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 September 30, 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) 4,104,690
------------------------------ ------------
(Title of Each Class) (Number of Shares Outstanding
as of November 1, 2000)
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
Page
Number
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2000 and June 30, 2000 (Unaudited) 1
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999 (Unaudited) 2
STATEMENT OF OTHER COMPREHENSIVE INCOME
Three Months Ended September 30, 2000 and 1999 (Unaudited) 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2000 and 1999 (Unaudited) 4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5-12
Item 2 .MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13-17
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 18-20
PART 2. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 21
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
Item 3. DEFAULTS UPON SENIOR SECURITIES 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
Item 5. OTHER INFORMATION 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
September 30, June 30,
2000 2000
--------------------- -------------------
(Unaudited)
ASSETS:
Cash in banks $ 5,473 $ 4,918
Interest-earning deposits 9,524 8,164
-------------------- ------------------
Total cash and cash equivalents 14,997 13,082
Trading account securities 6,774 12,838
Investment securities available for sale 97,520 92,468
Investment securities (fair value - September 30,
$35,947, June 30, $39,020) 36,381 39,821
Loans receivable, less allowance for
loan losses of $3,989 and $3,908 333,879 331,306
Accrued interest receivable 3,376 3,456
Property and equipment - net 8,917 8,768
Other assets 5,000 5,411
--------------------- -------------------
Total Assets $ 506,844 $ 507,150
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 394,473 $ 378,478
Advance payments by borrowers for taxes and insurance 1,070 2,962
Federal Home Loan Bank advances 71,272 86,778
Other borrowings 471 373
Accrued interest payable 1,619 1,648
Other liabilities 1,147 1,409
--------------------- -------------------
Total Liabilities 470,052 471,648
--------------------- -------------------
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;
4,109,323 and 4,107,794 shares issued at September 30,
and June 30, respectively 4,109 4,108
Additional paid-in capital 24,061 24,046
Treasury stock (5,050 shares at cost) (89) --
Retained earnings - partially restricted 11,238 10,603
Accumulated other comprehensive loss (2,527) (3,255)
--------------------- -------------------
Total Stockholders' Equity 36,792 35,502
--------------------- -------------------
Total Liabilities and Stockholders' Equity $ 506,844 $507,150
===================== ===================
See accompanying notes to unaudited consolidated financial statements.
1
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
Three Months Ended
September 30,
--------------------------------------------
2000 1999
-------------------- -------------------
(Unaudited)
INTEREST INCOME:
Loans $ 6,632 $ 5,900
Investment securities and interest-bearing deposits 2,390 2,342
-------------------- -------------------
Total interest income 9,022 8,242
-------------------- -------------------
INTEREST EXPENSE:
Deposits 4,301 3,457
Short-term borrowings 613 388
Long-term borrowings 589 526
-------------------- -------------------
Total interest expense 5,503 4,371
-------------------- -------------------
NET INTEREST INCOME 3,519 3,871
Provision for loan losses 105 105
-------------------- -------------------
Net interest income after provision for loan losses 3,414 3,766
-------------------- -------------------
OTHER INCOME:
Investment services income, net 935 812
Service charges and fees 421 399
Gain (loss) on trading account securities 182 (12)
(Loss) gain on sale of assets available for sale (11) 13
Other 35 46
-------------------- -------------------
Total other income 1,562 1,258
-------------------- -------------------
OPERATING EXPENSES:
Salaries and employee benefits 1,980 1,803
Occupancy and equipment 596 540
Data processing 230 218
Advertising 217 105
Deposit insurance premiums 17 48
Other 802 608
-------------------- -------------------
Total operating expenses 3,842 3,322
-------------------- -------------------
Income before income taxes 1,134 1,702
Income tax expense 139 422
-------------------- -------------------
NET INCOME $ 995 $ 1,280
==================== ===================
EARNINGS PER SHARE (1):
Basic $ .24 $ .31
==================== ===================
Diluted $ .24 $ .31
==================== ===================
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .09 $ .09
==================== ===================
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 4,105,703 4,084,305
==================== ===================
Diluted 4,158,961 4,118,288
==================== ===================
(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 and 2000.
See accompanying notes to unaudited consolidated financial statements.
2
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
STATEMENT OF OTHER COMPREHENSIVE INCOME
(Dollars in Thousands)
Three Months Ended
September 30,
--------------------
2000 1999
------- -------
(Unaudited)
Net income $ 995 $ 1,280
Other Comprehensive income (loss), net of tax:
Net unrealized holding gains (losses) on securities available
for sale during the period 720 (1,531)
Reclassification adjustment for losses (gains)
included in net income 8 (1)
------ -------
COMPREHENSIVE INCOME (LOSS) $1,723 $ (252)
====== =======
See accompanying notes to unaudited consolidated financial statements.
3
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Three Months Ended September 30,
--------------------------------
2000 1999
------------ -------------
(Unaudited)
Cash flows from (used in) operating activities:
Net income $ 995 $ 1,280
Add (deduct) items not affecting cash flows from operating activities:
Depreciation 251 226
Provision for loan losses 105 105
(Gain) loss on trading account securities (182) 12
Loss (gain) on sale of securities available for sale 11 (13)
Amortization of deferred loan fees, discounts and premiums (223) (210)
Decrease in trading account securities 6,311 262
Decrease (increase) in accrued interest receivable 80 (577)
Increase in other assets (149) (1,212)
Decrease in other liabilities (262) (329)
Decrease in accrued interest payable (29) (211)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (used in) operating activities 6,909 (667)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investment activities:
Capital expenditures (400) (90)
Net increase in loans (2,579) (13,716)
Purchase of investment securities (2,011) (757)
Proceeds from maturities, payments and calls of investment securities 59 1,096
Purchase of securities available for sale -- (35,821)
Proceeds from sales and calls of securities available for sale 1,675 21,526
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investment activities (3,256) (27,762)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities:
Net increase (decrease)in deposits before interest credited 12,005 (17,188)
Interest credited to deposits 3,990 3,843
Proceeds from FHLB advances 17,500 38,400
Repayments of FHLB advances (33,006) (15)
Decrease in advance payments by borrowers for taxes and insurance (1,892) (1,901)
Net increase in other borrowings 98 58
Cash dividends on common stock (352) (333)
Common stock issued -- 161
Payment for fractional shares (7) (7)
Stock options exercised 146 56
Common stock repurchased as treasury stock (220) (191)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows (used in) from financing activities (1,738) 22,883
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,915 (5,546)
Cash and cash equivalents:
Beginning of period 13,082 18,603
--------------- ----------------
End of period $ 14,997 $ 13,057
=============== ================
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 77 $ 54
Interest 5,532 $ 4,582
Non-cash items:
Stock dividend issued $ 3,344 $ 3,014
Net unrealized (loss) gain on investment securities available for sale, net of tax $ 728 $ (1,532)
Transfer investment securities from held to maturity to available for sale $ 5,319 --
See accompanying notes to unaudited consolidated financial statements.
4
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 eight branch offices 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 (both
non-interest and interest-bearing), savings accounts, certificates of deposit,
commercial business and installment loans, real estate mortgages, and home
equity loans. The Bank also offers ancillary services that complement these
products. The Bank is subject to extensive competition from other financial
institutions and other companies that provide financial services. PCIS is
registered as a broker/dealer in all 50 states and Washington, DC and it is also
registered as an investment advisor with the Securities and Exchange Commission.
PCIS provides many additional services, including self-directed and managed
retirement accounts, safekeeping, daily sweep money market funds, portfolio and
estate valuations, life insurance and annuities, and margin accounts to
individuals and small corporate accounts.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Bank and PCIS. The accounts of
the Bank include its wholly-owned subsidiary, D & S Service Corp., which owns D
& 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.
5
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-month period ended September 30, 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, 2000.
Earnings Per Share
The dilutive effect of stock options is excluded from the computation of 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 and 2000.
6
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
September 30,
-----------------------------------
2000 1999
---------- -----------
(Dollars in Thousands, Except
Per Share Amounts)
-----------------------------------
Numerator:
Net income $ 995 $ 1,280
========== ==========
Denominator:
Denominator for basic per share-
weighted average shares 4,105,703 4,084,305
Effect of dilutive securities:
Stock options 53,259 33,983
---------- ----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 4,158,961 4,118,288
========== ==========
Basic earnings per share $ .24 $ .31
========== ==========
Diluted earnings per share $ .24 $ .31
========== ==========
The Company's number of antidilutive stock options was 0 and 94,206 for the
three month period ended September 30, 2000 and 1999, respectively
7
NOTE 2 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
September 30, June 30,
2000 2000
----------------------- --------------------------
(Dollars in Thousands)
First mortgage loans:
Residential $164,339 $167,451
Construction-residential 18,080 18,146
Land acquisition and
development 10,686 10,960
Commercial 70,870 66,221
Construction-commercial 18,617 13,266
Commercial business 18,560 19,358
Consumer 63,466 62,433
------------------- ----------------------
Total loans 364,618 357,835
------------------- ----------------------
Less:
Undisbursed loan proceeds:
Construction-residential (15,425) (15,578)
Construction-commercial (9,624) (5,330)
Deferred loan fees - net (1,701) (1,713)
Allowance for loan losses (3,989) (3,908)
------------------- ----------------------
Net loans $333,879 $331,306
=================== ======================
For purposes of applying the measurement criteria for impaired loans, the
Company excludes large groups of smaller balance homogeneous loans, primarily
consisting of residential real estate loans and consumer loans as well as
commercial business loans with principal balances of less than $100,000. For
applicable loans, the Company evaluates the need for impairment recognition when
a loan becomes non-accrual or earlier if, based on management's assessment of
the relevant facts and circumstances, it is probable that the Company will be
unable to collect all proceeds under the contractual terms of the loan
agreement. At and during the three- month period ended September 30, 2000, the
recorded investment in impaired loans was not material.
8
NOTE 3 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $1.87 million as of
September 30, 2000, of which $292 thousand was for variable-rate loans. The
balance of the commitments represents $1.57 million of fixed-rate loans
(primarily consisting of single-family residential mortgages) bearing interest
rates of between 7.25% and 8.50%. At September 30, 2000, the Company had $25.05
million of undisbursed construction loan funds as well as $12.60 million of
undisbursed remaining consumer and commercial line balances.
NOTE 4 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
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
adjusted total assets (as defined). At September 30, 2000 and June 30, 2000 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 September 30, 2000 that management believes have changed the
institution's category.
9
The Bank's regulatory capital amounts and ratios are presented in the table as
follows (dollars in thousands):
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2000:
Total Capital
(to Risk Weighted Assets) $39,590 12.96% $24,444 8.00% $30,555 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $35,769 11.71% $12,222 4.00% $18,333 6.00%
Tier 1 Capital
(to Adjusted Total Assets) $35,769 7.08% $20,220 4.00% $25,275 5.00%
As of June 30, 2000:
Total Capital
(to Risk Weighted Assets) $38,662 12.80% $24,104 8.00% $30,130 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $34,894 11.58% $12,052 4.00% $18,078 6.00%
Tier 1 Capital
(to Adjusted Total Assets) $34,894 6.88% $20,276 4.00% $25,345 5.00%
NOTE 5 - SEGMENT REPORTING
The Company has two reportable segments: First Financial and PCIS. First
Financial 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 headquarters. PCIS operates a full
service investment advisory and securities brokerage firm through two offices.
Both segments operate in southeastern Pennsylvania.
The Company evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses. There are no material
intersegment sales or transfers.
The Company's reportable segments have traditionally been two independent
financial services institutions. PCIS was acquired by the Company on May 29,
1998. The two segments are managed separately. All senior officers from PCIS
prior to the acquisition have been retained to manage the segment.
10
The following table highlights income statement and balance sheet information
for each of the segments at or for September 30, 2000 and 1999:
At and during the three months ended September 30,
-----------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------- --------------------------------------------
Bank PCIS Total Bank PCIS Total
-----------------------------------------------------------------------------------------------
(Dollars in Thousands)
Net interest
income $ 3,496 $ 23 $ 3,519 $ 3,848 $ 23 $ 3,871
Other income 695 867 1,562 498 760 1,258
Total net income 899 96 995 1,209 71 1,280
Total assets 505,074 1,770 506,844 470,718 2,531 473,249
Total interest-
bearing deposits 8,359 1,165 9,524 3,562 1,689 5,251
Total trading
securities 6,546 228 6,774 8,483 464 8,947
NOTE 6 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
On July 1, 2000, the Company adopted Statement of Financial Accounting Standards
No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities", as amended. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for changes in the fair value of
derivatives depends on 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.
The Corporation's only derivative that requires separate accounting under SFAS
133 is an interest-rate cap with a notional amount of $30.0 million which limits
3-month LIBOR to 7% for two years ending September 30, 2002. The cap was
recorded at the date of purchase on September 28, 2000, in other assets, at a
cost of $114,000. The fair market value ("FMV"), which at inception is equal to
the cost, is broken into two components: the intrinsic value and the time value
of the cap. The cap will be marked-to-market quarterly, with changes in the
intrinsic value of the cap, net of tax, included in a separate component of
other comprehensive income and changes in the time value of the
11
cap included in interest expense as required under SFAS 133. In addition, the
ineffective portion, if any, will be expensed in the period in which
ineffectiveness is determined. It has been determined that the hedge is highly
effective and can reasonably be expected to remain so. Management is not aware
of any events that would result in the reclassification into earnings of gains
and losses that are currently reported in accumulated other comprehensive income
except for the change in the FMV of the interest rate cap which pertains to the
time value of the hedging instrument. The FMV is estimated using the calculated
FMV of similar instruments. The cap purchased on September 28, 2000 for $114,000
is the FMV as of September 30, 2000.
An additional provision of SFAS 133 affords the opportunity to reclassify
investment securities between held-to-maturity, available-for-sale and trading
at the date of adoption. Accordingly, the Company reclassified $5.32 million in
investment securities from held-to-maturity to available-for-sale.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
In this Report, the Company has included certain "forward looking statements"
concerning the future operations of the Company. It is management's desire to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing the Company of the protections of such safe harbor with respect to all
"forward looking statements" contained in this Report. The Company has used
"forward looking statements" to describe the future plans and strategies
including management's expectations of 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, but are not
limited to, interest rate trends, competition, the general economic climate in
Chester County, Pennsylvania, 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 decreased $306,000 to $506.84 million at September
30, 2000, from $507.15 million at June 30, 2000, principally due to a decreases
in trading account securities of approximately $6.06 million and investment
securities held to maturity of $3.44 million. These decreases were offset by a
$1.92 million increase in cash and equivalents, an increase in loans of $2.57
million and an increase in investment securities available for sale of $5.05
million. Total liabilities decreased $1.60 million, which reflected the effect
of a $16.00 million increase in deposits, primarily municipal deposits, which
was partially offset by a $15.51 million decrease in FHLB advances.
Stockholders' equity increased $1.29 million to $36.79 million at September 30,
2000 from $35.50 million at June 30, 2000, primarily as a result of a decrease
in net unrealized losses on securities available for sale of $728,000, net of
taxes, net income for the period of $995,000 and the exercise of stock options
of $146,470. These increases were offset in part by the payment of a $0.09 cash
dividend of $352,265, the payment of fractional shares of 7,400 related to a
cash-in-lieu payment as part of the Company's most recent stock dividend and the
repurchase of shares of common stock totaling $220,000.
13
RESULTS OF OPERATIONS
Net interest income, on a fully tax equivalent basis, decreased 7.5% to $3.80
million for the three-month period ended September 30, 2000, compared to $4.11
million for the same period in 1999. Total interest income, on a fully tax
equivalent basis, increased to $9.31 million for the three-month period ended
September 30, 2000, from $8.48 million for the same period in 1999, 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 $477.29 million for
the three-month period ended September 30, 2000, from $442.99 million for the
same period in 1999. The increase was primarily due to a $31.72 million increase
in the average balance of loans during the same period. Interest income also
increased because of the 14 basis-point increase in the yield to 7.80% on
interest-earning assets for the three-month period ended September 30, 2000, as
the result of increasing general market rates of interest.
Total interest expense increased 25.9% to $5.50 million for the three-month
period ended September 30, 2000, compared to $4.37 million for same period in
1999. This was largely the result of the increase in the average balance of
interest-bearing liabilities to $450.03 million for the three-month period ended
September 30, 2000, as compared to $390.31 million for the same period in 1999.
This increase was principally due to a $48.85 million increase in the average
balance of deposits during the same period. Also contributing to the increase in
interest expense was an increase in the average rate paid on such liabilities to
4.89% for the three-month period ended September 30, 2000, from 4.48% for the
same period in 1999. This was primarily the result of increasing general market
rates of interest during the period.
The tax equivalent interest rate spread decreased to 2.91% from 3.18%, and the
average tax equivalent net yield on interest-earning assets decreased to 3.19%
from 3.71% for the three-month period ended September 30, 2000 and 1999,
respectively, due to the reasons discussed above.
Provision for Loan Losses
The Company provided $105,000 for loan losses during the three-month period
ended September 30, 2000, which was unchanged as compared to the same period in
1999. This provision was added to the Company's allowance for loan losses due to
current economic conditions and management's assessment of the known and
inherent risk of loss existing in the loan portfolio. At September 30, 2000, the
allowance for loan losses totaled $3.99 million or 1.18% of net loans (before
allowance), compared to $3.91 million or 1.17% of net loans at June 30, 2000. As
a percentage of non-performing assets, the
14
allowance for loan losses was 499% at September 30, 2000 compared to 414% at
June 30, 2000, and further compared to 384% at September 30, 1999.
Other Income
Total other income increased $300,000 to $1.56 million during the three-month
period ended September 30, 2000 as compared to $1.26 million during the same
period in 1999. Investment services income increased 15.15% during the
three-month period ended September 30, 2000, compared to the same period in 1999
due to PCIS' increased commission income resulting from an increase in customer
trading activity and an increase in money market fund fees resulting from an
increase in customer balances. In addition, PCIS' advisory fee income increased
due to the continued implementation of PCIS' strategic plan to focus on advisory
services since such services provides a more stable revenue stream for PCIS and
stabilizes expenses for customers. The Trust Division, which offers both
individual and corporate clients an array of money management, trust and
investment services including portfolio management, estate and retirement
planning, and self directed individual retirement accounts also increased its
fees during the period. 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 an increased number of
cardholders, contributed to the increase of $22,000 in service charges and fees
during the three-month period ended September 30, 2000. The Company recognized
gains on trading account securities and sales of assets available for sale of
$171,000 during the three-month period ended September 30, 2000 compared to
$1,000 during the same period in 1999.
Operating Expenses
Total operating expenses increased $520,000 or 15.7% to $3.84 million for the
three-month period ended September 30, 2000 as compared to the same time period
in 1999. The increase in operating expenses for the three-month period in fiscal
2000 was due to (1) an increase in the number of employees and normal salary
increases combined with increasing benefits expense; (2) an increase in
occupancy and equipment expenses related to renovations to a loan office; (3) a
106.7% increase in advertising costs due primarily to the Bank's image campaign
and the advertising of our new E products and (4) a 31.9% increase or $194,000
in other expenses with the largest increase being approximately $70,000 in the
consulting area.
Income Tax Expense
Income tax expense was $139,000 for the three-month period ended September 30,
2000, compared to $422,000 for the same period in 1999. The decrease in income
tax expense for the three-month period ended September 30, 2000 was due to lower
15
earnings, a higher portion of the Company's pre-tax earnings comprised of
tax-free interest income as compared to the same period in 1999 and also because
of the tax credits related to low-income housing projects.
ASSET QUALITY
Non-performing assets are comprised of non-accrual loans and real estate owned
("REO") and totaled $800,000 and $943,000 at September 30, 2000 and June 30,
2000 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 September 30, 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 .16% at September 30, 2000 compared to .19% at June 30, 2000,
and .20% at September 30, 1999. Non-performing assets, which totaled $800,000 at
September 30, 2000 consisted of 7 single-family residential mortgage loans
aggregating $622,000 and non-performing consumer and commercial business loans
totaling $178,000.
At September 30, 2000 the Company's classified assets, which consisted of assets
classified as substandard, doubtful or loss, as well as REO, totaled $1.49
million compared to $1.59 million at June 30, 2000, and further compared to
$1.14 million at September 30, 1999. Included in assets classified substandard
at September 30, 2000 and 1999, and at June 30, 2000, 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 also includes in the
special mention category an investment with a balance of $4.19 million to an
extended term healthcare provider which was performing but had characteristics
which warranted management to classify it special mention. Although special
mention assets are not considered or classified as substandard, doubtful or
loss, they do have a potential weakness which may, if not corrected, result in
increased risk of loss at some future date.
16
LIQUIDITY AND CAPITAL RESOURCES
Management monitors liquidity daily and maintains funding sources to meet
unforeseen changes in cash requirements. The Company's primary sources of funds
are deposits, borrowings, repayments, prepayments and maturities of outstanding
loans and mortgage-backed securities, sales of assets available for sale,
maturities of investment securities and other short-term investments, and funds
provided from operations. While scheduled loan and mortgage-backed securities
repayments and maturing investment securities and short-term investments are
relatively predictable 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 September 30, 2000, the Company
had $1.87 million in commitments to fund loan originations. In addition, at such
date the Company had undisbursed loans in process for construction loans of
$25.05 million and $12.60 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 current and prior quarter and other relevant aspects. On
August 18, 2000, the Board of Directors declared a 5% stock dividend and a
quarterly cash dividend of $.09 per share, both of which were paid on September
15, 2000, to stockholders of record as of September 1, 2000. Cash dividends from
the Holding Company are primarily dependent upon dividends paid to it by First
Financial, which, in turn, are subject to certain restrictions established by
federal regulators and Pennsylvania law.
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
17
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 September 30, 2000 was
10.03%.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from the interest rate risk inherent
in its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. At September 30, 2000, the
Company's management believes that the interest rate exposure has not
significantly changed since disclosed at June 30, 2000.
The primary asset/liability management goal of the Company is to manage and
control its interest rate risk, thereby reducing its exposure to fluctuations in
interest rates, and achieving sustainable growth in net interest income over the
long term. Other objectives of asset/liability management include: (1) ensuring
adequate liquidity and funding, (2) maintaining a strong capital base and (3)
maximizing net interest income opportunities.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Company's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by management.
Changing the relative proportions of fixed-rate and adjustable-rate assets and
liabilities is one of the primary strategies utilized by the Company to
accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
To provide a more accurate one-year gap position of the Company, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that money
market, NOW and savings
18
deposits are sensitive to interest rate changes. Accordingly, some of the
interest sensitive portions of such liabilities are classified in the less than
one year categories with the remainder placed in the over five years category.
Deposit products with interest rates based on a particular index are classified
according to the specific repricing characteristic of the index. Deposit rates
other than time deposit rates are variable, and changes in deposit rates are
typically subject to local market conditions and management's discretion and are
not indexed to any particular rate.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates.
Even assets and liabilities which contractually reprice within the same period
may not, in fact, reprice at the same price or the same time or with the same
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as the Company adjusts its interest
sensitivity position throughout the year. Although interest rate sensitivity gap
is a useful measurement and contributes towards effective asset/liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure. An alternative methodology is to estimate the changes in
the Company's portfolio equity over a range of interest rate scenarios.
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 September 30, 2000, the Company serviced $15.48
million of mortgage loans for others. Sales of loans produce future servicing
income and provide funds for additional lending and other purposes.
The following is an interest rate sensitivity analysis for the Bank at September
30, 2000.
19
Interest Rate Sensitivity Analysis at September 30, 2000
(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
--------------- ------------------ ------------------- ------------------
INTEREST-EARNING ASSETS:
Loans: (1)
Real estate (2) $24,677 $17,130 $35,148 $89,068
Commercial 9,971 1,147 2,042 3,763
Consumer 7,449 2,316 4,595 16,852
Securities and interest-bearing deposits 38,823 490 8,649 19,010
--------------- ------------------ ------------------- ------------------
Total interest-earning assets $80,920 $21,083 $50,434 $128,693
--------------- ------------------ ------------------- ------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $501 $501 $998 $--
NOW accounts 450 450 900 --
Money market accounts 46,414 -- -- --
Certificate accounts 59,476 21,322 80,095 74,812
Borrowings 8,980 1,532 599 10,059
--------------- ------------------ ------------------- ------------------
Total interest-bearing liabilities $115,821 $23,805 $82,592 $84,871
--------------- ------------------ ------------------- ------------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities ($34,901) ($37,623) ($69,781) ($25,959)
=============== ================== =================== ==================
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 69.9% 73.1% 68.6% 91.5%
=============== ================== =================== ==================
Cumulative difference as a percentage of
total assets (6.9%) (7.4%) (13.8%) (5.1%)
=============== ================== =================== ==================
More Than
Three Years
Through More Than
Five Years Five Years Total
---------------- ----------------- ---------------
INTEREST-EARNING ASSETS:
Loans: (1)
Real estate (2) $44,503 $46,406 $256,932
Commercial 1,358 277 18,558
Consumer 11,791 20,083 63,086
Securities and interest-bearing deposits 24,779 61,009 152,760
---------------- ----------------- ---------------
Total interest-earning assets $82,431 $127,775 $491,336
---------------- ----------------- ---------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ -- $23,799 $25,799
NOW accounts -- 37,380 39,180
Money market accounts -- -- 46,414
Certificate accounts 7,094 3,329 246,128
Borrowings 6,719 43,383 71,272
---------------- ----------------- ---------------
Total interest-bearing liabilities $13,813 $107,891 $428,793
---------------- ----------------- ---------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities $42,659 $62,543 $62,543
================ ================= ===============
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 113.3% 114.6% 114.6%
================ ================= ===============
Cumulative difference as a percentage of
total assets 8.4% 12.3% 12.3%
================ ================= ===============
(1) Net of undisbursed loan proceeds.
(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.
20
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
The Company's annual meeting of stockholders was
held on October 25, 2000. The following matters
were presented for stockholder action at such
meeting:
(1) To elect three directors for a term of three years or
until their successors have been elected and
qualified:
Name Votes For Votes Withheld
---- --------- --------------
Edward T. Borer 3,279,238 55,090
Robert J. Bradbury 3,278,532 55,796
James E. McErlane 3,279,238 55,090
(2) To ratify the appointment of KPMG LLP as the
Company's independent auditors for the fiscal year
ending June 30, 2001:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
3,307,644 23,136 3,543
(3) To increase the number of issuable shares under the
Company's 1997 Stock Option Plan by 315,000 shares.
Votes For Votes Against Votes Abstained
----------- ------------- ---------------
2,351,445 154,850 12,776
21
Item 5. Other Information
On October 6, 2000, the Company's Chairman of the
Board and Chief Executive Officer, Ellen Ann
Roberts, passed away. On October 25, 2000, the
Board of Directors appointed James E. McErlane as
Chairman of the Board and on November 6, 2000,
Donna M. Coughey assumed the duties of President
and Chief Executive Officer of the Company.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
22
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 11-10-00 /s/ Donna M. Coughey
------------- -----------------------------------
Donna M. Coughey
President and Chief Executive Officer
Date 11-10-00 /s/ Albert S. Randa
------------- -----------------------
Albert S. Randa, CPA
CFO and Treasurer
23