SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001
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) 4,121,569
------------------------------ ---------------------------------
(Title of Each Class) (Number of Shares Outstanding
as of May 1, 2001)
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
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Page
PART 1. FINANCIAL INFORMATION Number
- ------------------------------ ------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2001 and June 30, 2000 (Unaudited) 1
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000 (Unaudited) 2
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2001 and 2000 (Unaudited) 3
STATEMENTS OF OTHER COMPREHENSIVE INCOME
Three Months Ended March 31, 2001 and 2000 (Unaudited) 4
STATEMENTS OF OTHER COMPREHENSIVE INCOME
Nine Months Ended March 31, 2001 and 2000 (Unaudited) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2001 and 2000 (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)
March 31, June 30,
2001 2000
--------- ---------
(Unaudited)
ASSETS:
Cash in banks $ 4,018 $ 4,918
Interest-earning deposits 15,488 8,164
--------- ---------
Total cash and cash equivalents 19,506 13,082
Trading account securities 332 12,838
Investment securities available for sale 114,502 92,468
Investment securities (fair value - March 31,
$62,205; June 30, $39,020) 61,792 39,821
Loans receivable, less allowance for
loan losses of $4,172 and $3,908 342,536 331,306
Accrued interest receivable 4,054 3,456
Property and equipment - net 9,096 8,768
Other assets 4,882 5,411
--------- ---------
Total Assets $ 556,700 $ 507,150
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 431,668 $ 378,478
Advance payments by borrowers for taxes and insurance 2,086 2,962
Federal Home Loan Bank advances 80,811 86,778
Other borrowings 557 373
Accrued interest payable 1,390 1,648
Other liabilities 897 1,409
--------- ---------
Total Liabilities $ 517,409 471,648
--------- ---------
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;
4,121,851 and 4,107,794 shares issued at March 31,
and June 30, respectively 4,122 4,108
Additional paid-in capital 24,072 24,046
Retained earnings - partially restricted 12,239 10,603
Treasury stock (282 shares at cost) (5) --
Accumulated other comprehensive loss (1,137) (3,255)
--------- ---------
Total Stockholders' Equity 39,291 35,502
--------- ---------
Total Liabilities and Stockholders' Equity $ 556,700 $ 507,150
========= =========
See accompanying notes to unaudited consolidated financial statements.
1
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
(Dollars in Thousands, Except for Per Share Amounts)
Three Months Ended
March 31,
--------------------------------
2001 2000
----------- -----------
(Unaudited)
INTEREST INCOME:
Loans $ 6,832 $ 6,196
Investment securities and interest-bearing deposits 2,625 2,249
----------- -----------
Total interest income 9,457 8,445
----------- -----------
INTEREST EXPENSE:
Deposits 4,492 3,281
Short-term borrowings 355 1,006
Long-term borrowings 707 476
----------- -----------
Total interest expense 5,554 4,763
----------- -----------
NET INTEREST INCOME 3,903 3,682
Provision for loan losses 105 105
----------- -----------
Net interest income after provision for loan losses 3,798 3,577
----------- -----------
OTHER INCOME:
Investment services income, net 910 1,064
Service charges and fees 402 365
Gain on sale of loans held for sale 18 --
Loss on trading account securities -- (131)
Gain (loss) on sale of securities available for sale 10 (1)
Other 39 22
----------- -----------
Total other income 1,379 1,319
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 2,071 2,120
Occupancy and equipment 566 572
Data processing 254 210
Deposit insurance premiums 18 18
Advertising 54 92
Other 756 624
----------- -----------
Total operating expenses 3,719 3,636
----------- -----------
Income before income taxes 1,458 1,260
Income tax expense 278 241
----------- -----------
NET INCOME $ 1,180 $ 1,019
=========== ===========
EARNINGS PER SHARE (1)
Basic $ .29 $ .25
=========== ===========
Diluted $ .28 $ .25
=========== ===========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .09 $ .09
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
Basic 4,116,633 4,086,711
=========== ===========
Diluted 4,169,157 4,109,376
=========== ===========
(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 SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
Nine Months Ended
March 31,
---------------------------------
2001 2000
----------- -----------
(Unaudited)
INTEREST INCOME:
Loans $ 20,266 $ 18,130
Investment securities and interest-bearing deposits 7,520 6,942
----------- -----------
Total interest income 27,786 25,072
----------- -----------
INTEREST EXPENSE:
Deposits 13,387 10,042
Short-term borrowings 1,343 2,319
Long-term borrowings 2,111 1,453
----------- -----------
Total interest expense 16,841 13,814
----------- -----------
NET INTEREST INCOME 10,945 11,258
Provision for loan losses 315 315
----------- -----------
Net interest income after provision for loan losses 10,630 10,943
----------- -----------
OTHER INCOME:
Investment services income, net 2,844 2,762
Service charges and fees 1,258 1,247
Gain (loss) on sale of loans 21 (3)
Gain (loss) on trading account securities 245 (93)
Loss on sale of securities available for sale (10) (168)
Loss for impairment of securities (291) --
Other 108 108
----------- -----------
Total other income 4,175 3,853
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 6,203 5,805
Occupancy and equipment 1,779 1,673
Data processing 726 634
Advertising 455 329
Deposit insurance premiums 53 119
Other 2,557 1,887
----------- -----------
Total operating expenses 11,773 10,447
----------- -----------
Income before income taxes 3,032 4,349
Income tax expense 296 895
----------- -----------
NET INCOME $ 2,736 $ 3,454
=========== ===========
EARNINGS PER SHARE (1)
Basic $ .67 $ .85
=========== ===========
Diluted $ .66 $ .84
=========== ===========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ .27 $ .27
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
Basic 4,109,212 4,082,889
=========== ===========
Diluted 4,164,673 4,111,187
=========== ===========
(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 SUBSIDIARIES
STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Dollars in Thousands)
Three Months Ended
March 31,
-------------------------------------
2001 2000
---------------- ----------------
(Unaudited)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 1,180 $ 1,019
Net unrealized gains on securities available
for sale during the period 272 19
Reclassification adjustment for losses (gains) included
in net income (7) 1
---------------- ----------------
COMPREHENSIVE INCOME $ 1,445 $ 1,039
================ ================
Nine Months Ended
March 31,
-------------------------------------
2001 2000
---------------- ----------------
(Unaudited)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Net income $ 2,736 $ 3,454
Net unrealized gain (losses) on securities available
for sale during the period 1,922 (1,813)
Reclassification adjustment for losses included
in net income 196 111
---------------- ----------------
COMPREHENSIVE INCOME $ 4,854 $ 1,752
================ ================
See accompanying notes to unaudited consolidated financial statements.
4
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Nine Months Ended March 31,
---------------------------------------
2001 2000
------------------ -----------------
(Unaudited)
Cash flows (used in) from operating activities:
Net income $ 2,736 $ 3,454
Add (deduct) items not affecting cash flows from operating activities:
Depreciation 747 680
Provision for loan losses 315 315
(Gain) loss on trading account securities (245) 93
(Gain) loss on sale of loans held for sale (21) 3
Loss on sale of securities available for sale 10 168
Loss for impairment of securities 291 --
Proceeds from sale of loans held for sale 2,227 197
Amortization of deferred loan fees, discounts and premiums (696) (513)
Decrease in trading account securities 6,433 2,269
Increase in accrued interest receivable (598) (603)
Increase in other assets (1,305) (160)
Decrease in other liabilities (512) (894)
Decrease in accrued interest payable (258) (416)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 9,124 4,593
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investment activities:
Capital expenditures (1,075) (677)
Net increase in loans (13,430) (32,272)
Purchase of investment securities (40,529) (33,064)
Proceeds from maturities, payments and calls of investment securities 13,138 5,648
Purchase of securities available for sale (39,282) (40,569)
Proceeds from sales and calls of securities available for sale 33,012 53,554
- ----------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investment activities (48,166) (47,380)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities:
Net increase (decrease) in deposits before interest credited 40,746 (27,305)
Interest credited to deposits 12,444 10,677
Proceeds from FHLB advances 37,500 55,050
Repayments of FHLB advances (43,467) (48)
Decrease in advance payments by borrowers for taxes and insurance (876) (1,055)
Net increase in other borrowings 184 41
Cash dividends on common stock (1,093) (1,032)
Common stock issued 7 463
Payment for fractional shares (7) (7)
Stock options exercised 254 75
Common stock repurchased (226) (531)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 45,466 36,328
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,424 (6,459)
Cash and cash equivalents:
Beginning of period 13,082 18,603
------------------ -----------------
End of period $ 19,506 $ 12,144
================== =================
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 496 $ 858
Interest $ 17,099 $ 14,230
Non-cash items:
Net unrealized gain (loss) on investment securities available for sale, net of tax $ 2,118 $ (1,702)
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 nine-month periods ended March 31,
2001, 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 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 Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(Dollars in Thousands, Except for Per Share Amounts)
Numerator:
Net income $ 1,180 $ 1,019 $ 2,736 $ 3,454
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,116,633 4,086,711 4,109,212 4,082,889
Effect of dilutive securities:
Stock options 52,524 22,665 55,460 28,298
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 4,169,157 4,109,376 4,164,673 4,111,187
========== ========== ========== ==========
Basic earnings per share $ .29 $ .25 $ .67 $ .85
========== ========== ========== ==========
Diluted earnings per share $ .28 $ .25 $ .66 $ .84
========== ========== ========== ==========
8
NOTE 2 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
At March 31, At June 30,
2000 2000
--------- ---------
(Dollars in Thousands)
First mortgage loans:
Residential $ 155,485 $ 167,451
Construction-residential 17,821 18,146
Land acquisition and
development 12,822 10,960
Commercial 79,421 66,221
Construction-commercial 13,998 13,266
Commercial business 24,380 19,358
Consumer 66,374 62,433
--------- ---------
Total loans 370,301 357,835
--------- ---------
Less:
Undisbursed loan proceeds:
Construction-residential (15,691) (15,578)
Construction-commercial (6,313) (5,330)
Deferred loan fees - net (1,589) (1,713)
Allowance for loan losses (4,172) (3,908)
--------- ---------
Net loans $ 342,536 $ 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 March 31, 2001, the
recorded investment in impaired loans was not material.
9
NOTE 3 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $4.32 million as of
March 31, 2001, of which $226,750 was for variable-rate loans. The balance of
the commitments consists of $4.09 million of fixed-rate loans (primarily
consisting of single-family residential mortgages) bearing interest rates of
between 5.75% and 7.25%. At March 31, 2001, the Company had $22.00 million of
undisbursed construction loan funds as well as $22.19 million of undisbursed
remaining consumer and commercial line commitments.
NOTE 4 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
result in the initiation of certain mandatory and possibly additional
discretionary actions by regulators that, if implemented, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). At March 31, 2001 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
March 31, 2001 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:
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
As of March 31, 2001
Total Capital
(to Risk-Weighted Assets) $40,450 12.68% $25,515 8.00% $31,893 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $36,461 11.43% $12,757 4.00% $19,136 6.00%
Tier 1 Capital
(to Adjusted Total Assets) $36,461 6.58% $22,170 4.00% $27,712 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: the Bank and PCIS. The Bank operates a
branch bank network with eight full-service banking offices and provides deposit
and loan services to customers. Additionally, the Bank offers trust services at
its Downingtown, Pennsylvania headquarters. PCIS operates a full service
investment advisory and securities brokerage firm through two offices. Both
segments operate primarily in southeastern Pennsylvania.
The Company evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses. There are no material
intersegment sales or transfers.
The Company's reportable segments have traditionally been two independent
financial services institutions. PCIS was acquired by the Company on May 29,
1998. The two segments are managed separately. All senior officers from PCIS
prior to the acquisition have been retained to manage that segment.
11
The following table highlights income statement and balance sheet information
for each of the segments at or for the periods ending March 31, 2001 and 2000:
At and for the three months ended March 31,
--------------------------------------------------------------------------------------------
2001 2000
------------------------------------------- ---------------------------------------------
Bank PCIS Total Bank PCIS Total
----------- ----------- ------------ ------------ ------------ ------------
(Dollars in Thousands)
Net interest income $ 3,880 $ 23 $ 3,903 $ 3,659 $ 23 $ 3,682
Other income 482 897 1,379 305 1,014 1,319
Total net income 1,081 99 1,180 913 106 1,019
Total assets 554,638 2,062 556,700 486,158 1,769 487,927
Total trading securities $ -- $ 332 $ 332 $ 6,409 $ 450 $ 6,859
For the nine months ended March 31,
---------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------- ---------------------------------------------
Bank PCIS Total Bank PCIS Total
------------ ----------- ------------- ------------ ------------- ------------
(Dollars in Thousands)
Net interest income $ 10,874 $ 71 $ 10,945 $ 11,182 $ 76 $ 11,258
Other income 1,477 2,698 4,175 1,242 2,611 3,853
Total net income $ 2,426 $ 310 $ 2,736 $ 3,192 $ 262 $ 3,454
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. This strategy was put into place during the rising
rate environment to cap our cost of funds at 7% on $30.0 million. 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 is expensed in the period
in which ineffectiveness is determined. The cap was written down approximately
$98,000 during the second quarter ending December 31, 2000. No adjustment was
required during the three month period ending March 31, 2001.
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"
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 may have used
expressed or implied "forward looking statements" to describe the future plans
and strategies and future financial results. Management's ability to predict the
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Chester County, the mid-Atlantic region and the
United States as a whole, loan delinquency rates, changes in federal and state
regulation, and other uncertainties described in the Company's filings with the
Securities and Exchange Commission. These factors should be considered in
evaluating the "forward looking statements", and undue reliance should not be
placed on such statements.
FINANCIAL CONDITION
The Company's total assets increased to $556.70 million at March 31, 2001, from
$507.15 million at June 30, 2000, due to an $11.23 million increase in loans
from $331.31 million at June 30, 2000 to $342.54 million at March 31, 2001, and
to a $31.50 million aggregate increase in securities to $176.63 million from
$145.13 million at June 30, 2000. Such increases were funded in large part by
increases in deposits of $53.19 million from $378.48 million at June 30, 2000 to
$431.67 million at March 31, 2001.
Stockholders' equity increased $3.79 million to $39.29 million at March 31, 2001
from $33.50 million at June 30, 2000. The increase in stockholders' equity
resulted from net income of $2.74 million, $254,000 from the sale of common
stock in connection with the Company's dividend reinvestment plan and the
exercise of stock options, the decrease in net unrealized losses on securities
available for sale of $2.12 million, partially offset by the payment of cash
dividends totaling $1.09 million, the repurchase of shares of common stock for
an aggregate cost of $226,000 and the payment for fractional shares of $7,000.
14
RESULTS OF OPERATIONS
Net interest income, on a fully tax equivalent basis, increased 6.4% to $4.15
million for the three-month period ended March 31, 2001, and decreased 1.56% to
$11.77 million for the nine-month period ended March 31, 2001, compared to $3.90
million and $11.95 million, respectively, for the same periods in 2000. Total
interest income, on a fully tax equivalent basis, increased to $9.71 million and
$28.61 million for the three- and nine-month periods ended March 31, 2001, from
$8.67 million and $25.77 million for the same periods in 2000, primarily as a
result of increases in the average balance of interest-earning assets.
The average balance of interest-earning assets increased to $513.66 million and
$498.08 million for the three- and nine-month periods ended March 31, 2001,
respectively, from $461.87 million and $453.05 million, respectively, for the
same periods in 2000. The increases were primarily due to $14.83 million and
$7.17 million increases in the average balance of investment securities and to
$27.29 million and $33.84 million increases in the average balance of net loans
during the three- and nine-month periods in 2001, respectively. Interest income
was adversely affected by the 10 basis-point and 8 basis-point decreases in the
yield on interest-earning assets to 7.60% and 7.66% for the three- and
nine-month periods ended March 31, 2001, respectively, as the result of a minor
decline in rates of interest experienced during the period.
Total interest expense increased to $5.55 million and $16.84 million from $4.76
million and $13.81 million for the respective three- and nine-month periods in
2001 and 2000, largely as the result of the increase in the average balance of
interest-bearing liabilities to $487.54 million and $474.32 million for the
three- and nine-month periods ended March 31, 2001, respectively, as compared to
$410.40 million and $401.71 million for the same periods in 2000. These
increases were due to $108.38 million and $86.01 million increases in the
average balance of deposits partially offset by decreases of $31.23 million and
$13.40 million in the average balance of borrowings during the three and
nine-month periods, respectively. The increase in interest expense was slightly
offset because of a decrease in the average rate paid on such liabilities to
4.62% and 4.73% for the three- and nine-month periods ended March 31, 2001,
respectively, from 4.64% and 4.58% for the same periods in 2000, as the result
primarily of decreasing rates of interest on borrowings and deposits despite
management's continued efforts to focus in the areas of low-costing or no-cost
deposits.
The tax equivalent interest rate spread decreased to 2.93% from 3.00%, and the
average tax equivalent net yield on interest-earning assets decreased to 3.15%
from 3.52% for the nine-month periods ended March 31, 2001 and 2000,
respectively, due to the reasons discussed above.
15
Provision for Loan Losses
The Company provided $105,000 and $315,000 for loan losses during the three- and
nine-month periods ended March 31, 2001 and 2000, respectively. These provisions
have been added to the Company's allowance for loan losses based on management's
assessment of the inherent risk of loss existing in the loan portfolio in light
of current economic conditions. At March 31, 2001, the allowance for loan losses
totaled $4.17 million or 1.20% of net loans (before allowance), compared to
$3.91 million or 1.17% of net loans and $3.83 million or 1.17% of net loans at
June 30, 2000, and March 31, 2001, respectively. As a percentage of
non-performing assets, the allowance for loan losses was 440% at March 31, 2001,
compared to 414% at June 30, 2000, and further compared to 412% at March 31,
2000.
Other Income
Total other income increased to $1.38 million and $4.18 million during the
three- and nine-month periods ended March 31, 2001, respectively, as compared to
$1.32 million and $3.85 million during the same periods in 2000. The $60,000
increase for the three-month period ended March 31, 2001 resulted primarily from
the decrease in losses on trading account securities of $131,000 plus increases
in service charges and fees of $37,000, which were partially offset by decreases
in investment services income of $154,000. The increase of $322,000 for the
nine-month period ended March 31, 2001 compared to the same period in 2000
resulted primarily from increases in gains on trading account securities, a
decrease in losses on the sale of investments somewhat offset by a loss of
$291,000 on the impairment of an investment.
Operating Expenses
Total operating expenses increased $83,000 or 2.28% and $1.33 million or 12.69%
to $3.72 million and $11.77 million, respectively, for the three- and nine-month
periods ended March 31, 2001 as compared to the same periods in 2000. The net
increase in operating expenses for the three-month period resulted from the
increase in other expenses of $132,000 or 21.15% and data processing costs of
$44,000 or 20.95% which were offset by decreases in salaries and employee
benefits of $49,000 and advertising of $38,000 respectively. The increase in
operating expenses for the nine-month period in fiscal 2001, except for the
decrease in deposit insurance of $66,000, were as follows: (i) salaries and
employee benefits increased $398,000 or 6.86% 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
$106,000 or 6.34% resulting from increased operating costs including
depreciation on improvements and additional equipment. (iii) data processing
cost increased $92,000 or 14.51% 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 $126,000 or 38.30% resulting primarily from a bank image campaign and
the marketing of our new electronic internet banking products; (v) other costs
and expenses increased $670,000 or 51.51% primarily from increases in legal,
accounting, consulting, printing, relocation costs and donations.
16
Income Tax Expense
Income tax expense was $278,000 and $296,000 for the three- and nine-month
periods ended March 31, 2001, respectively, as compared to $241,000 and $895,000
for the same periods in 2000. The increase in income tax expense for the
three-month period ended March 31, 2001 is due to a higher pre-tax income. The
decrease in income tax expense for the nine-month period ended March 31, 2001 is
due to lower pre-tax income and a higher portion of the Company's pre-tax
earnings comprised of tax-free interest income as compared to the same period in
2000.
ASSET QUALITY
Non-performing assets are comprised of non-accrual loans and real estate owned
("REO") and totaled $948,000 and $943,000 at March 31, 2001 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 March 31, 2001, 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 .17% at March 31, 2001,
compared to .19% at June 30, 2000, and .15% at March 31, 2000. Non-performing
loans, which totaled $948,000 at March 31, 2001 consisted of 12 single-family
residential mortgage loans aggregating $753,000, and 16 non-performing consumer
and commercial business loans totaling $195,000.
At March 31, 2001, the Company's classified assets, which consisted of assets
classified as substandard, doubtful or loss, as well as REO, totaled $2.80
million compared to $1.49 million at June 30, 2000, and further compared to
$5.50 million at March 31, 2000. The decrease in classified assets to $2.80
million from $5.50 million at March 31, 2000 was primarily due to the sale of a
$4.19 million investment in a long-term tax-free revenue bond, which was
classified as substandard at March 31, 2000. Included in assets classified
substandard at March 31, 2001 and 2000, 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.
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 March 31, 2001, the Company had
$4.32 million in commitments to fund loan originations. In addition, at such
date the Company had undisbursed loans in process for construction loans of
$22.00 million and $22.19 million in undisbursed lines of credit. Management of
the Company believes that the Company has adequate resources, including
principal prepayments and repayments of loans and investment securities and
borrowing capacity, to fund all of its commitments to the extent required.
The Company's current dividend policy is to declare a regular quarterly dividend
with the intent that the level of the dividend per share be reviewed by the
Board of Directors on a quarterly basis. Dividends will be in the form of cash
and/or stock after giving consideration to all aspects of the Company's
performance for the quarter. On February 21, 2001, the Board of Directors
declared a quarterly cash dividend of $.09 per share, which was paid on March
15, 2001, to stockholders of record as of March 1, 2001.
In the past, the Bank was 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 required the Bank to maintain a liquid asset ratio of
not less than 4% of its net withdrawable accounts plus short-term borrowings. In
the first quarter of 2001, the Office of Thrift Supervision ("OTS") issued an
interim rule that removes the requirement that savings associations maintain an
average daily balance of 4% of its net withdrawable accounts plus short-term
borrowings. The OTS proposes to maintain the liquidity requirement that all
savings associations and service corporations maintain sufficient liquidity to
ensure its safe and sound operations. First Financial's average regulatory
liquidity ratio for the month ended March 31, 2001 was 10.01%.
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 March 31, 2001, 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 March 31, 2001, the Company serviced $15.32 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 March 31,
2001.
20
Interest Rate Sensitivity Analysis at March 31, 2001
(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) $26,583 $21,119 $33,545 $91,796
Commercial 15,392 905 2,074 4,532
Consumer 7,359 2,522 5,022 18,291
Securities and interest-bearing deposits 102,043 18,533 9,720 7,346
----------------------------------------------------------------------------
Total interest-earning assets $151,377 $43,079 $50,361 $121,965
----------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $501 $501 $1,158 --
NOW accounts 450 450 740 --
Money market accounts 62,698 -- -- --
Certificate accounts 102,292 36,149 71,537 41,325
Borrowings 592 24 1,862 8,258
----------------------------------------------------------------------------
Total interest-bearing liabilities $166,533 $37,124 $75,297 $49,583
----------------------------------------------------------------------------
Cumulative excess (deficit) of
interest-earning assets to interest-bearing
liabilities ($15,156) ($9,201) ($34,137) $38,245
========= ======== ========= =======
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 90.9% 95.5% 87.8% 111.6%
===== ===== ===== ======
Cumulative difference as a percentage of
total assets (2.7%) (1.7%) (6.2%) 6.9%
====== ====== ====== ====
More Than
Three Years
Through More Than
Five Years Five Years Total
---------------------------------------------------
INTEREST-EARNING ASSETS:
Loans (1)
Real estate (2) $42,552 $41,979 $257,574
Commercial 1,327 150 24,380
Consumer 13,322 19,585 66,101
Securities and interest-bearing deposits 14,793 36,431 188,866
---------------------------------------------------
Total interest-earning assets $71,994 $98,145 $536,921
---------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts -- $23,383 $25,543
NOW accounts -- 43,625 45,265
Money market accounts -- -- 62,698
Certificate accounts 5,538 3,405 260,246
Borrowings 2,082 67,993 80,811
---------------------------------------------------
Total interest-bearing liabilities $7,620 $138,406 $474,563
---------------------------------------------------
Cumulative excess (deficit) of
interest-earning assets to interest-bearing
liabilities $102,619 $62,358 $62,358
======== ======= =======
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 130.5% 113.1% 113.1%
====== ====== ======
Cumulative difference as a percentage of
total assets 18.6% 11.3% 11.3%
===== ===== =====
(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
(a) Exhibits
(b) 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 5/11/01 /s/ Donna M. Coughey
----------------------- -------------------------------------
Donna M. Coughey
President and Chief Executive Officer
Date 5/11/01 /s/ Albert S. Randa, CPA
---------------------- -------------------------------------
Albert S. Randa
Chief Financial Officer and Treasurer
23