SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
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) 3,901,144
------------------------------ ---------
(Title of Each Class) (Number of Shares Outstanding
as of May 1, 2000)
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION Page
- ------------------------------ Number
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2000 and June 30, 1999 (Unaudited) 3
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999 (Unaudited) 4
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2000 and 1999 (Unaudited) 5
STATEMENT OF OTHER COMPREHENSIVE INCOME
Three Months Ended March 31, 2000 and 1999 (Unaudited) 6
STATEMENT OF OTHER COMPREHENSIVE INCOME
Nine Months Ended March 31, 2000 and 1999 (Unaudited) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2000 and 1999 (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
- ----------
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
March 31, June 30,
2000 1999
------------------ ----------------
ASSETS:
Cash in banks $ 5,044 $ 5,194
Interest-earning deposits 7,100 13,409
---------------- ---------------
Total cash and cash equivalents 12,144 18,603
Trading account securities 6,859 9,221
Investment securities available for sale 93,901 109,600
Investment securities (fair value - March 31,
$34,299; June 30, $7,816) 35,208 7,801
Loans receivable, less allowance for
loan losses of $3,829 and $3,651 323,440 291,388
Accrued interest receivable 3,064 2,461
Property and equipment - net 8,197 8,200
Other assets 5,114 3,884
------------------ ----------------
Total Assets $ 487,927 $ 451,158
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $342,885 $ 359,514
Advance payments by borrowers for taxes and insurance 2,000 3,055
Federal Home Loan Bank advances 105,377 50,375
Other borrowings 694 653
Accrued interest payable 1,157 1,573
Other liabilities 1,241 2,135
------------------ ----------------
Total Liabilities $ 453,354 $ 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;
3,900,388 and 3,707,460 shares issued at March 31,
and June 30, respectively 3,900 3,707
Additional paid-in capital 20,732 17,904
Retained earnings - partially restricted 13,195 13,794
Accumulated other comprehensive loss (3,254) (1,552)
------------------ ----------------
Total Stockholders' Equity 34,573 33,853
------------------ ----------------
Total Liabilities and Stockholders' Equity $ 487,927 $ 451,158
================== ================
See accompanying notes to unaudited consolidated financial statements.
3
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
----------------------
2000 1999
-------- --------
INTEREST INCOME:
Loans $ 6,196 $ 5,656
Investment securities and interest-bearing deposits 2,249 1,698
------- -------
Total interest income 8,445 7,354
------- -------
INTEREST EXPENSE:
Deposits 3,281 3,140
Securities sold under agreements to repurchase -- 2
Short-term borrowings 1,006 263
Long-term borrowings 476 504
------- -------
Total interest expense 4,763 3,909
------- -------
NET INTEREST INCOME 3,682 3,445
Provision for loan losses 105 45
------- -------
Net interest income after provision for loan losses 3,577 3,400
------- -------
OTHER INCOME:
Investment services income, net 1,064 871
Service charges and fees 365 370
Loss on trading account securities (131) (133)
(Loss) gain on sale of assets available for sale (1) 20
Other 22 42
------- -------
Total other income 1,319 1,170
------- -------
OPERATING EXPENSES:
Salaries and employee benefits 2,120 1,790
Occupancy and equipment 572 541
Data processing 210 195
Deposit insurance premiums 18 44
Other 716 693
------- -------
Total operating expenses 3,636 3,263
------- -------
Income before income taxes 1,260 1,307
Income tax expense 241 288
------- -------
NET INCOME 1,019 1,019
======= =======
EARNINGS PER SHARE (1)
Basic $ .26 $ .26
========= =============
Diluted $ .26 $ .26
========= =============
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .09 $ .08
========= =============
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
Basic 3,892,105 3,871,534
========= =============
Diluted 3,913,473 3,911,065
========= =============
(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
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
(Unaudited)
Nine Months Ended
March 31,
---------------------------
2000 1999
----------- ----------
INTEREST INCOME:
Loans $ 18,130 $ 17,083
Investment securities and interest-bearing deposits 6,942 4,433
----------- ----------
Total interest income 25,072 21,516
----------- ----------
INTEREST EXPENSE:
Deposits 10,042 9,281
Securities sold under agreements to repurchase -- 9
Short-term borrowings 2,319 721
Long-term borrowings 1,453 1,452
----------- ----------
Total interest expense 13,814 11,463
----------- ----------
NET INTEREST INCOME 11,258 10,053
Provision for loan losses 315 135
----------- ----------
Net interest income after provision for loan losses 10,943 9,918
----------- ----------
OTHER INCOME:
Investment services income, net 2,762 2,359
Service charges and fees 1,247 1,099
(Loss)gain on trading account securities (93) 247
(Loss)gain on sale of assets available for sale (171) 98
Other 108 140
----------- ----------
Total other income 3,853 3,943
----------- ----------
OPERATING EXPENSES:
Salaries and employee benefits 5,805 5,082
Occupancy and equipment 1,673 1,540
Data processing 634 580
Advertising 329 272
Deposit insurance premiums 119 129
Other 1,887 1677
----------- ----------
Total operating expenses 10,447 9,280
----------- ----------
Income before income taxes 4,349 4,581
Income tax expense 895 1,295
----------- ----------
NET INCOME $ 3,454 $ 3,286
=========== ==========
EARNINGS PER SHARE (1)
Basic $ .89 $ .85
=========== ==========
Diluted $ .88 $ .85
=========== ==========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .27 $ .22
=========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 3,888,466 3,844,540
=========== ==========
Diluted 3,915,766 3,887,030
=========== ==========
(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
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
2000 1999
---------------- ----------------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 1,019 $1,019
Net unrealized gains (losses) on securities available
for sale during the period 19 (245)
Reclassification adjustment for gains included
in net income 1 (13)
---------------- ----------------
COMPREHENSIVE INCOME $ 1,039 $ 761
================ ================
(Unaudited)
Nine Months Ended
March 31,
-------------------------------------
2000 1999
---------------- ----------------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 3,454 $ 3,286
Net unrealized (losses) on securities available
for sale during the period (1,813) (188)
Reclassification adjustment for gains included
in net income 111 (51)
---------------- ----------------
COMPREHENSIVE INCOME $ 1,752 $ 3,047
================ ================
See accompanying notes to unaudited consolidated financial statements.
6
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended March 31,
---------------------------------------
2000 1999
------------------ -----------------
Cash flows (used in) from operating activities:
Net income $ 3,454 $ 3,286
Add (deduct) items not affecting cash flows from operating activities:
Depreciation 680 638
Provision for loan losses 315 135
Loss (gain) on trading account securities 93 (247)
Loss (gain) on sale of loans held for sale 3 (20)
Loss (gain) on sale of securities available for sale 168 (78)
Amortization of deferred loan fees, discounts and premiums (513) (657)
Decrease in trading account securities 2,269 4,283
Increase in accrued interest receivable (603) (220)
Increase in other assets (160) (1,659)
(Decrease) increase in other liabilities (894) 2,981
(Decrease) increase in accrued interest payable (416) 175
- ------------------------------------------------------------------------------------ ------------------ -- -----------------
Net cash flows from operating activities 4,396 8,617
- ------------------------------------------------------------------------------------ ------------------ -- -----------------
Cash flows from (used in) investment activities:
Capital expenditures (677) (1,815)
Net increase in loans (32,272) (11,317)
Proceeds from sale of loans held for sale 197 1,457
Purchase of investment securities (33,064) (1,198)
Proceeds from maturities, payments and calls of investment securities 5,648 8,154
Purchase of securities available for sale (40,569) (75,596)
Proceeds from sales and calls of securities available for sale 53,554 25,581
- ------------------------------------------------------------------------------------ ------------------ -- -----------------
Net cash flows used in investment activities (47,183) (54,734)
- ------------------------------------------------------------------------------------ ------------------ -- -----------------
Cash flows from (used in) financing activities:
Net (decrease) increase in deposits before interest credited (27,305) 27,293
Interest credited to deposits 10,677 8,243
(Decrease) increase in securities sold under agreements to repurchase -- (104)
Proceeds from FHLB advances 55,050 13,599
Repayments of FHLB advances (48) (2,925)
Decrease in advance payments by borrowers for taxes and insurance (1,055) (715)
Net increase (decrease) in other borrowings 41 (183)
Cash dividends on common stock (1,032) (822)
Repayments of principal on ESOP debt -- (147)
Common stock issued 463 392
Payment for fractional shares (7) (15)
Stock options exercised 75 88
Reduction of common stock acquired by ESOP -- 147
Common stock repurchased (531) --
- ------------------------------------------------------------------------------------ ------------------ -- -----------------
Net cash flows from financing activities 36,328 44,851
- ------------------------------------------------------------------------------------ ------------------ -- -----------------
Net decrease in cash and cash equivalents (6,459) (1,266)
Cash and cash equivalents:
Beginning of period 18,603 15,905
------------------ -----------------
End of period $ 12,144 $ 14,639
================== =================
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 858 $ 1,347
Interest $ 14,230 $ 11,288
Non-cash items:
Net unrealized loss on investment securities available for sale, net of tax $ (1,702) $ (239)
See accompanying notes to unaudited consolidated financial statements.
7
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
& F Projects 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
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. However, such information
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of results for the unaudited interim periods.
The results of operations for the three- and nine-month periods ended March 31,
2000, 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
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------- -------------------------------------
(Dollars in Thousands, Except for Per Share Amounts)
2000 1999 2000 1999
---------------- ----------------- ---------------- ----------------
Numerator:
Net income $ 1,019 $ 1,019 $3,454 $ 3,286
================ ================= ================= ================
Denominator:
Denominator for basic earnings per
share-weighted average
shares 3,892,105 3,871,534 3,888,466 3,844,540
Effect of dilutive securities:
Stock options 21,368 39,531 27,300 42,490
---------------- ----------------- ----------------- ----------------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 3,913,473 3,911,065 3,915,766 3,887,030
================ ================= ================ ================
Basic earnings per share $ .26 $ .26 $ .89 $ .85
================ ================= ================ ================
Diluted earnings per share $ .26 $ .26 $ .88 $ .85
================ ================= ================ ================
10
NOTE 2 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
At March 31, At June 30,
2000 1999
--------------------------- ------------------------------
(Dollars in Thousands)
First mortgage loans:
Residential $ 166,436 $ 157,342
Construction-residential 17,548 14,469
Land acquisition and
development 5,152 5,075
Commercial 64,425 55,198
Construction-commercial 14,562 9,794
Commercial business 17,866 14,708
Consumer 60,087 51,416
--------------------------- ------------------------------
Total loans 346,076 308,002
--------------------------- ------------------------------
Less:
Undisbursed loan proceeds:
Construction-residential (11,720) (8,712)
Construction-commercial (5,428) (2,681)
Deferred loan fees - net (1,659) (1,570)
Allowance for loan losses (3,829) (3,651)
--------------------------- ------------------------------
Net loans $ 323,440 $ 291,388
=========================== ==============================
NOTE 3 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $6.57 million as of
March 31, 2000, of which $5.80 million was for variable-rate loans. The balance
of the commitments represents $771,000 of fixed-rate loans (primarily consisting
of single-family residential mortgages) bearing interest rates of between 7.00%
and 9.00%. At March 31, 2000, the Company had $17.15 million of undisbursed
construction loan funds as well as $20.49 million of undisbursed remaining
consumer and commercial line balances.
11
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
result in the initiation of certain mandatory and possibly additional
discretionary actions by regulators that, if implemented, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). At March 31, 2000 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
March 31, 2000 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):
To Be Well Capitalized
Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 2000
Total Capital
(to Risk-Weighted Assets) $37,529 12.97% $23,144 8.00% $28,930 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $33,910 11.72% $11,572 4.00% $17,358 6.00%
Tier 1 Capital
(to Average Assets) $33,910 6.96% $19,492 4.00% $24,366 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%
12
NOTE 5 - SEGMENT REPORTING
The Company has two reportable segments: First Financial Bank ("the Bank") and
Philadelphia Corporation for Investment Services ("PCIS"). 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 March 31, 2000 and 1999:
At and for the three months ended March 31,
(Dollars in Thousands)
------------------------------------------ ---------------------------------------------
2000 1999
------------------------------------------- ---------------------------------------------
Bank PCIS Total Bank PCIS Total
----------- ----------- ------------ ------------ ------------ ------------
Net interest
income $ 3,659 $ 23 $ 3,682 $ 3,433 $ 12 $ 3,445
Other income 305 1,014 1,319 373 797 1,170
Total net income 913 106 1,019 945 74 1,019
Total assets 486,158 1,769 487,927 425,971 2,095 428,066
Total trading
securities $ 6,409 $ 450 $ 6,859 $ 16,037 $ 279 $ 16,316
For the nine months ended March 31,
(Dollars in Thousands)
---------------------------------------- ---------------------------------------------
2000 1999
---------------------------------------- ---------------------------------------------
Bank PCIS Total Bank PCIS Total
------------ ----------- ---------- ------------ ------------- ------------
Net interest
income $11,182 $ 76 $ 11,258 $ 10,000 $ 53 $10,053
Other income 1,242 2,611 3,853 1,679 2,264 3,943
Total net income $ 3,192 $ 262 $ 3,454 $ 3,028 $ 258 $ 3,286
13
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 $487.93 million at March 31, 2000, from
$451.16 million at June 30, 1999, principally due to a $32.05 million increase
in loans from $291.39 million at June 30, 1999 to $323.44 million at March 31,
2000, and to a lesser extent, a $27.41 million aggregate increase in
held-to-maturity investment securities to $35.21 million from $7.80 million at
June 30, 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
$105.38 million at March 31, 2000.
Stockholders' equity increased $.72 million to $34.57 million at March 31, 2000
from $33.85 million at June 30, 1999. The increase in stockholders' equity
resulted from net income of $3.45 million, the sale of $463,000 of common stock
in connection with the Company's dividend reinvestment plan, and $75,000
received from the exercise of stock options, partially offset by the increase in
net unrealized losses on securities available for sale of $1.70 million, the
payment of cash dividends totaling $1.03 million and the repurchase of shares of
common stock for an aggregate cost of $531,000.
14
RESULTS OF OPERATIONS
Net interest income, on a fully tax equivalent basis, increased 7.1% to $3.90
million for the three-month period ended March 31, 2000, and 13.8% to $11.95
million for the nine-month period ended March 31, 2000, compared to $3.64
million and $10.5 million, respectively, for the same periods in 1999. Total
interest income, on a fully tax equivalent basis, increased to $8.67 million and
$25.77 million for the three- and nine-month periods ended March 31, 2000, from
$7.55 million and $21.96 million for the same periods in 1999, primarily as a
result of increases in the average balance of interest-earning assets.
The average balance of interest-earning assets increased to $461.87 million and
$453.05 million for the three- and nine-month periods ended March 31, 2000,
respectively, from $398.35 million and $381.59 million, respectively, for the
same periods in 1999. The increases were primarily due to a $24.90 million and
$48.40 million increase in the average balance of investment securities and to a
$36.13 million and $30.60 million increase in the average balance of net loans
during the three- and nine-month periods in 2000, respectively. Partially
offsetting the effect on interest income of the increases in the average
balances were the 8 basis-point and 11 basis-point decreases in the yield on
interest-earning assets to 7.50% and 7.58% for the three- and nine-month periods
ended March 31, 2000, respectively, as the result of a minor decline in rates of
interest experienced during the period.
Total interest expense increased to $4.76 million and $13.81 million from $3.91
million and $11.46 million for the respective three- and nine-month periods in
2000 and 1999, largely as the result of the increase in the average balance of
interest-bearing liabilities to $410.40 million and $401.71 million for the
three- and nine-month periods ended March 31, 2000, respectively, as compared to
$348.49 million and $329.56 million for the same periods in 1999. These
increases were due to $26.69 million and $35.71 million increases in the average
balance of deposits and $46.50 million and $36.43 million increases in the
average balance of borrowings during the three and nine-month periods,
respectively. The increase in interest expense was also the result of an
increase in the average rate paid on such liabilities to 4.64% and 4.58% for the
three- and nine-month periods ended March 31, 2000, respectively, from 4.60% and
4.55% for the same periods in 1999, as the result primarily of increasing rates
of interest on borrowings and deposits despite management's continued efforts to
focus in the areas of low-costing or no-cost deposits.
The tax equivalent interest rate spread decreased to 3.00% from 3.03%, and the
average tax equivalent net yield on interest-earning assets decreased to 3.52%
from 3.67% for the nine-month periods ended March 31, 2000 and 1999,
respectively, due to the reasons discussed above.
15
Provision for Loan Losses
The Company provided $105,000 and $315,000 for loan losses during the three- and
nine-month periods ended March 31, 2000, respectively as compared to $45,000 and
$135,000, respectively, for the same periods in 1999. The provision for the
three- and nine-months ending March 31, 2000 has increased over the three- and
nine-months ending March 31, 1999 primarily as a result of an increase in loans
of $32.05 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 March
31, 2000, the allowance for loan losses totaled $3.83 million or 1.17% of net
loans (before allowance), compared to $3.65 million or 1.24% of net loans and
$3.40 million or 1.18% of net loans at June 30, 1999, and March 31, 1999,
respectively. As a percentage of non-performing assets, the allowance for loan
losses was 412% at March 31, 2000, compared to 391% at June 30, 1999, and
further compared to 446% at March 31, 1999.
Other Income
Total other income increased to $1.32 million and decreased to $3.85 million
during the three- and nine-month periods ended March 31, 2000, respectively, as
compared to $1.17 million and $3.94 million during the same periods in 1999. The
increase for the three-month period ended March 31, 2000 of $149,000 resulted
from the growth in investment service income of $193,000 offset by several minor
decreases. The decrease of $90,000 for the nine-month period ending March 31,
2000 compared to the same period in 1999 resulted from a decrease in gains on
trading account securities and sales of assets held for sale of $345,000 in 1999
plus losses of $264,000 at March 31, 2000 for a total decrease of $609,000.
These decreases were partially offset by increases in investment service income
of $403,000 and service charge and fees income of $148,000.
Operating Expenses
Total operating expenses increased $373,000 or 11.43% and $1,167,000 or 12.58%
to $3.64 million and $10.45 million, respectively, for the three- and nine-month
periods ended March 31, 2000 as compared to the same time periods in 1999. The
increase in operating expenses for the three- and nine-month periods in fiscal
2000 was due to (i) normal salary increases combined with benefits expense; and
(ii) the increased number of staff resulting from the addition of the Bank's
eighth branch office that opened in March 1999 in Devon, Pennsylvania.
Income Tax Expense
Income tax expense was $241,000 and $895,000 for the three- and nine-month
periods ended March 31, 2000, respectively, as compared to $288,000 and $1.30
16
million for the same periods in 1999. The decrease in income tax expense for the
three- and nine-month periods ended March 31, 2000 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 1999. This caused the effective tax rate to decrease from
28.27% at March 31, 1999 to 20.58% at March 31, 2000.
ASSET QUALITY
Non-performing assets are comprised of non-accrual loans and real-estate owned
("REO") and totaled $729,171 and $933,000 at March 31, 2000 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 March 31, 2000, 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 .15% at March 31, 2000,
compared to .21% at June 30, 1999, and .18% at March 31, 1999. Non-performing
loans, which totaled $729,171 at March 31, 2000 consisted of 6 single-family
residential mortgage loans aggregating $573,000, and 7 non-performing consumer
and commercial business loans totaling $156,171.
At March 31, 2000, the Company's classified assets, which consisted of assets
classified as substandard, doubtful or loss, as well as REO, totaled $5.5
million compared to $1.24 million at June 30, 1999, and further compared to
$1.30 million at March 31, 1999. Included in assets classified substandard at
March 31, 2000 and 1999, 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 $4.56 million investment
in a long-term tax-free revenue bond which it had classified as substandard as a
result of a deterioration in cash flow for debt service. The investment has been
performing since its origination. Company management has met with the debtor and
a plan was presented to management to improve these deficiencies.
17
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 reviews and periodically adjusts the
pricing of its deposits to achieve a reasonable deposit balance. Although the
Company's deposits, which decreased $16.6 million for the nine-month period
ending March 31, 2000, represent the majority of its total liabilities, the
Company has increased borrowings consisting of $55 million in overnight FHLB
advances to fund new loan growth and replace the decrease in deposits. During
the twelve-month period ending March 31, 2001, the Company will have
approximately $115 million in maturing Certificates of Deposit. The Company
expects to retain these deposits by periodically adjusting deposit rates.
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 March 31, 2000, the Company had
$6.57 million in commitments to fund loan originations. In addition, at such
date the Company had undisbursed loans in process for construction loans of
$17.15 million and $20.49 million in undisbursed lines of credit. Management of
the Company believes that the Company has adequate resources, including
principal prepayments and repayments of loans and investment securities and
borrowing capacity, to fund all of its commitments 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 and February 16, 2000, the
Board of Directors declared quarterly cash dividends of $.09 per share
respectively, which were paid on December 17, 1999 and March 17, 2000, to
stockholders of record as of December 3, 1999 and March 3, 2000.
The Bank is required under applicable federal regulations, to maintain specified
levels of liquid investments and qualifying types of United States Treasury,
federal agency
18
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 Office of Thrift Supervision to
reflect economic conditions. First Financial's average regulatory liquidity
ratio for the month ended March 31, 2000 was 20.90%.
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 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.
19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary asset/liability management goal of the Company is to manage and
control its interest rate risk, thereby reducing its exposure to fluctuations in
interest rates, and achieving sustainable growth in net interest income over the
long term. Other objectives of asset/liability management include: (1) ensuring
adequate liquidity and funding, (2) maintaining a strong capital base and (3)
maximizing net interest income opportunities.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Company's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by management.
Changing the relative proportions of fixed-rate and adjustable-rate assets and
liabilities is one of the primary strategies utilized by the Company to
accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
To provide a more accurate one-year gap position of the Company, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that 52%
of its money market and NOW accounts are sensitive to interest rate changes and
that 7% of its savings deposits are sensitive to interest rate changes.
Accordingly, these interest sensitive portions of such liabilities are
classified in the less than one year categories with the remainder placed in the
over five years category. Deposit products with interest rates based on a
particular index are classified according to the specific repricing
characteristic of the index. Deposit rates other than time deposit rates are
variable, and changes in deposit rates are typically subject to local market
conditions and management's discretion and are not indexed to any particular
rate.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or
20
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 except as reflected in this 10Q
financial statement.
The Company periodically identifies certain loans as held for sale at the time
of origination, primarily consisting of fixed-rate, single-family residential
mortgage loans which meet the underwriting characteristics of certain
government-sponsored enterprises (conforming loans). The Company regularly
re-evaluates its policy and revises it as deemed necessary. The majority of
loans sold to date have consisted of sales to Freddie Mac of whole loans and 95%
participation interests in long-term, fixed-rate, single-family residential
mortgage loans in furtherance of the Company's goal of better matching the
maturities and interest-rate sensitivity of its assets and liabilities. When
selling loans, the Company has generally retained servicing in order to increase
its non-interest income. At March 31, 2000, the Company serviced $16.11 million
of mortgage loans for others. Sales of loans produce future servicing income and
provide funds for additional lending and other purposes.
21
Interest Rate Sensitivity Analysis at March 31, 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
------------- ----------- ---------- ----------- ------------ ----------- ---------
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) $21,462 $19,770 $33,585 $84,999 $48,073 $43,091 $250,980
Commercial 9,098 1,200 1,691 4,360 1,264 255 17,868
Consumer 8,045 2,094 4,148 15,118 10,491 19,798 59,694
Securities and interest-bearing deposits 33,924 3,317 855 18,116 23,771 60,322 140,305
------------- ----------- ---------- ---------- ------------ ----------- ---------
Total interest-earning assets $72,529 $26,381 $40,279 $122,593 $83,599 $123,466 $468,847
------------- ----------- ---------- ---------- ------------ ----------- ---------
INTEREST-BEARING LIABILITIES:
Savings accounts $501 $501 $998 -- -- $25,202 $27,202
NOW accounts 450 450 900 -- -- 37,464 39,264
Money market accounts 44,699 -- -- -- -- -- 44,699
Certificate accounts 66,853 19,730 29,914 67,625 8,094 3,223 195,439
Borrowings 70,599 1,506 3,460 12,727 15,205 1,882 105,379
------------- ----------- ---------- ---------- ------------ ----------- ---------
Total interest-bearing liabilities $183,102 $22,187 $35,272 $80,352 $23,299 $67,771 $411,983
------------- ----------- ---------- ---------- ------------ ----------- ---------
Cumulative excess (deficit) of
interest-earning assets to interest-bearing ($110,573) ($106,379) ($101,372) ($59,131) ($1,169) $56,864 $56,864
========== ========== ========= ========= ======== ======= =======
liabilities
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive
liabilities 39.6% 48.2% 57.9% 81.6% 100.3% 113.8% 113.8%
===== ===== ===== ===== ====== ====== ======
Cumulative difference as a percentage of
total assets (22.7%) (21.8%) (20.8%) 12.1% 0.2% 11.7% 11.7%
====== ====== ====== ===== ===== ===== =====
(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
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
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
23
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 MAY-11-00 /s/ Ellen Ann Roberts
----------------------- -----------------------
Ellen Ann Roberts
Chairman and Chief Executive Officer
Date MAY-11-00 /s/ Anthony J. Biondi
----------------------- ----------------------
Anthony J. Biondi
President and Chief Operating Officer
24