SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1998
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File No.: 0-18833
Chester Valley Bancorp Inc.
---------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2598554
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 E. Lancaster Ave., Downingtown PA 19335
------------------------------------- -----
(Address Of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (610) 269-9700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Transitional Small Business Disclosure Format. YES [ ] NO [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($1.00 par value) 3,686,196
------------------------------ ---------
(Title of Each Class) (Number of Shares Outstanding
as of February 1, 1999)
<PAGE>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and June 30, 1998 (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, 1998 and 1997 (Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 31, 1998 and 1997 (Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1998 and 1997 (Unaudited)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Item 2 .MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
PART 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 3. DEFAULTS UPON SENIOR SECURITIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
December 31, June 30,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS:
Cash in banks ............................................... $ 5,080 $ 4,044
Interest-bearing deposits ................................... 7,268 11,861
Trading account securities .................................. 18,236 20,352
Investment securities available for sale .................... 70,124 38,303
Investment securities (market value - December 31,
$11,781; June 30, $15,672) ............................ 11,761 15,600
Loans receivable, less allowance for
loan losses of $3,432 and $3,414 ...................... 281,762 273,128
Loans held for sale ......................................... -- 1,101
Accrued interest receivable ................................. 2,136 2,486
Property and equipment - net ................................ 7,525 7,094
Other assets ................................................ 6,602 3,043
=========== ===========
Total Assets ........................................... $ 410,494 $ 377,012
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits .................................................... $ 318,975 $ 298,191
Securities sold under agreements to repurchase .............. 199 144
Advance payments by borrowers for taxes and insurance ....... 1,835 2,963
Employee Stock Ownership Plan ("ESOP") debt ................. 49 147
Federal Home Loan Bank advances ............................. 51,627 40,936
Other borrowings ............................................ 842 708
Accrued interest payable .................................... 966 969
Other liabilities ........................................... 2,033 1,105
----------- -----------
Total Liabilities ...................................... 376,526 345,163
----------- -----------
Stockholders' Equity:
Preferred stock - $1.00 par value;
5,000,000 shares authorized; none issued ............... -- --
Common stock - $1.00 par value; 10,000,000 shares authorized;
3,682,326 and 3,664,914 shares issued at December 31,
and June 30, respectively .............................. 3,682 3,665
Additional paid-in capital .................................. 17,547 17,288
Common stock acquired by ESOP ............................... (49) (147)
Retained earnings - partially restricted .................... 12,477 10,751
Accumulated other comprehensive income ...................... 311 292
----------- -----------
Total Stockholders' Equity ............................. 33,968 31,849
----------- -----------
Total Liabilities and Stockholders' Equity ............. $ 410,494 $ 377,012
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
Three Months Ended
December 31,
-----------------------------
1998 1997
----------- ------------
<S> <C> <C>
INTEREST INCOME:
Loans ................................................. $ 5,777 $ 5,569
Investment securities and interest-bearing deposits ... 1,395 808
----------- -----------
Total interest income .............................. 7,172 6,377
----------- -----------
INTEREST EXPENSE:
Deposits .............................................. 3,029 2,883
Securities sold under agreements to repurchase ........ 4 2
Short-term borrowings ................................. 221 305
Long-term borrowings .................................. 529 165
----------- -----------
Total interest expense ............................. 3,783 3,355
----------- -----------
NET INTEREST INCOME ..................................... 3,389 3,022
Provision for loan losses ............................. 45 120
----------- -----------
Net interest income after provision for loan losses 3,344 2,902
----------- -----------
OTHER INCOME:
Investment services income, net ....................... 742 599
Service charges and fees .............................. 369 281
Gain on trading account securities .................... 227 5
Gain (loss) on sale of assets available for sale ...... (2) 78
Other ................................................. 51 40
----------- -----------
Total other income ................................. 1,387 1,003
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits ........................ 1,624 1,383
Occupancy and equipment ............................... 491 465
Data processing ....................................... 195 177
Deposit insurance premiums ............................ 43 41
Other ................................................. 675 593
----------- -----------
Total operating expenses ........................... 3,028 2,659
----------- -----------
Income before income taxes ............................ 1,703 1,246
Income tax expense .................................... 535 337
----------- -----------
NET INCOME .............................................. $ 1,168 $ 909
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
(continued)
Three Months Ended
December 31,
-----------------------------
1998 1997
----------- ------------
<S> <C> <C>
EARNINGS PER SHARE (1):
Basic ................................................. $ 0.32 $ 0.25
=========== ===========
Diluted ............................................... $ 0.31 $ 0.25
=========== ===========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) .............. $ 0.07 $ 0.07
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic ................................................. 3,675,352 3,617,226
=========== ===========
Diluted ............................................... 3,716,126 3,671,038
=========== ===========
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income ........................................... $ 1,168 $ 909
Net unrealized holding gains (losses) on securities
available for sale during the period .............. (100) 243
Less reclassification adjustment
for gains (losses) included in net income ......... -- 49
----------- -----------
COMPREHENSIVE INCOME .................................... $ 1,068 $ 1,103
=========== ===========
</TABLE>
(1) Earnings per share, dividends per share and weighted average shares
outstanding have been restated to reflect the effects of the 5% stock
dividend paid in September 1998 and the three-for-two stock
split effected in the form of dividend in December 1998.
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
Six Months Ended
December 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
INTEREST INCOME:
Loans ................................................. $ 11,427 $ 11,071
Investment securities and interest-bearing deposits ... 2,735 1,616
---------- ----------
Total interest income .............................. 14,162 12,687
---------- ----------
INTEREST EXPENSE:
Deposits .............................................. 6,141 5,724
Securities sold under agreements to repurchase ........ 7 3
Short-term borrowings ................................. 458 548
Long-term borrowings .................................. 948 347
---------- ----------
Total interest expense ............................. 7,554 6,622
---------- ----------
NET INTEREST INCOME ..................................... 6,608 6,065
Provision for loan losses ............................. 90 240
---------- ----------
Net interest income after provision for loan losses 6,518 5,825
---------- ----------
OTHER INCOME:
Investment services income, net ....................... 1,488 1,279
Service charges and fees .............................. 729 583
Gain on trading account securities .................... 380 5
Gain on sale of assets available for sale ............. 78 166
Other ................................................. 98 85
---------- ----------
Total other income ................................. 2,773 2,118
---------- ----------
OPERATING EXPENSES:
Salaries and employee benefits ........................ 3,292 2,822
Occupancy and equipment ............................... 999 906
Data processing ....................................... 385 343
Deposit insurance premiums ............................ 85 79
Other ................................................. 1,256 1,183
---------- ----------
Total operating expenses ........................... 6,017 5,333
---------- ----------
Income before income taxes ............................ 3,274 2,610
Income tax expense .................................... 1,007 697
---------- ----------
NET INCOME .............................................. $ 2,267 $ 1,913
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
(continued)
Six Months Ended
December 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
EARNINGS PER SHARE (1):
Basic ................................................. $ 0.62 $ 0.53
========== ==========
Diluted ............................................... $ 0.61 $ 0.52
========== ==========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) .............. $ 0.14 $ 0.14
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic ................................................. 3,671,156 3,616,165
========== ==========
Diluted ............................................... 3,713,031 3,664,802
========== ==========
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income ........................................... $ 2,267 $ 1,913
Net unrealized holding gains on securities
available for sale during the period .............. 55 398
Less reclassification adjustment
for gains (losses) included in net income ......... 36 102
---------- ----------
COMPREHENSIVE INCOME .................................... $ 2,286 $ 2,209
========== ==========
</TABLE>
(1) Earnings per share, dividends per share and weighted average shares
outstanding have been restated to reflect the effects of the 5% stock
dividend paid in September 1998 and the three-for-two stock split
effected in the form of dividend in December 1998
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended December 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 2,267 $ 1,913
Add (deduct) items not affecting cash flows from operating activities:
Depreciation ............................................................. 311 331
Provision for loan losses ................................................ 90 240
Gain on trading account securities ....................................... (380) (5)
Gain on sale of loans held for sale ..................................... (20) --
Gain on sale of securities available for sale ............................ (58) (166)
Amortization of deferred loan fees, discounts and premiums ............... (466) (271)
Decrease (increase) in trading account securities ........................ 2,496 (185)
Decrease in accrued interest receivable .................................. 350 328
Decrease (increase) in other assets ...................................... (3,559) 175
Increase in other liabilities ............................................ 928 1,064
Increase (decrease) in accrued interest payable .......................... (3) 50
--------- ---------
Net cash flows from operating activities .................................... 1,956 3,474
--------- ---------
Cash flows from (used in) investment activities:
Capital expenditures ..................................................... (742) (504)
Net increase in loans and loans held for sale ............................ (8,650) (9,648)
Proceeds from sale of loans held for sale ................................ 1,457 1,742
Purchase of investment securities ........................................ (1,083) (533)
Proceeds from maturities, payments and calls of investment securities .... 4,921 2,644
Purchase of securities available for sale ................................ (49,238) (138,102)
Proceeds from sales and calls of securities available for sale ........... 17,551 141,917
--------- ---------
Net cash flows used in investment activities ................................ (35,784) (2,484)
--------- ---------
Cash flows from (used in) financing activities:
Net increase in deposits before interest credited ....................... 15,146 1,009
Interest credited to deposits ............................................ 5,638 4,889
Increase in securities sold under agreements to repurchase ............... 55 167
Proceeds from FHLB advances .............................................. 13,599 6,275
Repayments of FHLB advances .............................................. (2,908) (12,037)
Decrease in advance payments by borrowers for taxes and insurance ........ (1,128) (1,049)
Net increase in other borrowings ......................................... 134 247
Cash dividends on common stock ........................................... (526) (626)
Repayments of principal on ESOP debt ..................................... (98) (92)
Common stock issued ...................................................... 244 301
Payment for fractional shares ............................................ (15) (7)
Stock options exercised .................................................. 32 32
Reduction of common stock acquired by ESOP ............................... 98 92
Common stock repurchased ................................................. -- (266)
--------- ---------
Net cash flows from (used in) financing activities ......................... 30,271 (1,065)
--------- ---------
Net decrease in cash and cash equivalents ................................... (3,557) (75)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(continued)
Six Months Ended December 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash and cash equivalents:
Beginning of period ...................................................... 15,905 10,550
========= =========
End of period ............................................................ $ 12,348 $ 10,475
========= =========
Supplemental disclosures:
Cash payments during the year for:
Taxes ................................................................. $ 936 $ 850
Interest
$ 7,557 $ 6,572
Non-cash items:
Net unrealized gain on investment securities available for sale .......... $ 31 $ 482
Tax effect on unrealized gain on investment securities available for sale $ 12 $ 187
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
CHESTER VALLEY BANCORP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Chester Valley Bancorp Inc. (the "Company") is a unitary thrift holding company,
incorporated in the Commonwealth of Pennsylvania in 1989. The Company is subject
to the regulations of certain federal and state banking agencies and undergoes
periodic examinations by those regulatory authorities. The business of the
Company and its subsidiaries consists of the operations of First Financial Bank
("First Financial" or the "Bank"), a Pennsylvania-chartered stock savings and
loan association founded in 1922, and Philadelphia Corporation for Investment
Services ("PCIS"), a full service investment advisory and securities brokerage
firm. The Bank provides a wide range of banking services to individual and
corporate customers through its branch banks in Chester County, Pennsylvania.
All of the branches are full service and offer commercial and retail deposit and
loan products. These products include checking accounts (non-interest and
interest-bearing), savings accounts, certificates of deposit, commercial and
installment loans, real estate mortgages, and home equity loans. The Bank also
offers ancillary services that complement these products. The Bank is subject to
extensive competition from other financial institutions and other companies that
provide financial services. PCIS is registered as a broker/dealer in all 50
states and Washington, DC and it is also registered as an investment advisor
with the Securities and Exchange Commission. PCIS provides many additional
services, including self-directed and managed retirement accounts, safekeeping,
daily sweep money market funds, portfolio and estate valuations, life insurance
and annuities, and margin accounts, to individuals and small corporate accounts.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Bank and PCIS. The accounts of
the Bank include its wholly-owned subsidiary, D & S Service Corp., which owns D
& FProjects and Wildman Projects, Inc., both of which are wholly-owned
subsidiaries thereof. All material inter-company balances and transactions have
been eliminated in consolidation. Prior period amounts are reclassified when
necessary to conform with the current period's presentation.
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. However, such information
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of results for the unaudited interim periods.
The results of operations for the three- and six-month periods ended December
31, 1998, are not necessarily indicative of the results to be expected for the
fiscal year ending June 30, 1999. The consolidated financial statements
presented herein should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 1998.
<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
generally of three months or less.
Securities
The Company divides its securities portfolio into three segments: (a) held to
maturity; (b) available for sale; and (c) trading. At the time of purchase, the
Company makes a determination on whether or not it will hold the investments to
maturity, based upon an evaluation of the probability of the occurrence of
future events. Securities in the 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 estimated losses based upon an evaluation of known and
inherent risks in the loan portfolio. Management's evaluation is based upon,
among other things, delinquency trends, the volume of non-performing loans,
prior loss experience of the portfolio, current economic conditions, and other
relevant factors. Although management believes it has used the best information
available to it in making such determinations, and that the allowance for loan
losses at December 31, 1998 is adequate, future adjustments to the allowance may
be necessary, and net income may be adversely affected if circumstances differ
substantially from the assumptions used in determining the level of the
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination. The allowance is increased by the provision for
loan losses which is charged to operations. Loan losses, other than those
incurred on loans held for sale, are charged directly against the allowance and
recoveries on previously charged-off loans are generally added to the allowance.
For purposes of applying the measurement criteria for impaired loans, the
Company excludes large groups of smaller balance homogeneous loans, primarily
consisting of residential real estate loans and consumer loans as well as
commercial business loans with principal balances of less than $100,000. For
applicable loans, the Company evaluates the need for impairment recognition when
a loan becomes non-accrual or earlier if, based on management's assessment of
the relevant facts and circumstances, it is probable that the Company will be
<PAGE>
unable to collect all proceeds under the contractual terms of the loan
agreement. At and during the three- and six-month periods ended December 31,
1998, 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 borrower's ability to
service the debt.
Loans Held for Sale
The Company periodically identifies certain loans as held for sale at the time
of their origination. These loans consist primarily of fixed-rate, single-family
residential mortgage loans which meet the underwriting characteristics of
certain government-sponsored enterprises (conforming loans). Loans held for sale
are carried at the lower of aggregate cost or fair value, with any resulting
gain or loss included in other income for the period. Realized gains or losses
are included in other income for the period.
Real Estate Owned ("REO")
Real estate acquired through foreclosure or by deed in lieu of foreclosure is
classified as REO. REO is carried at the lower of cost (lesser of carrying value
of the loan or fair value of the property at date of acquisition) or fair value
less selling expenses. Costs relating to the development or improvement of the
property are capitalized; holding costs are charged to expense.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts. The
cost of maintenance and repairs is charged to expense as incurred and renewals
and betterments are capitalized.
<PAGE>
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128. "Earnings per
Share," which was required to be adopted in both interim and annual financial
statements for periods ending after December 15, 1997. Accordingly, the Company
has changed its methodology for computing earnings per share and restated all
prior period amounts. SFAS 128 replaced "primary" and "fully" diluted earnings
per share with "basic" and "diluted" earnings per share. Under the new
requirements for calculating earnings per share, the dilutive effect of stock
options is excluded from basic earnings per share but included in the
computation of diluted earnings per share. Earnings per share and weighted
average shares outstanding for the periods presented herein have been adjusted
to reflect the effects of the 5% stock dividend paid in September 1998 and the
three-for-two stock split effected in the form of a dividend in December 1998.
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- -------------------------
(Dollars in Thousands)
1998 1997 1998 1997
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income ................... $ 1,168 $ 909 $ 2,267 $ 1,913
============ ========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted average
shares ....................... 3,675,352 3,617,226 3,671,156 3,616,165
Effect of dilutive securities:
Stock options ................ 40,774 53,812 41,875 48,637
------------ ---------- ---------- ----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise ..................... 3,716,126 3,617,038 3,713,031 3,664,802
============ ========== ========== ==========
Basic earnings per share ........ $ .32 $ 0.25 $ .62 $ .53
============ ========== ========== ==========
Diluted earnings per share ...... $ .31 $ 0.25 $ .61 $ .52
============ ========== ========== ==========
</TABLE>
<PAGE>
NOTE 2 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
At December 31, At June 30,
1998 1998
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
First mortgage loans:
Residential ........................... $ 154,984 $ 155,628
Construction-residential .............. 12,973 13,502
Land acquisition and
development ........................ 5,835 6,529
Commercial ............................ 45,028 41,002
Construction-commercial ............... 12,909 10,614
Commercial business ...................... 15,244 11,437
Consumer ................................. 51,568 51,829
--------- ---------
Total loans .............................. 298,541 290,541
--------- ---------
Less:
Undisbursed loan proceeds:
Construction-residential ........... (7,079) (7,915)
Construction-commercial ............ (4,701) (4,464)
Deferred loan fees - net .............. (1,567) (1,620)
Allowance for loan losses ............. (3,432) (3,414)
--------- ---------
Net loans ................................ $ 281,762 $ 273,128
========= =========
</TABLE>
NOTE 3 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $7.15 million as of
December 31, 1998, of which $2.22 million was for variable-rate loans. The
balance of the commitments represents $4.93 million of fixed-rate loans
(primarily consisting of single-family residential mortgages) bearing interest
rates of between 5.75% and 9.50%. At December 31, 1998, the Company had $11.78
million of undisbursed construction loan funds as well as $15.44 million of
undisbursed remaining consumer and commercial line balances.
NOTE 4 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
<PAGE>
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 December 31, 1998 and June 30, 1998 the Bank was in
compliance with all such requirements and is deemed a "well-capitalized"
institution for regulatory purposes. There are no conditions or events since
December 31, 1998 that management believes have changed the institution's
category.
The Bank's regulatory capital amounts and ratios are presented in the table as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Porposes Action Provisions
-------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $32,705 13.62% $16,243 8.00% $24,016 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $29,698 12.37% $ 9,606 4.00% $14,409 6.00%
Tier 1 Capital
(to Average Assets) $29,698 7.31% $16,243 4.00% $20,304 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>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
In this Report, the Company has included certain "forward looking statements"
concerning the future operations of the Company. It is management's desire to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing the Company of the protections of such safe harbor with respect to all
"forward looking statements" contained in this Report. The Company has used
"forward looking statements" to describe the future plans and strategies
including management's expectations of the Company's Year 2000 readiness and
future financial results. Management's ability to predict the results or the
effect of future plans and strategy is inherently uncertain. Factors that could
affect results include interest rate trends, competition, the general economic
climate in Chester County, the mid-Atlantic region and the United States as a
whole, loan delinquency rates, changes in federal and state regulation, Year
2000 uncertainties and other uncertainties described in the Company's filings
with the Securities and Exchange Commission. These factors should be considered
in evaluating the "forward looking statements", and undue reliance should not be
placed on such statements.
FINANCIAL CONDITION
The Company's total assets increased to $410.49 million at December 31, 1998,
from $377.01 million at June 30, 1998, principally due to a $25.87 million
aggregate increase in trading account securities, investment securities
available for sale and investment securities to $100.12 million from $74.25
million at June 30, 1998. Such increases were funded in large part by increases
in deposits and Federal Home Loan Bank ("FHLB") advances from $298.19 million
and $40.94 million at June 30, 1998, to $318.98 million and $51.63 million at
December 31, 1998, respectively.
Stockholders' equity increased to $33.97 million at December 31, 1998 from
$31.85 million at June 30, 1998, as a result of net income of $2.27 million, the
recognition of an increase in net unrealized gains on securities available for
sale, net of taxes, of $19,000, the sale of $243,900 of common stock in
connection with the Company's dividend reinvestment plan, $32,800 received as a
result of the exercise of stock options, and the reduction in the principal
balance of the ESOP debt by $98,000. The increase in stockholders' equity was
partially offset by the payment during the period of cash dividends totaling
$525,700.
RESULTS OF OPERATIONS
Net interest income, on a fully tax equivalent basis, increased 12.1% to $3.52
million for the three-month period ended December 31, 1998, and 9.2% to $6.86
million for the six-month period ended December 31, 1998, compared to $3.14
million and $6.28 million, respectively, for the same periods in 1997. Total
interest income, on a fully tax equivalent basis, increased to $7.30 million and
$14.41 million for the three- and six-month periods ended December 31, 1998,
from $6.49 million and $12.90 million for the same periods in 1997, primarily as
a result of the effect of an increase in the average balance of interest-earning
assets.
The average balance of interest-earning assets increased to $376.83 million and
$373.09 million for the three- and six-month periods ended December 31, 1998,
respectively, from $314.11 million and $313.93 million, respectively, for the
<PAGE>
same periods in 1997. Partially offsetting the effect on interest income of the
increases in the average balances was the 51 basis-point and 50 basis-point
decreases in the yield to 7.75% and 7.72% on interest-earning assets for the
three- and six-month periods ended December 31, 1998, respectively, as the
result of declining general market rates of interest.
Total interest expense increased to $3.78 million and $7.55 million from $3.35
million and $6.62 million for the respective three- and six-month periods in
1998 and 1997, largely as the result of the increase in the average balance of
interest-bearing liabilities to $325.04 million and $320.25 million for the
three- and six-month periods ended December 31, 1998, respectively, as compared
to $269.88 million and $270.07 million for the same periods in 1997. Partially
offsetting the increase in interest expense was a decrease in the average rate
paid on such liabilities to 4.65% and 4.72% for the three- and six-month periods
ended December 31, 1998, respectively, from 4.97% and 4.90% for the same periods
in 1997, as the result primarily of declining general market rates of interest
and management's continued efforts to focus its growth in the areas of
low-costing or no-cost deposits.
The tax equivalent interest rate spread decreased to 3.00% from 3.32%, and the
average tax equivalent net yield on interest-earning assets decreased to 3.68%
from 4.00% for the six-month periods ended December 31, 1998 and 1997,
respectively, due to the reasons discussed above.
Provision for Loan Losses
The Company provided $45,000 and $90,000 for loan losses during the three- and
six-month periods ended December 31, 1998, respectively as compared to $120,000
and $240,000, respectively, for the same periods in 1997. These provisions have
been added to the Company's allowance for loan losses due to current economic
conditions and management's assessment of the inherent risk of loss existing in
the loan portfolio. At December 31, 1998, the allowance for loan losses totaled
$3.43 million or 1.22% of net loans (before allowance), compared to $3.41
million or 1.23% of net loans and $3.08 million or 1.15% of net loans at June
30, 1998, and December 31, 1997, respectively. As a percentage of non-performing
assets, the allowance for loan losses was 237% at December 31, 1998, compared to
274% at June 30, 1998, and further compared to 386% at December 31, 1997.
Other Income
Total other income increased to $1.39 million and $2.77 million during the
three- and six-month periods ended December 31, 1998 respectively, as compared
to $1.00 million and $2.12 million during the same periods in 1997. Investment
services income increased 23.9% and 16.3% during the three- and six-month
periods ended December 31, 1998, respectively compared to the same periods in
1997 as the result of PCIS' increased commission income due to an increase in
trading activity and an increase in money market fund fees due to an increase in
customer balances. In addition, PCIS' advisory fee income increased 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.
Investment services income also increased as the result of the opening of the
Bank's Investment Services and Trust Division in the second quarter of fiscal
1998. The Trust Division offers both individual and corporate clients an array
of money management, trust and investment services including portfolio
<PAGE>
management, estate and retirement planning, and self directed individual
retirement accounts. An increase in checking account fees, as the result of an
increased number of accounts, and an increase in the fees earned on the Bank's
debit card, due to increased usage and also an increased number of cardholders,
contributed to the increase of $88,000 and $146,000 in service charges and fees
during the three- and six-month periods ended December 31, 1998. The Company
recognized gains on trading account securities and sales of assets available for
sale of $225,000 and $458,000, respectively, during the three- and six-month
periods ended December 31, 1998 compared to $83,000 and $171,000 during the same
periods in 1997.
Operating Expenses
Total operating expenses increased $369,000 or 13.9% and $684,000 or 12.8% to
$3.03 million and $6.02 million, respectively, for the three- and six-month
periods ended December 31, 1998 as compared to the same time periods in 1997.
The increase in operating expenses for the three- and six-month periods in
fiscal 1999 was due to (i) normal salary increases combined with benefits
expense; (ii) the increased number of staff associated with the addition of the
Bank's Investment Services and Trust Division combined with the expansion of the
Bank's Commercial Loan Department; (iii) an increase in occupancy and equipment
expenses related to renovations required to provide accommodations for the
Bank's new Trust Division; and (iv) an increase in occupancy and equipment
expenses related to the Company's conversion of its data service processing
system and its computer hardware and software upgrades as the result of the
Company's technology strategic plan and the Year 2000 issues (see " Year 2000
Issues" herein).
Income Tax Expense
Income tax expense was $535,000 and $1.01 million for the three- and six-month
periods ended December 31, 1998, respectively, as compared to $337,000 and
$697,000 for the same periods in 1997, reflecting the increased profitability of
the Company in the 1998 periods. The increase in income tax expense for the
three- and six-month periods ended December 31, 1998 was also due to the fact
that 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 (which
treat S Corporations in a manner similar to partnerships). 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 the Company on May 29, 1998, PCIS is no longer eligible
to be taxed under the provisions of Subchapter S of the Internal Revenue Code.
ASSET QUALITY
Non-performing assets are comprised of non-accrual loans and REO and totaled
$1.45 million and $1.25 million at December 31, 1998 and June 30, 1998
respectively. Non-accrual loans are loans on which the accrual of interest has
ceased because the collection of principal or interest payments is determined to
be doubtful by management. It is the policy of the Company to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days
or more (unless the loan principal and interest are determined by management to
be fully secured and in the process of collection), or earlier, if the financial
<PAGE>
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the current loan terms.
Interest income is not accrued until the financial condition and payment record
of the borrower once again demonstrate the borrower's ability to service the
debt. At December 31, 1998, the Company did not have any loans greater than 90
days delinquent which were accruing interest. Non-performing assets to total
assets and non-performing loans to total assets were .35% at December 31, 1998,
compared to .33% at June 30, 1998, and .25% at December 31, 1997. Non-performing
loans, which totaled $1.45 million at December 31, 1998. consisted of 12
single-family residential mortgage loans aggregating $1.08 million, two
commercial mortgage loans aggregating $135,000 and non-performing consumer and
commercial business loans totaling $227,000.
At December 31, 1998, the Company's classified assets, which consisted of assets
classified as substandard, doubtful or loss, as well as REO, totaled $1.82
million compared to $1.47 million at June 30, 1998, and further compared to
$1.38 million at December 31, 1997. Included in assets classified substandard at
December 31, 1998 and 1997, and at June 30, 1998, were all loans 90 days past
due and loans which were less than 90 days delinquent but inadequately protected
by the current paying capacity of the borrower or of the collateral pledged, or
which were subject to one or more well-defined weaknesses which may jeopardize
the satisfaction of the debt.
LIQUIDITY AND CAPITAL RESOURCES
Management monitors liquidity daily and maintains funding sources to meet
unforseen changes in cash requirements. The Company's primary sources of funds
are deposits, borrowings, repayments, prepayments and maturities of outstanding
loans and mortgage-backed securities, sales of assets available for sale,
maturities of investment securities and other short-term investments, and funds
provided from operations. While scheduled loan and mortgage-backed securities
repayments and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by the movement of interest rates in general, economic
conditions and competition. The Company manages the pricing of its deposits to
maintain a deposit balance deemed appropriate and desirable. Although the
Company's deposits represent the majority of its total liabilities, the Company
has also utilized other borrowing sources, namely FHLB advances.
Liquidity management is both a daily and long-term function. Excess liquidity is
generally invested in short-term investments such as FHLB overnight deposits. On
a longer term basis, the Company maintains a strategy of investing in various
lending and investment securities products. The Company uses its sources of
funds to primarily fund loan commitments and maintain a substantial portfolio of
investment securities, and to meet its ongoing commitments to pay maturing
savings certificates and savings withdrawals. At December 31, 1998, the Company
had $7.15 million in commitments to fund loan originations. In addition, at such
date the Company had undisbursed loans in process for construction loans of
$11.78 million and $15.44 million in undisbursed lines of credit. Management of
the Company believes that the Company has adequate resources, including
principal prepayments and repayments of loans and investment securities and
borrowing capacity, to fund all of its commitments to the extent required.
<PAGE>
The Company's current dividend policy is to declare a regular quarterly dividend
with the intent that the level of the dividend per share be reviewed by the
Board of Directors on a quarterly basis. Dividends will be in the form of cash
and/or stock after giving consideration to all aspects of the Company's
performance for the quarter. On November 18, 1998, the Board of Directors
declared a three-for-two stock split and a quarterly cash dividend of $.11 per
share, both of which were paid on December 18, 1998, to stockholders of record
as of December 4, 1998.
The Bank is required under applicable federal regulations, to maintain specified
levels of liquid investments and qualifying types of United States Treasury,
federal agency and other investments having maturities of five years or less.
Regulations currently in effect require the Bank to maintain a liquid asset
ratio of not less than 4% of its net withdrawable accounts plus short-term
borrowings. These levels are changed from time to time by the OTS to reflect
economic conditions. First Financial's average regulatory liquidity ratio for
the month ended December 31, 1998 was 23.92%.
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 will perform
Year 2000 testing as required. Based on an ongoing assessment, management
presently believes that with planned modifications to existing software and
hardware and recent and planned conversions to new software and hardware,
including a conversion by the Bank to a new core data processing system in
October 1998, the Company's third party vendors are taking the appropriate steps
to ensure critical systems will function properly.
The Bank has identified five mission critical systems (without which the Bank
cannot operate) and critical (necessary applications but the Company can
function for a moderate amount of time without such applications being Year 2000
compliant) applications 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 drives the Bank's ATMs and telephone voice response units, as well as
processes its ATM cards and debit cards; 3) the equipment and software that
processes the Bank's item processing and check inclearing; 4) the Wide Area
Network ("WAN") which facilitates electronic communications between the Bank's
<PAGE>
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 its vendors
that a substantial majority have certified 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 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.
Substantially all of the Company's vendors of its mission critical systems and
critical applications have provided written assurances that their products and
services will be Year 2000 compliant. The Company currently expects the majority
of its mission critical modifications and conversions and related testing of
such systems to be completed by March 31, 1999 with any remaining ones being
completed by June 30, 1999.
The Year 2000 issues also affect certain of the Bank's customers, particularly
in the areas of access to funds and additional expenditures to achieve
compliance. As of September 30, 1998, Bank personnel had contacted all
commercial credit customers regarding the customers' awareness of the Year 2000
Issue. At that time the Bank adopted the FFIEC Millennium Risk Evaluation
Package ("FFIEC Package") as the standard for evaluating the Bank risk in
relation to Year 2000 issues. From the customer responses, the Bank 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 be medium. 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 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>
are also required to be filed with the SEC by April 30, 1999 and will include 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 system 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 compliant software which
PCIS will install 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
will be replaced as a result of the new specification requirements dictated by
the clearing brokerage and investment market service vendors, and will be 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.
While the Company has received assurances from such vendors as to compliance,
such assurances are not guarantees and may not be enforceable. The Company's
existing older contracts with such vendors do not include Year 2000
certifications or warranties. Thus, in the event such vendors' products and/or
services are not Year 2000 compliant, the Company's recourse in the event of
such failure may be limited. If the required modifications and conversions are
not made, or are not completed on a timely basis, the Year 2000 Issue could have
a material impact on the operations of the Company. There can be no assurance
that potential systems interruptions or unanticipated additional expense
incurred to obtain Year 2000 compliance would not have a material adverse effect
on the Company's business, financial condition, results of operations and
business prospects. Nevertheless, the Company does not believe that the cost of
addressing the Year 2000 issues will be a material event or uncertainty that
would cause reported financial information not to be necessarily indicative of
future operating results or financial conditions, nor does it believe that the
costs or the consequences of incomplete or untimely resolution of its Year 2000
issues represent a known material event or uncertainty that is reasonably likely
to affect its future financial results, or cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition.
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 to be 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 has completed contingency plans for its identified
mission critical and critical applications. The Company's contingency plans also
includes plans which address operational policies and procedures in the event of
data processing, electric power supply and/or telephone service failures
<PAGE>
associated with the Year 2000. Such contingency plans provide 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. Such plans may include providing off-line system
processing, back-up electrical and telephone systems and other methods to ensure
the Company's ability to continue to operate.
The costs of modifications to the existing software is being primarily absorbed
by the third party vendors. However, the Company recognizes that the need exists
to purchase new hardware and software. Based upon current estimates, the Company
has identified approximately $635,000 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 anticipates spending substantially
all of this amount during the fiscal year ended June 30, 1999. Expenditures for
software are typically depreciated over three years while expenditures for
hardware are typically depreciated over five years. Of the estimated $635,000 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 $50,000 will be spent on
costs 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.
RECENT ACCOUNTING ANNOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
According to the statement, all items of "comprehensive income" are to be
reported in a "financial statement that is displayed with the same prominence as
other financial statements". Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Along with net income, examples
of comprehensive income include foreign currency translation adjustments,
unrealized holding gains and losses on securities available-for-sale, changes in
the market value of a futures contract that qualifies as a hedge of an asset
reported at fair value, and minimum pension liability adjustments. This
statement is effective for fiscal years beginning after December 15, 1997.
Accordingly all disclosures within this report are in compliance with SFAS No.
130.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". This statement, which supersedes SFAS No.
14, requires public companies to report financial and descriptive information
about their reportable operating segments on both an annual and interim basis.
SFAS No. 131 mandates disclosure of a measure of segment profit/loss, certain
revenue and expense items and segment assets. In addition, the statement
requires reporting information on the entity's products and services, countries
in which the entity earns revenues and holds assets, and major customers. This
statement requires changes in disclosures only and would not affect the
financial condition, equity or operating results of the Company. This statement
is effective for fiscal years beginning after December 15, 1997. The disclosures
are not required for interim financial statements in the initial year of its
application.
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures About
Pensions and Other Postretirement Benefits." This statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions", were issued. This statement
simply requires changes in disclosures and does not affect the financial
condition, equity or operating results of the Corporation. This statement is
effective for fiscal years beginning after December 15, 1997. No additional
disclosures were required by the Company.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of certain foreign currency exposures. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
adoption is permitted. The Company has not yet decided whether to adopt the
statement early or determined the impact, if any, of this statement, including
its provisions for the potential reclassifications of investments securities, on
the Company's operations, financial condition or equity.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". This statement requires that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify any retained mortgage-backed securities based on the
ability and intent to sell or hold those investments, except that a mortgage
banking enterprise must classify as trading any retained mortgage-backed
securities that it commits to sell before or during the securitization process.
This statement is effective for the first fiscal quarter beginning after January
30, 1999 with earlier adoption permitted. This statement provides a one-time
opportunity for an enterprise to reclassify, based on the ability and intent on
the date of adoption of this statement, mortgage-backed securities and other
beneficial interests retained after securitization of mortgage loans held for
sale from the trading category, except for those with commitments in place. The
Company has not yet determined the impact, if any, of this statement, including,
if applicable, its provisions for the potential reclassifications of certain
investment securities, on operations, financial condition or equity.
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The primary asset/liability management goal of the Company is to manage and
control its interest rate risk, thereby reducing its exposure to fluctuations in
interest rates, and achieving sustainable growth in net interest income over the
long term. Other objectives of asset/liability management include: (1) ensuring
adequate liquidity and funding, (2) maintaining a strong capital base and (3)
maximizing net interest income opportunities.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Company's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by management.
Changing the relative proportions of fixed-rate and adjustable-rate assets and
liabilities is one of the primary strategies utilized by the Company to
accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
To provide a more accurate one-year gap position of the Company, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that 52%
of its money market and NOW accounts are sensitive to interest rate changes and
that 7% of its savings deposits are sensitive to interest rate changes.
Accordingly, these interest sensitive portions of such liabilities are
classified in the less than one year categories with the remainder placed in the
over five years category. Deposit products with interest rates based on a
particular index are classified according to the specific repricing
characteristic of the index. Deposit rates other than time deposit rates are
variable, and changes in deposit rates are typically subject to local market
conditions and management's discretion and are not indexed to any particular
rate.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates.
Even assets and liabilities which contractually reprice within the same period
may not, in fact, reprice at the same price or the same time or with the same
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as the Company adjusts its interest
sensitivity position throughout the year. For a discussion of the potential
impact of interest rate changes upon the market value of the Company's portfolio
equity, see "Market Risk" in the Company's Annual Report on Form 10-K for the
year ended June 30, 1998. There has been no material change in the Company's
market value of portfolio equity since June 30, 1998.
<PAGE>
The Company periodically identifies certain loans as held for sale at the time
of origination, primarily consisting of fixed-rate, single-family residential
mortgage loans which meet the underwriting characteristics of certain
government-sponsored enterprises (conforming loans). The Company regularly
re-evaluates its policy and revises it as deemed necessary. The majority of
loans sold to date have consisted of sales to Freddie Mac of whole loans and 95%
participation interests in long-term, fixed-rate, single-family residential
mortgage loans in furtherance of the Company's goal of better matching the
maturities and interest-rate sensitivity of its assets and liabilities. When
selling loans, the Company has generally retained servicing in order to increase
its non-interest income. At December 31, 1998, the Company serviced $20.65
million of mortgage loans for others. Sales of loans produce future servicing
income and provide funds for additional lending and other purposes.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at December 31, 1998
(Dollars in thousands)
More Than More Than More Than
Three Months Six Months One Year
Three Months Through Through Through
or Less Six Months One Year Three Years
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) ........................ $ 26,042 $ 19,199 $ 37,258 $ 71,166
Commercial ............................. 9,078 749 2,649 2,232
Consumer ............................... 7,745 1,901 3,720 13,126
Securities and interest-bearing deposits .... 54,081 1,999 7,185 5,689
--------- --------- --------- ---------
Total interest-earning assets ............... $ 96,946 $ 23,848 $ 50,812 $ 92,213
--------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Savings accounts ............................ $ 501 $ 501 $ 998 --
NOW accounts ................................ 450 450 900 --
Money market accounts ....................... 34,888 -- -- --
Certificate accounts ........................ 61,421 26,130 40,838 41,545
Securities sold under agreements to
repurchase ............................... 199 -- -- --
Borrowings .................................. 3,619 1,233 634 9,940
--------- --------- --------- ---------
Total interest-bearing liabilities .......... $ 101,078 $ 28,314 $ 43,370 $ 51,485
--------- --------- --------- ---------
Cumulative excess of interest-earning assets
to interest-bearing liabilities ............. ($ 4,132) ($ 8,598) ($ 1,156) $ 39,572
========= ========= ========= =========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 95.9% 93.4% 99.3% 117.6%
========= ========= ========= =========
Cumulative difference as a percentage of
total assets ................................ (1.0%) (2.1%) (0.3%) 9.6%
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at December 31, 1998
(Dollars in thousands)
(continued)
More Than
Three Years
Through More Than
Five Years Five Years Total
--------- --------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) ........................ $ 34,050 $ 32,234 $ 219,949
Commercial ............................. 484 52 15,244
Consumer ............................... 8,866 16,210 51,568
Securities and interest-bearing deposits .... 16,592 21,843 107,389
--------- --------- ---------
Total interest-earning assets ............... $ 59,992 $ 70,339 $ 394,150
--------- --------- ---------
INTEREST-BEARING LIABILITIES:
Savings accounts ............................ -- $ 25,737 $ 27,737
NOW accounts ................................ -- 33,675 35,475
Money market accounts ....................... -- -- 34,888
Certificate accounts ........................ 6,626 12,807 189,367
Securities sold under agreements to
repurchase ............................... -- -- 199
Borrowings .................................. 13,103 23,989 52,518
--------- --------- ---------
Total interest-bearing liabilities .......... $ 19,729 $ 96,208 $ 340,184
--------- --------- ---------
Cumulative excess of interest-earning assets
to interest-bearing liabilities ............. $ 79,835 $ 53,966 $ 53,966
========= ========= =========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 132.7% 115.9% 115.9%
========= ========= =========
Cumulative difference as a percentage of
total assets ................................ 19.4% 13.1% 13.1%
========= ========= =========
</TABLE>
(1) Net of undisbursed loan proceeds related to commercial and residential
construction loans. (2) Includes commercial mortgage loans.
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chester Valley Bancorp Inc.
Date 2-11-99 /s/Ellen Ann Roberts
--------------------
Ellen Ann Roberts
Chairman and Chief Executive Officer
Date 2-11-99 /s/Christine N. Dullinger
-------------------------
Christine N. Dullinger
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 5,080 5,080
<INT-BEARING-DEPOSITS> 7,268 7,268
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 18,236 18,236
<INVESTMENTS-HELD-FOR-SALE> 70,124 70,124
<INVESTMENTS-CARRYING> 11,761 11,761
<INVESTMENTS-MARKET> 11,781 11,781
<LOANS> 285,194 285,194
<ALLOWANCE> 3,432 3,432
<TOTAL-ASSETS> 410,494 410,494
<DEPOSITS> 318,975 318,975
<SHORT-TERM> 35,918 35,918
<LIABILITIES-OTHER> 5,033 5,033
<LONG-TERM> 16,600 16,600
0 0
0 0
<COMMON> 3,682 3,682
<OTHER-SE> 30,286 30,286
<TOTAL-LIABILITIES-AND-EQUITY> 410,494 410,494
<INTEREST-LOAN> 5,777 11,427
<INTEREST-INVEST> 1,395 2,735
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 7,172 14,162
<INTEREST-DEPOSIT> 3,029 6,141
<INTEREST-EXPENSE> 3,783 7,554
<INTEREST-INCOME-NET> 3,389 6,608
<LOAN-LOSSES> 45 90
<SECURITIES-GAINS> 225 458
<EXPENSE-OTHER> 3,028 6,017
<INCOME-PRETAX> 1,703 3,274
<INCOME-PRE-EXTRAORDINARY> 1,703 3,274
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,168 2,267
<EPS-PRIMARY> .32 .62
<EPS-DILUTED> .31 .61
<YIELD-ACTUAL> 3.74 3.68
<LOANS-NON> 1,446 0
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 1,821 0
<ALLOWANCE-OPEN> 3,383 3,414
<CHARGE-OFFS> 5 85
<RECOVERIES> 9 13
<ALLOWANCE-CLOSE> 3,432 3,432
<ALLOWANCE-DOMESTIC> 1,531 1,531
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,901 1,901
</TABLE>
