SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended December 31, 1999
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File No.: 0-18833
Chester Valley Bancorp Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2598554
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 E. Lancaster Ave., Downingtown PA 19335
- --------------------------------------------------------------------------------
(Address Of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (610) 269-9700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Transitional Small Business Disclosure Format. YES [ ] NO [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($1.00 par value) 3,890,603
------------------------------ ---------
(Title of Each Class) (Number of Shares Outstanding
as of February 1, 2000)
<PAGE>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and June 30, 1999 (Unaudited) 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, 1999 and 1998 (Unaudited) 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 31, 1999 and 1998 (Unaudited) 5
STATEMENT OF OTHER COMPREHENSIVE INCOME
Three Months Ended December 31, 1999 and 1998 (Unaudited) 6
STATEMENT OF OTHER COMPREHENSIVE INCOME
Six Months Ended December 31, 1999 and 1998 (Unaudited) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1999 and 1998 (Unaudited) 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 8-13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14-19
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 20-22
PART 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 23
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 23
Item 3. DEFAULTS UPON SENIOR SECURITIES 23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
Item 5. OTHER INFORMATION 23
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
December 31, June 30,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS:
Cash in banks $ 6,562 $ 5,194
Interest-earning deposits 8,015 13,409
----------- -----------
Total cash and cash equivalents 14,577 18,603
Trading account securities 6,891 9,221
Investment securities available for sale 94,590 109,600
Investment securities (fair value - December 31,
$35,121; June 30, $7,816) 35,922 7,801
Loans receivable, less allowance for
loan losses of $3,821 and $3,651 312,637 291,388
Accrued interest receivable 3,069 2,461
Property and equipment - net 8,048 8,200
Other assets 5,498 3,884
----------- -----------
Total Assets $ 481,232 $ 451,158
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 341,957 $ 359,514
Advance payments by borrowers for taxes and insurance 1,747 3,055
Federal Home Loan Bank advances 101,245 50,375
Other borrowings 677 653
Accrued interest payable 1,390 1,573
Other liabilities 462 2,135
----------- -----------
Total Liabilities $ 447,478 $ 417,305
----------- -----------
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;
3,898,170 and 3,707,460 shares issued at December 31,
and June 30, respectively 3,898 3,707
Additional paid-in capital 20,732 17,904
Retained earnings - partially restricted 12,526 13,794
Accumulated other comprehensive income (loss) (3,274) (1,552)
----------- -----------
Subtotal 33,882 33,853
Treasury stock, at cost (7,914 shares at December 31) (128) --
----------- -----------
Total Stockholders' Equity 33,754 33,853
----------- -----------
Total Liabilities and Stockholders' Equity $ 481,232 $ 451,158
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
(Unaudited)
Three Months Ended
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans $ 6,033 $ 5,777
Investment securities and interest-bearing deposits 2,352 1,395
----------- -----------
Total interest income 8,385 7,172
----------- -----------
INTEREST EXPENSE:
Deposits 3,304 3,029
Securities sold under agreements to repurchase -- 4
Short-term borrowings 925 221
Long-term borrowings 451 529
----------- -----------
Total interest expense 4,680 3,783
----------- -----------
NET INTEREST INCOME 3,705 3,389
Provision for loan losses 105 45
----------- -----------
Net interest income after provision for loan losses 3,600 3,344
----------- -----------
OTHER INCOME:
Investment services income, net 886 742
Service charges and fees 483 369
Gain on trading account securities 50 227
(Loss) on sale of assets available for sale (183) (2)
Other 40 51
----------- -----------
Total other income 1,276 1,387
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 1,882 1,624
Occupancy and equipment 561 491
Data processing 206 195
Deposit insurance premiums 53 43
Other 787 675
----------- -----------
Total operating expenses 3,489 3,028
----------- -----------
Income before income taxes 1,387 1,703
Income tax expense 232 535
----------- -----------
NET INCOME 1,155 1,168
=========== ===========
EARNINGS PER SHARE (1):
Basic $ .30 $ .30
=========== ===========
Diluted $ .29 $ .30
=========== ===========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .09 $ .07
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 3,883,519 3,812,784
=========== ===========
Diluted 3,911,761 3,855,598
=========== ===========
</TABLE>
(1) Earnings per share, dividends per share and weighted average shares
outstanding have been restated to reflect the effects of the 5% stock
dividend paid in September 1999.
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
(Unaudited)
Six Months Ended
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans $ 11,933 $ 11,427
Investment securities and interest-bearing deposits 4,694 2,735
----------- -----------
Total interest income 16,627 14,162
----------- -----------
INTEREST EXPENSE:
Deposits 6,761 6,141
Securities sold under agreements to repurchase -- 7
Short-term borrowings 1,313 458
Long-term borrowings 977 948
----------- -----------
Total interest expense 9,051 7,554
----------- -----------
NET INTEREST INCOME 7,576 6,608
Provision for loan losses 210 90
----------- -----------
Net interest income after provision for loan losses 7,366 6,518
----------- -----------
OTHER INCOME:
Investment services income, net 1,698 1,488
Service charges and fees 882 729
Gain on trading account securities 38 380
(Loss)/gain on sale of assets available for sale (170) 78
Other 86 98
----------- -----------
Total other income 2,534 2,773
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 3,685 3,292
Occupancy and equipment 1,101 999
Data processing 424 385
Deposit insurance premiums 101 85
Other 1,500 1,256
----------- -----------
Total operating expenses 6,811 6,017
----------- -----------
Income before income taxes 3,089 3,274
Income tax expense 654 1,007
----------- -----------
NET INCOME $ 2,435 $ 2,267
=========== ===========
EARNINGS PER SHARE (1):
Basic $ .63 $ .59
=========== ===========
Diluted $ .62 $ .58
=========== ===========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .18 $ .13
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 3,886,667 3,831,337
=========== ===========
Diluted 3,916,974 3,875,307
=========== ===========
</TABLE>
(1) Earnings per share, dividends per share and weighted average shares
outstanding have been restated to reflect the effects of the 5% stock
dividend paid in September 1999.
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
December 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 1,155 $ 1,168
Net unrealized holding (losses) on securities available
for sale during the period (301) (99)
Reclassification adjustment for losses included
in net income 111 --
------- -------
COMPREHENSIVE INCOME $ 965 $ 1,069
======= =======
<CAPTION>
(Unaudited)
Six Months Ended
December 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 2,435 $ 2,267
Net unrealized holding (losses) gains on securities available
for sale during the period (1,832) 57
Reclassification adjustment for losses (gains) included
in net income 110 (38)
------- -------
COMPREHENSIVE INCOME $ 713 $ 2,286
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended December 31,
-----------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows (used in) from operating activities:
Net income $ 2,435 $ 2,267
Add (deduct) items not affecting cash flows from operating activities:
Depreciation 451 311
Provision for loan losses 210 90
Gain on trading account securities (38) (380)
Loss (gain) on sale of loans held for sale 3 (20)
Loss (gain) on sale of securities available for sale 167 (58)
Amortization of deferred loan fees, discounts and premiums (381) (466)
Decrease (increase) in trading account securities 2,368 2,496
(Increase) decrease in accrued interest receivable (608) 350
(Increase) in other assets (532) (3,559)
(Decrease) increase in other liabilities (1,673) 928
(Decrease) in accrued interest payable (183) (3)
-------- --------
Net cash flows from operating activities 2,219 1,956
-------- --------
Cash flows from (used in) investment activities:
Capital expenditures (299) (742)
Net increase in loans (21,450) (8,650)
Proceeds from sale of loans held for sale 197 1,457
Purchase of investment securities (32,966) (1,083)
Proceeds from maturities, payments and calls of investment securities 4,838 4,921
Purchase of securities available for sale (38,069) (49,238)
Proceeds from sales and calls of securities available for sale 50,287 17,551
-------- --------
Net cash flows used in investment activities (37,462) (35,784)
-------- --------
Cash flows from (used in) financing activities:
Net (decrease) increase in deposits before interest credited (24,679) 15,146
Interest credited to deposits 7,122 5,638
Increase in securities sold under agreements to repurchase -- 55
Proceeds from FHLB advances 50,901 13,599
Repayments of FHLB advances (31) (2,908)
Decrease in advance payments by borrowers for taxes and insurance (1,308) (1,128)
Net increase in other borrowings 24 134
Cash dividends on common stock (682) (526)
Repayments of principal on ESOP debt -- (98)
Common stock issued 333 244
Payment for fractional shares (7) (15)
Stock options exercised 75 32
Reduction of common stock acquired by ESOP -- 98
Common stock repurchased (531) --
-------- --------
Net cash flows from financing activities 31,217 30,271
-------- --------
Net decrease in cash and cash equivalents (4,026) (3,557)
Cash and cash equivalents:
Beginning of period 18,603 15,905
-------- --------
End of period $ 14,577 $ 12,348
======== ========
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 579 $ 936
Interest $ 9,234 $ 7,557
Non-cash items:
Net unrealized (loss) gain on investment securities available for sale,
net of tax $ (1,722) $ 19
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
CHESTER VALLEY BANCORP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Chester Valley Bancorp Inc. (the "Company") is a unitary thrift holding company,
incorporated in the Commonwealth of Pennsylvania in 1989. The Company is subject
to the regulations of certain federal and state banking agencies and undergoes
periodic examinations by those regulatory authorities. The business of the
Company and its subsidiaries consists of the operations of First Financial Bank
("First Financial" or the "Bank"), a Pennsylvania-chartered stock savings and
loan association founded in 1922, and Philadelphia Corporation for Investment
Services ("PCIS"), a full service investment advisory and securities brokerage
firm. The Bank provides a wide range of banking services to individual and
corporate customers through its branch banks in Chester County, Pennsylvania.
All of the branches are full service and offer commercial and retail deposit and
loan products. These products include checking accounts (non-interest and
interest-bearing), savings accounts, certificates of deposit, commercial and
installment loans, real estate mortgages, and home equity loans. The Bank also
offers ancillary services, including trust services and money management, that
complement these products. The Bank is subject to extensive competition from
other financial institutions and other companies that provide financial
services. PCIS is registered as a broker/dealer in all 50 states and Washington,
DC and it is also registered as an investment advisor with the Securities and
Exchange Commission. PCIS provides many additional services, including
self-directed and managed retirement accounts, safekeeping, daily sweep money
market funds, portfolio and estate valuations, life insurance and annuities, and
margin accounts, to individuals and small corporate accounts.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Bank and PCIS. The accounts of
the Bank include its wholly-owned subsidiary, D & S Service Corp., which owns D
& FProjects and Wildman Projects, Inc., both of which are wholly-owned
subsidiaries thereof. All material inter-company balances and transactions have
been eliminated in consolidation. Prior period amounts are reclassified when
necessary to conform with the current period's presentation.
8
<PAGE>
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. However, such information
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of results for the unaudited interim periods.
The results of operations for the three- and six-month periods ended December
31, 1999, are not necessarily indicative of the results to be expected for the
fiscal year ending June 30, 2000. The consolidated financial statements
presented herein should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Annual
Report to Stockholders for the fiscal year ended June 30, 1999.
Earnings Per Share
The dilutive effect of stock options is excluded from basic earnings per share
but included in the computation of diluted earnings per share. Earnings per
share and weighted average shares outstanding for the periods presented herein
have been adjusted to reflect the effects of the 5% stock dividend paid in
September 1999.
9
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -------------------------
(Dollars in Thousands, Except for Per Share Amounts)
1999 1998 1999 1998
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,155 $ 1,168 $ 2,435 $ 2,267
========= ========== ========== ==========
Denominator:
Denominator for basic earnings
per share-weighted average
shares 3,883,519 3,812,784 3,886,667 3,831,337
Effect of dilutive securities:
Stock options 28,242 42,814 30,307 43,970
--------- ---------- ---------- ----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 3,911,761 3,855,598 3,916,974 3,875,307
========= ========== ========== ==========
Basic earnings per share $ .30 $ .30 $ .63 $ .59
========= ========== ========== ==========
Diluted earnings per share $ .29 $ .30 $ .62 $ .58
========= ========== ========== ==========
</TABLE>
10
<PAGE>
NOTE 2 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
At December 31, At June 30,
1999 1999
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
First mortgage loans:
Residential $ 163,924 $ 157,342
Construction-residential 14,743 14,469
Land acquisition and
development 4,500 5,075
Commercial 62,230 55,198
Construction-commercial 9,694 9,794
Commercial business 17,242 14,708
Consumer 59,114 51,416
--------- ---------
Total loans 331,447 308,002
--------- ---------
Less:
Undisbursed loan proceeds:
Construction-residential (9,669) (8,712)
Construction-commercial (3,719) (2,681)
Deferred loan fees - net (1,601) (1,570)
Allowance for loan losses (3,821) (3,651)
--------- ---------
Net loans $ 312,637 $ 291,388
========= =========
</TABLE>
NOTE 3 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $3.96 million as of
December 31, 1999, of which $3.17 million was for variable-rate loans. The
balance of the commitments represents $788,000 of fixed-rate loans (primarily
consisting of single-family residential mortgages) bearing interest rates of
between 7.00% and 7.63%. At December 31, 1999, the Company had $13.39 million of
undisbursed construction loan funds as well as $17.74 million of undisbursed
remaining consumer and commercial line balances.
11
<PAGE>
NOTE 4 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). At December 31, 1999 and June 30, 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
December 31, 1999 that management believes have changed the institution's
category.
The Bank's regulatory capital amounts and ratios are presented in the table as
follows (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $36,524 13.04% $22,412 8.00% $28,015 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $33,018 11.79% $11,206 4.00% $16,809 6.00%
Tier 1 Capital
(to Average Assets) $33,018 6.87% $19,217 4.00% $24,021 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
<PAGE>
NOTE 5 - SEGMENT REPORTING
The Company has two reportable segments: First Financial Bank ("the Bank") and
Philadelphia Corporation for Investment Services ("the Brokerage"). The Bank
operates a branch bank network with eight full-service banking offices and
provides deposit and loan services to customers. Additionally, the Bank offers
trust services at its Downingtown, Pennsylvania headquarters. PCIS operates a
full service investment advisory and securities brokerage firm through two
offices. Both segments operate primarily in southeastern Pennsylvania.
The Company evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses. There are no material
intersegment sales or transfers.
The Company's reportable segments have traditionally been two independent
financial services institutions. PCIS was acquired by the Company on May 29,
1998. The two segments are managed separately. All senior officers from PCIS
prior to the acquisition have been retained to manage that segment.
The following table highlights income statement and balance sheet information
for each of the segments at or for December 31, 1999 and 1998:
<TABLE>
<CAPTION>
At and for the three months ended December 31,
(Dollars in Thousands)
-------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Bank Brokerage Total Bank Brokerage Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest
income $ 3,675 $ 30 $ 3,705 $ 3,372 $ 17 $ 3,389
Other income 438 838 1,276 662 725 1,387
Total net income 1,070 85 1,155 1,078 90 1,168
Total assets 479,236 1,996 481,232 408,303 2,191 410,494
Total trading
securities $ 6,461 $ 430 $ 6,891 $ 17,688 $ 548 $ 18,236
<CAPTION>
For the six months ended December 31,
(Dollars in Thousands)
-------------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Bank Brokerage Total Bank Brokerage Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest
income $ 7,523 $ 53 $ 7,576 $ 6,567 $ 41 $ 6,608
Other income 936 1,598 2,534 1,306 1,467 2,773
Total net income $ 2,279 $ 156 $ 2,435 $ 2,083 $ 184 $ 2,267
</TABLE>
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
In this Report, the Company has included certain "forward looking statements"
concerning the future operations of the Company. It is management's desire to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing the Company of the protections of such safe harbor with respect to all
"forward looking statements" contained in this Report. The Company has used
"forward looking statements" to describe the future plans and strategies and
future financial results. Management's ability to predict the results or the
effect of future plans and strategy is inherently uncertain. Factors that could
affect results include interest rate trends, competition, the general economic
climate in Chester County, the mid-Atlantic region and the United States as a
whole, loan delinquency rates, changes in federal and state regulation, and
other uncertainties described in the Company's filings with the Securities and
Exchange Commission. These factors should be considered in evaluating the
"forward looking statements", and undue reliance should not be placed on such
statements.
FINANCIAL CONDITION
The Company's total assets increased to $481.23 million at December 31, 1999,
from $451.16 million at June 30, 1999, principally due to a $28.12 million
aggregate increase in held-to-maturity investment securities to $35.92 million
from $7.80 million at June 30, 1999 and to a lesser extent, a $21.25 million
increase in loans from $291.39 million at June 30, 1999 to $312.64 million at
December 31, 1999. Such increases were funded in large part by increases in
Federal Home Loan Bank ("FHLB") advances from $50.38 million at June 30, 1999,
to $101.25 million at December 31, 1999.
Stockholders' equity decreased to $33.75 million at December 31, 1999 from
$33.85 million at June 30, 1999, as a result of the recognition of an increase
in net unrealized losses on securities available for sale, net of taxes, of
$3.27 million and the payment during the period of cash dividends totaling
$349,000. The decrease in stockholders' equity was offset by net income of $2.44
million, the sale of $333,000 of common stock in connection with the Company's
dividend reinvestment plan, and $75,000 received as a result of the exercise of
stock options.
14
<PAGE>
RESULTS OF OPERATIONS
Net interest income, on a fully tax equivalent basis, increased 11.9% to $3.94
million for the three-month period ended December 31, 1999, and 17.35% to $8.05
million for the six-month period ended December 31, 1999, compared to $3.52
million and $6.86 million, respectively, for the same periods in 1998. Total
interest income, on a fully tax equivalent basis, increased to $8.62 million and
$17.10 million for the three- and six-month periods ended December 31, 1999,
from $7.30 million and $14.41 million for the same periods in 1998, primarily as
a result of the effect of an increase in the average balance of interest-earning
assets.
The average balance of interest-earning assets increased to $454.59 million and
$448.73 million for the three- and six-month periods ended December 31, 1999,
respectively, from $376.83 million and $373.09 million, respectively, for the
same periods in 1998. The increase was primarily due to a $53.97 million and
$58.48 million increase in the average balance of investment securities during
the three- and six-month periods in 1999, respectively. Partially offsetting the
effect on interest income of the increases in the average balances were the 17
basis-point and 10 basis-point decreases in the yield to 7.54% and 7.62% on
interest-earning assets for the three- and six-month periods ended December 31,
1999, respectively, as the result of declining general market rates of interest
experienced during the period.
Total interest expense increased to $4.68 million and $9.05 million from $3.78
million and $7.55 million for the respective three- and six-month periods in
1999 and 1998, largely as the result of the increase in the average balance of
interest-bearing liabilities to $406.73 million and $397.74 million for the
three- and six-month periods ended December 31, 1999, respectively, as compared
to $325.04 million and $320.25 million for the same periods in 1998. These
increases were due to $35.76 million and $45.05 million increases in the average
balance of deposits and $45.92 million and $32.44 million increases in the
average balance of borrowings during the three and six-month periods,
respectively. Partially offsetting the increase in interest expense was a
decrease in the average rate paid on such liabilities to 4.60% and 4.55% for the
three- and six-month periods ended December 31, 1999, respectively, from 4.65%
and 4.72% for the same periods in 1998, as the result primarily of declining
general market rates of interest and management's continued efforts to focus its
growth in the areas of low-costing or no-cost deposits.
Although the tax equivalent interest rate spread increased to 3.07% from 3.00%,
the average tax equivalent net yield on interest-earning assets decreased to
3.59% from 3.68% for the six-month periods ended December 31, 1999 and 1998,
respectively, due to the reasons discussed above.
15
<PAGE>
Provision for Loan Losses
The Company provided $105,000 and $210,000 for loan losses during the three- and
six-month periods ended December 31, 1999, respectively as compared to $45,000
and $90,000, respectively, for the same periods in 1998. The provision for the
three- and six-months ending December 31, 1999 has increased over the three- and
six-months ending December 31, 1998 primarily as a result of an increase in
loans of $21.25 million since June 30, 1999. These provisions have been added to
the Company's allowance for loan losses due to economic conditions and
management's assessment of the inherent risk of loss existing in the loan
portfolio. At December 31, 1999, the allowance for loan losses totaled $3.82
million or 1.21% of net loans (before allowance), compared to $3.65 million or
1.24% of net loans and $3.43 million or 1.22% of net loans at June 30, 1999, and
December 31, 1998, respectively. As a percentage of non-performing assets, the
allowance for loan losses was 321% at December 31, 1999, compared to 391% at
June 30, 1999, and further compared to 237% at December 31, 1998.
Other Income
Total other income decreased to $1.28 million and $2.53 million during the
three- and six-month periods ended December 31, 1999 respectively, as compared
to $1.39 million and $2.77 million during the same periods in 1998. The decrease
is a result of a $181,000 and $248,000 increase in losses on the sale of assets
available for sale, primarily securities available for sale, during the three-
and six-month, ended December 31, 1999, respectively. Additionally, gains on
trading account security decreased $177,000 and $342,000 for the three-and
six-month period in 1999. The decrease in other income was offset by increases
in investment services income of $144,000 and $210,000 during the three- and
six-month periods ended December 31, 1999, respectively, compared to the same
periods in 1998. 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 $114,000 and $153,000 in service charges and fees
during the three- and six-month periods ended December 31, 1999.
Operating Expenses
Total operating expenses increased $461,000 or 15.22% and $794,000 or 13.20% to
$3.49 million and $6.81 million, respectively, for the three- and six-month
periods ended December 31, 1999 as compared to the same time periods in 1998.
The increase in operating expenses for the three- and six-month periods in
fiscal 2000 was due to (i) normal salary increases combined with benefits
expense; and (ii) the increased number of staff associated with the addition of
the Bank's eighth branch office that opened in March 1999 in Devon.
16
<PAGE>
Income Tax Expense
Income tax expense was $232,000 and $654,000 for the three- and six-month
periods ended December 31, 1999, respectively, as compared to $535,000 and $1.01
million for the same periods in 1998. The decrease in income tax expense for the
three- and six-month periods ended December 31, 1999 is due to a higher portion
of the Company's pre-tax earnings comprised of tax-free interest income as
compared to the same period in 1998. This caused the effective tax rate to
decrease from 30.76% at December 31, 1998 to 21.17% at December 31, 1999.
ASSET QUALITY
Non-performing assets are comprised of non-accrual loans and real-estate owned
("REO") and totaled $1.19 million and $933,000 at December 31, 1999, and June
30, 1999, respectively. Non-accrual loans are loans on which the accrual of
interest has ceased because the collection of principal or interest payments is
determined to be doubtful by management. It is the policy of the Company to
discontinue the accrual of interest when principal or interest payments are
delinquent 90 days or more (unless the loan principal and interest are
determined by management to be fully secured and in the process of collection),
or earlier, if the financial condition of the borrower raises significant
concern with regard to the ability of the borrower to service the debt in
accordance with the current loan terms. Interest income is not accrued until the
financial condition and payment record of the borrower once again demonstrate
the borrower's ability to service the debt. At December 31, 1999, the Company
did not have any loans greater than 90 days delinquent which were accruing
interest. Non-performing assets to total assets and non-performing loans to
total assets were both .27% at December 31, 1999, compared to .21% at June 30,
1999, and .35% at December 31, 1998. Non-performing loans, which totaled $1.19
million at December 31, 1999 consisted of eight single-family residential
mortgage loans aggregating $816,000, one commercial mortgage loan aggregating
$221,000 and non-performing consumer and commercial business loans totaling
$152,000.
At December 31, 1999, the Company's classified assets, which consisted of assets
classified as substandard, doubtful or loss, as well as REO, totaled $1.42
million compared to $1.24 million at June 30, 1999, and further compared to
$1.82 million at December 31, 1998. Included in assets classified substandard at
December 31, 1999 and 1998, and at June 30, 1999, were all loans 90 days past
due and loans which were less than 90 days delinquent but inadequately protected
by the current paying capacity of the borrower or of the collateral pledged, or
which were subject to one or more well-defined weaknesses which may jeopardize
the satisfaction of the debt. The Company maintains a $4.19 million investment
in a long-term tax-free revenue bond which it had classified as special mention
as a result of a deterioration in cash flow for debt service. The investment has
been performing since its
17
<PAGE>
origination. Company management has met with the debtor and a plan was presented
to management to improve these deficiencies. The Company has underwritten and is
reporting $2.00 million of this investment as a loan in connection with its due
diligence since the bonds are not rated. This project is being monitored by
management on a monthly basis.
LIQUIDITY AND CAPITAL RESOURCES
Management monitors liquidity daily and maintains funding sources to meet
unforseen changes in cash requirements. The Company's primary sources of funds
are deposits, borrowings, repayments, prepayments and maturities of outstanding
loans and mortgage-backed securities, sales of assets available for sale,
maturities of investment securities and other short-term investments, and funds
provided from operations. While scheduled loan and mortgage-backed securities
repayments and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by the movement of interest rates in general, economic
conditions and competition. The Company manages the pricing of its deposits to
maintain a deposit balance deemed appropriate and desirable. Although the
Company's deposits represent the majority of its total liabilities, the Company
has also utilized other borrowing sources, namely FHLB advances.
Liquidity management is both a daily and long-term function. Excess liquidity is
generally invested in short-term investments such as FHLB overnight deposits. On
a longer term basis, the Company maintains a strategy of investing in various
lending and investment securities products. The Company uses its sources of
funds to primarily fund loan commitments and maintain a substantial portfolio of
investment securities, and to meet its ongoing commitments to pay maturing
savings certificates and savings withdrawals. At December 31, 1999, the Company
had $3.96 million in commitments to fund loan originations. In addition, at such
date the Company had undisbursed loans in process for construction loans of
$13.39 million and $17.74 million in undisbursed lines of credit. Management of
the Company believes that the Company has adequate resources, including
principal prepayments and repayments of loans and investment securities and
borrowing capacity, to fund all of its commitments to the extent required.
The Company's current dividend policy is to declare a regular quarterly dividend
with the intent that the level of the dividend per share be reviewed by the
Board of Directors on a quarterly basis. Dividends will be in the form of cash
and/or stock after giving consideration to all aspects of the Company's
performance for the quarter. On November 17, 1999, the Board of Directors
declared a quarterly cash dividend of $.09 per share, which was paid on December
17, 1999, to stockholders of record as of December 3, 1999.
18
<PAGE>
The Bank is required under applicable federal regulations, to maintain specified
levels of liquid investments and qualifying types of United States Treasury,
federal agency and other investments having maturities of five years or less.
Regulations currently in effect require the Bank to maintain a liquid asset
ratio of not less than 4% of its net withdrawable accounts plus short-term
borrowings. These levels are changed from time to time by the OTS to reflect
economic conditions. First Financial's average regulatory liquidity ratio for
the month ended December 31, 1999 was 20.84%.
YEAR 2000 ISSUES
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use data for the year
2000 or later. These potential shortcomings could result in a system failure or
miscalculations causing disruptions of operation, including among other things,
a temporary inability to process transactions, track important customer
information, provide convenient access to this information, or engage in normal
business operations. The Company did not incur any additional costs for the Year
2000 in the second quarter ended December 31, 1999. While lingering concern
exists about certain dates during Year 2000, the most significant date, January
1, 2000, has passed without incident. As of the date of this filing the Company
has not experienced any significant Year 2000 problems relating to its internal
or third party computer systems. Nor has the Company experienced any issues
regarding the ability of commercial customers to meet debt service as a result
of Year 2000 issues. The Company will continue to monitor systems for problems
in the future, however the costs related to that process are not expected to be
significant.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement (as amended by SFAS No. 137 in June 1999) establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of certain foreign currency exposures. SFAS No. 133, as amended, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Earlier adoption is permitted. The Company has not yet decided whether to
19
<PAGE>
adopt the statement early or determined the impact, if any, of this statement,
including its provisions for the potential reclassifications of investments
securities, on the Company's operations, financial condition or equity.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary asset/liability management goal of the Company is to manage and
control its interest rate risk, thereby reducing its exposure to fluctuations in
interest rates, and achieving sustainable growth in net interest income over the
long term. Other objectives of asset/liability management include: (1) ensuring
adequate liquidity and funding, (2) maintaining a strong capital base and (3)
maximizing net interest income opportunities.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Company's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by management.
Changing the relative proportions of fixed-rate and adjustable-rate assets and
liabilities is one of the primary strategies utilized by the Company to
accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
To provide a more accurate one-year gap position of the Company, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that 52%
of its money market and NOW accounts are sensitive to interest rate changes and
that 7% of its savings deposits are sensitive to interest rate changes.
Accordingly, these interest sensitive portions of such liabilities are
classified in the less than one year categories with the remainder placed in the
over five years category. Deposit products with interest rates based on a
particular index are classified according to the specific repricing
characteristic of the index. Deposit rates other than time deposit rates are
variable, and changes in deposit rates are typically subject to local market
conditions and management's discretion and are not indexed to any particular
rate.
20
<PAGE>
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates.
Even assets and liabilities which contractually reprice within the same period
may not, in fact, reprice at the same price or the same time or with the same
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as the Company adjusts its interest
sensitivity position throughout the year. For a discussion of the potential
impact of interest rate changes upon the market value of the Company's portfolio
equity, see "Market Risk" in the Company's Annual Report on Form 10-K for the
year ended June 30, 1999. There has been no material change in the Company's
market value of portfolio equity since June 30, 1999.
The Company periodically identifies certain loans as held for sale at the time
of origination, primarily consisting of fixed-rate, single-family residential
mortgage loans which meet the underwriting characteristics of certain
government-sponsored enterprises (conforming loans). The Company regularly
re-evaluates its policy and revises it as deemed necessary. The majority of
loans sold to date have consisted of sales to Freddie Mac of whole loans and 95%
participation interests in long-term, fixed-rate, single-family residential
mortgage loans in furtherance of the Company's goal of better matching the
maturities and interest-rate sensitivity of its assets and liabilities. When
selling loans, the Company has generally retained servicing in order to increase
its non-interest income. At December 31, 1999, the Company serviced $16.39
million of mortgage loans for others. Sales of loans produce future servicing
income and provide funds for additional lending and other purposes.
21
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at December 31, 1999
(Dollars in thousands)
More Than More Than More Than
Three Months Six Months One Year
Three Months Through Through Through
or Less Six Months One Year Three Years
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) $8,995 $946 $1,602 $3,827
Commercial 20,185 15,888 34,023 80,396
Consumer 8,183 2,027 3,976 14,566
Securities and interest-bearing deposits 37,478 675 3,814 15,803
----------------------------------------------------------------------------
Total interest-earning assets $74,841 $19,536 $43,415 $114,592
----------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $500 $501 $999 --
NOW accounts 450 450 900 --
Money market accounts 41,108 -- -- --
Certificate accounts 62,728 25,894 31,670 69,355
Borrowings 65,018 2,599 3,460 6,880
----------------------------------------------------------------------------
Total interest-bearing liabilities $169,804 $29,444 $37,029 $76,235
----------------------------------------------------------------------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities ($94,963) ($104,871) ($98,485) ($60,128)
========= ========== ========= =========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 44.1% 47.4% 58.3% 80.8%
===== ===== ===== =====
Cumulative difference as a percentage of
total assets (19.7%) (21.8%) (20.5%) 12.5%
======= ======= ======= =====
<PAGE>
<CAPTION>
More Than
Three Years
Through More Than
Five Years Five Years Total
-------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) $1,218 $432 $17,020
Commercial 48,440 41,951 240,883
Consumer 10,233 19,788 58,773
Securities and interest-bearing deposits 22,099 62,251 142,120
-------------------------------------------------
Total interest-earning assets $81,990 $124,422 $458,796
-------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts -- $24,548 $26,548
NOW accounts -- 37,253 39,053
Money market accounts -- -- 41,108
Certificate accounts 8,625 2,961 201,233
Borrowings 21,055 2,234 101,246
-------------------------------------------------
Total interest-bearing liabilities $29,680 $66,996 $409,188
-------------------------------------------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities ($7,818) $49,608 $49,608
======== ======= =======
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 97.7% 112.1% 112.1%
===== ====== ======
Cumulative difference as a percentage of
total assets 1.6% 10.3% 10.3%
==== ===== =====
</TABLE>
(1) Net of undisbursed loan proceeds related to commercial and residential
construction loans.
(2) Includes commercial mortgage loans.
Certain shortcomings are inherent in the method of analysis
presented in the table above. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the event
of changes in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to service their adjustable-rate loans
may decrease in the event of an interest rate increase.
22
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
Exhibit 27 Financial Data Schedule
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chester Valley Bancorp Inc.
Date 2-11-00 /s/Ellen Ann Roberts
-------------------------------- ------------------------------------
Ellen Ann Roberts
Chairman and Chief Executive Officer
Date 2-11-00 /s/Anthony J. Biondi
-------------------------------- ------------------------------------
Anthony J. Biondi
President and Chief Operating Officer
24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 6,562 6,562
<INT-BEARING-DEPOSITS> 8,015 8,015
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 6,891 6,891
<INVESTMENTS-HELD-FOR-SALE> 94,590 94,590
<INVESTMENTS-CARRYING> 35,922 35,922
<INVESTMENTS-MARKET> 35,121 35,121
<LOANS> 312,637 312,637
<ALLOWANCE> 3,821 3,821
<TOTAL-ASSETS> 481,232 481,232
<DEPOSITS> 341,957 341,957
<SHORT-TERM> 71,486 71,486
<LIABILITIES-OTHER> 3,599 3,599
<LONG-TERM> 30,346 30,346
0 0
0 0
<COMMON> 3,898 3,898
<OTHER-SE> 29,856 29,856
<TOTAL-LIABILITIES-AND-EQUITY> 481,232 481,232
<INTEREST-LOAN> 6,033 11,933
<INTEREST-INVEST> 2,352 4,694
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 8,385 16,627
<INTEREST-DEPOSIT> 3,304 6,761
<INTEREST-EXPENSE> 4,680 9,051
<INTEREST-INCOME-NET> 3,705 7,576
<LOAN-LOSSES> 105 210
<SECURITIES-GAINS> (133) (129)
<EXPENSE-OTHER> 3,489 6,811
<INCOME-PRETAX> 1,387 3,089
<INCOME-PRE-EXTRAORDINARY> 1,387 3,089
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,155 2,435
<EPS-BASIC> .30 .63
<EPS-DILUTED> .29 .62
<YIELD-ACTUAL> 3.26 0
<LOANS-NON> 1,189 1,189
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 5,608 5,608
<ALLOWANCE-OPEN> 3,721 3,651
<CHARGE-OFFS> 7 42
<RECOVERIES> 3 3
<ALLOWANCE-CLOSE> 3,821 3,821
<ALLOWANCE-DOMESTIC> 1,760 1,760
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,061 2,061
</TABLE>
