SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended December 31, 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) 4,109,323
------------------------------ ---------
(Title of Each Class) (Number of Shares Outstanding
as of February 1, 2001)
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART 1. FINANCIAL INFORMATION
- ------------------------------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 and June 30, 2000 (Unaudited) 1
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2000 and 1999 (Unaudited) 2
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2000 and 1999 (Unaudited) 3
STATEMENTS OF OTHER COMPREHENSIVE INCOME
Three Months Ended December 31, 2000 and 1999 (Unaudited) 4
STATEMENTS OF OTHER COMPREHENSIVE INCOME
Six Months Ended December 31, 2000 and 1999 (Unaudited) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2000 and 1999 (Unaudited) 5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6 - 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14 - 18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 19 - 21
PART 2. OTHER INFORMATION
- --------------------------
Item 1. LEGAL PROCEEDINGS 22
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
Item 3. DEFAULTS UPON SENIOR SECURITIES 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
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)
December 31, June 30,
2000 2000
------------ -----------
(Unaudited)
ASSETS:
Cash in banks $ 4,092 $ 4,918
Interest-earning deposits 19,931 8,164
----------- -----------
Total cash and cash equivalents 24,023 13,082
Trading account securities 434 12,838
Investment securities available for sale 97,658 92,468
Investment securities (fair value - December 31,
$43,505; June 30, $39,020) 43,584 39,821
Loans receivable, less allowance for
loan losses of $4,082 and $3,908 339,989 331,306
Accrued interest receivable 3,490 3,456
Property and equipment - net 8,253 8,768
Other assets 6,626 5,411
----------- -----------
Total Assets $ 524,057 $ 507,150
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 408,330 $ 378,478
Advance payments by borrowers for taxes and insurance 1,761 2,962
Federal Home Loan Bank advances 72,318 86,778
Other borrowings 660 373
Accrued interest payable 1,780 1,648
Other liabilities 1,053 1,409
----------- -----------
Total Liabilities 485,902 471,648
----------- -----------
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 December 31,
and June 30, respectively 4,109 4,108
Additional paid-in capital 24,023 24,046
Retained earnings - partially restricted 11,430 10,603
Accumulated other comprehensive loss (1,402) (3,255)
----------- -----------
Subtotal 38,160 35,502
Treasury stock, at cost (282 shares at December 31) (5) --
----------- -----------
Total Stockholders' Equity 38,155 35,502
----------- -----------
Total Liabilities and Stockholders' Equity $ 524,057 $ 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 Per Share Amounts)
Three Months Ended
December 31,
---------------------------
2000 1999
----------- -----------
(Unaudited)
INTEREST INCOME:
Loans $ 6,802 $ 6,033
Investment securities and interest-bearing deposits 2,505 2,352
----------- -----------
Total interest income 9,307 8,385
----------- -----------
INTEREST EXPENSE:
Deposits 4,594 3,304
Short-term borrowings 375 925
Long-term borrowings 815 451
----------- -----------
Total interest expense 5,784 4,680
----------- -----------
NET INTEREST INCOME 3,523 3,705
Provision for loan losses 105 105
----------- -----------
Net interest income after provision for loan losses 3,418 3,600
----------- -----------
OTHER INCOME:
Investment services income, net 999 886
Service charges and fees 435 483
Gain on trading account securities 57 50
Loss on sale of assets available for sale (5) (183)
Loss for impairment of securities (291) --
Other 39 40
----------- -----------
Total other income 1,234 1,276
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 2,152 1,882
Occupancy and equipment 617 561
Data processing 242 206
Deposit insurance premiums 18 53
Advertising 184 105
Other 999 682
----------- -----------
Total operating expenses 4,212 3,489
----------- -----------
Income before income taxes 440 1,387
Income tax (benefit) expense (121) 232
----------- -----------
NET INCOME $ 561 $ 1,155
=========== ===========
EARNINGS PER SHARE (1):
Basic $ .14 $ .28
=========== ===========
Diluted $ .14 $ .28
=========== ===========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .09 $ .09
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 4,105,463 4,077,695
=========== ===========
Diluted 4,147,645 4,107,349
=========== ===========
(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 2000.
See accompanying notes to unaudited consolidated financial statements.
2
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Six Months Ended
December 31,
---------------------------
2000 1999
----------- -----------
(Unaudited)
INTEREST INCOME:
Loans $ 13,434 $ 11,933
Investment securities and interest-bearing deposits 4,895 4,694
----------- -----------
Total interest income 18,329 16,627
----------- -----------
INTEREST EXPENSE:
Deposits 8,895 6,761
Short-term borrowings 988 1,313
Long-term borrowings 1,404 977
----------- -----------
Total interest expense 11,287 9,051
----------- -----------
NET INTEREST INCOME 7,042 7,576
Provision for loan losses 210 210
----------- -----------
Net interest income after provision for loan losses 6,832 7,366
----------- -----------
OTHER INCOME:
Investment services income, net 1,934 1,698
Service charges and fees 856 882
Gain on trading account securities 239 38
Loss on sale of assets available for sale (13) (170)
Loss for impairment of securities (291) --
Other 71 86
----------- -----------
Total other income 2,796 2,534
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 4,132 3,685
Occupancy and equipment 1,213 1,101
Data processing 472 424
Deposit insurance premiums 35 101
Advertising 401 237
Other 1,801 1,263
----------- -----------
Total operating expenses 8,054 6,811
----------- -----------
Income before income taxes 1,574 3,089
Income tax expense 18 654
----------- -----------
NET INCOME $ 1,556 $ 2,435
=========== ===========
EARNINGS PER SHARE (1):
Basic $ .38 $ .60
=========== ===========
Diluted $ .37 $ .59
=========== ===========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .18 $ .18
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 4,105,583 4,081,000
=========== ===========
Diluted 4,153,478 4,112,822
=========== ===========
(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 2000.
See accompanying notes to unaudited consolidated financial statements.
3
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Dollars in Thousands)
Three Months Ended
December 31,
------------------------
2000 1999
---------- ---------
(Unaudited)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 561 $ 1,155
Net unrealized holding gains (losses) on securities available
for sale during the period 1,122 (301)
Reclassification adjustment for losses included
in net income 3 111
---------- ---------
COMPREHENSIVE INCOME $ 1,686 $ 965
========== =========
Six Months Ended
December 31,
-------------------------
2000 1999
---------- ----------
(Unaudited)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 1,556 $ 2,435
Net unrealized holding gains (losses) on securities available
for sale during the period 1,842 (1,832)
Reclassification adjustment for losses included
in net income 11 110
---------- ----------
COMPREHENSIVE INCOME $ 3,409 $ 713
========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended December 31,
---------------------------------
2000 1999
------------ ------------
(Unaudited)
Cash flows (used in) from operating activities:
Net income $ 1,556 $ 2,435
Add (deduct) items not affecting cash flows from operating activities:
Depreciation 495 451
Provision for loan losses 210 210
Gain on trading account securities (239) (38)
(Gain) loss on sale of loans held for sale (3) 3
Loss on sale of securities available for sale 16 167
Loss for impairment of securities 291 -
Proceeds from sale of loans held for sale 568 197
Amortization of deferred loan fees, discounts and premiums (457) (381)
Decrease in trading account securities 6,112 2,368
Increase in accrued interest receivable (34) (608)
Increase in other assets (2,627) (532)
Decrease in other liabilities (356) (1,673)
Increase (decrease) in accrued interest payable 132 (183)
- ------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 5,664 2,416
- ------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investment activities:
Capital expenditures 20 (299)
Net increase in loans (9,258) (21,450)
Purchase of investment securities (9,555) (32,966)
Proceeds from maturities, payments and calls of investment securities 220 4,838
Purchase of securities available for sale (2,040) (38,069)
Proceeds from sales and calls of securities available for sale 12,168 50,287
- ------------------------------------------------------------------------------------------------------------------
Net cash flows used in investment activities (8,445) (37,659)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities:
Net increase (decrease) in deposits before interest credited 21,340 (24,679)
Interest credited to deposits 8,512 7,122
Proceeds from FHLB advances 27,500 50,901
Repayments of FHLB advances (41,960) (31)
Decrease in advance payments by borrowers for taxes and insurance (1,201) (1,308)
Net increase in other borrowings 287 24
Cash dividends on common stock (722) (682)
Repayments of principal on ESOP debt -- --
Common stock issued -- 333
Payment for fractional shares (7) (7)
Stock options exercised 193 75
Common stock repurchased (220) (531)
- ------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 13,722 31,217
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,941 (4,026)
Cash and cash equivalents:
Beginning of period 13,082 18,603
------------ ------------
End of period $ 24,023 $ 14,577
============ ============
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 287 $ 579
Interest $ 11,155 $ 9,234
Non-cash items:
Net unrealized (loss) gain on investment securities
available for sale, net of tax $ 1,853 $ (1,722)
Transfer of investment securities from held to maturity to
available for sale due to the adoption of FAS 133 $ 5,319 $ --
Transfer of investment securities from trading account to available
for sale $ 6,596 $ --
See accompanying notes to unaudited consolidated financial statements.
5
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.
6
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. However, such information
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of results for the unaudited interim periods.
The results of operations for the three- and six-month periods ended December
31, 2000, are not necessarily indicative of the results to be expected for the
fiscal year ending June 30, 2001. 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 2000.
7
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- -----------------------------
(Dollars in Thousands, Except Per Share Amounts)
2000 1999 2000 1999
----------- ------------ ------------ ------------
Numerator:
Net income $ 561 $ 1,155 $ 1,556 $ 2,435
=========== ============ ============ ============
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,105,463 4,077,695 4,105,583 4,081,000
Effect of dilutive securities:
Stock options 42,182 29,654 47,895 31,822
----------- ------------ ------------ ------------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 4,147,645 4,107,349 4,153,478 4,112,822
=========== ============ ============ ============
Basic earnings per share $ .14 $ .28 $ .38 $ .60
=========== ============ ============ ============
Diluted earnings per share $ .14 $ .28 $ .37 $ .59
=========== ============ ============ ============
The Company's number of antidilutive stock options was 89,212 and 253,285 for
the three- and six-month periods ended December 31, 2000 and 1999, respectively.
8
NOTE 2 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
December 31, June 30,
2000 2000
------------ -------------
(Dollars in Thousands)
First mortgage loans:
Residential $ 160,551 $ 167,451
Construction-residential 17,830 18,146
Land acquisition and
development 12,687 10,960
Commercial 73,183 66,221
Construction-commercial 17,700 13,266
Commercial business 21,234 19,358
Consumer 65,481 62,433
------------ -------------
Total loans 368,666 357,835
------------ -------------
Less:
Undisbursed loan proceeds:
Construction-residential (15,855) (15,578)
Construction-commercial (7,083) (5,330)
Deferred loan fees - net (1,657) (1,713)
Allowance for loan losses (4,082) (3,908)
------------ -------------
Net loans $ 339,989 $ 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 December 31, 2000, the
recorded investment in impaired loans was not material.
9
NOTE 3 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $851,000 as of
December 31, 2000. The majority of the commitments represents $851,000 of
fixed-rate loans (primarily consisting of single-family residential mortgages)
bearing interest rates of between 6.50% and 8.50%. At December 31, 2000, the
Company had $22.99 million of undisbursed construction loan funds as well as
$21.08 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 assets (as defined). At December 31, 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 which
have occurred since December 31, 2000 that management believes have changed the
institution's category.
10
The Bank's regulatory capital amounts and ratios are presented in the table as
follows (dollars in thousands):
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2000:
Total Capital
(to Risk Weighted Assets) $39,745 12.61% $25,222 8.00% $31,528 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $35,802 11.36% $12,611 4.00% $18,917 6.00%
Tier 1 Capital
(to Average Assets) $35,802 6.86% $20,870 4.00% $26,088 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 Average 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, Pennsylvania 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 that segment.
11
The following table highlights income statement and balance sheet information
for each of the segments at or for December 31, 2000 and 1999:
For the three months ended December 31,
--------------------------------------------------------------------------------------------
2000 1999
------------------------------------------- ---------------------------------------------
Bank PCIS Total Bank PCIS Total
----------- ----------- ------------ ------------ ------------ ------------
(Dollars in Thousands)
Net interest income $ 3,498 $ 25 $ 3,523 $ 3,675 $ 30 $ 3,705
Other income 300 934 1,234 438 838 1,276
Total net income 446 115 561 1,070 85 1,155
Total assets 522,112 1,945 524,057 479,236 1,996 481,232
Total trading securities -- 434 434 6,461 430 6,891
For the six months ended December 31,
---------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------- ---------------------------------------------
Bank PCIS Total Bank PCIS Total
------------ ----------- ------------- ------------ ------------- ------------
(Dollars in Thousands)
Net interest income $ 6,994 $ 48 $ 7,042 $ 7,523 $ 53 $ 7,576
Other income 995 1,801 2,796 936 1,598 2,534
Total net income 1,345 211 1,556 2,279 156 2,435
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.
12
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 London Inter Bank Offering Rate ("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 is
marked-to-market quarterly, with changes in the time value of the cap included
in interest expense as required under SFAS 133. In addition, the ineffective
portion, if any, of the cap will be expensed in the period in which
ineffectiveness is determined. The cap purchased on September 28, 2000 for
$114,000 has a FMV at December 31, 2000 of $16,000 and the adjustment in time
value was recorded as interest expense.
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.
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",
expressed or implied, 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 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 $524.06 million at December 31, 2000,
from $507.15 million at June 30, 2000, principally due to a $11.77 million
aggregate increase in interest-bearing deposits to $19.93 million from $8.16
million at June 30, 2000 and to a lesser extent, a $8.68 million increase in
loans from $331.31 million at June 30, 2000 to $339.99 million at December 31,
2000. Such increases were funded by a $29.85 million increase in deposits from
$378.48 million at June 30, 2000, to $408.33 million at December 31, 2000. In
addition, the deposit increase also partially funded the $14.46 million
reduction in Federal Home Loan Bank of Pittsburgh ("FHLB") borrowings from
$86.78 million at June 30, 2000 to $72.32 million at December 31, 2000.
Stockholders' equity increased $2.66 million to $38.16 million at December 31,
2000 from $35.50 million at June 30, 2000, as a result of the recognition of a
decrease in net unrealized losses on securities available for sale, net of
taxes, of $1.85 million, net income of $1.56 million, the sale of common stock
in connection with the Company's dividend reinvestment plan and the exercise of
stock options with an aggregate exercise price of $192,702. The increase in
stockholders' equity was offset by the payment of cash dividends of $721,737,
the payment of $7,410 for fractional shares related to the Stock dividend in
September 2000 and the purchase of treasury stock of $218,867.
14
RESULTS OF OPERATIONS
Net interest income, on a fully tax equivalent basis, decreased 3.30% to $3.81
million for the three-month period ended December 31, 2000, and 5.47% to $7.61
million for the six-month period ended December 31, 2000, compared to $3.94
million and $8.05 million, respectively, for the same periods in 1999. Total
interest income, on a fully tax equivalent basis, increased to $9.59 million and
$18.90 million for the three- and six-month periods ended December 31, 2000,
from $8.62 million and $17.10 million for the same periods 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 $496.48 million and
$487.42 million for the three- and six-month periods ended December 31, 2000,
respectively, from $454.59 million and $448.73 million, respectively, for the
same periods in 1999. The increase was primarily due to a $31.93 million and
$34.70 million increase in the average balance of loans and loans held for sale
during the three- and six-month periods in 2000, respectively. The increase in
interest income also resulted from a 11 basis-point and 8 basis-point increases
in the yield to 7.56% and 7.59% on interest-earning assets for the three- and
six-month periods ended December 31, 2000, respectively, as the result of
increasing general market rates of interest experienced during the period.
Total interest expense increased to $5.78 million and $11.29 million from $4.68
million and $9.05 million for the respective three- and six-month periods in
2000 and 1999, largely as the result of the increase in the average balance of
interest-bearing liabilities to $473.40 million and $467.90 million for the
three- and six-month periods ended December 31, 2000, respectively, as compared
to $406.73 million and $397.74 million for the same periods in 1999. These
increases were due to $56.66 million and $41.86 million increases in the average
balance of deposits which was partially offset by decreases of $24.05 million
and $5.31 million in the average balance of borrowings during the three and
six-month periods, respectively. Also contributing to the increase in interest
expense was an increase in the average rate paid on such liabilities to 4.85%
and 4.79% for the three- and six-month periods ended December 31, 2000,
respectively, from 4.60% and 4.55% for the same periods in 1999, as the result
primarily of the continued increases in the market rates of interest experienced
throughout much of 2000. In addition, interest expense for the three- and
six-month periods ended December 31, 2000, respectively, includes $96,000 for
the loss in the time value of an interest rate cap. (See Note 6 of Notes to
Unaudited Consolidated Financial Statements)
The tax equivalent interest rate spread decreased to 2.80% from 3.07%, and the
average tax equivalent net yield on interest-earning assets decreased to 3.12%
from 3.59% for the six-month periods ended December 31, 2000 and 1999,
respectively, due to the reasons discussed above.
15
Provision for Loan Losses
The Company provided $105,000 and $210,000 for loan losses during the three- and
six-month periods ended December 31, 2000 and 1999, respectively. These
provisions have been added to the Company's allowance for loan losses due to
economic conditions and management's assessment of the inherent risk of loss
existing in the loan portfolio. At December 31, 2000, the allowance for loan
losses totaled $4.08 million or 1.19% 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 allowance for loan losses was 426% at December 31,
2000, compared to 414% at June 30, 2000, and further compared to 321% at
December 31, 1999.
Other Income
Total other income decreased to $1.23 million and increased to $2.80 million
during the three- and six-month periods ended December 31, 2000 respectively, as
compared to $1.28 million and $2.53 million during the same periods in 1999. The
Company's other income was adversaly affected in both periods by a $291,000 loss
for impairment of securities and a decrease in service charges and other fees of
$48,000 and $26,000 for the three- and six-months ended December 31, 2000,
respectively. Offsetting such declines were $113,000 and $236,000 increases in
investment service income, net gains of $7,000 and $201,000 on trading account
securities and $178,000 and $154,000 declines in the loss on sale of assets
available for sale for the three- and six-months ended December 31, 2000.
Operating Expenses
Total operating expenses increased $723,000 or 20.72% and $1.24 million or
18.25% to $4.21 million and $8.05 million, respectively, for the three- and
six-month periods ended December 31, 2000 as compared to the same time periods
in 1999. The increase in operating expenses for the three- and six-month periods
in fiscal 2001 except for the decrease in deposit insurance of $35,000 and
$66,000 respectively were as follows: (i) salaries and employee benefits
increased $270,000 or 14.35% and $447,000 or 12.13% resulting from normal salary
adjustments effective July 1, 2000, additional staff, and the general increase
in employee benefit costs; (ii) occupancy and equipment expense increased
$56,000 or 9.98% and $112,000 or 10.17% resulting from increased operating costs
including depreciation on improvements and additional equipment. (iii) data
processing cost increased $36,000 or 17.48% and $48,000 or 11.32% resulting
principally from the introduction of our new E Services Products (E Bank for
internet banking, E Voice for 24 hour telephone banking and E Corp for business
Banking); (iv) advertising expense increased $79,000 or 75.24% and $164,000 or
69.20% resulting primarily from a bank image campaign and the marketing of our
new electronic internet banking products; (v) other costs and expenses increased
$317,000 or 46.48% and $538,000 or 42.60% primarily from increases in legal,
accounting, consulting, printing and donations.
16
Income Tax Expense
The Company received a $121,000 benefit and incurred a $18,000 expense for the
three- and six-month periods ended December 31, 2000, respectively, as compared
to expense of $232,000 and $654,000 for the same periods in 1999. The decrease
in income tax expense for the three- and six-month periods ended December 31,
2000 is due to lower pre-tax income, a higher portion of the Company's pre-tax
income being comprised of tax-free interest income and an increase in low income
housing credits as compared to the same period in 1999.
ASSET QUALITY
Non-performing assets are comprised of non-accrual loans totaled $959,000 and
$943,000 at December 31, 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 December 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 .18% at December 31,
2000, compared to .19% at June 30, 2000, and .27% at December 31, 1999.
Non-performing loans, which totaled $959,000 at December 31, 2000, consisted of
ten single-family residential mortgage loans aggregating $781,000 and
ten non-performing consumer loans totaling $178,000.
At December 31, 2000, the Company's classified assets, which consisted of assets
classified as substandard, doubtful or loss, as well as real estate owned,
totaled $6.74 million compared to $1.49 million at June 30, 2000, and further
compared to $1.42 million at December 31, 1999. Included in assets classified
substandard at December 31, 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. At December 31, 2000, the
Company recognized a $291,000 loss for the impairment of long-term, tax free
revenue bonds resulting in a remaining carrying value of $3.95 million.
17
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 December 31, 2000, the Company
had $851,000 in commitments to fund loan originations. In addition, at such date
the Company had undisbursed loans in process for construction loans of $22.99
million and $21.08 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 approved 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 15, 2000, the Board of Directors
declared a quarterly cash dividend of $.09 per share, which was paid on December
15, 2000, to stockholders of record as of December 1, 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 and other investments having maturities of five years or less.
Regulations currently in effect require the Bank to maintain a liquid asset
ratio of not less than 4% of its net withdrawable accounts plus short-term
borrowings. These levels are changed from time to time by the OTS to reflect
economic conditions. First Financial's average regulatory liquidity ratio for
the month ended December 31, 2000 was 11.75%.
18
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 December 31, 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 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.
19
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 December 31, 2000, the Company serviced $15.15
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 December
31, 2000.
20
Interest Rate Sensitivity Analysis at December 31, 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:
<C
Loans (1)
Real estate (2) $ 29,862 $ 15,831 $ 37,745 $ 86,431
Commercial 12,741 1,358 1,551 4,000
Consumer 7,498 2,440 4,846 17,828
Securities and interest-bearing deposits 58,544 3,542 12,801 16,241
------------------------------------------------------------------------------
Total interest-earning assets $108,645 $ 23,171 $ 56,943 $124,500
------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 501 $ 501 $ 1,088 --
NOW accounts 450 450 811 --
Money market accounts 52,655 -- -- --
Certificate accounts 79,246 35,744 70,614 51,999
Borrowings 1,533 584 1,862 8,251
------------------------------------------------------------------------------
Total interest-bearing liabilities $134,385 $ 37,279 $ 74,375 $ 60,250
------------------------------------------------------------------------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities ($25,740) ($39,848) ($57,280) $ 6,970
========= ========= ========= ========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 80.8% 76.8% 76.7% 102.3%
===== ===== ===== ======
Cumulative difference as a percentage of
total assets (4.9%) (7.7%) (11.0%) 1.3%
====== ====== ======= ====
More Than
Three Years
Through More Than
Five Years Five Years Total
----------------------------------------------------
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) $46,452 $ 42,696 $259,017
Commercial 1,414 170 21,234
Consumer 12,453 20,389 65,454
Securities and interest-bearing deposits 14,581 52,849 158,558
----------------------------------------------------
Total interest-earning assets $74,900 $116,104 $504,263
----------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts -- $ 22,518 $ 24,608
NOW accounts -- 42,811 44,522
Money market accounts -- -- 52,655
Certificate accounts 6,364 3,286 247,253
Borrowings 2,075 58,013 72,318
----------------------------------------------------
Total interest-bearing liabilities $ 8,439 $126,628 $441,356
----------------------------------------------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities $73,431 $ 62,907 $ 62,907
======= ======== ========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 123.3% 114.3% 114.3%
====== ====== ======
Cumulative difference as a percentage of
total assets 14.1% 12.1% 12.1%
===== ===== =====
(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.
21
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
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 2-14-01 /s/ Donna M. Coughey
------------------------ ----------------------------------------
Donna M. Coughey
President and Chief Executive Officer
Date 2-14-01 /s/ Albert S. Randa
------------------------ ----------------------------------------
Albert S. Randa, CPA
Chief Financial Officer and Treasurer
23