Chester Valley Bancorp Inc.
Annual report 2000
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[INSIDE FRONT COVER]
A DECADE OF STRONG FINANCIAL GROWTH
[GRAPHIC- CHART]
CORPORATE PROFILE
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 Philadepphia Corporation for Investment Services ('PCIS"),
a full service investment advisory adn 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. All of the
branches are full service and offer commercial and retail products. 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 Exchange Commisssion.
PCIS's offices are located in Wayne and Philadelphia, Pennsylvania.
Chester Valley's common stock is traded over the counter and is included in
the NASDAQ National Market System under the symbol "CVAL".
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THE SOUL OF CHESTER COUNTY
As a community bank that has been an integral part of Chester County for almost
80 years, First Financial Bank confirms our commitment not only to our customers
and shareholders, but also to the Chester County community. As a community bank,
we have always taken our responsibilities to heart.
Whether it is the March of Dimes, The Chester County Historical Society, The
Housing Partnership of Chester County, United Way, or a long, long list of other
worthwhile organizations, business groups and charities, First Financial and our
employees have contributed time and resources with enthusiasm. Very recently we
have had the groundbreaking ceremony of our expanded corporate headquarters in
Downingtown. We could have simply moved to a corporate park outside of the
borough but our roots are in Downingtown and all of Chester County.
[DRAWING OF DOWNTOWN AREA]
We consider our expansion and the renovations of nearby buildings to be an
investment in the revitalization of this community. And the community has
returned the favor. For the last several years the annualized growth in the
price of our stock has been approximately 16%, better than the Dow Jones
Industrial Average and the S&P 500 Index. We continue to grow in asset size and,
more importantly, increase profitability. Our mission continues to be to
increase shareholder wealth, and we have done this successfully without leaving
behind the strong commitment to our community. The Directors, Officers, and
Employees of Chester Valley Bancorp pledge to serve you well.
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[GRAPHIC CHART OF NET INCOME]
Net income chart
(in thousands)
96 $2,732
97 2,237
98 3,626
99 4,213
00 4,557
[GRAPHIC CHART OF TOTAL ASSETS]
Total Assets
(in millions)
96 $274.6
97 325.2
98 377.0
99 451.2
00 507.2
[GRAPHIC CHART COMMERCIAL LOAN PORTFOLIO]
Commercial Loan Portfolio
(in millions)
96 $29.7
97 44.6
98 58.6
99 77.0
00 93.5
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FINANCIAL HIGLIGHTS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
At June 30,
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2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets $507,150 $451,158 $377,012 $325,201 $274,548
Net loans receivable 331,306 291,388 273,128 257,040 223,963
Deposits 378,478 359,514 298,191 260,750 228,206
Borrowings 87,151 51,028 41,791 31,032 14,827
Stockholders' equity 35,502 33,853 31,849 28,279 26,766
Book value per common share(1),(2) 9.08 8.70 8.28 7.41 7.02
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------
2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Selected Operations Data
Interest income $33,837 $29,385 $25,753 $22,621 $20,637
Interest expense 18,975 15,682 13,409 11,506 10,887
Net interest income 14,862 13,703 12,344 11,115 9,750
Net income 4,557 4,213 3,626 2,237(1) 2,732
Basic earnings per share 1.17 1.09 .95 .59 .72
Diluted earnings per share 1.16 1.08 .94 .59 .71
Dividend per share(2) .36 .30 .29 .21 .16
</TABLE>
(1) Fiscal 1997 includes the one-time FDIC insurance assessment of
$832,000 net of taxes.
(2) Adjusted to reflect 5% stock dividends paid in September 1999, 1998,
1997, and 1996, and the three-for-two stock split and five-for-four
stock split effected in the form of a dividend in December 1998 and
March 1997, respectively.
<TABLE>
<CAPTION>
Other Selected Data
(based on monthly balances)
<S> <C> <C> <C> <C> <C>
Average interest rate spread 2.95% 3.03% 3.28% 3.37% 3.20%
Net yield on average interest-earning assets 3.49% 3.64% 3.94% 4.03% 3.87%
Ratio of non-performing loans and real estate
owned to total assets at end of period .19% .21% .33% .23% .85%
Number of full-service bank
branches at end of period 8 8 7 7 6
</TABLE>
3
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TO OUR SHAREHOLDERS
We are pleased to report that Fiscal 2000 brought another year of strong
earnings for Chester Valley Bancorp Inc. Several key achievements during the
last year have positioned Chester Valley for an even stronger future. We combine
people and systems to create new financial services solutions to meet the
specific needs of all our customers.
Chester Valley pledges our continued support of the local community by being a
major part of the revitalization of the Borough of Downingtown, Pennsylvania.
Our corporate headquarters expansion receives many accolades from the
residential and business community. We are proud to be leaders in the
revitalization effort and look forward to its completion.
[PHOTO OF ELLEN ANN ROBERTS AND JAMES E. MCERLANE]
Ellen Ann Roberts and James E. McErlane
During Fiscal 2000, the Company put into place many exciting services that take
us into the new age. Electronic banking services ("eServices") offer the best in
traditional financial services, but also provide banking services for today's
busy consumers via personal computer or touch- tone phone. eBank, our Internet
Banking product, was introduced in July 2000 and has received an overwhelming
response from both customers and non-customers. eVoice, our Telephone Banking
product, is another venue for our customers to receive their account
information, anytime, anywhere, via their touch-tone phone. We firmly believe
that we have a unique niche in today's market - as a community bank we provide
one-on-one personal attention to our customers while also offering the
convenience of electronic banking services that today's lifestyles demand.
Philadelphia Corporation for Investment Services' revenues and profits continue
to grow. Both PCIS and our Investment Services and Trust Division are committed
to providing clients with the highest level of personalized service. For these
reasons, the Company opened a new Trust Office in our PCIS branch in
Philadelphia. The Trust Division now
4
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offers several lines of well-known Mutual Funds along with eTrust, our Trust
Portfolio Internet Access service.
Our Business Banking area had another phenomenal year of growth. Commercial
loans had an overall increase of an astounding 21%. eCorp, our new PC Banking
for Business, was introduced in July 2000 and has been extremely well-received
by our customers. Our VISA(R) Business Card was also introduced to our business
clients and is a great addition to our business product line. One of our
proudest accomplishments during the past fiscal year is the fact that First
Financial Bank received an "outstanding" rating from the Office of Thrift
Supervision (OTS) for our Community Reinvestment Act responsibilities. The OTS
cited that First Financial Bank demonstrated an excellent penetration of loans
to low- and moderate-income borrowers and to small businesses, and that we
effectively addressed the credit needs of the most economically disadvantaged
areas in our community.
We have created FFBMarketplace.com, our community portal website, which will
offer our business customers a unique opportunity to gain or increase their web
presence and make their business accessible to all of Chester County via the
World Wide Web. This is one more reason for our business customers to continue
banking with us as well as an innovative way of acquiring new relationships.
We are pleased with the direction the Bank has taken, particularly our focus on
technology and customer convenience. Our extended hours of operation,
interactive website, and various new "e" (electronic) services are all part of
our continued effort to keep First Financial the premier bank of Chester County
and surrounding market areas.
As always, our Directors, Officers and Employees thank you for your continued
support. Based on our commitment to sound banking principles and business
strategies, we believe that the next fiscal year will again be a year of strong
asset growth for Chester Valley Bancorp. We are proud of the accomplishments to
date and eager to continue to provide results that reflect an increase in
shareholder value.
Sincerely,
/S/ Ellen Ann Roberts /s/ James E. McErlane
--------------------- ---------------------
Ellen Ann Roberts James E. McErlane
Chairman and Chief Executive Officer Interim President
5
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[VERTICAL GRAPHIC eSERVICES ON LEFT MARGIN]
[PHOTO OF BUILDING]
As part of the revitalization of the Downingtown Borough and during Phase One of
the renovations, First Financial Bank restored the facades of storefronts
located at 112, 114, and 118 East Lancaster Avenue. The Bank's Loan Operations
are now housed in this facility.
COMMITMENT TO COMMUNITY
As a community bank that has been a part of Chester County for almost 80 years,
First Financial confirms our commitment to Downingtown, Pennsylvania along with
our pledge to have our corporate headquarters remain in the heart of the County.
As a growing financial institution, we have a great need for increased office
space. Our growth and expansion will bring new opportunities to the Downingtown
area as well as to all of Chester County. Phase One of the revitalization,
completed in April 2000, includes the restoration of the facades of several
buildings along Downingtown's main corridor, Business Route 30, along with many
other interior and exterior improvements. Phase Two follows immediately and will
include a new multi-story office building with 24,050 square feet to be built
beside the existing Bank building. The anticipated completion date of the entire
renovation and expansion is July 2001. The revitalization of the Borough is an
exciting undertaking and has received many accolades from the residential and
business communities.
TECHNOLOGY AND OPETATIONS
In August 1999, First Financial Bank launched our web site, www.FFBonline.com.
Since then, the number of visitors to the site has more than quadrupled. In July
2000, our site became more interactive and now includes online loan
applications, e-mail capabilities, requests for product information as well as
an online employee application. As always, our customers have the knowledge that
the personalized service of a community bank for which we are known is always
available via our eight-branch network or our First Call Center.
Electronic banking services ("eServices") allow our customers to access their
account information via their personal computer or touch-tone phone. Several
services have been introduced over this past fiscal year including:
[GRAPHIC LOGO OF eVOICE] - Our 24-Hour Telephone Information System
Customers can now access up-to-the-minute information on their First Financial
accounts via their touch-tone phone, 24 hours a day, 7 days a week.
6
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[VERTICAL GRAPHIC FFBONLINE.COM ON LEFT MARGIN]
[PHOTO OF SKYSCRAPER]
Philadelphia Corporation for Investment Services, our investment advisor and
securities brokerage service, is headquartered at One Liberty Place in
Philadelphia, Pennsylvania. The combination of PCIS's services with the Bank's
Trust Division, which now also has an office located at One Liberty Place,
provides one-stop financial shopping for customers whose non-cash financial
assets are now held or managed elsewhere.
[GRAPHIC LOGO OF eVOICE] - Our Internet Banking Service
Customers can now do all their banking online from the comfort of their home or
office. This includes reviewing current and past account statements,
transferring funds, and paying monthly bills.
In addition to the introduction of our new electronic banking services, our
Operations Department has completely automated the statement rendering process.
This has allowed the Bank to simplify consolidated statements, which in turn,
has saved costs on both paper and postage while facilitating the customer's
information in a more efficient and easy-to-read format.
First Financial will soon introduce our community Internet portal web site,
FFBMarketplace.com. This unique concept allows Bank business customers, centers
of influence, and community service providers to list their products and
services on this web site - and offers one-stop shopping for today's busy
consumers. FFBMarketplace.com provides one more reason for local residents and
businesses to choose us as their financial services provider.
INVESTMENT SERVICES AND PHILADELPHIA
CORPORATION
Our Investment Services and Trust Division along with Philadelphia Corporation
for Investment Services ("PCIS") continue to bring increased fee revenue to the
Company. Our partnership with PCIS continues to flourish by offering individual
and corporate customers a full line of asset management and investment services.
During the past fiscal year, the PCIS Web Site, www.PCISonline.com, has been
graphically enhanced. The functionality of the site has been improved with more
information available at visitors' fingertips. An additional PCIS highlight
during the past fiscal year was the election of A. Louis Denton, President and
CEO of Philadelphia Corporation to two prominent positions. Mr. Denton was
elected Chairman of the NASD Regulation Inc., District 9 Committee, and was
appointed to the NASD, Inc. Small Firm Advisory Board. These positions only
further demonstrate the knowledge and respect Mr. Denton has acquired during his
distinguished career within the securities and brokerage industry.
7
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[VERTICAL GRAPHIC eBANK ON LEFT MARGIN]
[PHOTO OF eSERVICE CENTER]
In recognition of our new line of electronic banking services, "eServices", all
of our branches now have an Internet-ready computer, phone and printer/copier/
fax machine. These centers are available for customers to perform their banking
transactions as well as any other Internet-related tasks they would like to
complete.
Our Investment Services and Trust Division has recently broadened its
product lines, continuing to expand its customer base and improve existing
customer relationships for both individual and corporate customers. We are
pleased to report that this Division has seen a 100% increase in accounts during
the past fiscal year. This Division has recently introduced additional Mutual
Funds. Also during the past fiscal year, Trust Portfolio Internet Access
("eTrust") was introduced. eTrust allows our Trust customers to access their
trust and investment account information via the Bank's web site, 24 hours a
day, 7 days a week. This is yet another convenient tool enabling our customers
to retrieve their pertinent portfolio information from the comfort of their home
or office, any day, any time.
CONSUMER BANKING
Our eight branch locations continue to provide the best in financial services
and personalized attention to all the residents and businesses we serve
throughout our Chester County market area. Our personalized attention and
interaction with customers are what truly sets us apart. During our next fiscal
year, we are looking to expand our branch markets to include Eagle and Chadds
Ford, Pennsylvania.
As part of the wide variety of "eServices" that are being introduced, our
Community Banking Division has introduced two new exciting accounts as well, our
eChecking and eMarket accounts. These products are available for those customers
who use eBank and eVoice as their primary methods of banking. eChecking offers
free checking with many other free services. eMarket offers money market
interest with many other services as well. These accounts further demonstrate
how we continue to offer a unique blend of convenient electronic banking with
the one-on-one attention to which our customers have become accustomed.
Another major Fiscal 2000 highlight is the phenomenal growth in our Consumer
Loan area. The Bank has surpassed its goals for loan originations and exceeded
expectations in ongoing outstanding balances. Overall loan delinquency remains
at a very low .19% of total assets.
Our branches are now equipped with "eServices Centers." In recognition of our
new line of electronic banking services, we have installed a computer, phone,
and printer/copier/fax machine in all of our branch locations. The computers are
Internet-ready and available for customers to perform
8
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[VERTICAL GRAPHIC eCORP ON LEFT MARGIN]
[GRAPHIC - COMPUTER]
eCorp, our PC Banking for Business, presents a dynamic tool for our business
customers' financial management. It allows our business clients to have access
to their bank information 24 hours a day, seven days a week. Along with all our
other business account services, eCorp is just one more reason to bank with
First Financial. banking transactions as well as any other Internet-related
tasks they would like to complete. As a community bank, we also welcome
non-customers to use the Centers. Not everyone has Internet access in his/her
home and this may be thought of as an alternative to a local library.
BUSINESS BANKING
The commercial lending area of our Company continues to grow beyond
expectations, with an average growth rate of 29.2% over the past five years.
Besides providing deposit and loan services to our local business customers,
First Financial Bank maintains relationships with many other not-for-profit and
community organizations. This includes contributions and loans to support small
business development, low-income housing and other programs undertaken with
local community development organizations. The Bank is proud to be the primary
lending institution for the upcoming expansion and renovation of the Chester
County Chamber's headquarters to be located just outside of West Chester,
Pennsylvania.
One of our proudest accomplishments during the past fiscal year is the fact that
First Financial Bank received an "outstanding" rating from the Office of Thrift
Supervision (OTS) for our Community Reinvestment Act responsibilities. The OTS
cited that First Financial Bank demonstrated an excellent penetration of loans
to low- and moderate-income borrowers and to small businesses, and effectively
addressed the credit needs of the most economically disadvantaged areas. The
Bank was also commended for demonstrating a leadership position by engaging in
various investment activities and providing grants to organizations that promote
affordable housing and community service. Among the projects in which we
participated were the Honey Brook Senior Associates, in which the Honey Brook
Elementary School, abandoned for ten years, was renovated to provide low-income
housing for senior citizens. The Scattered Site Housing Project included
renovating 15 dilapidated houses throughout Chester County for low-income
families. Also notable is the Second Avenue Project, which renovated the greater
portion of a Coatesville block into newly constructed senior housing. The
Company is extremely pleased with our "outstanding" rating as we continue our
strong commitment to the Chester County community.
First Financial Bank is proud to continue to be a leading producer for the SBA
504 loan program. This program works in conjunction with the Chester County
Development Council
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[VERTICAL GRAPHIC eTRUST ON LEFT MARGIN]
[GRAPHIC - PHONE]
ChesterValley Bancorp looks forward to the future with great anticipation. The
world of financial services is everchanging, and we continue to strive to be the
premierfinancial services provider in the Chester County area.
to provide 90% financing loan-to-value for real estate and equipment loans for
small businesses. These loans allow small businesses to expand without using all
of their working capital. In July 2000, the Bank introduced another exciting
electronic banking product called eCorp -PC Banking for Business. With this
secure software, our business customers can manage their finances like never
before. Select employees of those businesses can initiate transfers, review
check clearing and loans, generate ACH transactions and payroll origination,
just to name a few. This has received an overwhelmingly positive response from
our business clients.
Lastly, in September 2000, the Bank introduced our VISA(R) Business Card to our
business banking clients. As a community bank, it is our desire to offer the
best range of business products to our customers with the service that they have
become accustomed to from First Financial Bank. Our new Business Card sets new
standards in purchasing power for businesses and carries with it all the
advantages expected from the world's most prestigious card.
OUR FUTURE
In looking to the future, Chester Valley Bancorp is positioned for continued
success. We are genuinely excited about the recent introduction of our new
electronic banking services, which greatly enhances the level of convenience we
are able to offer our customers. Our Investment Services and Trust Division is
pleased to have added mutual funds to its portfolio of products and services.
These funds provide our customers with alternative investments to traditional
certificates of deposit or money market accounts and most importantly, for each
fund sold, the Bank increases its bottom line with valuable fee income. The
expansion of our headquarters in Downingtown, Pennsylvania, is becoming a
reality. The new headquarters will attract other businesses to move to the
Borough and ultimately play a role in its revitalization.
FFBMarketplace.com, our community portal web site, is an innovative concept and
one that will have great value to all our customers, both retail and business.
As we continue to strive to be the premier financial services provider in the
markets we serve, our Directors, Officers, and Employees thank you for your
continued support.
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Financial Information
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Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Consolidated Statements of Financial Condition 20
Consolidated Statements of Operations 21
Consolidated Statements of Changes in
Stockholders' Equity and Comprehensive
Income Statement 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Independent Auditors' Report 37
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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 accounts. PCIS's offices are located in Wayne
and Philadelphia, Pennsylvania.
The Company posted record earnings of $4.56 million, or $1.16 per diluted
share, for the fiscal year ended June 30, 2000, compared to $4.21 million or
$1.08 per diluted share for the same period in 1999. This represents an 8.3%
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.
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 money
market, NOW accounts and savings deposits are sensitive to interest rate
changes. Accordingly, some of these interest-sensitive portions are classified
in the less than one year categories
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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 below
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
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at June 30, 2000
(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) $ 24,458 $ 17,637 $ 30,975 $ 89,037 $45,783 $ 47,246 $255,136
Commercial 10,395 1,462 2,247 3,633 1,341 280 19,358
Consumer 8,455 2,166 4,324 15,889 11,139 20,460 62,433
Securities and interest-bearing deposits 46,194 771 3,849 22,979 21,905 57,593 153,291
--------- -------- -------- --------- ------- -------- --------
Total interest-earning assets $ 89,502 $ 22,036 $ 41,395 $ 131,538 $80,168 $125,579 $490,218
--------- -------- -------- --------- ------- -------- --------
Interest-Bearing Liabilities
Savings accounts $ 501 $ 501 $ 998 $ -- $ -- $ 24,636 $ 26,636
NOW accounts 450 450 900 -- -- 36,852 38,652
Money market accounts 41,690 -- -- -- -- -- 41,690
Certificate accounts 66,516 22,259 42,422 90,926 7,742 3,443 233,308
Borrowings 33,033 1,980 2,101 12,360 15,420 21,884 86,778
--------- -------- -------- --------- ------- -------- --------
Total interest-bearing liabilities $ 142,190 $ 25,190 $ 46,421 $ 103,286 $23,162 $ 86,815 $427,064
--------- -------- -------- --------- ------- -------- --------
Cumulative excess (deficit) of interest-
earning assets to interest-bearing liabilities $ (52,688) $(55,842) $(60,868) $ (32,616) $24,390 $ 63,154 $ 63,154
========= ======== ======== ========= ======= ======== ========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 62.9% 66.6% 71.5% 89.7% 107.2% 114.8% 114.8%
========= ======== ======== ========= ======= ======== ========
Cumulative difference as a
percentage of total assets (10.4%) (11.0%) (12.0%) (6.4%) 4.8% 12.5% 12.5%
========= ======== ======== ========= ======= ======== ========
</TABLE>
(1) Net of undisbursed loan proceeds.
(2) Includes commercial mortgage loans.
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Federal income taxes, which the Company realizes by investing in certain
tax-free municipal securities and by making loans to certain tax-exempt
organizations. In this way, the ultimate economic impact of earnings from
various assets can be more readily compared.
Total interest income increased to $34.99 million during fiscal 2000, a
$4.98 million or 16.6% increase over the comparable prior year. This increase
was due to a $65.41 million increase in the average balance of interest-earning
assets. The yield on average interest earning assets was 7.62% for fiscal 2000
and 1999.
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%.
Interest Expense
Total interest expense increased to $18.98 million during fiscal 2000, a
$3.30 million or 21.0% increase over the comparable prior year. The increase in
interest expense was primarily due to a $28.34 million and $36.59 million
increase in the average balances of deposits and borrowings, respectively, at
June 30, 2000, which funded the increase in the average balances of
interest-earning assets discussed previously. The average rate paid on deposits
decreased to 4.34% for fiscal 2000 from 4.42% 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 increased 28 basis
points to 5.82%.
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. The average rate paid on deposits decreased to 4.60% for fiscal
1999. The average rate paid on borrowings in 1999 decreased 54 basis points to
5.54%.
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 11.7%, or $1.68
million to $16.01 million in 2000 from $14.33 million in 1999, compared to a
12.0% increase of $1.54 million from 1998 to 1999. Net interest margin, on a
fully tax equivalent basis, was 3.49% for the year ended 2000, compared to 3.64%
in 1999 and 3.94% in 1998.
Provision for Loan Losses
The Company's provision for loan losses was $420,000, $390,000 and
$606,000, during the respective periods of 2000 through 1998. 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, 2000, the allowance for
loan losses was $3.91 million or 1.17% of net loans compared to $3.65 million or
1.24% of net loans at June 30, 1999.
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.
14
<PAGE>
Other Operating Income
Total other income increased $339,000 or 6.5% to $5.54 million for the
year ended June 30, 2000, from the comparable prior period. Investment services
income increased $440,000 or 13.5% to $3.70 million as the result of increased
fees from the Trust Department and 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 2000. 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 $181,000 or 12.3% in service charges and fees in fiscal 2000.
The increases in other income above were offset in part by decreases in gains on
trading account securities of $109,000, gains on sale of assets available for
sale of $103,000, and other income of $70,000.
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 $461,000 or 16.5% to $3.26 million as the result of increases
in revenue generated by PCIS and the Trust Division. Service Charges and fees
increased $354,000 in fiscal 1999. The Company recognized gains on trading
account securities of $171,000 during fiscal 1999 compared to $337,500 during
fiscal 1998.
Other Operating Expenses
Total operating expenses increased $1.43 million or 11.3% to $14.16
million for the year ended June 30, 2000 compared to the same period in fiscal
1999. The increase in operating expenses over the prior fiscal year was
primarily due to a $851,000 or 12.2% increase in salaries and employee benefits
related to general salary increases as well as the costs for a full year of
operations of the Call Center and the Devon Branch. Other operating expenses,
which increased primarily because of the general increase in the cost of doing
business, are as follows: occupancy increased $66,000 or 6%; furniture and
fixtures increased $105,000 or 10.9%; data processing increased $109,000 or
14.7%; advertising increased $87,000 or 26.4%; deposit insurance premiums
decreased $38,000 or 21.7%; and other expenses increased $254,000 or 10% of
which $100,000 relates to increased operations of PCIS.
Total operating expenses increased $1.09 million or 9.4% to $12.73 million
for the year ended June 30, 1999, from the comparable prior period. 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 addition of
the Bank's new Call Center and its new Investment Services and Trust Division
established during 1997. Also, in March 1999, the Bank opened its eighth branch
office in Devon, Pennsylvania which further contributed to an increase in staff.
In addition, occupancy and equipment expenses increased $190,000 or 10.1% to
$2.08 million for the year ended June 30, 1999, from the comparable prior period
related to the opening of the Bank's branch office in Devon and expenditures
associated with technology upgrades and enhancements.
15
<PAGE>
Income Taxes
The Company incurred income tax expense of $1.26 million during the year
ended June 30, 2000, compared to $1.57 million during fiscal 1999. The primary
reason for the decrease in income tax expense was due to a $1.39 million or 99%
increase in tax free income in fiscal 2000.
The Company incurred income tax expense of $1.57 million during fiscal
1999. The primary reason for the increase in income tax expense in fiscal 1999
compared to fiscal 1998 was due to the increase in income before taxes.
For periods ended 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 did not pay income taxes on its taxable income. Instead,
the former stockholders of PCIS were liable for individual income taxes based on
their respective shares of PCIS's taxable income. As a result of all of PCIS's
stock being purchased by 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.
Capital Resources
The Company's assets totaled $507.15 million at June 30, 2000, as compared
with $451.16 million as of June 30, 1999. This 12.4% increase in assets was
primarily funded by an increase in deposits of $18.96 million or 5.3% from
$359.51 million at June 30, 1999, to $378.48 million at June 30, 2000, and an
increase in Federal Home Loan Bank advances of $36.40 million from $50.38
million to $86.78 million at June 30, 1999 and 2000, 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 $291.39
million at June 30, 1999, to $331.31 million at June 30, 2000. In addition, the
Company's securities port-folios along with its interest-bearing deposits
increased from $140.03 million to $153.29 million at June 30, 1999 and 2000,
respectively.
Stockholders' equity increased to $35.50 million at June 30, 2000, from
$33.85 million at June 30, 1999, as a result of net income earned of $4.56
million during fiscal 2000, and net proceeds totaling $185,000 from common
stock. The increase in stockholders' equity was offset in part by a change in
net unrealized value of securities available for sale of $1.70 million from a
loss of $1.55 million at June 30, 1999 to a net unrealized loss of $3.26 million
at June 30, 2000, and also offset in part by the payment of cash dividends of
$1.38 million as well as the payment of $7,000 in lieu of fractional shares in
connection with the 5% stock dividend paid during fiscal 2000.
Asset Quality
Non-performing assets are comprised of non-performing loans and REO and
totaled $943,000 at June 30, 2000, compared to $933,000 at June 30, 1999.
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 .19% at June 30, 2000, compared to
.21% at June 30, 1999. Non-performing loans of $943,000 at June 30, 2000,
consisted of nine residential mortgage loans in the amount of $735,000, and ten
consumer loans totaling $208,000.
16
<PAGE>
At June 30, 2000 and 1999, the Company's classified assets, which
consisted of assets classified as substandard, doubtful, loss, and REO, totaled
$1.59 million and $1.24 million, respectively. Included in the assets classified
substandard at June 30, 2000, 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 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. 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
credit line is $15.45 million, and is subject to certain conditions, including
the holding of a pre-deter- mined amount of FHLB stock as collateral. This line
of credit is used from time to time for liquidity purposes. At June 30, 2000
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, 2000, 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, 2000, the Company had $3.76 million in commitments
to fund loan originations. The majority of these commitments are anticipated to
be funded by December 31, 2000. In addition, as of June 30, 2000, the Company
had undisbursed loans in process for construction loans of $20.91 million and
$19.55 million in undisbursed lines of credit. In addition, the Company has
issued $604,000 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, 2000, liquidity for the Bank as
defined under these guidelines was 15.24%, which exceeded the regulatory minimum
requirement of 4.0%.
17
<PAGE>
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 as inflation.
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 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, 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, 2000.
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, 6.09 million shares
remain unissued. In addition, none of the 5.00 million shares of Preferred Stock
authorized has been issued.
Dividend Policy
The Board of Directors of Chester Valley Bancorp Inc. intends to continue
the policy of paying dividends when the directors deem it prudent to do so. The
Board of Directors will consider payment of dividends on a quarterly basis,
after giving consideration to the level of the profit for the prior quarter and
other relevant aspects. On August 16, 2000, the Board of Directors of the
Holding Company declared an $.09 per share cash dividend and a 5% stock dividend
based on the financial results of the quarter ended June 30, 2000. The cash
dividend will be calculated on shares held before the issuance of the stock
dividend. During fiscal 2000, 1999, and 1998 the Holding Company paid a total of
$1.38 million, $1.15 million and $1.23 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 11 to Notes to Consolidated Financial Statements.)
18
<PAGE>
Market Information
As of August 1, 2000, the Holding Company's Common Stock was held by
approximately 1,094 registered shareholders. 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 2000 and 1999 the Holding Company paid dividends of $.36 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 2000 and
1999.
Fiscal 2000 Low High
--------------------------------------------------------------------------
First Quarter $ 14.75 $ 18.00
Second Quarter 14.50 16.00
Third Quarter 12.50 15.00
Fourth Quarter 17.00 18.00
Fiscal 1999 Low High
--------------------------------------------------------------------------
First Quarter $ 16.50 $ 19.28
Second Quarter 16.50 19.36
Third Quarter 17.38 18.57
Fourth Quarter 15.48 17.62
Recent Accounting Pronouncements
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 and SFAS No. 138 in June 2000) 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 adopted this statement as of July
1, 2000. Adoption of this ststement did not have a material affect on the
Company's operation, financial condition or equity.
19
<PAGE>
Consolidated Statements Of
--------------------------------------------------------------------------------
Financial Condition (Dollars in thousands)
<TABLE>
<CAPTION>
At June 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Assets
Cash in banks $ 4,918 $ 5,194
Interest-bearing deposits 8,164 13,409
------------ ---------
Total cash and cash equivalents 13,082 18,603
Trading account securities 12,838 9,221
Investment securities available for sale 92,468 109,600
Investment securities held to maturity (fair value -
June 30, 2000, $39,020
June 30, 1999, $7,816) 39,821 7,801
Loans receivable, less allowance for loan
losses of $3,908 and $3,651 at
June 30, 2000 and 1999, respectively 331,306 291,388
Accrued interest receivable 3,456 2,461
Property and equipment - net 8,768 8,200
Other assets 5,411 3,884
------------ ---------
Total Assets $ 507,150 $ 451,158
============ =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 378,478 $ 359,514
Advance payments by borrowers for taxes and insurance 2,962 3,055
Federal Home Loan Bank advances 86,778 50,375
Other borrowings 373 653
Accrued interest payable 1,648 1,573
Other liabilities 1,409 2,135
------------ ---------
Total Liabilities 471,648 417,305
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;
3,912,185 and 3,892,833 shares issued at
June 30, 2000 and June 30, 1999, respectively 3,912 3,707
Additional paid-in capital 20,898 17,904
Retained earnings - partially restricted 13,947 13,794
Accumulated other comprehensive (loss) (3,255) (1,552)
Total Stockholders' Equity 35,502 33,853
Total Liabilities and Stockholders' Equity $ 507,150 $ 451,158
============ =========
</TABLE>
Chester Valley Bancorp Inc. and Subsidiaries
See accompanying notes to consolidated financial statements.
20
<PAGE>
Consolidated Statements Of Operations
--------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
2000 1999 1998
---------- ---------- ----------
Interest Income:
<S> <C> <C> <C>
Loans $ 24,581 $ 22,772 $ 22,191
Mortgage-backed securities 1,042 982 530
Interest-bearing deposits 153 717 254
Investment securities:
Taxable 5,272 3,512 1,857
Non-taxable 2,789 1,402 921
---------- ---------- ----------
Total interest income 33,837 29,385 25,753
---------- ---------- ----------
Interest Expense:
Deposits 13,700 12,703 11,468
Securities sold under agreements to repurchase -- 8 8
Short-term borrowings 3,317 1,000 971
Long-term borrowings 1,958 1,971 962
---------- ---------- ----------
Total interest expense 18,975 15,682 13,409
---------- ---------- ----------
Net interest income 14,862 13,703 12,344
Provision for loan losses 420 390 606
---------- ---------- ----------
Net interest income after provision for loan losses 14,442 13,313 11,738
---------- ---------- ----------
Other Income:
Investment services income 3,698 3,258 2,797
Service charges and fees 1,652 1,471 1,117
Gain on trading account securities 62 171 338
Gain on sale of assets available for sale 8 111 166
Other 116 186 200
---------- ---------- ----------
Total other income 5,536 5,197 4,618
---------- ---------- ----------
Operating Expenses:
Salaries and employee benefits 7,804 6,953 5,915
Occupancy 1,175 1,109 1,061
Furniture and equipment 1,072 967 825
Data processing 849 740 722
Advertising 417 330 297
Deposit insurance premiums 137 175 161
Other 2,710 2,456 2,662
---------- ---------- ----------
Total operating expenses 14,164 12,730 11,643
---------- ---------- ----------
Income before income taxes 5,814 5,780 4,713
Income tax expense 1,257 1,567 1,087
---------- ---------- ----------
Net income $ 4,557 $ 4,213 $ 3,626
========== ========== ==========
Earnings per common share(*):
Basic $ 1.17 $ 1.09 $ 0.95
Diluted $ 1.16 $ 1.08 $ 0.94
Weighted average number of shares outstanding(*):
Basic 3,892,132 3,865,792 3,813,838
Diluted 3,922,737 3,906,246 3,866,059
</TABLE>
(*) Earnings per share and weighted average shares outstanding have been
restated to reflect the effects of the 5% stock dividendspaid in September
1999, 1998 and 1997 and the three-for-two stock split effected in the form
of a dividend in December 1998.
Chester Valley Bancorp Inc. and Subsidiaries
See accompanying notes to consolidated financial statements.
21
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income Statement
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Retained Accumulated
Additional Stock Earnings Other Total
Common Paid-in Acquired Partially Comprehensive Treasury Stockholders'
Stock Capital by ESOP Restricted Income (Loss) Stock Equity
--------- ------------ ------- ------------ ------------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 3,440 $ 11,835 $ (333) $ 13,533 $ 3 $ (199) $ 28,279
Net income 3,626 3,626
Cash dividends paid
($.29 per share) (1,229) (1,229)
Principal payments
on ESOP debt 187 187
Issuance of stock dividend 102 2,052 (2,155) (1)
Cash payment for
fractional shares (7) (7)
Stock options exercised 15 268 157 440
Common stock issued 7 326 207 540
Common stock repurchased (12) (98) (165) (275)
Change in unrealized gain
(loss) on securities
available for sale 289 289
--------- ------------ ------- ------------ ----------- ----- ------------
Balance at June 30, 1998 $ 3,552 $ 14,383 $ (146) $ 13,768 $ 292 $ 0 $ 31,849
========= ============ ======= ============ =========== ===== ============
Net income 4,213 4,213
Cash dividends paid
($.30 per share) (1,154) (1,154)
Principal payments
on ESOP debt 146 146
Issuance of stock dividend 116 2,901 (3,017) 0
Cash payment for
fractional shares (16) (16)
Stock options exercised 11 132 24 167
Common stock issued 28 488 516
Common stock repurchased (24) (24)
Change in unrealized gain
(loss) on securities
available for sale (1,844) (1,844)
--------- ------------ ------- ------------ ----------- ----- ------------
Balance at June 30, 1999 $ 3,707 $ 17,904 $ 0 $ 13,794 $ (1,552) $ 0 $ 33,853
========= ============ ======= ============ =========== ===== ============
Net income 4,557 4,557
Cash dividends paid
($.36 per share) (1,383) (1,383)
Issuance of stock dividend 185 2,829 (3,014) --
Cash payment for
fractional shares (7) (7)
Stock options exercised 3 (51) 151 103
Common stock issued 17 216 380 613
Common stock repurchased (531) (531)
Change in unrealized gain
(loss) on securities
available for sale (1,703) (1,703)
--------- ------------ ------- ------------ ----------- ----- ------------
Balance at June 30, 2000 $ 3,912 $ 20,898 $ 0 $ 13,947 $ (3,255) $ 0 $ 35,502
========= ============ ======= ============ =========== ===== ============
Other Comprehensive Income, Net of Tax: 2000 1999 1998
------------ ----------- -----------
Net income $ 4,557 $ 4,213 $ 3,626
Net unrealized holding gains (losses) on securities
available for sale during the period (1,695) (1,785) 400
Less reclassification adjustment for
gains included in net income (7) (60) (111)
------------ ----------- -----------
Comprehensive Income $ 2,855 $ 2,368 $ 3,915
============ =========== ===========
</TABLE>
Chester Valley Bancorp Inc. and Subsidiaries
See accompanying notes to consolidated financial statements.
22
<PAGE>
Consolidated Statements Of Cash Flows
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,557 $ 4,213 $ 3,626
Add (deduct) items not affecting cash flows from (used in) operating activities:
Depreciation 917 879 725
Provision for loan losses 420 390 606
Gain on trading account securities (62) (171) (338)
Gain on sale of securities available for sale 3 (91) (168)
Loss (gain) on sale of loans held for sale (11) (20) 2
Amortization of deferred loan fees, discounts and premiums (628) (754) (585)
Decrease (increase) in trading account securities (3,679) 11,302 (19,763)
Decrease (increase) in accrued interest receivable (995) 25 (376)
(Increase) in other assets (457) (841) (407)
Increase (decrease) in other liabilities (726) 1,030 (235)
Increase in accrued interest payable 75 604 180
--------- --------- --------
Net cash flows from (used in) operating activities (586) 16,566 16,733
--------- --------- --------
Cash flows from investment activities:
Capital expenditures (1,485) (1,985) (2,348)
Net increase in loans and loans held for sale (39,990) (17,256) (23,345)
Proceeds from sale of loans held for sale 171 1,601 6,024
Purchase of investment securities (37,998) (2,397) (1,073)
Proceeds from maturities, payments and calls of investment securities 5,971 10,187 4,929
Purchase of securities available for sale (44,328) (108,847) (51,555)
Proceeds from sales and calls of securities available for sale 58,935 34,685 41,504
--------- --------- --------
Net cash flows used in investment activities (58,724) (84,012) (25,864)
--------- --------- --------
Cash flows from financing activities:
Net increase in deposits before interest credited 5,089 50,465 27,568
Interest credited to deposits 13,875 10,857 9,873
(Decrease) increase in securities sold under agreements to repurchase -- (144) 132
Proceeds from FHLB advances 107,052 13,599 32,024
Repayments of FHLB advances (70,649) (4,160) (21,286)
Increase in other borrowings (280) (55) 207
Net decrease in advance payments by borrowers for taxes and insurance (93) 93 (36)
Cash dividends on common stock (1,383) (1,153) (1,229)
Repayments of principal on ESOP debt -- (146) (187)
Common stock repurchased (531) (24) (275)
Payment for fractional shares (7) (15) (7)
Stock options exercised 103 167 440
Reduction of common stock acquired by ESOP -- 146 187
Common stock issued 613 514 540
--------- --------- --------
Net cash flows from financing activities 53,789 70,144 47,951
--------- --------- --------
Net increase (decrease) in cash (5,521) 2,698 5,354
Cash and cash equivalents:
Beginning of period 18,603 15,905 10,551
--------- --------- --------
End of period $ 13,082 $ 18,603 $ 15,905
========= ========= ========
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 1,246 $ 1,553 $ 1,379
Interest $ 18,900 $ 15,077 $ 13,229
--------- --------- --------
Non-cash items:
Stock dividend issued $ 3,014 $ 3,017 $ 2,155
========= ========= ========
Net change in unrealized gain (loss) on investment securities available for sale $ (2,774) $ (3,004) $ 471
========= ========= ========
Tax effect on unrealized gain (loss) on investment securities available for sale $ (1,071) $ (1,160) $ 182
========= ========= ========
</TABLE>
Chester Valley Bancorp Inc. and Subsidiaries
See accompanying notes to consolidated financial statements.
23
<PAGE>
Notes To Consolidated Financial Statements
--------------------------------------------------------------------------------
1 - Summary Of Significant Accounting Policies
----------------------------------------------
Business
Chester Valley Bancorp Inc. (the "Holding Company") is a unitary thrift
holding company, incorporated in the Commonwealth of Pennsylvania in August
1989. The business of Chester Valley Bancorp Inc. and its 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 intercompany balances and transactions have been
eliminated in consolidation. Prior period amounts are reclassified when
necessary to conform with the current year's presentation.
The Company follows accounting principles and reporting practices which
are in accordance with generally accepted accounting principles. In preparing
the consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate owned. Management believes that the allowance for
loan losses and the valuation of real estate owned are adequate. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and valuations of
real estate owned. Such agencies may require the Bank to recognize additions to
the allowance or adjustments to the valuations based on their judgments about
information available to them at the time of their examination.
Cash and Cash Equivalents
For the purpose of the consolidated statements of cash flows, cash and
cash equivalents include cash and interest-bearing deposits with an original
maturity of generally three months or less.
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 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.
24
<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 twelvemonth periods ended June 30, 2000, 1999, and 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 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.
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 1999, 1998 and 1997, and
the three-for-two stock split effected in the form of a dividend in December
1998.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year Ended June 30,
-----------------------------------
2000 1999 1998
------- ------- -------
Numerator:
Net income $ 4,557 $ 4,213 $ 3,626
======= ======= =======
Denominator:
Denominator for basic
earnings per share-weighted
average shares 3,892 3,866 3,814
Effect of dilutive securities:
Employee stock options 31 40 52
------- ------- -------
Denominator for diluted earnings
per share-adjusted weighted
average shares
and assumed exercise 3,923 3,906 3,866
======= ======= =======
Basic earnings per share $ 1.17 $ 1.09 $ 0.95
======= ======= =======
Diluted earnings per share $ 1.16 $ 1.08 $ 0.94
======= ======= =======
25
<PAGE>
2- Investment Securities (Dollars in thousands)
--------------------------------------------------------------------------------
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealize 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 $ 25,110 $ -- $ (677) $ 24,433 $ -- $ -- $ -- $ --
Federal Home Loan Bank
of Pittsburgh stock 5,739 -- -- 5,739 3,781 -- -- 3,781
Municipal notes and bonds 8,332 65 (189) 8,208 3,229 11 (2) 3,238
Mortgage-Backed securities 640 4 (5) 639 791 9 (4) 796
FNMA Stock 0 1 -- 1 0 1 -- 1
-------- -------- -------- -------- -------- -------- -------- --------
Total held to maturity $ 39,821 $ 70 $ (871) $ 39,020 $ 7,801 $ 21 $ (6) $ 7,816
======== ======== ======== ======== ======== ======== ======== ========
Available for sale:
U.S. Government agency
notes and bonds $ 27,688 $ -- $ (1,049) $ 26,639 $ 48,287 $ 3 $ (1,048) $ 47,242
Municipal notes and bonds 36,159 69 (2,068) 34,160 27,975 492 (1,089) 27,378
Mortgage-Backed securities 14,417 24 (637) 13,804 16,232 104 (520) 15,816
Equity securities 1,453 18 (613) 858 1,450 111 (224) 1,337
Debt securities 15,894 -- (1,096) 14,798 15,849 19 (438) 15,430
Other 2,158 51 -- 2,209 2,336 61 -- 2,397
-------- -------- -------- -------- -------- -------- -------- --------
Total available for sale $ 97,769 $ 162 $ (5,463) $ 92,468 $112,129 $ 790 $ (3,319) $109,600
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The amortized cost and estimated fair value of investment securities at June 30,
2000, by contractual maturity, are shown below.
Estimated Weighted
Amortized Fair Average
Cost Value Yield
------- ------- -----
Held to Maturity:
Due in one year or less $ 210 $ 209 4.97%
Due after one year through five years 17,216 17,008 6.37%
Due after five years through ten years 9,130 8,696 6.96%
Due after ten years 7,526 7,367 6.87%
No stated maturity 5,739 5,740 0.00%
------- ------- -----
Total held to maturity $39,821 $39,020 5.65%
======= ======= ====
Available for Sale:
Due in one year or less $ -- $ -- --
Due after one year through five years 23,058 22,567 6.09%
Due after five years through ten years 14,964 14,341 6.08%
Due after ten years 58,294 54,703 6.75%
No stated maturity 1,453 857 0.00%
------- ------- -----
Total available for sale $97,769 $92,468 6.42%
======= ======= ====
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 2000, 1999,
and 1998, were $58.94, $34.68 and $41.50 million, respectively. Gains of $195,
$94 and $171, 26 in fiscal 2000, 1999, and 1998, respectively, and gross losses
of $184, $4, and $3, in fiscal 2000, 1999, and 1998, respectively, were realized
on those sales. Accrued interest receivable on investments amounted to $1,898
and $1,035 at June 30, 2000 and 1999, respectively. At June 30, 2000, $88,840 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.
26
<PAGE>
3 - Loans Receivable (Dollars in thousands)
--------------------------------------------------------------------------------
Loans receivable are summarized as follows:
At June 30,
----------------------------
2000 1999
------------ ------------
First mortgage loans:
Residential $ 167,451 $ 157,342
Construction-residential 18,146 14,469
Land acquisition and development 10,960 5,075
Commercial 66,221 55,198
Construction-commercial 13,266 9,794
Commercial business 19,358 14,708
Consumer 62,433 51,416
------------ ------------
Total loans 357,835 308,002
Less:
Undisbursed loan proceeds:
Construction-residential (15,578) (8,712)
Construction-commercial (5,330) (2,681)
Deferred loan fees (1,713) (1,570)
Allowance for loan losses (3,908) (3,651)
------------ ------------
Net loans $ 331,306 $ 291,388
============ ============
Accrued interest receivable on loans amounted to $1,496 and $1,353 at June
30, 2000 and 1999, respectively. At June 30, 2000, 1999, and 1998, the Company
serviced loans for others of $23,670, $26,740 and $28,870, respectively.
The aggregate amount of loans by the Company to its directors and
executive officers was $3,812 and $4,231 at June 30, 2000 and 1999,
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, 1999 $ 4,231
New Loans 225
Repayments (338)
Other (change in status) (306)
------------------------ -------
Balance at June 30, 2000 $ 3,812
=======
The activity in the allowance for loan losses was as follows:
Year Ended June 30,
-------------------------------------
2000 1999 1998
------- ------- -------
Balance, beginning of period $ 3,651 $ 3,414 $ 2,855
Provision for loan losses 420 390 606
Loans charged off (171) (177) (81)
Recoveries 8 24 34
------- ------- -------
Balance, end of period $ 3,908 $ 3,651 $ 3,414
======= ======= =======
The total amount of non-performing loans was $942, $933 and $1.25 million,
at June 30, 2000, 1999 and 1998, 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 2000, 1999, and 1998
that would have been recorded for these loans was $82, $75, and $112. Interest
income on these non-performing loans included in income for fiscal 2000, 1999,
and 1998 amounted to $24, $26, and $58, respectively. At June 30, 2000, and
throughout fiscal 2000, there were no loans for which impairment was required to
be recognized.
27
<PAGE>
4 - Property and Equipment (Dollars in thousands)
--------------------------------------------------------------------------------
Property and equipment by major classification are summarized as follows:
At June 30,
---------------------------
2000 1999
----------- ----------
Land $ 1,281 $ 1,263
Buildings and Improvements 7,009 6,238
Furniture, Fixtures and Equipment 3,655 4,212
Total 11,945 11,713
Less Accumulated Depreciation (3,177) (3,513)
Net $ 8,768 $ 8,200
5 - Deposits
--------------------------------------------------------------------------------
Deposits consist of the following major classifications:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------
2000 1999
------------------------------ ------------------------------------
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Total Rate Amount Total
------ -------- ----- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing --% $ 38,192 10.1% --% $ 33,007 9.2%
------ -------- ----- -------- ---------- ------
Interest-bearing:
NOW checking accounts 1.57 38,652 10.2 1.47 36,012 10.0
Money market deposit accounts 4.00 41,690 11.0 3.82 47,464 13.2
Savings accounts 1.71 26,636 7.0 1.87 29,033 8.1
Certificates less than $100,000 5.60 126,910 33.6 5.36 137,559 38.2
Certificates $100,000 and greater 5.72 106,398 28.1 5.07 76,439 21.3
------ -------- ----- ----- -------- -----
Total interest-bearing 4.68 340,286 89.9 4.33 326,507 90.8
------ -------- ----- ----- -------- -----
Total deposits 4.21 $378,478 100.0% 3.93% $359,514 100.0%
====== ======== ===== ===== ======== =====
</TABLE>
At June 30, 2000 and 1999 certificates of deposit includes municipal deposits of
$82,664 and $47,782 respectively which are collateralized with pledged
investments.
While the certificates frequently are renewed at maturity rather than paid out,
a summary of certificates by contractual maturity at June 30, 2000 is as
follows:
Years Ending June 30, Amount
--------------------- -----------
2001 $ 131,289
2002 71,910
2003 18,909
2004 4,664
2005 3,092
2006 and thereafter 3,444
-----------
$ 233,308
===========
Interest expense on deposits is comprised of the following:
Year Ended June 30,
-----------------------------------------
2000 1999 1998
------- ------- -------
NOW Checking Accounts $ 590 $ 492 $ 530
Money Market Deposit Accounts 1,662 1,282 1,048
Savings Accounts 503 570 694
Certificates Less than $100,000 6,978 7,627 7,079
Certificates $100,000 & Greater 3,967 2,732 2,117
------- ------- -------
Total $13,700 $12,703 $11,468
======= ======= =======
28
<PAGE>
6 - Advances From Federal Home Loan Bank of Pittsburgh ("FHLBP") (Dollars in
thousands)
--------------------------------------------------------------------------------
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, 2000 and 1999, such
advances mature as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Weighted Weighted
Average June 30, Average June 30,
Due by June 30, Rate 2000 Due by June 30, Rate 1999
------------------------------------------------------ ----------------------------------------------
<S> <C> <C> <C> <C> <C>
2001 6.47% $ 37,041 2000 6.42% $ 3,241
2002 6.08 1,832 2001 5.76 5,526
2003 5.76 10,368 2002 5.75 4,316
2004 5.29 13,720 2003 5.86 7,352
2005 5.99 1,521 2004 5.79 702
Thereafter 6.32 22,296 Thereafter 5.31 29,238
-------------------------------------------------- ----------------------------------------------
Total FHLBP advances 6.16% $ 86,778 Total FHLBP advances 5.55% $ 50,375
-------------------------------------------------- ----------------------------------------------
</TABLE>
Included in the table above at June 30, 2000 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 $15,450 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, 2000 and 1999, there were no
balances outstanding on the line of credit. 7 - Income Taxes
7 - Income Taxes
--------------------------------------------------------------------------------
The provision (and benefit) for income taxes is summarized as follows:
Year Ended June 30,
------------------------------------------
2000 1999 1998
----------- ------------ -----------
Current:
Federal $ 1,065 $ 1,389 $ 1,177
State 203 304 76
Deferred - Federal (11) (126) (166)
----------- ------------ -----------
Total $ 1,257 $ 1,567 $ 1,087
The provision for income taxes differs from the statutory rate due to the
following:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 1,977 $ 1,965 $ 1,602
Tax exempt interest, net (847) (510) (367)
State taxes net of Federal benefit 134 201 50
Non-taxable S Corp income -- -- (213)
Non-deductible merger expenses -- -- 72
Other, net (7) (89) (57)
----------- ------------ ------------
Total $ 1,257 $ 1,567 $ 1,087
=========== ============ ============
</TABLE>
29
<PAGE>
7 - Income Taxes(Continued) (Dollars in thousands)
--------------------------------------------------------------------------------
The deferred tax assets and liabilities at June 30, 1999 and 1998, consisted of
the following:
At June 30,
-----------------------
2000 1999
Deferred tax assets: ------ ------
Allowance for loan losses $1,329 $1,241
Deferred loan fees 36 52
Uncollected interest 25 52
Net unrealized loss on securities available for sale 2,046 976
Investment in joint ventures 19 --
Other 22 23
------ ------
Gross deferred tax assets 3,477 2,344
Deferred tax liabilities:
Tax bad debt reserves 109 138
Loan discount 102 116
Depreciation 108 12
------ ------
Gross deferred tax liabilities 319 266
------ ------
Net deferred tax assets $3,158 $2,078
====== ======
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.
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,
2000, are approximately $2,960, of which $2,640 represents the base year amount
and $321 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
--------------------------------------------------------------------------------
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 $3,760 as of June 30, 2000, of which $1,700 was for
variable-rate loans. The balance of the commitments represent fixed-rate loans
with interest rates ranging 7.5% to 8.25%. At June 30, 2000, the Company had
undisbursed loans in process for construction loans of $20,910 and $19,550
million in undisbursed lines of credit. In addition, the Company has issued $604
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, in 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, 2000, are as follows:
Year Minimum Lease Payments
--------------- ----------------------
2001 $ 433
2002 419
2003 394
2004 367
2005 262
2006 and after 729
Rent expense under these leases for each of the years ended June 30, 2000, 1999,
and 1998, was $573, $537, and $521, respectively.
30
<PAGE>
9 - Affiliated Transactions (Dollars in thousands)
--------------------------------------------------------------------------------
During fiscal 2000, 1999 and 1998 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. The Board of
Directors approved the agreements and the Bank paid $3,030 in 2000, $4,625 in
1999, and $5,060 in 1998.
Two directors of the Company are a principal and a partner in law firms
which the Company retained during fiscal years 2000, 1999, and 1998, and which
the Company intends to retain during fiscal year 2001. During the year ended
December 31, 1999, 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 2000, 1999, and 1998. The Company
intends to continue the business relationship during fiscal 2001. The purchases
of investment securities from the investment banking firm amounted to $162,080,
$343,290, and $321,780, and the sales amounted to $131,680, $240,740, and
$272,340, during fiscal years 2000, 1999 and 1998, 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, 1999, 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 2000, 1999, and 1998, and the Company intends to
continue the business relationship during fiscal year 2001. During fiscal 2000,
1999 and 1998, the purchases of loans from the mortgage banking firm amounted to
$1,610, $4,730, and $7,280, respectively, with fees of $24, $50, and $93,
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 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 1999 and 1998 the Company paid 5% common stock dividends in
the amounts of 184,907 and 116,034 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.
31
<PAGE>
11 - Regulatory Capital (Dollars in thousands)
--------------------------------------------------------------------------------
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, 2000 and 1999 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, 2000 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): As of June 30, 2000:
<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, 2000:
Total Capital (to Risk Weighted Assets) $38,662 12.80% $24,104 8.00% $30,130 10.00%
Tier 1 Capital (to Risk Weighted Assets) $34,894 11.58% $12,052 4.00% $18,078 6.00%
Tier 1 Capital (to Average Assets) $34,894 6.88% $20,276 4.00% $25,345 5.00%
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%
</TABLE>
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, 2000 and 1999:
Cash and cash equivalents:
Current carrying amounts approximate estimated fair value.
33
<PAGE>
12 - Fair Value Of Financial Instruments(Continued) (Dollars in thousands)
--------------------------------------------------------------------------------
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.
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 of the
commitments approximates the recorded amounts which are included in Loans,
receivable on the following schedule.
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------
2000 1999
-----------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 13,082 $ 13,082 $ 18,602 $ 18,602
Trading account securities 12,838 12,838 9,221 9,221
Investment securities available for sale 92,468 92,468 109,600 109,600
Investment securities 39,821 39,020 7,801 7,816
Loans receivable, net 331,306 323,104 291,388 289,314
Accrued interest receivable 3,456 3,456 2,461 2,461
-------- -------- -------- --------
Total financial assets $492,971 $483,968 $439,073 $437,014
======== ======== ======== ========
Financial Liabilities:
Deposits and repos $378,478 $375,892 $359,514 $360,037
Borrowed funds 87,151 86,380 51,028 51,322
Accrued interest payable 1,648 1,648 1,573 1,573
-------- -------- -------- --------
Total financial liabilities $467,277 $463,920 $412,115 $412,932
======== ======== ======== ========
</TABLE>
13 - Employee Benefits
--------------------------------------------------------------------------------
Stock Compensation Program
The Company has two stock option plans (collectively, the "Plans") -- the
1993 Plan and the 1997 Plan. At June 30, 2000, an aggregate of 188,451 and
248,063 authorized but unissued shares of common stock of the Company, adjusted
for the 5% stock dividends in September 1999, 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, respec-
tively. As of June 30, 2000 there were 163,703 and 220,695 options granted under
the 1993 and 1997 Plan, 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.
33
<PAGE>
13 - Employee Benefits(Continued) (Dollars in thousands)
--------------------------------------------------------------------------------
The following table is a summary of option transactions since June 30,
1998. 1998, 1999, and 2000 have been adjusted to reflect the stock dividends in
fiscal 1998, 1999 and 2000 and the stock split in fiscal 1999:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- -------------------------- --------------------------
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 166,252 $ 14.77 88,391 $ 8.65 123,047 $ 8.17
Granted 185,245 16.02 101,912 19.43 10,853 13.82
Exercised (11,745) 8.09 (15,551) 8.56 (33,290) 8.19
Forfeited (17,472) 17.80 (8,500) 18.19 (12,219) 9.74
Outstanding at end of year 322,280 15.57 166,252 14.77 88,391 8.65
Exercisable at end of year 150,865 95,167 55,638
Weighted-average fair value
of options granted $ 5.22 $ 6.43 $ 4.67
</TABLE>
At June 30, 2000, the range of exercise prices was $8.01 -$19.43 and the
weighted average remaining contractual life of the outstanding options was 8.0
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 5.86% in 2000, 5.81% in
1999, and .39% in 1998; expected option life of 6 years for 2000, 1999 and 1998
options; expected stock price volatility of 29.91% for 2000, 29.73% for 1999,
and 27.64% for 1998 and expected dividends of .12%, 1.82%, and 1.51%, for 2000,
1999, and 1998, 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 $269 in 2000, $126 in 1999 and $27 in 1998 in compensation
expense related to its Option Plans. a result, proforma net income of the
Company would have been $4,288 in 2000, $4,086 in 1999 and $3,599 in 1998 and
proforma diluted earnings per share would have been $1.09 in 2000 and $1.05 in
1999.
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.
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% vest-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 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 2000, 1999, and 1998 respectively.
Contributions by the Bank to the ESOP in fiscal 2000, 1999, and 1998
amounted to $122, $129, and $174, respectively, and are included in the
accompanying consolidated statements of operations in salaries and employee
benefits. Interest expense paid during 2000, 1999, and 1998, by the ESOP for the
loan amounted to $0, $11, and $20, respectively. The interest rate on the ESOP
loan was fixed at 7.50% until maturity with interest expense being computed on
the unpaid principal balance. As principal payments were made by the ESOP, the
corresponding liability is reduced and stockholders' equity was increased. The
loan matured and was paid in April, 1999. There was no interest expense in
fiscal 2000.
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, 2000, 1999, and 1998
totaled $6, $5, and $4, respectively. Information relative to the financial
status of the Bank's portion of the Plan is not currently available.
34
<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
after 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, 2000,
1999 and 1998 (in thousands):
For The Year Ended June 30, 2000:
---------------------------------
FFB PCIS Total
---------------------------------
Net interest income $ 14,774 $ 88 $ 14,862
Other income 2,016 3,520 5,536
Total net income 4,198 359 4,557
Total assets 505,743 1,407 507,150
Total interest-bearing deposits 7,247 917 8,164
Total trading securities 12,708 130 12,838
=================================
For The Year Ended June 30, 1999:
---------------------------------
FFB PCIS Total
---------------------------------
Net interest income $ 13,632 $ 71 $ 13,703
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
=================================
16 - Summarized Quarterly Financial Data For Fiscal 2000 and 1999 (Unaudited)
--------------------------------------------------------------------------------
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------- ------------------------------------------------
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 $8,242 $8,385 $8,445 $8,765 $6,990 $7,172 $7,354 $7,869
Interest expense 4,371 4,680 4,763 5,161 3,771 3,783 3,909 4,218
Net interest income 3,871 3,705 3,682 3,604 3,219 3,389 3,445 3,651
Provision for loan losses 105 105 105 105 45 45 45 255
Net interest income after
provision for loan losses 3,766 3,600 3,577 3,499 3,174 3,344 3,400 3,396
Other income 1,258 1,276 1,319 1,683 1,386 1,387 1,170 1,254
Operating expenses 3,322 3,489 3,636 3,717 2,989 3,028 3,263 3,450
Income(loss) before income taxes 1,702 1,387 1,260 1,465 1,571 1,703 1,307 1,200
Income tax expense 422 232 241 362 472 535 288 273
Net Income $1,280 $1,155 $1,019 $1,103 $1,099 $1,168 $1,019 $ 927
Earnings per common share(1)
Basic $ 0.33 $ 0.30 $ 0.26 $ 0.28 $ 0.29 $ 0.30 $ 0.26 $ 0.24
Diluted $ 0.33 $ 0.29 $ 0.26 $ 0.28 $ 0.28 $ 0.30 $ 0.26 $ 0.24
</TABLE>
(1) Earnings per share have been restated to reflect the effects of the 5%
stock dividend paid in and 1998 and the three-for-two stock split effected
in September 1999 the form of a dividend in December 1998.
35
<PAGE>
17 - Parent Company Financial Information (Dollars in thousands)
--------------------------------------------------------------------------------
Financial information of Chester Valley Bancorp Inc. (parent company only)
follows:
Statements of Financial Condition
---------------------------------
At June 30,
-----------------------------
2000 1999
Assets -------- --------
On deposit with subsidiaries $ 633 $ 783
Securities available for sale 1,428 1,963
Investment in subsidiaries 33,178 31,051
Other assets 263 56
Total Assets $35,502 $33,853
Liabilities
Other liabilities $ -- $ --
Total Liabilities -- --
Stockholders' Equity 35,502 33,853
-------- -------
Total Liabilities and Stockholders' Equity $35,502 $33,853
======== ========
Statements of Operations
------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
2000 1999 1998
----------------------------------------------------------
<S> <C> <C> <C>
Income
Distributed income from subsidiaries $ 980 $ 1,797 $ 2,188
Interest income 103 98 28
Equity in undistributed income of subsidiaries 3,490 2,329 1,588
--------- --------- --------
Total Income 4,573 4,224 3,804
Expense
Other Expense 16 11 178
--------- --------- --------
Net Income $ 4,557 $ 4,213 $ 3,626
========= ========= ========
</TABLE>
Statements of Cash Flows
------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
2000 1999 1998
-----------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,557 $ 4,213 $ 3,626
Add (deduct) items not affecting cash flows
from operating activities:
Equity in undistributed income of subsidiaries (3,490) (2,329) (1,588)
Decease (increase) in other assets, net 4 (30) (22)
Decrease (increase) in other liabilities -- (84) 83
Reduction of common stock acquired by ESOP -- 146 187
------- ------ -------
Net cash flows from operating activities 1,071 1,916 2,286
------- ------ -------
Investment activities:
Purchase of securities available for sale (259) (908) (1,403)
Proceeds from sales and calls of securities available for sale 259 100 --
------- ------ -------
Net cash flows used in investment activities -- (808) (1,403)
------- ------ -------
Financing activities:
Income tax benefit on exercise of stock options (16) (43) (99)
Cash dividends (1,383) (1,153) (1,229)
Payment for fractional shares (7) (17) (7)
Common stock repurchased (531) (24) (275)
Repayments of principal on ESOP debt -- (146) (187)
Proceeds from exercise of stock options 103 167 440
Proceeds from issuance of common stock 613 516 540
------- ------ -------
Net cash flows used in financing activities (1,221) (700) (817)
------- ------ -------
Net increase (decrease) in cash (150) 408 66
Cash and cash equivalents:
Beginning of period 783 375 309
------- ------ -------
End of period $ 633 $ 783 $ 375
======= ======= =======
Non-cash items:
Net unrealized gain (loss) on investment securities
available for sale, net of taxes $ 1,703 $(1,844) $ 289
======= ======= =======
Stock dividend issued $ 3,014 $ 3,017 $ 2,155
======= ======= =======
</TABLE>
36
<PAGE>
Independent Auditors' Report
--------------------------------------------------------------------------------
[KMPG LOGO]
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, 2000
and 1999, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income statement, and cash flows for each
of the years in the three-year period ended June 30, 2000. 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 auditing standards generally
accepted in the United States of America. 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. as of June 30, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three year period
ended June 30, 2000 in conformity with accounting principles generally accepted
in the United States of America.
/s/ KPMG LLP
------------
KPMG LLP
Philadelphia, Pennsylvania
July 25, 2000
37
<PAGE>
BOARD OF DIRECTORS
[PHOTO] [PHOTO] [PHOTO]
ELLEN ANN ROBERTS JAMES E. McERLANE, ESQ. EDWARD T. BORER
[PHOTO] [PHOTO] [PHOTO]
ROBERT J. BRADBURY JOHN J. CUNNINGHAM, ESQ. GERARD F. GRIESSER
[PHOTO] [PHOTO] [PHOTO]
RICHARD L. RADCLIFF EMORY S. TODD WILLIAM M. WRIGHT
SENIOR OFFICERS
[PHOTO OF THE SENIOR OFFICERS]
First Financial Bank's Senior Officers assure that the best service is
always provided. As we look forward to the year ahead, we search for ways to
enhance our profitability through the development of improved processes, the
delivery of exemplary customer service and careful investment in emerging
technology. Left to right are: Steven C. Cunningham, Ellen Ann Roberts, Colin N.
Maropis, Kay B. Falkow, and Albert S. Randa
(Photo taken at: Chester County Historical Society, West Chester, Pennsylvania)
38
<PAGE>
Directors Serving in the
Same Capacity for Chester Valley
Bancorp Inc. and First Financial Bank:
Edward T. Borer
Chairman
Philadelphia Corporation
for Investment Services
Robert J. Bradbury
Co-chairman
Dolphin & Bradbury Incorporated
John J. Cunningham, III, Esquire
Partner
Cozen and O'Connor, PC
Gerard F. Griesser
President
Trident Financial Group
James E. McErlane, Esquire
Interim President
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
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 PCIS
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
James E. McErlane, Esquire
Interim President
and Secretary
Colin N. Maropis
Executive Vice President
Albert S. Randa, CPA
Chief Financial Officer
and Treasurer
Executive Officers of First Financial Bank:
Ellen Ann Roberts
Chairman and Chief Executive Officer
James E. McErlane,
Esquire Interim President
Colin N. Maropis
Executive Vice President
Albert S. Randa, CPA
Chief Financial Officer
and Treasurer
Steven C. Cunningham
Vice President
Kay B. Falkow
Vice President
Other Officers of
First Financial Bank:
Edward S. Lawrence Senior Vice
President
Frank J. Baldassarre
Vice President
C. Ward Braceland
Vice President
William G. Eads, Jr.
Vice President
Stephen E. Miller
Vice President
David L. Summers
Vice President
Phillis D. Weidenhammer
Vice President
Pamela M. Collins
Secretary
Arlene S. Cunningham
Assistant Vice President
Assistant Secretary
Shelley A. Castrinoes
Assistant Vice President
Linda B. Draper
Assistant 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
Cheryl M. Owens
Assistant Vice President
Carol F. Reichard
Assistant Vice President
Paula D. Stevens
Assistant Vice President
Joseph M. Swarr
Assistant 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
39
<PAGE>
First Financial Bank
Advisory Board Members:
Airport Advisory Board:
Milton Allen
Albert W. Eastburn
Aleda P. Loughman
John H. Newton, Jr.
Hudson Voltz
Brandywine Advisory Board:
Harry A. Arena
William E. Augustine
Jay G. Fischer
Kevin Holleran, Esq.
Neil Liebman
Devon Advisory Board:
Douglas R. Cranage
Matthew DiDomenico
Alan F. Hark
William T. McDonnell
Kevin E. Mengel
Dennis C. Reardon, LL.M.
Exton Advisory Board:
Barry G. Balmer
Raymond H. Carr
Carl K. Croft, CPA
Cindy Dickerman
Ronald L. White
Frazer Advisory Board:
Drew A. Alleva
David M. Frees, III
Florence D. Hunt
Albert P. Massey, Jr.
R. Wayne Raffety
A. Joseph Rubino
Thorndale Advisory Board:
Dr. Louis M. Laurento
Romaine Dunlap
Martin L. Lockhart
Kathleen K. Good, Esq.
Paul J. Phillips
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 25, 2000, 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".
Market Makers:
F. J. Morrissey & Co., Inc.
Philadelphia, Pennsylvania
(215) 563-8500
Ferris Baker Watts, Inc.
100 Light Street
Baltimore, Maryland 21202
(800) 638-7411
Janney Montgomery Scott
Philadelphia, Pennsylvania
(215) 563-8671
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, 2000 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
Cozen & O'Connor The Atrium 1900
Market Street
Philadelphia, Pennsylvania 19103-3527
Executive Office:
Chester Valley Bancorp Inc. 100 E. Lancaster Avenue
Downingtown, Pennsylvania 19335 (610) 269-9700
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