stated in
writing and filed with the Secretary at least 45 days before the Corporation
mails its proxy materials for the current year." A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting (a) a brief description of the proposal desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting; (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business; (c) the class
and number of shares on the Corporation's books, of the stockholder proposing
such business; (d) the class and number of shares of the Corporation's stock
which are beneficially owned by the stockholder on the date of such stockholder
notice; and (e) any financial interest of the stockholder in such proposal. No
proposal which has not been so stated and filed shall be considered.
ARTICLE III
BOARD OF DIRECTORS
3.1 Number and Powers. The management of the affairs, property and
interest of the Corporation shall be vested in a Board of Directors of not less
than 3 directors who shall be natural persons of full age. The initial Board of
Directors shall consist of nine persons. The number of directors may at any time
be increased or decreased (subject to the minimum of 3 directors stated above)
by a vote of a majority of the Board of Directors, provided that no decrease
will have the effect of shortening the term of any incumbent director. The Board
of Directors shall be divided into three classes as nearly equal in number as
possible. The classification and terms of office of the directors shall be as
set forth in the Corporation's Articles of Incorporation. In addition to the
powers and authorities expressly conferred upon it and by these Bylaws and the
Articles of Incorporation, the Board of Directors may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by statute
or by the Articles of Incorporation or by these Bylaws directed or required to
be exercised or done by the stockholders.
4
<PAGE>
3.2 Vacancies. Vacancies in the Board of Directors, including those
caused by an increase in the number of directors, may be filled by a majority of
the remaining members of the Board though less than a quorum. Each person
elected to fill a vacancy created by the death, resignation or removal of a
director shall serve for the unexpired term of the director whom he or she
replaces and until his or her successor is duly elected and qualifies. Each
person elected to fill a vacancy created by an increase in the number of
directors shall be a director until the Corporation's next annual meeting of
stockholders and until his or her successor is elected by stockholders and
qualifies except that for vacancies occurring on and after October 1, 1989, each
person elected to fill a vacancy shall serve until the next selection of the
class for which such director has been chosen, and until his or her successor
has been elected and qualified.
3.3 Removal of Directors. The Board of Directors or the stockholders
may declare the office of a director vacant if he or she be judicially declared
of unsound mind or convicted of an offense punishable by imprisonment for a term
of more than one year or if the director has breached or failed to perform his
or her fiduciary duty to the Corporation and such breach or failure constitutes
self-dealing, willful misconduct or recklessness or if, within sixty (60) days
after notice of his or her election, he or she does not accept such office
either in writing or by attending a meeting of the Board.
3.4 Regular Meetings. Regular meetings of the Board of Directors or any
committee may be held without notice at the principal place of business of the
Corporation or at such other place or places, either within or without the
Commonwealth of Pennsylvania, as the Board of Directors or such committee, as
the case may be, may from time to time designate. The annual meeting of the
Board of Directors shall be held without notice immediately after the
adjournment of the annual meeting of stockholders.
3.5 Special Meetings. Special meetings of the Board of Directors may be
held at any time and place and shall be called by the Secretary upon the written
request of the Chairman of the Board of Directors, or any three (3) directors,
specifying the general purpose of the meeting. Upon receipt of such request, the
Secretary shall fix the place and time for such special meeting which shall not
be less than five (5) nor more than thirty (30) days after receipt of the
request. The Secretary shall give notice of the meeting at least three (3) days
prior to the meeting if delivered by mail at the address at which the director
is most likely to be reached, and at least 24 hours prior to the meeting, if
delivered personally or by telegram. Notice by mail or telegram shall be deemed
to be delivered when deposited in the U.S. mail, with postage prepaid, if mailed
and when delivered to the telegram company, if sent by telegram.
5
<PAGE>
3.6 Quorum: Voting. A majority of the directors in office shall be
necessary at all meetings to constitute a quorum of the Board of Directors for
the transaction of business and the acts of a majority of the directors present
(including participants by telephone or similar communication as provided in
Section 3.12) at a meeting at which a quorum is present shall be the acts of the
Board of Directors, except as may otherwise be specifically provided by statute,
or by the Articles of Incorporation or by these Bylaws.
3.7 Waiver of Notice. Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends
for the express purpose of objecting at the beginning of the meeting to the
transaction of any business because the meting is not lawfully called or
convened. A waiver of notice signed by the director or directors, whether before
or after the time stated for the meeting, shall be equivalent to the giving of
notice.
3.8 Nominations of Directors. Only persons who are nominated in
accordance with the procedures set forth in this Section 3.8 shall be eligible
for election, by stockholders, as directors. The Board of Directors shall act as
a nominating committee and, by resolution adopted by a majority of its members,
select the management nominees for election as directors. Except in the case of
a nominee substituted as a result of the death or other incapacity of a
management nominee, the Board shall deliver written nominations to the Secretary
at least 30 days prior to the date of the annual meeting. Provided the Board
makes such nominations, no nominations for directors except those made by the
Board and such other nominations as shall be made by stockholders in accordance
with the provisions of this Section 3.8 shall be voted upon at the annual
meeting. Nominations of individuals for election to the Board of Directors of
the Corporation at an annual meeting of stockholders may be made by any
stockholder of the Corporation entitled to vote for the election of directors at
that meeting who complies with the notice procedures set forth in this Section
3.8. Such nominations, other than those made by the Board of Directors acting as
the nominating committee, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation as set forth in this Section 3.8. To be timely,
a stockholder's notice shall be delivered to or received at the principal
executive offices of the Corporation not less than 30 days prior to the meeting.
Each such stockholder's notice shall set forth: (a) the name of the stockholder
who intends to make the nomination and of the person or persons to be nominated;
(b) a representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or
6
<PAGE>
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would be required to be
disclosed in a solicitation of proxies with respect to nominees for election as
directors, pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended, including but not limited to, information required to be disclosed
by Items 4, 5, 6 and 7 of Schedule 14A and information which would be required
to be filed on Schedule 14B with the Securities Exchange Commission (or any
successors of such items or schedules); and (e) the consent of each nominee to
serve as a director of the Corporation if so elected. At the request of the
Board of Directors, any person nominated by the Board of Directors for election
as a director shall furnish to the Secretary of the Corporation that information
required to be set forth in a stockholders' notice of nomination which pertains
to the nominee together with a written consent to serve as a director if
elected. No person shall be elected as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 3.8,
except that if the Board shall fail or refuse to act at least 30 days prior to
the annual meeting, nominations for directors may be made at the annual meeting
by any stockholder entitled to vote and shall be voted upon.
3.9 Executive and Other Committees. Standing or special committees may
be appointed from its own number by the Board of Directors from time to time,
and the Board of Directors may from time to time invest such committees with
such powers as it may see fit, subject to such conditions as may be prescribed
by the Board. An Executive Committee may be appointed by resolution passed by a
majority of the full Board of Directors. It shall have and exercise all of the
authority of the Board of Directors, except in reference to the submission to
stockholders of any action requiring stockholder approval, amending or repealing
any resolution of the Board that by its terms is amendable or repealable only by
the Board, taking action on matters committed by these Bylaws or resolution of
the Board to another committee of the Board, creating or filling a vacancy on
the Board of Directors or amending these Bylaws. All committees so appointed
shall keep regular minutes of the transactions of their meetings and shall cause
them to be recorded in books kept for that purpose in the office of the
Corporation.
3.10 Remuneration. No stated fee shall be paid to directors, as such,
for their service, but by resolution of the Board of Directors, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of such Board; provided, that nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefore. Members of standing or special
committees may be allowed like compensation for attending committee meetings.
7
<PAGE>
3.11 Action by Directors Without a Meeting. Any action which may be
taken at a meeting of the directors, or of a committee thereof, may be taken
without a meeting if a consent in writing, setting forth the action so taken or
to be taken, shall be signed by all of the directors, or all of the members of
the committee, as the case may be.
3.12 Action of Directors by Communications Equipment. Any action which
may be taken at a meeting of directors, or of a committee thereof, may be taken
by means of a conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other at the
same time. Participation in a meeting pursuant to this Section 3.12 shall
constitute presence in person at the meeting.
3.13 Discharge of Duties. In discharging the duties of their respective
positions, the Board of Directors shall, in considering the best interests of
the Corporation, consider the effects of any action upon the employees of the
Corporation and its subsidiaries, the depositors and the borrowers of any
insured institution subsidiary, the communities in which offices and other
establishments of the Corporation or any subsidiary are located and all other
pertinent factors.
3.14 Personal Liability of Directors. To the fullest extent permitted
by Pennsylvania law, as now in effect and as amended from time to time, a
director of the Corporation shall not be personally liable for monetary damages
for any action taken, or any failure to take any action, as a director.
ARTICLE IV
OFFICERS
4.1 Designations. The officers of the Corporation shall be elected by
the Board of Directors and shall be a President, a Secretary and a Treasurer. A
Chairman of the Board, one or more Vice President (including executive and
senior vice presidents), and such other officers and assistant officers also may
be elected or appointed as the Board of Directors may authorize from time to
time. Any number of officers may be held by the same person. The
responsibilities of the persons holding executive management positions may be
clarified, by adding descriptive works to the office they hold such as "Chief
Executive Officer." "Chief Operating Officer. "Chief Financial Officer," or a
similar term, which designations may be made only by the Board of Directors.
4.2 Election and Term of Office. Each officer shall hold office until
his or her successor shall have been duly elected and qualified or until his or
her death or until he or she shall resign or shall have been removed in the
manner hereinafter
8
<PAGE>
provided. A vacancy in an office for any cause may be filled by the Board of
Directors at any time, and pending the filling of a vacancy, the Board of
Directors may delegate the powers or duties of any office to another officer or
director or any other person it may select.
4.3 Removal of Officers. Any officer or agent elected or appointed by
the Board of Directors may be removed by the vote or a majority of the full
Board of Directors at any time, with or without cause, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
4.4 Posers and Duties. The officers of the Corporation shall have such
authority and perform such duties as the Board of Directors may from time to
time authorize or determine. In the absence of action of the Board of Directors,
the officers shall have such powers and duties as generally pertain to their
respective officers.
4.5 Delegation. In the case of absence or inability to act or any
officers of the Corporation and of any person authorized to act in his or her
place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or any director or other person it
may select.
4.6 Other Officers. The Board of Directors may appoint such other
officers and agents as it shall deem necessary or expedient, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors.
4.7 Bonds. The Board of Directors may, by resolution, require any and
all of the officers to give bonds to the Corporation, with sufficient surety or
sureties, conditioned for the faithful performance of the duties of their
respective offices, and to comply with such other conditions as may from time to
time be required by the Board of Directors.
4.8 Salaries. The salaries of all officers of the Corporation shall be
fixed by the Board of Directors or by authority conferred by resolution of the
Board. The Board also may fix the salaries or other compensation of assistant
officers, agents and employees of the Corporation, but in the absence of such
action, this function shall be performed by the President or by others under his
or her supervision.
9
<PAGE>
ARTICLE V
CAPITAL STOCK
5.1 Certificates. Certificates of stock shall be issued in numerical
order, and each stockholder shall be entitled to a certificate signed by the
President or a Vice President, and the Secretary or the Treasurer, and sealed
with the seal of the Corporation or a facsimile thereof. The signatures of such
officers may be facsimiles if the certificate is manually signed on behalf of a
transfer agent or registrar, other than the Corporation itself or an employee of
the Corporation. If an officer who has signed or whose facsimile signature has
been placed upon such certificate ceases to be an officer before the certificate
is issued, it may be issued by the Corporation with the same effect as if the
person were an officer on the date of issue. Each certificate of stock shall
state: (a) that the Corporation is incorporated under the laws of the
Commonwealth of Pennsylvania; (b) the name of the person whom issued; and (c)
the number and class of shares and the designation of the series, if any, which
such certificate represents.
5.2 Transfers.
(a) Transfers of stock shall be made only upon the stock transfer
books of the Corporation, kept at the registered office of the
Corporation or at its principal place of business, or at the office of
its transfer agent or registrar, and before a new certificate is issued
the old certificate shall be surrendered for cancellation. The Board of
Directors may, by resolution, open a share register in any state of the
United States, and may employ an agent or agents to keep such register,
ant to record transfers of shares therein.
(b) Shares of stock shall be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing
on the back of the certificate or an assignment separate from the
certificate, or by a written power of attorney to sell, assign and
transfer the same, signed by the holder of said certificate. No shares
of stock shall be transferred on the books of Corporation until the
outstanding certificates therefor have been surrendered to the
Corporation.
5.3 Registered Owner. Registered stockholders shall be treated by the
Corporation as the holders in fact of the stock standing in their respective
names and the Corporation shall not be bound to recognize any equitable or other
claim to or interest in any share on the part of any other person, whether or
not it shall have express or other notice thereof, except as expressly provided
by the laws of the Commonwealth of Pennsylvania.
10
<PAGE>
5.4 Mutilated, Lost or Destroyed Certificates. In case of any
mutilation, loss or destruction of any certificate of stock, another may be
issued in its place upon receipt of proof of such mutilation, loss or
destruction. The Board of Directors may impose conditions on such issuance and
may require the giving of a satisfactory bond or indemnity to the Corporation in
such sum as it may determine, or establish such other procedures as it deems
necessary.
5.5 Fractional Shares or Scrip. The Corporation may (a) issue fractions
of a share which shall entitle the holder to exercise voting rights, to receive
dividends thereon, and to participate in any of the assets of the Corporation in
the event of liquidation; (b) arrange for the disposition of fractional
interests by those entitled thereto; (c) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such shares are
determined; or (d) issue scrip in registered or bearer form which shall entitle
the holder to receive a certificate for a full share upon the surrender of such
scrip aggregating a full share.
5.6 Share of Another Corporation. Shares owned by the Corporation in
another corporation, domestic or foreign, may be voted by such officer, agent or
proxy as the Board of Directors may determine or, in the absence of such
determination, by the President of the Corporation.
5.7 Determination of Stockholders or Record. The Board of Directors may
fix a time, not more than ninety (90) days prior to the date of any meeting of
stockholders or the date fixed for the payment of any dividend or distribution,
or the date for the allotment of rights, or to exercise the rights in respect to
any such change, conversion or exchange of shares, for the determination of
stockholders of record for any such purpose. In such case, only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitles to notice of any to vote at, such a meeting, or to receive payment of
such dividend, to receive such allotment of rights, or to exercise such rights,
as the case may be, notwithstanding any transfer of any shares on the books of
the Corporation after any record date fixed as aforesaid.
The Board of Directors may close the books of the Corporation against
transfer of shares during the whole of any part of such period, and in such case
written or printed notice thereof shall be mailed at lease (10) days before
closing thereof to each stockholder of record at the address appearing on the
records of the Corporation or supplied by him or her to the Corporation for the
purpose of notice. While the stock transfer books of the Corporation are closed,
no transfer of shares shall be made thereon.
11
<PAGE>
Unless a record date is fixed by the Board of Directors for the
determination of stockholders entitled to receive notice of, or vote at, a
stockholders' meeting, transferees of shares which are transferred on the books
of the Corporation within ten (10) days next preceding the date of such meeting
shall not ben entitled to notice of or to vote at such meeting.
ARTICLES VI
FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the Corporation shall begin on the 1st day of July
and end on the 30th day of June in each year. The Corporation shall be subject
to an annual audit as of the end of its fiscal year by independent public
accountants appointed by and responsible to the Board of Directors. The
appointment of such accountants shall be subject to annual ratification by the
stockholders.
ARTICLE VII
INDEMNIFICATION. ETC. OF OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS
7.1 Indemnification. The Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, including actions by or in the right of
the Corporation, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprises, against expenses (including
attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding to the full extent permissible under Pennsylvania law.
7.2 Advancement of Expenses. Reasonable expenses incurred by an
officer, director, employee or agent of the Corporation in defending a civil or
criminal action, suit or proceeding described in Section 7.1 may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that the person is not
entitled to be indemnified by the Corporation.
12
<PAGE>
7.3 Other Rights. This indemnification and advancement of expenses
provided by or pursuant to this Article VII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any insurance or other agreement, vote of stockholders or
directors or otherwise, both as to actions in their official capacity and as to
actions in another capacity while holding an office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person.
7.4 Insurance. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against any liability
asserted against and incurred by such person in any such capacity, or arising
out of his or her status as such, whether or not the Corporation would have the
power to indemnify him or her against such liability under the provisions of
this Article VII.
7.5 Security Fund; Indemnity Agreements. By action of the Board of
Directors (notwithstanding its interest in the transaction), the Corporation may
create and fund a trust fund or fund of any nature, and may enter into
agreements with its officers, directors, employees and agents for the purpose of
securing or insuring in any manner its obligation to indemnify or advance
expenses provided for in this Article VII.
7.6 Modification. The duties of the Corporation to indemnify and to
advance expenses to any person as provided in this Article VII shall be in the
nature of a contract between the Corporation and each such person, and no
amendment or repeal of any provision of this Article VII and no amendment or
termination of any trust or other fund created pursuant to Section 7.5 of this
Article VII, shall alter to the detriment of such person the right of such
person to the advancement of expenses or indemnification related to a claim
based on an act or failure to act which took place prior to such amendment,
repeal or termination.
7.7 Proceedings Initiated by Indemnified Persons. Notwithstanding any
other provision of this Article VII, the Corporation shall not indemnify a
director, officer, employee or agent for any liability incurred in an action,
suit or proceeding initiated (which shall not be deemed to include
counter-claims or affirmative defenses) or participated in as an intervenor or
amicus curiae by the person seeking indemnification unless such initiation of or
participation in the action, suit or proceeding is authorized, either before or
after its commencement, by the affirmative vote of a majority of the directors
in office.
13
<PAGE>
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Seal. The corporate seal of the Corporation shall be in such form
and bear such inscription as may be adopted by resolution of the Board of
Directors, or by usage of the officers on behalf of the Corporation.
8.2 Books and Records. The Corporation shall keep it its registered
office or principal place of business correct and complete books and records of
account and an original in duplicate record of the proceedings of meetings of
its stockholders and Board of Directors and committees thereof, and the original
or a copy of the Bylaws, including all amendments or alterations thereto to
date, certified by the Secretary; and it shall keep at its registered office or
principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of the shares held by each. Any books,
records and minutes may be in written form or any other form capable of being
converted into written form within a reasonable time.
8.3 Execution of Written Instruments. All contracts, deeds, mortgages,
obligations, documents and instruments, whether or not requiring a seal, may be
executed by the Chairman, the President or any Vice President and attested by
the Secretary o the Treasurer or an Assistant Secretary or Assistant Treasurer,
or may be executed or attested, or both, by such other person or persons as may
be specifically designated by resolution of the Board of Directors. All checks,
notes, drafts and orders for the payment of money shall be signed by such one or
more officers of agents as the Board of Directors may from time to time
designate.
ARTICLE IX
AMENDMENTS
These Bylaws may be altered, amended or repealed by the Board of
Directors of the Corporation in the manner prescribed at the time by the laws of
the Commonwealth of Pennsylvania, subject to the ability of the Corporation's
stockholders to change such action; provided, however, that any amendment or
alteration to or repeal of the provisions of these Bylaws relating to the
qualifications, classifications and terms of office of the Board of Directors
and any amendment to this Article IX shall be authorized only upon receiving at
least two-thirds of the votes that all holders of capital stock of the
Corporation entitled to vote generally in the election of directors, considered
for this purpose as one class, are entitled to cast thereon.
14
Financial Information
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Consolidated Statements of Financial Condition 24
Consolidated Statements of Operations 25
Consolidated Statements of Changes in
Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
Independent Auditors' Report 41
<PAGE>
Management's Discussion
and Analysis of Financial Condition
and Results of Operations
GENERAL
Chester Valley Bancorp Inc. (the "Holding Company") is a unitary thrift
holding company, incorporated in the Commonwealth of Pennsylvania in August
1989. The business of Chester Valley Bancorp Inc. and its subsidiaries (the
"Company") consists of the operations of First Financial Bank ("First Financial"
or the "Bank"), a Pennsylvania-chartered stock savings and loan association
founded in 1922 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 eight branch offices in Chester County, Pennsylvania. The Bank
provides residential real estate, commercial real estate, commercial and
consumer lending services and funds these activities primarily with retail
deposits and borrowings. Philadelphia Corporation for Investment Services 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 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 smaller corporate account. PCIS's offices are located in Wayne
and Philadelphia, Pennsylvania.
The Company posted record operating earnings of $4.21 million, or $1.13 per
diluted share, for the fiscal year ended June 30, 1999, compared to $3.63
million or $.98 per diluted share for the same period in 1998. This represents a
16.2% increase in earnings.
ASSET/LIABILITY MANAGEMENT
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.
<PAGE>
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 59%
of money market and NOW accounts are sensitive to interest rate changes and that
7% of savings deposits are sensitive to interest rate changes. Accordingly,
these interest-sensitive portions are classified in the less than one year
categories with the remainder in the over five years category. Deposit products
with interest rates based on a particular 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.
OPERATING RESULTS
Interest Income (Taxable-Equivalent Basis)
Interest income is analyzed on a tax-equivalent basis, i.e., an adjustment
is made for analysis purposes only, to increase interest income by the amount of
savings of Federal income taxes, which the Company realizes by investing in
certain tax-free municipal securities and by making loans to certain tax-exempt
organizations. In this way, the ultimate economic impact of earnings from
various assets can be more readily compared.
16
<PAGE>
Total interest income increased to $30.01 million during fiscal 1999, a
$3.81 million or 14.5% increase over the comparable prior year. This increase
was due to a $68.77 million increase in the average balance of interest-earning
assets. Partially offsetting the effect of the increase in the average balance
on interest income was the 44 basis-point decrease in the yield, to 7.62%, on
the loan portfolio as the result of the flattening yield curve during fiscal
1998 and 1999 which resulted in customers refinancing their loans to lower
interest rates.
Total interest income increased to $26.20 million during fiscal 1998, a
$3.28 million or 14.3% increase over the comparable prior year. This increase
was due to a $41.46 million increase in the average balance of interest-earning
assets. Partially offsetting the effect of the increase in the average balance
on interest income was the 5 basis-point decrease in the yield, to 8.44%.
Interest Expense
Total interest expense increased to $15.68 million during fiscal 1999, a
$2.27 million or 16.9% increase over the comparable prior year. The increase in
interest expense was primarily due to a $39.72 million and $21.78 million
increase in the average balances of deposits and borrowings, respectively, at
June 30, 1999, which funded the increase in the average balances of
interest-earning assets discussed previously. The average rate paid on deposits
decreased to 4.60% for fiscal 1999 from 4.79% the previous year as the result of
management's continued efforts to focus its growth in the areas of low-costing
or no-cost deposits. The average rate paid on borrowings decreased 54 basis
points to 5.54%.
Total interest expense increased to $13.41 million during fiscal 1998, a
$1.90 million or 16.5% increase over the comparable prior year. The increase in
interest expense was primarily due to a $24.86 million and $10.87 million
increase in the average balances of deposits and borrowings, respectively, at
June 30, 1998. The average rate paid on deposits remained at 4.63% for fiscal
1998. The average rate paid on borrowings increased 50 basis points to 6.08%.
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at June 30, 1999
(Dollars in thousands)
More Than More Than More Than More Than
Three Months Six Months One Year Three Years
Three Months Through Through Through Through More Than
or Less Six Months One Year Three Years Five Years Five Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans (1)
Real estate (2) $ 24,051 $ 19,954 $ 32,306 $ 74,466 $ 41,968 $ 37,740 $ 230,485
Commercial 6,721 2,158 1,822 3,084 630 293 14,708
Consumer 8,218 1,845 3,871 12,740 8,420 16,322 51,416
Securities and interest-bearing
deposits 48,877 1,683 5,159 5,353 38,997 39,962 140,031
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 87,867 $ 25,640 $ 43,158 $ 95,643 $ 90,015 $ 94,317 $ 436,640
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Savings accounts $ 501 $ 501 $ 998 $ - $ - $ 27,033 $ 29,033
NOW accounts 450 450 900 - - 34,211 36,011
Money market accounts 47,464 - - - - - 47,464
Certificate accounts 66,116 29,287 35,708 71,386 9,216 2,285 213,998
Borrowings 4,022 17 2,625 9,829 13,053 21,482 51,028
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 118,553 $ 30,255 $ 40,231 $ 81,215 $ 22,269 $ 85,011 $ 377,534
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative excess of interest-
earning assets to
interest-bearing liabilities $ (30,686) $ (35,301) $ (32,374) $ (17,946) $ 49,800 $ 59,106 $ 59,106
====================================================================================================================================
Cumulative ratio of interest
rate-sensitive assets to
interest rate-sensitive liabilities 74.1% 76.3% 82.9% 93.4% 117.0% 115.7% 115.7%
====================================================================================================================================
Cumulative difference as a
percentage of total assets (6.8%) (7.8%) (7.2%) (4.0%) 11.0% 13.1% 13.1%
====================================================================================================================================
</TABLE>
(1) Net of undisbursed loan proceeds.
(2) Includes commercial mortgage loans.
17
<PAGE>
Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income, on a fully tax equivalent basis, increased 12.00%, or $1.54
million to $14.33 million in 1999 from $12.80 million in 1998, compared to a
12.1% increase of $1.39 million from 1997 to 1998. Net interest margin, on a
fully tax equivalent basis, was 3.64% for the year ended 1999, compared to 3.94%
in 1998 and 4.03% in 1997.
Provision for Loan Losses
The Company's provision for loan losses was $390,000, $606,000, and
$523,000, during the respective periods of 1999 through 1997. These provisions
have been added to the Company's allowance for loan losses due to general
economic conditions, loan growth, and management's assessment of the inherent
risk of loss existing in the loan portfolio. At June 30, 1999, the allowance for
loan losses was $3.65 million or 1.24% of net loans compared to $3.41 million or
1.23% of net loans at June 30, 1998.
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon, among other things, delinquency trends,
the volume of non-performing loans, prior loss experience of the portfolio,
current economic conditions, and other relevant factors. Although management
believes it has used the best information available to it in making such
determinations, and that the present allowance for loan losses is adequate,
future adjustments to the allowance may be necessary, and net income may be
adversely affected if the circumstances differ substantially from the
assumptions used in determining the level of the allowance for loan losses. 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.
Other Operating Income
Total other income increased $579,000 or 12.5% to $5.20 million for the
year ended June 30, 1999, from the comparable prior period. Investment services
income increased $460,000 or 16.5% to $3.26 million as the result of PCIS's
increased commission income due to the continued increase in the stock market
activity, an increase in advisory fee income due to the strategic plan of PCIS
to focus on advisory services as it provides a more stable revenue stream for
PCIS and stabilizes expenses for the customer, and an increase in money market
fund fees due to an increase in customer balances. The growth in the Bank's
Investment Services and Trust Division also contributed to the increase in
investment services income for fiscal 1999. 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 increased usage and also an
increased number of cardholders, contributed to the increase of $354,000 or
31.7% in service charges and fees in fiscal 1999. The Company recognized gains
on trading account securities of $171,000 during fiscal 1999 compared to
$338,000 during fiscal 1998.
<PAGE>
Total other income increased $968,800 or 26.6% to $4.62 million for the
year ended June 30, 1998, from the comparable prior period. Investment services
income increased $488,400 or 21.2% to $2.80 million as the result of increases
in revenue generated by PCIS and the Trust Division. Service Charges and fees
increased $139,700 in fiscal 1998. The Company recognized gains on trading
account securities of $337,500 during fiscal 1998 compared to $15,700 during
fiscal 1997.
Other Operating Expenses
Total operating expenses increased $1.09 million or 9.4% to $12.73 million
for the year ended June 30, 1999 compared to the same period in fiscal 1998. The
increase in operating expenses over the prior fiscal year was primarily due to a
$1.04 million or 17.6% increase in salaries and employee benefits related to
general salary increases and increased number of staff associated with the
Bank's Call Center and its Investment Services and Trust Division established
during the summer and fall of 1997, respectively. Also, in the winter of 1999,
the Bank opened its eighth branch office in Devon, Pennsylvania which further
contributed to an increase in staff. Occupancy and equipment expenses increased
$190,000 or 10.1% to $2.08 million for the year ended June 30, 1999 compared to
the same period in 1998 as a result of the opening of the Bank's branch office
in Devon and capital expenditures associated with technology upgrades and
enhancements. During fiscal 1998 the Bank made a $291,000 donation in relation
to a project to provide low income housing for the elderly. As an offset to the
donation, the Bank received a state tax credit in the amount of $146,000 through
the Neighborhood Assistance Act which was recorded as a reduction to income tax
expense in fiscal 1998.
Total operating expenses increased $1.78 million or 18.1% to $11.64 million
for the year ended June 30, 1998, from the comparable prior period, excluding
the $1.39 million one-time SAIF assessment in fiscal 1997. The increase in
operating expenses over the prior fiscal year was primarily due to a $632,500 or
12.0% increase in salaries and employee benefits related to general salary
increases and increased number of staff associated with the addition of the
Bank's new Call Center and its new Investment Services and Trust Division. In
addition, occupancy and equipment expenses increased $246,900 or 15.1% to $1.89
million for the year ended June 30, 1998, from the comparable prior period
related to the refurbishment of the Bank's Operation Center and the renovations
required to provide accommodations for the Bank's new Call Center and Trust
Department. Also contributing to the increase in operating expenses during
fiscal 1998 was the previously mentioned $291,000 donation to a project to
provide low income housing for the elderly.
18
<PAGE>
Income Taxes
The Company incurred income tax expense of $1.57 million during the year
ended June 30, 1999, compared to $1.09 million during fiscal 1998. The primary
reason for the increase in income tax expense was due to a 22.7% increase in
income before taxes in fiscal 1999. Income tax expense for fiscal 1998 includes
a $146,000 state tax credit through the Neighborhood Assistance Act relating to
a donation the Bank made to provide low income housing for the elderly. For
periods ending prior to May 29, 1998, no expense has been made for income taxes
for PCIS since PCIS had elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code and similar state provisions. Under these
provisions, PCIS does not pay income taxes on its taxable income. Instead, the
former stockholders of PCIS are 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 Chester Valley Bancorp Inc. on May 29, 1998, PCIS is no
longer eligible to be taxed under the provisions of Subchapter S of the Internal
Revenue Code.
The Company incurred income tax expense of $757,400 during fiscal 1997. The
primary reason for the increase in income tax expense in fiscal 1998 compared to
fiscal 1997 was due to the increase in income before taxes in fiscal 1998 to
$4.71 million from $2.99 million during fiscal 1997. The increase in income tax
expense in fiscal 1998 was partially offset by the $146,000 state tax credit
through the Neighborhood Assistance Act donation mentioned earlier.
Capital Resources
The Company's assets totaled $451.16 million at June 30, 1999, as compared
with $377.01 million as of June 30, 1998. This 19.7% increase in assets was
primarily funded by an increase in deposits of $61.32 million or 20.6% from
$298.19 million at June 30, 1998, to $359.51 million at June 30, 1999, and an
increase in Federal Home Loan Bank advances of $9.44 million from $40.94 million
to $50.38 million at June 30, 1998 and 1999, respectively. The increase in
deposits and advances was used in part to fund loan originations during the
period, which contributed to an increase in net loans receivable from $273.13
million at June 30, 1998, to $291.39 million at June 30, 1999. In addition, the
Company's securities portfolios along with its interest-bearing deposits
increased from $86.12 million to $140.03 million at June 30, 1998 and 1999,
respectively.
Stockholders' equity inceased to $33.85 million at June 30, 1999, from
$31.85 million at June 30, 1998, as a result of net income earned of $4.21
million during fiscal 1999, the reduction in the principal balance of the
Employee Stock Ownership Plan ("ESOP") debt by $147,000 (See Note 13 of the
Notes to the Consolidated Financial Statements), proceeds from stock options
exercised during the 1999 period of $168,000, and proceeds totaling $514,000
from the issuance of common stock. The increase in stockholders' equity was
offset in part by a change in net unrealized value of securities available for
sale of $1.84 million from a gain of $292,000 at June 30, 1998 to a net
unrealized loss of $1.55 million at June 30, 1999, and also offset in part by
the payment of cash dividends of $1.15 million and the repurchase of $24,000 of
common stock, as well as the payment of $16,000 in lieu of fractional shares in
connection with the 5% stock dividend paid during fiscal 1999.
<PAGE>
Asset Quality
Non-performing assets are comprised of non-performing loans and REO and
totaled $933,000 at June 30, 1999, compared to $1.25 million at June 30, 1998.
Non-accrual loans are loans on which the accrual of interest ceases when
the collection of principal or interest payments is determined to be doubtful by
management. It is the policy of the Company to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days or more
(unless the loan principal and interest are determined by management to be fully
secured and in the process of collection), or earlier, if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the current loan term.
Interest income is not accrued until the financial condition and payment record
of the borrower once again demonstrate the ability to service the debt.
Non-performing assets to total assets was .21% at June 30, 1999, compared to
.33% at June 30, 1998. Non-performing loans of $933,000 at June 30, 1999,
consisted of six residential mortgage loans in the amount of $568,000, two
commercial loans for $258,000 and $107,000 in consumer loans.
At June 30, 1999 and 1998, the Company's classified assets, which consisted
of assets classified as substandard, doubtful, loss, and REO, totaled $1.24
million and $1.47 million, respectively. Included in the assets classified
substandard at June 30, 1999, were all loans 90 days past due and loans which
are less than 90 days delinquent, but inadequately protected by the current
paying capacity of the borrower or of the collateral pledged, as well as a
well-defined weakness that may jeopardize the liquidation of the debt.
Liquidity and Committed Resources
Management monitors liquidity daily and maintains funding sources to meet
unforeseen 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
19
<PAGE>
sources of funds, deposit flows and loan prepayments are greatly influenced by
the movement of interest rates in general, economic conditions and competition.
The Company manages the pricing of its deposits to maintain a deposit balance
deemed appropriate and desirable. Although the Company's deposits represent the
majority of its total liabilities, the Company has also utilized other borrowing
sources, namely FHLB advances. In addition to its ability to obtain advances
from the FHLB under several different credit programs, the Company has
established a line of credit with the FHLB, in an amount not to exceed 10% of
the Company's maximum borrowing capacity, which borrowing capacity was $13.13
million at the time the commitment was executed, and subject to certain
conditions, including the holding of a pre-determined amount of FHLB stock as
collateral. This line of credit is used from time to time for liquidity
purposes. At June 30, 1999 there was no outstanding balance on this line of
credit.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as FHLB overnight
deposits. On a longer-term basis, the Company maintains a strategy of investing
in various lending and investment securities products. During the year ended
June 30, 1999, the Company used 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. As of June 30, 1999, the Company had $7.77 million in commitments
to fund loan originations. The majority of these commitments are anticipated to
be funded by December 31, 1999. In addition, as of June 30, 1999, the Company
had undisbursed loans in process for construction loans of $11.39 million and
$17.10 million in undisbursed lines of credit. In addition, the Company has
issued $40,000 in commercial letters of credit fully secured by deposit accounts
or real estate. The management of the Company believes that the Company has
adequate resources, including principal prepayments and repayments of loans and
investment securities and borrowing capacity, to fund all of its commitments to
the extent required.
For regulatory purposes, liquidity is defined as a ratio of cash and
certain marketable securities that can be readily converted into cash to total
deposits and short-term borrowings. At June 30, 1999, liquidity for the Bank as
defined under these guidelines was 18.34%, which exceeded the regulatory minimum
requirement of 4.0%.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Related Notes presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP") which generally require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike many industrial companies, substantially all of the assets and
liabilities of the Company on a consolidated basis are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the general level of inflation. Over a short period of time,
interest rates may not necessarily move in the same direction or with the same
magnitude of inflation.
<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 that with the recent conversions and modifications to the
Company's software and hardware, including a conversion by the Bank to a new
core data processing system in October 1998, the Company and its third party
vendors are taking the appropriate steps to ensure critical systems will
function properly.
Company's State of Readiness
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 commu-
20
<PAGE>
nications 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.
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 June 30, 1999, the Company successfully
completed the majority of its mission critical modifications and conversions and
related testing of all mission critical and non-mission critical systems.
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 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
<PAGE>
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.
Risks of Year 2000
While the Company has received assurances from such vendors as to
compliance, such assurances are not guarantees and may not be enforceable, or
often limit the warrantor's liability or excluded liability for consequential
damages. 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
21
<PAGE>
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.
Contingency Plans
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.
Costs of Year 2000
The costs of modifications to the existing software are 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 Company expended substantially all of
this amount during fiscal 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>
FORWARD LOOKING STATEMENTS
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 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 country as a
whole, loan delinquency rates, changes in federal and state regulation, Year
2000 uncertainties discussed previously and other uncertainties described in the
Company's filings with the Securities and Exchange Commission, including its
Form 10K for the year ended June 30, 1999. These factors should be considered in
evaluating the "forward looking statements", and undue reliance should not be
placed on such statements.
OTHER INFORMATION
Description of Stock
The holders of the Common Stock of the Holding Company possess exclusive
voting rights in the corporation. Each holder of shares of Common Stock is
entitled to one vote for each share held, in accordance with the charter and
bylaws, including voting on the election of directors. Of the 10.00 million
shares of Common Stock authorized by the Holding Company, 6.29 million shares
remain unissued. In addition, none of the 5.00 million shares of Preferred Stock
authorized has been issued.
Dividend Policy
The Board of Directors of Chester Valley Bancorp Inc. intends to continue
the policy of paying dividends when the directors deem it prudent to do so. The
Board of Directors will consider
22
<PAGE>
payment of dividends on a quarterly basis, after giving consideration to the
level of the profit for the prior quarter and other relevant aspects. On August
18, 1999, the Board of Directors of the Holding Company declared a $.09 per
share cash dividend and a 5% stock dividend based on the financial results of
the quarter ended June 30, 1999. The cash dividend will be calculated on shares
held before the issuance of the stock dividend. During fiscal 1999, 1998, and
1997 the Holding Company paid a total of $1.15 million, $1.23 million, and $1.06
million, respectively, in cash dividends and a 5% stock dividend in each year.
Cash dividends from the Holding Company are primarily dependent upon dividends
paid to it by First Financial, which, in turn, are subject to certain
restrictions established by federal regulators and Pennsylvania law. (See Note
10 to Notes to Consolidated Financial Statements.)
Market Information
As of August 1, 1999, the Holding Company's Common Stock was held by
approximately 2,000 shareholders, including shares held in nominee name. Any
broker or any NASDAQ member can be contacted for the latest quotations of the
Holding Company's Common Stock. Upon the reorganization into a holding company
structure in May 1990, the stock of the Holding Company was approved for
inclusion in NASDAQ's National Market System. The Holding Company's NASDAQ
symbol is "CVAL". The transfer agent for the stock is American Stock Transfer
and Trust Company, New York, New York. During fiscal 1999 and 1998 the Holding
Company paid dividends of $.31 and $.30 per share, respectively, adjusted for
stock dividends and stock splits during those periods.
The following table sets forth the high and low closing prices for the
periods described. For comparability purposes, the closing prices shown below
have been adjusted to reflect the 5% stock dividends paid in fiscal 1999 and
1998.
<TABLE>
<CAPTION>
Fiscal 1999 Low High
- --------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $ 17.33 $ 20.24
Second Quarter 17.33 20.33
Third Quarter 18.25 19.50
Fourth Quarter 16.25 18.50
Fiscal 1998 Low High
- --------------------------------------------------------------------------------
First Quarter $ 12.25 $ 14.60
Second Quarter 13.49 18.57
Third Quarter 18.41 23.49
Fourth Quarter 20.16 22.22
</TABLE>
<PAGE>
Recent Accounting Pronouncements
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 requires changes in disclosures and would not affect the
financial condition, equity or operating results of the Corporation. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement (as amended by SFAS No. 137
in June, 1999) 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. SFAS No. 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier adoption
is permitted. The Company has not yet determined the impact, if any, of this
statement, including its provisions for the potential reclassifications of
investments securities, on operations, financial condition or equity.
23
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Financial Condition
At June 30,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Assets
Cash in banks $ 5,193,447 $ 4,043,627
Interest-bearing deposits 13,408,911 11,861,301
Trading account securities 9,221,027 20,351,747
Investment securities available for sale 109,599,940 38,302,791
Investment securities held to maturity (fair value -
June 30, 1999, $7,816,320
June 30, 1998, $15,672,486) 7,801,383 15,600,347
Loans receivable, less allowance for loan
losses of $3,650,893 and $3,413,830 at
June 30, 1999 and 1998, respectively 291,387,858 273,127,856
Loans held for sale -- 1,101,071
Accrued interest receivable 2,460,823 2,486,224
Property and equipment - net 8,199,882 7,093,850
Other assets 3,884,333 3,043,102
------------- -------------
Total Assets $ 451,157,604 $ 377,011,916
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 359,513,516 $ 298,191,412
Securities sold under agreements to repurchase -- 144,417
Advance payments by borrowers for taxes and insurance 3,055,229 2,962,637
Employee Stock Ownership Plan ("ESOP") debt -- 146,618
Federal Home Loan Bank advances 50,375,002 40,935,822
Other borrowings 653,061 708,409
Accrued interest payable 1,573,007 968,544
Other liabilities 2,135,280 1,105,214
------------- -------------
Total Liabilities 417,305,095 345,163,073
Commitments and contingencies (Note 8)
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; 3,707,460 and
3,552,458 shares issued at
June 30, 1999 and June 30, 1998, respectively 3,707,460 3,552,458
Additional paid-in capital 17,903,651 14,383,521
Common stock acquired by ESOP -- (146,618)
Retained earnings - partially restricted 13,794,043 13,767,573
Accumulated other comprehensive (loss) income (1,552,645) 291,909
------------- -------------
Total Stockholders' Equity 33,852,509 31,848,843
------------- -------------
Total Liabilities and Stockholders' Equity $ 451,157,604 $ 377,011,916
============= =============
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Operations
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Interest Income:
<S> <C> <C> <C>
Loans $ 22,772,277 $ 22,190,864 $ 20,388,526
Mortgage-backed securities 981,906 530,425 227,293
Interest-bearing deposits 717,474 253,558 280,490
Investment securities:
Taxable 3,512,158 1,857,376 1,104,410
Non-taxable 1,401,577 920,792 620,703
------------ ------------ ------------
Total interest income 29,385,392 25,753,015 22,621,422
------------ ------------ ------------
Interest Expense:
Deposits 12,702,540 11,467,998 10,285,725
Securities sold under agreements to repurchase 8,356 7,636 51,801
Short-term borrowings 999,857 971,431 386,958
Long-term borrowings 1,970,833 961,952 782,218
------------ ------------ ------------
Total interest expense 15,681,586 13,409,017 11,506,702
------------ ------------ ------------
Net interest income 13,703,806 12,343,998 11,114,720
Provision for loan losses 390,000 605,672 523,413
------------ ------------ ------------
Net interest income after provision for loan losses 13,313,806 11,738,326 10,591,307
------------ ------------ ------------
Other Income:
Investment services income, net 3,257,647 2,797,436 2,309,032
Service charges and fees 1,471,192 1,116,876 977,145
Gain on trading account securities 171,496 337,509 15,682
Gain on sale of assets available for sale 110,977 166,240 161,303
Other 185,532 199,508 185,621
------------ ------------ ------------
Total other income 5,196,844 4,617,569 3,648,783
------------ ------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Operating Expenses:
Salaries and employee benefits 6,953,188 5,914,592 5,282,068
Occupancy 1,108,823 1,060,628 993,530
Furniture and equipment 967,245 825,228 645,403
Data processing 739,725 722,479 605,149
SAIF special assessment -- -- 1,386,516
Deposit insurance premiums 175,487 160,994 309,689
Other 2,786,101 2,959,189 2,023,193
------------ ------------ ------------
Total operating expenses 12,730,569 11,643,110 11,245,548
------------ ------------ ------------
Income before income taxes 5,780,081 4,712,785 2,994,542
Income tax expense 1,567,580 1,086,755 757,434
------------ ------------ ------------
Net income $ 4,212,501 $ 3,626,030 $ 2,237,108
============ ============ ============
Earnings per common share(*):
Basic $ 1.14 $ 1.00 $ 0.62
Diluted $ 1.13 $ 0.98 $ 0.62
Weighted average number of shares outstanding(*):
Basic 3,682,104 3,632,624 3,600,693
Diluted 3,720,631 3,682,358 3,619,618
Other Comprehensive Income, Net of Tax:
Net income $ 4,212,501 $ 3,626,030 $ 2,237,108
Net unrealized holding gains (losses) on securities
available for sale during the period (1,784,750) 400,068 203,194
Less reclassification adjustment for gains included
in net income (59,804) (110,873) (103,258)
------------ ------------ ------------
Comprehensive Income $ 2,367,947 $ 3,915,225 $ 2,337,044
============ ============ ============
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Common Retained Accumulated
Additional Stock Earnings Other Total
Common Paid-in Acquired Partially Comprehensive Treasury Treasury
Stock Capital by ESOP Restricted Income Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1996 $ 3,361,854 $ 10,322,860 $ (510,740) $13,883,220 $ (97,222) $ (193,473) $ 26,766,499
Net income 2,237,108 2,237,108
Cash dividends paid (1,061,628) (1,061,628)
Principal payments
on ESOP debt 177,250 177,250
Issuance of stock
dividend 77,731 1,438,024 (1,515,755) --
Cash payment for
fractional shares (6,140) (9,787) (15,927)
Stock options exercised 78,958 258,083 337,041
Common stock issued 586 4,213 85,382 90,181
Common stock repurchased (351) (2,849) (348,679) (351,879)
Change in unrealized gain
(loss) on securities
available for sale 99,936 99,936
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1997 3,439,820 11,835,066 (333,490) 13,533,158 2,714 (198,687) 28,278,581
Net income 3,626,030 3,626,030
Cash dividends paid (1,229,256) (1,229,256)
Principal payments
on ESOP debt 186,872 186,872
Issuance of stock
dividend 102,606 2,052,120 (2,154,726) --
Cash payment for
fractional shares (7,633) (7,633)
Stock options exercised 15,167 268,232 156,703 440,102
Common stock issued 6,811 325,769 207,283 539,863
Common stock repurchased (11,946) (97,666) (165,299) (274,911)
Change in unrealized gain
(loss) on securities
available for sale 289,195 289,195
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1998 3,552,458 14,383,521 (146,618) 13,767,573 291,909 -- 31,848,843
Net income 4,212,501 4,212,501
Cash dividends paid (1,153,622) (1,153,622)
Principal payments
on ESOP debt 146,618 146,618
Issuance of stock
dividend 116,034 2,900,850 (3,016,884) --
Cash payment for
fractional shares (15,525) (15,525)
Stock options exercised 11,468 132,333 23,800 167,601
Common stock issued 27,500 486,947 514,447
Common stock repurchased (23,800) (23,800)
Change in unrealized gain
(loss) on securities
available for sale (1,844,554) (1,844,554)
Balance at
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1999 $ 3,707,460 $ 17,903,651 $ -- $13,794,043 $ (1,552,645) $ -- $33,852,509
===================================================================================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements Of Cash Flows
Year Ended June 30,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 4,212,501 $ 3,626,030 $ 2,237,108
Add (deduct) items not affecting cash flows from operating activities:
Depreciation 878,957 725,434 584,337
Provision for loan losses 390,000 605,672 523,413
Gain on trading account securities (171,496) (337,509) (15,682)
Gain on sale of securities available for sale (90,612) (167,989) (156,451)
Loss (gain) on sale of loans held for sale (20,365) 1,749 (2,445)
Loss (gain) on sale of real estate owned -- -- (2,407)
Amortization of deferred loan fees, discounts and premiums (753,969) (586,088) (530,806)
Decrease (increase) in trading account securities 11,302,216 (19,762,661) 106,902
Decrease (increase) in accrued interest receivable 25,401 (375,638) (489,124)
(Increase) in other assets (841,231) (406,987) (661,282)
Increase (decrease) in other liabilities 1,030,066 (235,232) 259,335
Increase in accrued interest payable 604,463 180,285 134,901
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (used in) operating activities 16,565,931 (16,732,934) 1,987,799
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investment activities:
Capital expenditures (1,984,989) (2,348,274) (1,691,371)
Net increase in loans and loans held for sale (17,256,008) (23,344,652) (34,923,474)
Proceeds from sale of loans held for sale 1,601,138 6,023,850 1,257,348
Proceeds from real estate owned -- -- 571,834
Purchase of investment securities (2,397,400) (1,073,100) (115,645)
Proceeds from maturities, payments and calls of investment securities 10,187,442 4,929,360 5,237,914
Purchase of securities available for sale (108,846,839) (51,554,985) (124,134,642)
Proceeds from sales and calls of securities available for sale 34,684,943 41,504,286 103,031,326
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investment activities (84,011,713) (25,863,515) (50,766,710)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits before interest credited 50,464,992 27,568,357 23,847,975
Interest credited to deposits 10,857,112 9,872,744 8,696,779
(Decrease) increase in securities sold under agreements to repurchase (144,417) 132,331 12,086
Proceeds from FHLB advances 13,599,000 32,024,225 29,914,500
Repayments of FHLB advances (4,159,820) (21,286,650) (13,688,530)
Increase in other borrowings (55,348) 207,655 157,268
Net decrease in advance payments by borrowers for taxes and insurance 92,592 (36,044) (16,413)
Cash dividends on common stock (1,153,622) (1,229,256) (1,061,628)
Repayments of principal on ESOP debt (146,618) (186,872) (177,250)
Common stock repurchased (23,800) (274,911) (351,879)
Payment for fractional shares (15,525) (7,633) (15,927)
Stock options exercised 167,601 440,102 337,041
Reduction of common stock acquired by ESOP 146,618 186,872 177,250
Common stock issued 514,447 539,863 90,181
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 70,143,212 47,950,783 47,921,453
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,697,430 5,354,334 (857,458)
Cash and cash equivalents:
Beginning of period 15,904,928 10,550,594 11,408,052
- ------------------------------------------------------------------------------------------------------------------------------------
End of period $ 18,602,358 $ 15,904,928 $ 10,550,594
====================================================================================================================================
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 1,553,000 $ 1,379,000 $ 757,000
====================================================================================================================================
Interest $ 15,077,123 $ 13,228,732 $ 11,371,801
====================================================================================================================================
Non-cash items:
Acquisition of real estate in settlement of loans $ -- $ -- $ 448,427
====================================================================================================================================
Stock dividend issued $ 3,016,884 $ 2,154,726 $ 1,515,755
====================================================================================================================================
Net change in unrealized gain (loss) on investment securities
available for sale $ (3,004,159) $ 471,001 $ 151,727
====================================================================================================================================
Tax effect on unrealized gain (loss) on investment securities
available for sale $ (1,159,605) $ 181,806 $ 51,791
====================================================================================================================================
</TABLE>
27
<PAGE>
Notes To Consolidated Financial Statements
1 - Summary of Significant Accounting Policies
Business
Chester Valley Bancorp Inc. (the "Holding Company") is a unitary thrift
holding company, incorporated in the Commonwealth of Pennsylvania in August
1989. The business of Chester Valley Bancorp Inc. and its subsidiaries (the
"Company") consists of the operations of First Financial Bank ("First Financial"
or the "Bank"), a Pennsylvania-chartered stock savings and loan association
founded in 1922 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 products. These products
include checking accounts (non-interest and interest-bearing), savings accounts,
certificates of deposit, commercial and installment loans, real estate
mortgages, and home equity loans. The Bank also offers ancillary services that
complement these products. The Bank is subject to competition from other
financial institutions and other companies that provide financial services.
Philadelphia Corporation for Investment Services 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 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 smaller corporate accounts. The Company is subject to the regulations of
certain federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of
Chester Valley Bancorp Inc. and its wholly-owned subsidiaries, First Financial
Bank and Philadelphia Corporation for Investment Services. The accounts of the
Bank include its wholly-owned subsidiary, D & S Service Corp., which owns D & F
Projects and Wildman Projects, Inc., both of which are wholly-owned
subsidiaries. All material inter-company balances and transactions have been
eliminated in consolidation. Prior period amounts are reclassified when
necessary to conform with the current year's presentation.
The Company follows accounting principles and reporting practices which
are in accordance with generally accepted accounting principles. In preparing
the consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate owned. Management believes that the allowance for
loan losses and the valuation of real estate owned are adequate. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and valuations of
real estate owned. Such agencies may require the Bank to recognize additions to
the allowance or adjustments to the valuations based on their judgments about
information available to them at the time of their examination.
<PAGE>
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.
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
future events. Securities classified as held to maturity category 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.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an evaluation of
known and inherent risks in the loan portfolio. Management's evaluation is based
upon, 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 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
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.
28
<PAGE>
1 - Summary of Significant Accounting Policies (Continued)
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 under the contractual terms of the loan agreement. At
and during the twelve-month periods ended June 30, 1999, 1998, and 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.
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 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 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.
<PAGE>
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. 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 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 have been adjusted to reflect
the effects of the 5% stock dividends paid in September 1998 and 1997, the
three-for-two stock split effected in the form of a dividend in December 1998
and the five-for-four stock split effected in the form of a dividend in March
1997.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Numerator:
Net income $4,213 $3,626 $2,237
====== ====== ======
Denominator:
Denominator for basic
earnings per share-weighted
average shares 3,682 3,632 3,601
Effect of dilutive securities:
Employee stock options 39 50 19
------ ------ ------
Denominator for diluted earnings
per share-adjusted weighted
average shares and
assumed exercise 3,721 3,682 3,620
------ ------ ------
Basic earnings per share $ 1.14 $ 1.00 $ 0.62
------ ------ ------
Diluted earnings per share $ 1.13 $ 0.98 $ 0.62
====== ====== ======
</TABLE>
29
<PAGE>
2 - Investment Securities
- -------------------------
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------ --------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------ -------- ----------- ------------ ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Government
agency notes
and bonds $ -- $ -- $ -- $ -- $ 4,500,000 $ 8,630 $ (4,737) $ 4,503,893
Federal Home
Loan Bank of
Pittsburgh stock 3,781,100 -- -- 3,781,100 2,583,100 -- -- 2,583,100
Municipal notes
and bonds 3,229,291 11,229 (2,013) 3,238,507 7,394,443 47,512 (12,021) 7,429,934
Mortgage-Backed
securities 790,960 9,061 (4,146) 795,875 1,122,772 32,052 -- 1,154,824
Other 32 806 -- 838 32 703 -- 735
------------ -------- ----------- ------------ ----------- -------- -------- ------------
Total held to maturity $ 7,801,383 $ 21,096 $ (6,159) $ 7,816,320 $15,600,347 $ 88,897 $(16,758) $ 15,672,486
============ ======== =========== ============ =========== ======== ======== ============
Available for sale:
U.S. Government
agency notes
and bonds $ 48,286,934 $ 3,504 $(1,048,381) $ 47,242,057 $12,298,216 $ 7,334 $ (9,959) $ 12,295,591
Municipal notes
and bonds 27,975,449 492,308 (1,089,658) 27,378,099 15,072,678 136,492 (36,458) 15,172,712
Mortgage-Backed
securities 16,231,504 103,505 (518,476) 15,816,533 9,228,956 202,553 -- 9,431,509
Equity securities 1,450,316 110,733 (224,500) 1,336,549 886,230 222,522 (12,419) 1,096,333
Debt securities 15,848,975 18,906 (438,008) 15,429,873 313,223 -- (6,577) 306,646
Other 2,335,500 61,329 -- 2,396,829 -- -- -- --
------------ -------- ----------- ------------ ----------- -------- -------- ------------
Total available for sale $112,128,678 $790,285 $(3,319,023) $109,599,940 $37,799,303 $568,901 $(65,413) $ 38,302,791
============ ======== =========== ============ =========== ======== ======== ============
</TABLE>
<PAGE>
The amortized cost and estimated fair value of investment securities at June 30,
1999, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Estimated Weighted
Amortized Fair Average
Cost Value Yield
------------ ------------ ----
<S> <C> <C> <C>
Held to Maturity:
Due in one year or less $ 1,839,873 $ 1,848,119 7.22%
Due after one year through five years 1,087,374 1,087,730 6.27%
Due after five years through ten years -- -- --
Due after ten years 1,093,004 1,098,533 6.96%
No stated maturity 3,781,132 3,781,938 0.00%
------------ ------------ ----
Total held to maturity $ 7,801,383 $ 7,816,320 3.55%
============ ============ ====
Available for Sale:
Due in one year or less $ 339,808 $ 341,366 5.52%
Due after one year through five years 25,804,961 25,528,208 6.28%
Due after five years through ten years 27,982,555 27,312,878 6.36%
Due after ten years 56,551,038 55,080,939 6.97%
No stated maturity 1,450,316 1,336,549 0.00%
------------ ------------ ----
Total available for sale $112,128,678 $109,599,940 6.56%
============ ============ ====
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers generally have the right to call or prepay obligations without
prepayment penalties. The weighted average yield, based on amortized cost, is
presented on a taxable equivalent basis using the Federal marginal rate of 34%
adjusted for the 20% interest expense disallowance (27.2%). Proceeds from sales
and calls of investment securities available for sale during fiscal 1999, 1998,
and 1997 were $34.68 million, $41.50 million, and $103.03 million, respectively.
Gains of $94,247, $171,135, and $162,284 in fiscal 1999, 1998, and 1997,
respectively, and gross losses of $3,635, $3,146, and $5,833 in fiscal 1999,
1998, and 1997, respectively, were realized on those sales. Accrued interest
receivable on investments amounted to $1,035,000 and $703,800 at June 30, 1999
and 1998, respectively. At June 30, 1999, $53.23 million of investment
securities were pledged as collateral for Municipal savings deposits with the
Bank, for securities sold under agreements to repurchase, and for the Bank's
treasury, tax and loan account with the Federal Reserve.
30
<PAGE>
3 - Loans Receivable
- --------------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
First mortgage loans:
Residential $ 157,341,833 $ 155,627,889
Construction-residential 14,469,204 13,501,993
Land acquisition and
development 5,075,535 6,529,495
Commercial 55,197,514 41,001,909
Construction-commercial 9,793,986 10,614,137
Commercial business 14,708,274 11,437,190
Consumer 51,416,108 51,828,965
------------- -------------
Total loans 308,002,454 290,541,578
Less:
Undisbursed loan proceeds:
Construction-residential (8,711,869) (7,915,210)
Construction-commercial (2,681,071) (4,464,863)
Deferred loan fees (1,570,763) (1,619,819)
Allowance for loan losses (3,650,893) (3,413,830)
------------- -------------
Net loans $ 291,387,858 $ 273,127,856
============= =============
</TABLE>
Accrued interest receivable on loans amounted to $1,353,118 and $1,387,721
at June 30, 1999 and 1998, respectively. At June 30, 1999, 1998, and 1997, the
Company serviced loans for others of $26.74 million, $28.87 million, and $24.89
million, respectively.
The aggregate amount of loans by the Company to its directors and
executive officers was $4,294,400 and $3,789,600 at June 30, 1999 and 1998,
respectively. These loans were made in the ordinary course of business at
substantially the same terms and conditions as those with other borrowers.
An analysis of the activity of these loans follows:
Balance at July 1, 1998 $3,789,600
New Loans 784,700
Repayments 279,900
----------
Balance at June 30, 1999 $4,294,400
==========
The total amount of non-performing loans was $933,000, $1.25 million, and
$748,000 at June 30, 1999, 1998 and 1997, respectively. If these non-performing
loans had been current in accordance with their original terms and had been
outstanding throughout the period, the gross interest income for fiscal 1999,
1998, and 1997 that would have been recorded for these loans was $75,200,
$111,800, and $71,400. Interest income on these non-performing loans included in
income for fiscal 1999, 1998, and 1997 amounted to $26,100, $57,560, and
$35,200, respectively. At June 30, 1999, and throughout fiscal 1999, there were
no loans for which impairment was required to be recognized.
<PAGE>
The activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period $ 3,413,830 $ 2,855,003 $ 2,667,104
Provision for loan losses 390,000 605,672 523,413
Loans charged off (177,287) (81,411) (377,923)
Recoveries 24,350 34,566 42,409
----------- ----------- -----------
Balance, end of period $ 3,650,893 $ 3,413,830 $ 2,855,003
=========== =========== ===========
</TABLE>
31
<PAGE>
4 - Property and Equipment
- --------------------------
Property and equipment by major classification are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land $ 1,263,160 $ 1,096,715
Buildings and Improvements 6,237,529 5,878,644
Furniture, Fixtures and Equipment 4,212,324 3,980,286
------------ ------------
Total 11,713,013 10,955,645
Less Accumulated Depreciation (3,513,131) (3,861,795)
------------ ------------
Net $ 8,199,882 $ 7,093,850
============ ============
</TABLE>
5 - Deposits
- ------------
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Total Rate Amount Total
---- ------------ ----- ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing -- % $33,007,163 9.2% -- % $32,361,445 10.9%
---- ------------ ----- ---- ------------ -----
Interest-bearing:
NOW checking accounts 1.47 36,011,370 10.0 1.55 31,769,680 10.6
Money market deposit accounts 3.82 47,464,015 13.2 3.77 35,609,735 11.9
Savings accounts 1.87 29,033,243 8.1 2.39 27,163,761 9.1
Certificates less than $100,000 5.36 137,558,712 38.2 5.64 133,801,531 44.9
Certificates $100,000 and greater 5.07 76,439,013 21.3 5.73 37,485,260 12.6
---- ------------ ----- ---- ------------ -----
Total interest-bearing 4.33 326,506,353 90.8 4.58 265,829,967 89.1
---- ------------ ----- ---- ------------ -----
Total deposits 3.93% $359,513,516 100.0% 4.08% $298,191,412 100.0%
==== ============ ===== ==== ============ =====
</TABLE>
While the certificates frequently are renewed at maturity rather than paid out,
a summary of certificates by contractual maturity at June 30, 1999 is as
follows:
<PAGE>
Years Ending June 30, Amount
--------------------- ------
2000 $ 131,158,982
2001 22,518,824
2002 48,751,670
2003 4,511,095
2004 4,714,419
2005 and thereafter 2,342,735
----------------
$ 213,997,725
================
Interest expense on deposits is comprised of the following:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NOW Checking Accounts $ 491,758 $ 530,069 $ 461,510
Money Market Deposit Accounts 1,281,591 1,048,056 875,546
Savings Accounts 569,724 694,306 719,751
Certificates Less than $100,000 7,627,071 7,079,114 6,639,858
Certificates $100,000 & Greater 2,732,396 2,116,453 1,589,060
----------- ----------- -----------
Total $12,702,540 $11,467,998 $10,285,725
=========== =========== ===========
</TABLE>
32
<PAGE>
6 - Advances From Federal Home Loan Bank of Pittsburgh ("FHLBP")
Under terms of its collateral agreement with the FHLBP, the Company
maintains otherwise unencumbered qualifying assets (principally 1-4-family
residential mortgage loans and U.S. Government & Agency notes and bonds) in the
amount of at least as much as its advances from the FHLBP. The Company's FHLBP
stock is also pledged to secure these advances. At June 30, 1999 and 1998, such
advances mature as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average June 30, Average June 30,
Due by June 30, Rate 1999 Due by June 30, Rate 1998
- ---------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000 6.42% $ 3,241,147 1999 5.63% $ 3,284,594
2001 5.76 5,526,281 2000 6.33 3,517,372
2002 5.75 4,316,269 2001 5.76 5,526,281
2003 5.86 7,351,822 2002 5.75 4,316,268
2004 5.79 701,878 2003 5.86 7,351,822
Thereafter 5.31 29,237,605 Thereafter 5.36 16,939,485
- ---------------------------------------------------------- ---------------------------------------------------------
Total FHLBP advances 5.55% $ 50,375,002 Total FHLBP advances 5.65% $ 40,935,822
========================================================== =========================================================
</TABLE>
Included in the table above at June 30, 1999 are convertible advances
whereby the FHLBP has the option at a predetermined time to convert the fixed
interest rate to an adjustable rate tied to LIBOR. The Bank then has the option
to prepay these advances if the FHLBP converts the interest rate. These advances
are included in the year in which they mature.
The Company has available an annually renewable line of credit not to
exceed 10% of the Company's maximum borrowing capacity which was $13.13 million
at the time the commitment was executed. The Company, from time to time, has
used the line of credit to meet liquidity needs. At June 30, 1999 and 1998,
there were no balances outstanding on the line of credit.
<PAGE>
7 - Income Taxes
- ----------------
The provision (and benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Current:
Federal $ 1,388,865 $ 1,177,200 $ 753,774
State 304,209 75,547 144,145
Deferred - Federal (125,494) (165,992) (140,485)
-------------- --------------- --------------
Total $ 1,567,580 $ 1,086,755 $ 757,434
============== =============== ==============
</TABLE>
The provision for income taxes differs from the statutory rate due to the
following:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 1,965,228 $ 1,602,347 $ 1,018,144
Tax exempt interest, net (509,621) (367,469) (222,162)
State taxes net of Federal benefit 201,372 50,454 95,136
Non-taxable S Corp income -- (212,735) (105,892)
Non-deductible merger expenses -- 71,484 --
Other, net (89,399) (57,326) (27,792)
-------------- --------------- --------------
Total $ 1,567,580 $ 1,086,755 $ 757,434
============== =============== ==============
</TABLE>
33
<PAGE>
7 - Income Taxes (Continued)
- ----------------------------
The deferred tax assets and liabilities at June 30, 1999 and 1998, consisted of
the following:
<TABLE>
<CAPTION>
At June 30,
------------------------
1999 1998
---------- ----------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $1,241,304 $1,135,202
Deferred loan fees 51,656 75,841
Uncollected interest 52,172 35,172
Net unrealized loss on securities available for sale 976,093 --
Other 22,524 40,393
---------- ----------
Gross deferred tax assets 2,343,749 1,286,608
Deferred tax liabilities:
Tax bad debt reserves 138,297 165,957
Loan discount 115,732 129,586
Depreciation 12,065 14,998
Net unrealized gain on securities available for sale -- 183,512
---------- ----------
Gross deferred tax liabilities 266,094 494,053
---------- ----------
Net deferred tax assets $2,077,655 $ 792,555
========== ==========
</TABLE>
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that the Company will realize the benefits of these
deferred tax assets.
For periods ending prior to May 29, 1998, no provision has been made for
income taxes for PCIS since PCIS had elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code and similar state provisions. Under
these provisions, PCIS does not pay income taxes on its taxable income. Instead,
the former stockholders of PCIS are 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 Chester Valley Bancorp Inc. on May 29, 1998, PCIS is no
longer eligible to be taxed under the provisions of Subchapter S of the Internal
Revenue Code.
The Small Business Job Protection Act of 1996 ("Act"), enacted on August
20, 1996, provides for the repeal of the tax bad debt deduction computed under
the percentage of taxable income method. The repeal of the use of this method is
effective for tax years beginning after December 31, 1995. Prior to the change
in law, the Bank had qualified under the provisions of the Internal Revenue Code
which permitted it to deduct from taxable income an allowance for bad debts
based on 8% of taxable income.
<PAGE>
Upon repeal, the Bank is required to recapture into income, over a
six-year period, the portion of its tax bad debt reserves that exceed its base
year reserves (i.e., tax reserves for tax years beginning before 1988). The base
year tax reserves, which may be subject to recapture if the Bank ceases to
qualify as a bank for federal income tax purposes, are restricted with respect
to certain distributions. The Bank's total tax bad debt reserves at June 30,
1999, are approximately $3.04 million, of which $2.64 million represents the
base year amount and $407,000 is subject to recapture. The Company has
previously recorded a deferred tax liability for the excess base year reserves
to be recaptured; therefore, this recapture will not impact the statement of
operations.
8 - Commitments And Contingencies
- ---------------------------------
Financial instruments with off-balance-sheet risk:
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
Commitments to originate loans amounted to $7.77 million as of June 30, 1999, of
which $6.08 million was for variable-rate loans. The balance of the commitments
represent fixed-rate loans with interest rates ranging from 6.38% to 9.00%. At
June 30, 1999, the Company had undisbursed loans in process for construction
loans of $11.39 million and $17.10 million in undisbursed lines of credit. In
addition, the Company has issued $40,000 in commercial letters of credit fully
secured by deposit accounts or real estate.
Concentration of credit risk:
The Company is principally a local lender and therefore has a significant
concentration of residential and commercial real estate loans as well as
consumer and commercial business loans to borrowers who reside in and/or which
are collateralized by real estate located primarily in Chester County,
Pennsylvania. The ability of such customers to honor these obligations is
dependent, to varying degrees, on the overall economic performance of this
diversified region.
Other commitments:
The Bank and PCIS have entered into operating leases for several of their
branch and office facilities. The minimum annual rental payments under these
leases at June 30, 1999, are as follows:
Year Minimum Lease Payments
---- ----------------------
2000 $407,112
2001 295,862
2002 289,601
2003 264,360
2004 237,919
2005 and after 922,081
Rent expense under these leases for each of the years ended June 30, 1999,
1998, and 1997, was $536,694, $521,175, and $499,213, respectively.
34
<PAGE>
9 - Affiliated Transactions
- ---------------------------
During fiscal 1999, 1998 and 1997 the Company entered into an agreement
with one of the directors of the Company to perform reviews of appraisals in
connection with the origination of residential mortgage loans. During fiscal
1997 the Company entered into an agreement with another director of the Company
for the improvement and renovation of certain of the Bank's offices, for the
performance of routine maintenance and repair at all of the Bank's offices, and
for the inspection services performed in connection with loans. The Board of
Directors approved the agreements with both directors, one a general contractor
and the other an architect. The total paid was $4,625 in 1999, $5,060 in 1998,
and $26,638 in 1997.
Two directors of the Company are a principal and a partner in law firms
which the Company retained during fiscal years 1999, 1998, and 1997, and which
the Company intends to retain during fiscal year 2000. During the year ended
December 31, 1998, the amount of legal fees paid to the law firms did not exceed
5% of those firms' gross revenues for such fiscal year.
A director of the Company is an executive officer, director and principal
of an investment banking firm from which the Company purchased and sold
investment securities during fiscal years 1999, 1998, and 1997. The Company
intends to continue the business relationship during fiscal 2000. The purchases
of investment securities from the investment banking firm amounted to $343.29
million, $321.78 million, and $119.11 million and the sales amounted to $240.74
million, $272.34 million, and $103.03 million during fiscal years 1999, 1998 and
1997, respectively. These securities were purchased and sold at market rates and
on terms no more favorable to the investment banking firm than those obtainable
on an arm's-length basis. The investment banking firm receives income on these
transactions as a result of a spread differential (on a net yield basis). During
the year ended December 31, 1998, the amount of income earned by the investment
banking firm related to the investment activity with the Company did not exceed
5% of that firm's gross revenues for such fiscal year.
A director of the Company is a director and president of a mortgage
banking firm from which the Company purchased single-family residential mortgage
loans during fiscal years 1999, 1998, and 1997, and the Company intends to
continue the business relationship during fiscal year 2000. During fiscal 1999,
1998 and 1997, the purchases of loans from the mortgage banking firm amounted to
$4.73 million, $7.28 million, and $16.32 million, respectively, with fees of
$50,471, $93,314, and $135,061, respectively, paid to the firm. The loans were
purchased at market rates and terms no more favorable to the mortgage banking
firm than those obtainable on an arm's-length basis.
During fiscal 1999, 1998 and 1997 the Company entered into an agreement
with one of the directors of the Company to perform reviews of appraisals in
connection with the origination of residential mortgage loans. During fiscal
1997 the Company entered into an agreement with another director of the Company
for the improvement and renovation of certain of the Bank's offices, for the
performance of routine maintenance and repair at all of the Bank's offices, and
for the inspection services performed in connection with loans. The Board of
Directors approved the agreements with both directors, one a general contractor
and the other an architect. The total paid was $4,625 in 1999, $5,060 in 1998,
and $26,638 in 1997.
<PAGE>
Two directors of the Company are a principal and a partner in law firms
which the Company retained during fiscal years 1999, 1998, and 1997, and which
the Company intends to retain during fiscal year 2000. During the year ended
December 31, 1998, the amount of legal fees paid to the law firms did not exceed
5% of those firms' gross revenues for such fiscal year.
A director of the Company is an executive officer, director and principal
of an investment banking firm from which the Company purchased and sold
investment securities during fiscal years 1999, 1998, and 1997. The Company
intends to continue the business relationship during fiscal 2000. The purchases
of investment securities from the investment banking firm amounted to $343.29
million, $321.78 million, and $119.11 million and the sales amounted to $240.74
million, $272.34 million, and $103.03 million during fiscal years 1999, 1998 and
1997, respectively. These securities were purchased and sold at market rates and
on terms no more favorable to the investment banking firm than those obtainable
on an arm's-length basis. The investment banking firm receives income on these
transactions as a result of a spread differential (on a net yield basis). During
the year ended December 31, 1998, the amount of income earned by the investment
banking firm related to the investment activity with the Company did not exceed
5% of that firm's gross revenues for such fiscal year.
A director of the Company is a director and president of a mortgage
banking firm from which the Company purchased single-family residential mortgage
loans during fiscal years 1999, 1998, and 1997, and the Company intends to
continue the business relationship during fiscal year 2000. During fiscal 1999,
1998 and 1997, the purchases of loans from the mortgage banking firm amounted to
$4.73 million, $7.28 million, and $16.32 million, respectively, with fees of
$50,471, $93,314, and $135,061, respectively, paid to the firm. The loans were
purchased at market rates and terms no more favorable to the mortgage banking
firm than those obtainable on an arm's-length basis.
10 - Stockholders' Equity
- -------------------------
At the time of its conversion from a state-chartered mutual association to
a state-chartered capital stock association, the Bank established a liquidation
account in an amount equal to $4,845,000 at September 30, 1986. The liquidation
account is maintained for the benefit of eligible savings account holders who
have maintained their savings account in the Bank after conversion. In the
unlikely event of a complete liquidation, each eligible savings account holder
will be entitled to receive a liquidation distribution from the liquidation
account, in the amount of the then current adjusted sub-account balance for
savings accounts held, before any liquidation distribution may be made with
respect to capital stock.
Except for the repurchase of stock and payment of dividends by the Bank,
the existence of the liquidation account does not restrict the use or
application of such net worth. The Company may not declare or pay a cash
dividend on, or repurchase, any of its common stock if the effect thereof would
cause the net worth of the Bank to be reduced below either the amount required
for the liquidation account or the net worth requirements imposed by the Office
of Thrift Supervision.
In September 1998 and 1997 the Company paid 5% common stock dividends in
the amounts of 116,034 and 102,606 shares, respectively, from authorized but
unissued common stock with fractional shares paid in the form of cash. In
December 1998 the Company paid a three-for-two stock split effected in the form
of a dividend in the amount of 1,224,980 shares, with fractional shares paid in
the form of cash.
35
<PAGE>
11 - 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 June 30, 1999 and 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 June 30, 1999 that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table as
follows (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital (to Risk Weighted Assets) $ 34,005 13.05% $ 20,848 8.00% $ 26,060 10.00%
Tier 1 Capital (to Risk Weighted Assets) $ 30,768 11.81% $ 10,424 4.00% $ 15,636 6.00%
Tier 1 Capital (to Average Assets) $ 30,768 6.86% $ 17,934 4.00% $ 22,418 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>
<PAGE>
12 - Fair Value Of Financial Instruments
- ----------------------------------------
The Company is required to disclose estimated fair values for its
financial instruments.
Limitations
Estimates of fair value are made at a specific point in time, based upon,
where available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparts, future expected loss
experience and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and therefore
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies are likely to result in significantly different
fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking, or other businesses, existing
customer relationships, extensive branch banking network, property, equipment,
goodwill or certain tax implications related to the realization of unrealized
gains or losses. Also, the fair value of non-interest bearing demand deposits,
savings and NOW accounts and money market deposit accounts is equal to the
carrying amount because these deposits have no stated maturity. This approach to
estimating fair value excludes the significant benefit that results from the
low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of individual
assets and liabilities may not be reflective of the fair value of a banking
organization that is a going concern.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at June 30, 1999 and 1998:
Cash and cash equivalents:
Current carrying amounts approximate estimated fair value.
36
<PAGE>
12 - Fair Value Of Financial Instruments (Continued)
- ----------------------------------------------------
Trading account securities, securities held to maturity and securities available
for sale:
Current quoted market prices were used to determine fair value.
Loans:
Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type, and each loan category was
further segmented by fixed- and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
through the estimated maturity and prepayment speeds while using estimated
market discount rates that reflected credit and interest risk inherent in the
loans. The estimate of the maturities and prepayment speeds was based on the
Company's historical experience. Cash flows were discounted using market rates
adjusted for the various types of loan portfolios.
Deposits:
The fair value of deposits with no stated maturity, such as non-interest
bearing deposits, savings, NOW and money market accounts, as well as repurchase
agreements, is equal to the amount payable on demand. The fair value of
certificates of deposit was estimated by discounting the contractual cash flows
using current market rates offered in the Company's market area for deposits
with comparable terms and maturities.
Borrowed Funds:
The fair value of borrowings was estimated using rates currently available
to the Company for debt with similar terms and remaining maturities.
Commitments to extend credit:
The majority of the Company's commitments to extend credit carry current
market interest rates if converted to loans. Because commitments to extend
credit are generally unassignable by either the Company or the borrower, they
only have value to the Company and the borrower. The estimated fair value
approximates the recorded deferred fee amounts.
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------
1999 1998
---------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- --------- --------- ----------
Financial Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 18,602 $ 18,602 $ 15,905 $ 15,905
Trading account securities 9,221 9,221 20,352 20,352
Investment securities available for sale 109,600 109,600 38,303 38,303
Investment securities 7,801 7,816 15,600 15,672
Loans receivable, net 291,388 289,314 274,229 275,243
Accrued interest receivable 2,461 2,461 2,486 2,486
--------- --------- --------- ----------
Total financial assets $ 439,073 $ 437,014 $ 366,875 $ 367,961
========= ========= ========= ==========
Financial Liabilities:
Deposits and repos $ 359,514 $ 360,037 $ 298,336 $ 299,123
Borrowed funds 51,028 51,322 41,791 41,893
Accrued interest payable 1,573 1,573 969 969
--------- --------- --------- ----------
Total financial liabilities $ 412,115 $ 412,932 $ 341,096 $ 341,985
========= ========= ========= ==========
</TABLE>
13 - Employee Benefits
- ----------------------
Stock Compensation Program
The Company has two stock option plans (collectively, the "Plans") -- the
1993 Plan and the 1997 Plan. An aggregate of 179,477 and 236,250 authorized but
unissued shares of common stock of the Company, adjusted for the 5% stock
dividends in September 1998, 1997, 1996 and 1995, and the December 1998
three-for-two stock split and the March 1997 five-for-four stock split, were
reserved for issuance under the 1993 Plan and the 1997 Plan, respectively. As of
June 30, 1999 there were 155,908 and 33,762 options granted under the 1993 and
1997 Plans, respectively. Under the Plans, the option price per share for
incentive options granted may not be less than the fair market value of the
common stock on the date of grant. Options may be granted under the 1993 Plan
and the 1997 Plan during the ten-year periods ending 2003 and 2007,
respectively, and options granted under the Plans are exercisable up to ten
years from the date of grant. Rights to exercise options under the Plans may be
limited by imposition of vesting schedules at the time the options are granted.
37
<PAGE>
The following table is a summary of option transactions since June 30,
1997. These options and option prices for the years 1997, 1998, and 1999 have
been adjusted to reflect the stock dividends in fiscal 1997, 1998 and 1999 and
the stock splits in fiscal 1997 and fiscal 1999:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 84,182 $ 9.08 117,188 $ 8.58 138,675 $ 7.50
Granted 97,059 20.40 10,336 14.51 20,734 8.51
Exercised (14,810) 8.99 (31,705) 8.60 (29,284) 3.40
Forfeited (8,095) 19.10 (11,637) 10.23 (12,937) 8.64
-------- -------- --------
Outstanding at end of year 158,336 15.51 84,182 9.08 117,188 8.58
Exercisable at end of year 90,635 52,989 46,023
Weighted-average fair value
of options granted $ 6.75 $ 4.90 $ 2.89
</TABLE>
At June 30, 1999, the range of exercise prices was $8.41 - $20.40 and the
weighted average remaining contractual life of the outstanding options was 7.6
years. The Black-Scholes option-pricing model was used to determine the
grant-date fair value of options. Significant assumptions used in the model
included a weighted average risk free rate of return of 5.81% in 1999, 6.39% in
1998 and 6.49% in 1997; expected option life of 6 years for 1999, 1998 and 1997
options; expected stock price volatility of 29.73% for 1999, 27.64% for 1998 and
28.04% in 1997 and expected dividends of 1.82%, 1.51%, and 1.82% for 1999, 1998,
and 1997, respectively.
The Company, as permitted, has elected not to adopt the fair value
accounting provisions of SFAS 123 "Accounting for Stock-based Compensation", and
has instead continued to apply APB Opinion 25 and related Interpretations in
accounting for plans and provide the required proforma disclosures of SFAS 123.
Had the grant-date fair-value provisions of SFAS 123 been adopted, the Company
would have recognized $126,109 in 1999 and $26,500 in 1998 in compensation
expense related to its Option Plans. As a result, proforma net income of the
Company would have been $4,086,400 in 1999 and $3,599,500 in 1998 and proforma
diluted earnings per share would have been $1.10 in 1999 and $.98 in 1998.
The effects of proforma net income and diluted earnings per share of
applying the disclosure requirements of SFAS 123 in past years may not be
representative of the future proforma effects on net income and EPS due to the
vesting provisions of the options and future awards that are available to be
granted.
<PAGE>
Employee Stock Ownership Plan
The Bank maintains an ESOP for all employees of the Bank with at least one
year of credited service. Benefits become 20% vested after three years of
service, increasing to 100% after seven years. Forfeitures are reallocated among
remaining participating employees. Vested benefits are generally payable upon
retirement, disability or separation from service.
The ESOP is subject to the requirements of the Employee Retirement Income
Security Act of 1974, as amended, and the regulations of the Internal Revenue
Service and the Department of Labor.
The ESOP is funded by the Bank's contributions, and all contributions to
date have been used to pay principal, interest and other fees associated with
the ESOP's loan referred to below. Benefits to participants are normally paid in
whole shares of common stock.
The ESOP borrowed funds to acquire the initial 78,125 shares of common
stock at $5.76 per share, adjusted for the subsequent stock splits effected in
the form of dividends. The ESOP purchased an additional 101,544 shares of the
common stock at a weighted average price of $8.69 per share, also adjusted for
the subsequent stock splits effected in the form of dividends. Funds necessary
to purchase such shares were borrowed from an independent third-party lender.
The Company has not guaranteed the debt but anticipates contributing sufficient
funds to the ESOP to enable it to meet its debt service requirements. The
outstanding loan balance has been reflected as a liability and a reduction of
stockholders' equity in the consolidated statements of financial condition.
Shares purchased with such loan proceeds are held in a suspense account for
allocation among members as the loan is repaid. Contributions to the ESOP and
shares released from the suspense account are allocated among members on the
basis of compensation and years of service. A total of 57,901, 85,094, and
27,928, shares were allocated in fiscal 1999, 1998, and 1997, respectively.
Contributions by the Bank to the ESOP in fiscal 1999, 1998 and 1997
amounted to $128,609, $173,957, and $181,240, respectively, and are included in
the accompanying consolidated statements of operations in salaries and employee
benefits. Interest expense paid during 1999, 1998, and 1997 by the ESOP for the
loan amounted to $10,568, $19,839, and $34,298, respectively.
The interest rate on the ESOP loan is fixed at 7.50% until maturity with
interest expense being computed on the unpaid principal balance. As principal
payments are made by the ESOP, the corresponding liability is reduced and
stockholders' equity is increased. Principal payments and cash dividends paid on
the common stock held by the ESOP in fiscal 1999 amounted to $146,618, on the
loan which matured on April 1, 1999.
Pension Plan
The Bank has a noncontributory defined benefit pension plan which is fully
funded through a multi-employer investment trust covering qualified salaried
employees. Costs recognized for the years ended June 30, 1999, 1998 and 1997,
totaled $5,158, $3,884, and $4,953, respectively. Information relative to the
financial status of the Bank's portion of the Plan is not currently available.
38
<PAGE>
14 - Acquisition
- ----------------
On May 29, 1998, the Company acquired Philadelphia Corporation for
Investment Services, a full-service investment advisory and securities brokerage
firm. The transaction was accounted for as a pooling of interests and the
shareholders of PCIS received 23.4239 shares of Chester Valley Bancorp Inc.
stock for each share of PCIS stock. Approximately 134,000 shares of CVAL stock
were issued in the exchange.
The results of operations previously reported by the separate companies
and the combined amounts presented in the accompanying consolidated financial
statements are summarized in the Segment Reporting footnote (see footnote 15).
15 - Segment Reporting
- ----------------------
The Company has two reportable segments: First Financial Bank ("FFB") and
Philadelphia Corporation for Investment Services ("PCIS"). FFB operates a branch
bank network with eight full-service banking offices and provides deposits and
loan services to customers. Additionally, FFB offers trust services at its
Downingtown headquarters. PCIS operates a full service investment advisory and
securities brokerage firm through two offices. Both segments operate in
southeastern Pennsylvania.
The Company evaluates performance based on profit or loss from operations
before income taxes not including nonrecurring gains and losses. There are no
material intersegment sales or transfers.
The Company's reportable segments have traditionally been two independent
financial services institutions. PCIS was acquired by the Company on May 29,
1998. The two segments are managed separately. All senior officers from PCIS
prior to the acquisition have been retained to manage the segment.
The following table highlights income statement and balance sheet
information for each of the segments at or for the years ended June 30, 1999,
1998 and 1997 (in thousands):
For The Year Ended June 30, 1999
- ---------------------------------------------------------------
FFB PCIS Total
- ---------------------------------------------------------------
Net interest income $ 13,633 $ 71 $ 13,704
Other income 2,056 3,141 5,197
Total net income 3,855 358 4,213
Total assets 448,901 2,257 451,158
Total interest-bearing deposits 11,971 1,438 13,409
Total trading securities 8,815 406 9,221
==============================================================
For The Year Ended June 30, 1998
- --------------------------------------------------------------
FFB PCIS Total
- --------------------------------------------------------------
Net interest income $ 12,291 $ 53 $ 12,344
Other income 1,851 2,767 4,618
Total net income 3,196 430 3,626
Total assets 375,153 1,859 377,012
Total interest-bearing deposits 10,643 1,218 11,861
Total trading securities 19,944 408 20,352
==============================================================
<PAGE>
For The Year Ended June 30, 1997
- --------------------------------------------------------------
FFB PCIS Total
- --------------------------------------------------------------
Net interest income $ 11,066 $ 49 $ 11,115
Other income 1,324 2,325 3,649
Total net income 1,926 311 2,237
Total assets 323,673 1,528 325,201
Total interest-bearing deposits 6,844 1,057 7,901
Total trading securities -- 252 252
==============================================================
16 - Summarized Quarterly Financial Data For Fiscal 1999 and 1998 (Unaudited)
- ----------------------------------------------------------------------------
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 6,990 $ 7,172 $ 7,354 $ 7,869 $ 6,310 $ 6,377 $ 6,404 $ 6,662
Interest expense 3,771 3,783 3,909 4,218 3,267 3,355 3,278 3,509
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,219 3,389 3,445 3,651 3,043 3,022 3,126 3,153
Provision for loan losses 45 45 45 255 120 120 201 165
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,174 3,344 3,400 3,396 2,923 2,902 2,925 2,988
Other income 1,386 1,387 1,170 1,254 1,115 1,004 1,349 1,150
Operating expenses(1) 2,989 3,028 3,263 3,450 2,674 2,659 2,870 3,440
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,571 1,703 1,307 1,200 1,364 1,247 1,404 698
Income tax expense(1) 472 535 288 273 360 338 346 43
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,099 $ 1,168 $ 1,019 $ 927 $ 1,004 $ 909 $ 1,058 $ 655
=================================================================================================================================
Earnings per common share(2)
Basic $ 0.30 $ 0.32 $ 0.28 $ 0.24 $ 0.28 $ 0.25 $ 0.29 $ 0.18
=================================================================================================================================
Diluted $ 0.30 $ 0.31 $ 0.27 $ 0.25 $ 0.27 $ 0.25 $ 0.29 $ 0.17
=================================================================================================================================
</TABLE>
(1) The fourth quarter of fiscal 1998 includes PCIS acquisition costs of $.21
million in addition to a charitable donation of $.29 million which resulted
in a $.15 million state tax credit.
(2) Earnings per share have been restated to reflect the effects of the 5%
stock dividend paid in September 1998 and 1997 and the three-for-two stock
split effected in the form of a dividend in December 1998.
39
<PAGE>
17 - Parent Company Financial Information
- -----------------------------------------
Financial information of Chester Valley Bancorp Inc. (parent company only)
follows:
<TABLE>
<CAPTION>
Statements of Financial Condition
- ---------------------------------
At June 30,
---------------------------
1999 1998
----------- -----------
Assets
<S> <C> <C>
On deposit with subsidiaries $ 782,599 $ 375,801
Securities available for sale 1,962,797 1,402,979
Investment in subsidiaries 31,051,563 30,274,690
Other assets 55,550 25,523
----------- -----------
Total Assets $33,852,509 $32,078,993
=========== ===========
Liabilities
ESOP debt $ -- $ 146,618
Other liabilities -- 83,532
----------- -----------
Total Liabilities -- 230,150
Stockholders' Equity 33,852,509 31,848,843
----------- -----------
Total Liabilities and Stockholders' Equity $33,852,509 $32,078,993
=========== ===========
<CAPTION>
Statements of Operations
- ------------------------
Year Ended June 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Income
<S> <C> <C> <C>
Distributed income from subsidiaries $1,796,652 $2,188,259 $1,049,582
Interest income 98,020 28,490 16,598
Equity in undistributed income of subsidiaries 2,329,245 1,587,662 1,188,273
---------- ---------- ----------
Expense
Other expense 11,416 178,381 17,345
---------- ---------- ----------
Net Income $4,212,501 $3,626,030 $2,237,108
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
- ------------------------
Year Ended June 30,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Operating activities:
<S> <C> <C> <C>
Net income $ 4,212,501 $ 3,626,030 $ 2,237,108
Add (deduct) items not affecting cash flows
from operating activities:
Equity in undistributed income of subsidiaries (2,329,245) (1,587,662) (1,188,273)
Increase in other assets (30,027) (22,169) --
Increase (decrease) in other liabilities (83,532) 83,532 --
Reduction of common stock acquired by ESOP 146,618 186,872 177,250
----------- ----------- -----------
Net cash flows from operating activities 1,916,315 2,286,603 1,226,085
----------- ----------- -----------
Investment activities:
Purchase of securities available for sale (908,446) (1,402,979) --
Proceeds from sales and calls of securities available for sale 99,900 --
----------- ----------- -----------
Net cash flows used in investment activities (808,546) (1,402,979) --
----------- ----------- -----------
Financing activities:
Income tax benefit on exercise of stock options (43,454) (98,270) (92,246)
Cash dividends (1,153,622) (1,229,256) (1,061,628)
Payment for fractional shares (15,525) (7,633) (15,927)
Common stock repurchased (23,800) (274,911) (351,879)
Repayments of principal on ESOP debt (146,618) (186,872) (177,250)
Proceeds from exercise of stock options 167,601 440,102 337,041
Proceeds from issuance of common stock 514,447 539,863 90,181
----------- ----------- -----------
Net cash flows used in financing activities (700,971) (816,977) (1,271,708)
----------- ----------- -----------
Net increase (decrease) in cash 406,798 66,647 (45,623)
Cash and cash equivalents:
Beginning of period 375,801 309,154 354,777
----------- ----------- -----------
End of period $ 782,599 $ 375,801 $ 309,154
=========== =========== ===========
Non-cash items:
Net unrealized gain (loss) on investment securities
available for sale, net of taxes $(1,844,554) $ 289,195 $ 99,936
Stock dividend issued $ 3,016,884 $ 2,154,726 $ 1,515,755
=========== =========== ===========
</TABLE>
40
<PAGE>
Independent Auditors' Report
[GRAPHIC-LOGO FOR KPMG]
To the Board of Directors and Stockholders of
Chester Valley Bancorp Inc:
We have audited the accompanying consolidated statements of financial
condition of Chester Valley Bancorp Inc. and subsidiaries as of June 30, 1999
and 1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chester
Valley Bancorp Inc. and subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1999, in conformity with generally accepted
accounting principles.
/s/KPMG LLP
- -----------
KPMG LLP
Philadelphia, Pennsylvania
July 22, 1999
41
<PAGE>
[GRAPHIC-PHOTOS OF BOARD OF DIRECTORS]
42
<PAGE>
Directors Serving in the
Same Capacity for Chester Valley Bancorp Inc. and
First Financial Bank:
Anthony J. Biondi
Director, President, and
Chief Operating Officer
of the Company and the Bank
Edward T. Borer
Chairman
Philadelphia Corporation
for Investment Services
Robert J. Bradbury
Co-chairman
Dolphin & Bradbury Incorporated
John J. Cunningham, III, Esquire
Partner
Schnader Harrison Segal & Lewis LLP
Gerard F. Griesser
President
Trident Financial Group
James E. McErlane, Esquire
Partner
Lamb, Windle & McErlane, PC
Richard L. Radcliff
President and Co-owner (Retired)
Radcliff & Sipe Architectural Firm
Ellen Ann Roberts
Director, Chairman, and
Chief Executive Officer
of the Company and the Bank
Emory S. Todd
Certified Public Accountant
William M. Wright
Retired General Manager
Malcolm Wright Buick Olds, Inc.
Directors on the Board of Philadelphia Corporation for Investment Services:
Philip J. Baldassari
Senior Vice President
<PAGE>
Anthony J. Biondi
Director, President, and
Chief Operating Officer
of the Company and the Bank
Frederick A. Bluefeld
Vice President
Edward T. Borer
Chairman
Robert J. Bradbury
Co-chairman
Dolphin & Bradbury Incorporated
A. Louis Denton
President and Chief Executive Officer
James E. McErlane, Esquire
Partner
Lamb, Windle & McErlane, PC
R. Wayne Raffety
Senior Vice President
Ellen Ann Roberts
Director, Chairman, and
Chief Executive Officer
of the Company and the Bank
Vernon C. Walker
Senior Vice President
Spencer D. Wright, III
Chairman Emeritus
Executive Officers of Chester Valley Bancorp Inc:
Ellen Ann Roberts
Chairman and Chief Executive Officer
Anthony J. Biondi
President and Chief Operating Officer
James E. McErlane, Esquire
Secretary
Colin N. Maropis
Executive Vice President
Executive Officers of
First Financial Bank:
Ellen Ann Roberts
Chairman and Chief Executive Officer
<PAGE>
Anthony J. Biondi
President and Chief Operating Officer
Steven C. Cunningham
Vice President
Kay B. Falkow
Vice President
Edward S. Lawrence
Senior Vice President
Colin N. Maropis
Executive Vice President
David L. Summers
Vice President
Other Officers of
First Financial Bank:
Frank J. Baldassarre
Vice President
C. Ward Braceland
Vice President
Shelley A. Castrinoes
Assistant Vice President
Pamela M. Collins
Secretary
Arlene S. Cunningham
Assistant Vice President
Assistant Secretary
Linda B. Draper
Assistant Vice President
Romaine R. Dunlap
Assistant Vice President
William G. Eads, Jr.
Vice President
Veronica Gilken
Assistant Vice President
Michelle L. Guerrero
Assistant Vice President
Anne S. Johnson
Assistant Vice President
Kelly L. Laurento
Assistant Vice President
<PAGE>
Celeste L. Moore
Assistant Vice President
Cheryl M. Owens
Assistant Vice President
Carol F. Reichard
Assistant Vice President
Paula D. Stevens
Assistant Vice President
Joseph M. Swarr
Assistant Vice President
Phillis D. Weidenhammer
Vice President
Jo Ann Willenbrock
Assistant Vice President
Paige M. Willover
Assistant Vice President
Executive and Administrative Officers of Philadelphia
Corporation for Investment Services:
Edward T. Borer
Chairman
A. Louis Denton
President and Chief Executive Officer
Mary Kay Greenwood
Assistant Vice President and Secretary
Kathleen D. Hartung
Treasurer
43
<PAGE>
First Financial Bank
Advisory Board Members:
Coatesville Advisory Board:
Milton Allen
Albert W. Eastburn
Nicholas J. Fantanarosa, Jr.
Dr. Louis M. Laurento
Aleda P. Loughman
John H. Newton, Jr.
Devon Advisory Board:
Matthew DiDomenico
Alan F. Hark
William T. McDonnell
Dennis C. Reardon, LL.M.
Exton Advisory Board:
William E. Augustine
Raymond H. Carr
Carl K. Croft, CPA
Jay G. Fischer
Kevin Holleran, Esquire
James Knipe, Sr.
Frazer Advisory Board:
Timothy O. Fanning
David M. Frees, III
Florence D. Hunt
Albert P. Massey, Jr.
R. Wayne Raffety
A. Joseph Rubino
Westtown Advisory Board:
Wayne W. Grafton
Charles A. Hackett, CPA
Marita M. Hutchinson, Esquire
Conrad E. Muhly, III
Earl Stoltzfus
John R. Williams
George C. Zumbano, Esquire
CORPORATE INFORMATION:
Annual Meeting
The Annual Meeting of Stockholders will be held at 10 AM on Wednesday, October
27, 1999, at:
Chester Valley Golf and Country Club
430 Swedesford Road
Malvern, Pennsylvania 19355
Stock Listing
Chester Valley Bancorp Inc. Stock is traded on the NASDAQ National Market System
under the symbol "CVAL".
<PAGE>
Market Makers:
F. J. Morrissey & Co., Inc.
Philadelphia, Pennsylvania
(215) 563-8500
Herzog Heine & Geduld, Inc.
Philadelphia, Pennsylvania
(800) 462-0443
Janney Montgomery Scott
Philadelphia, Pennsylvania
(215) 563-8671
Knight Securities LP
Jersey City, NJ 07310
Hopper Soliday Division of Tucker Anthony
Lancaster, Pennsylvania
(800) 456-9234
Spear, Leeds & Kellog
Jersey City, NJ 07302
Investor Information:
Patricia A. Ferretti
Shareholder Relations Administrator
Chester Valley Bancorp Inc.
100 E. Lancaster Avenue
Downingtown, Pennsylvania 19335
(610) 269-9700
Transfer Agent, Registrar and Dividend Disbursing Agent:
American Stock Transfer and Trust Co.
40 Wall Street, 46th Floor
New York, New York 10005
(212) 936-5100
Form 10-K
Subsequent to the required filing with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, the Company will furnish to any
shareholder, without charge, a copy of the Company's Annual Report on Form 10-K
for the year ended June 30, 1999 and the exhibits thereto, upon written request
to Patricia A. Ferretti, Shareholder Relations Administrator.
Auditors:
KPMG LLP
1600 Market Street
Philadelphia, Pennsylvania 19103
Counsel:
Lamb, Windle & McErlane, PC
24 E. Market Street
West Chester, Pennsylvania 19381
Schnader Harrison Segal & Lewis LLP
1600 Market Street
Suite 3600
Philadelphia, Pennsylvania 19103
<PAGE>
Elias, Matz, Tiernan & Herrick
The Walker Building, 12th Floor
734 15th Street, NW
Washington DC 20005
Executive Office:
Chester Valley Bancorp Inc.
100 E. Lancaster Avenue
Downingtown, Pennsylvania 19335
(610) 269-9700
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Chester Valley Bancorp Inc.:
We consent to incorporation by reference in the registration statements Nos.
33-71736 and 333-42099 on Form S-8 and No. 33-72210 on Form S-3 of Chester
Valley Bancorp Inc. of our report dated July 22, 1999, relating to the
consolidated statements of financial condition of Chester Valley Bancorp Inc.
and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1999, which appears in
the June 30, 1999 annual report on Form 10-K of Chester Valley Bancorp Inc.
/s/ KPMG LLP
- ------------
KPMG LLP
Philadelphia, PA
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,193
<INT-BEARING-DEPOSITS> 13,409
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 9,221
<INVESTMENTS-HELD-FOR-SALE> 109,600
<INVESTMENTS-CARRYING> 7,801
<INVESTMENTS-MARKET> 7,816
<LOANS> 291,388
<ALLOWANCE> 3,651
<TOTAL-ASSETS> 451,158
<DEPOSITS> 298,191
<SHORT-TERM> 3,241
<LIABILITIES-OTHER> 6,763
<LONG-TERM> 47,787
0
0
<COMMON> 3,707
<OTHER-SE> 30,146
<TOTAL-LIABILITIES-AND-EQUITY> 451,158
<INTEREST-LOAN> 22,772
<INTEREST-INVEST> 5,896
<INTEREST-OTHER> 717
<INTEREST-TOTAL> 29,385
<INTEREST-DEPOSIT> 12,703
<INTEREST-EXPENSE> 15,682
<INTEREST-INCOME-NET> 13,704
<LOAN-LOSSES> 390
<SECURITIES-GAINS> 282
<EXPENSE-OTHER> 12,731
<INCOME-PRETAX> 5,780
<INCOME-PRE-EXTRAORDINARY> 5,780
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,213
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 3.64
<LOANS-NON> 933
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,240
<ALLOWANCE-OPEN> 3,414
<CHARGE-OFFS> 177
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 3,651
<ALLOWANCE-DOMESTIC> 1,608
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,043
</TABLE>
