Financial Information
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Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Consolidated Statements of Financial Condition 24
Consolidated Statements of Operations 25
Consolidated Statements of Changes in
Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
Independent Auditors' Report 41
Management's Discussion
and Analysis of Financial Condition
and Results of Operations
GENERAL
Chester Valley Bancorp Inc. (the "Holding Company") is a unitary thrift
holding company, incorporated in the Commonwealth of Pennsylvania in August
1989. The business of Chester Valley Bancorp Inc. and its subsidiaries (the
"Company") consists of the operations of First Financial Bank ("First Financial"
or the "Bank"), a Pennsylvania-chartered stock savings and loan association
founded in 1922 and Philadelphia Corporation for Investment Services ("PCIS"), a
full-service investment advisory and securities brokerage firm. The Bank
provides a wide range of banking services to individual and corporate customers
through its eight branch offices in Chester County, Pennsylvania. The Bank
provides residential real estate, commercial real estate, commercial and
consumer lending services and funds these activities primarily with retail
deposits and borrowings. Philadelphia Corporation for Investment Services 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 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 smaller corporate account. PCIS's offices are located in Wayne
and Philadelphia, Pennsylvania.
The Company posted record operating earnings of $4.21 million, or $1.13 per
diluted share, for the fiscal year ended June 30, 1999, compared to $3.63
million or $.98 per diluted share for the same period in 1998. This represents a
16.2% increase in earnings.
ASSET/LIABILITY MANAGEMENT
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 59%
of money market and NOW accounts are sensitive to interest rate changes and that
7% of savings deposits are sensitive to interest rate changes. Accordingly,
these interest-sensitive portions are classified in the less than one year
categories with the remainder in the over five years category. Deposit products
with interest rates based on a particular index are classified according to the
specific repricing characteristic of the index. Deposit rates other than time
deposit rates are variable, and changes in deposit rates are typically subject
to local market conditions and management's discretion and are not indexed to
any particular rate.
Generally, during a period of rising interest rates, a positive gap would
result in an increase in net interest income while a negative gap would
adversely affect net interest income. However, the interest-sensitivity table
does not provide a comprehensive representation of the impact of interest rate
changes on net interest income. Each category of assets or liabilities will not
be affected equally or simultaneously by changes in the general level of
interest rates. Even assets and liabilities which contractually reprice within
the same period may not, in fact, reprice at the same price or the same time or
with the same frequency. It is also important to consider that the table
represents a specific point in time. Variations can occur as the Company adjusts
its interest-sensitivity position throughout the year.
OPERATING RESULTS
Interest Income (Taxable-Equivalent Basis)
Interest income is analyzed on a tax-equivalent basis, i.e., an adjustment
is made for analysis purposes only, to increase interest income by the amount of
savings of Federal income taxes, which the Company realizes by investing in
certain tax-free municipal securities and by making loans to certain tax-exempt
organizations. In this way, the ultimate economic impact of earnings from
various assets can be more readily compared.
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Total interest income increased to $30.01 million during fiscal 1999, a
$3.81 million or 14.5% increase over the comparable prior year. This increase
was due to a $68.77 million increase in the average balance of interest-earning
assets. Partially offsetting the effect of the increase in the average balance
on interest income was the 44 basis-point decrease in the yield, to 7.62%, on
the loan portfolio as the result of the flattening yield curve during fiscal
1998 and 1999 which resulted in customers refinancing their loans to lower
interest rates.
Total interest income increased to $26.20 million during fiscal 1998, a
$3.28 million or 14.3% increase over the comparable prior year. This increase
was due to a $41.46 million increase in the average balance of interest-earning
assets. Partially offsetting the effect of the increase in the average balance
on interest income was the 5 basis-point decrease in the yield, to 8.44%.
Interest Expense
Total interest expense increased to $15.68 million during fiscal 1999, a
$2.27 million or 16.9% increase over the comparable prior year. The increase in
interest expense was primarily due to a $39.72 million and $21.78 million
increase in the average balances of deposits and borrowings, respectively, at
June 30, 1999, which funded the increase in the average balances of
interest-earning assets discussed previously. The average rate paid on deposits
decreased to 4.60% for fiscal 1999 from 4.79% the previous year as the result of
management's continued efforts to focus its growth in the areas of low-costing
or no-cost deposits. The average rate paid on borrowings decreased 54 basis
points to 5.54%.
Total interest expense increased to $13.41 million during fiscal 1998, a
$1.90 million or 16.5% increase over the comparable prior year. The increase in
interest expense was primarily due to a $24.86 million and $10.87 million
increase in the average balances of deposits and borrowings, respectively, at
June 30, 1998. The average rate paid on deposits remained at 4.63% for fiscal
1998. The average rate paid on borrowings increased 50 basis points to 6.08%.
Interest Rate Sensitivity Analysis at June 30, 1999
(Dollars in thousands)
More Than More Than More Than More Than
Three Months Six Months One Year Three Years
Three Months Through Through Through Through More Than
or Less Six Months One Year Three Years Five Years Five Years Total
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Interest-Earning Assets
Loans (1)
Real estate (2) $ 24,051 $ 19,954 $ 32,306 $ 74,466 $ 41,968 $ 37,740 $ 230,485
Commercial 6,721 2,158 1,822 3,084 630 293 14,708
Consumer 8,218 1,845 3,871 12,740 8,420 16,322 51,416
Securities and interest-bearing
deposits 48,877 1,683 5,159 5,353 38,997 39,962 140,031
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Total interest-earning assets $ 87,867 $ 25,640 $ 43,158 $ 95,643 $ 90,015 $ 94,317 $ 436,640
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Interest-Bearing Liabilities
Savings accounts $ 501 $ 501 $ 998 $ - $ - $ 27,033 $ 29,033
NOW accounts 450 450 900 - - 34,211 36,011
Money market accounts 47,464 - - - - - 47,464
Certificate accounts 66,116 29,287 35,708 71,386 9,216 2,285 213,998
Borrowings 4,022 17 2,625 9,829 13,053 21,482 51,028
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Total interest-bearing liabilities $ 118,553 $ 30,255 $ 40,231 $ 81,215 $ 22,269 $ 85,011 $ 377,534
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Cumulative excess of interest-
earning assets to
interest-bearing liabilities $ (30,686) $ (35,301) $ (32,374) $ (17,946) $ 49,800 $ 59,106 $ 59,106
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Cumulative ratio of interest
rate-sensitive assets to
interest rate-sensitive liabilities 74.1% 76.3% 82.9% 93.4% 117.0% 115.7% 115.7%
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Cumulative difference as a
percentage of total assets (6.8%) (7.8%) (7.2%) (4.0%) 11.0% 13.1% 13.1%
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(1) Net of undisbursed loan proceeds.
(2) Includes commercial mortgage loans.
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Net Interest Income
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income, on a fully tax equivalent basis, increased 12.00%, or $1.54
million to $14.33 million in 1999 from $12.80 million in 1998, compared to a
12.1% increase of $1.39 million from 1997 to 1998. Net interest margin, on a
fully tax equivalent basis, was 3.64% for the year ended 1999, compared to 3.94%
in 1998 and 4.03% in 1997.
Provision for Loan Losses
The Company's provision for loan losses was $390,000, $606,000, and
$523,000, during the respective periods of 1999 through 1997. These provisions
have been added to the Company's allowance for loan losses due to general
economic conditions, loan growth, and management's assessment of the inherent
risk of loss existing in the loan portfolio. At June 30, 1999, the allowance for
loan losses was $3.65 million or 1.24% of net loans compared to $3.41 million or
1.23% of net loans at June 30, 1998.
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon, among other things, delinquency trends,
the volume of non-performing loans, prior loss experience of the portfolio,
current economic conditions, and other relevant factors. Although management
believes it has used the best information available to it in making such
determinations, and that the present allowance for loan losses is adequate,
future adjustments to the allowance may be necessary, and net income may be
adversely affected if the circumstances differ substantially from the
assumptions used in determining the level of the allowance for loan losses. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for losses on loans. Such
agencies may require the Company to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
Other Operating Income
Total other income increased $579,000 or 12.5% to $5.20 million for the
year ended June 30, 1999, from the comparable prior period. Investment services
income increased $460,000 or 16.5% to $3.26 million as the result of PCIS's
increased commission income due to the continued increase in the stock market
activity, an increase in advisory fee income due to the strategic plan of PCIS
to focus on advisory services as it provides a more stable revenue stream for
PCIS and stabilizes expenses for the customer, and an increase in money market
fund fees due to an increase in customer balances. The growth in the Bank's
Investment Services and Trust Division also contributed to the increase in
investment services income for fiscal 1999. An increase in checking account
fees, as the result of an increased number of accounts, and an increase in the
fees earned on the Bank's debit card, due to increased usage and also an
increased number of cardholders, contributed to the increase of $354,000 or
31.7% in service charges and fees in fiscal 1999. The Company recognized gains
on trading account securities of $171,000 during fiscal 1999 compared to
$338,000 during fiscal 1998.
Total other income increased $968,800 or 26.6% to $4.62 million for the
year ended June 30, 1998, from the comparable prior period. Investment services
income increased $488,400 or 21.2% to $2.80 million as the result of increases
in revenue generated by PCIS and the Trust Division. Service Charges and fees
increased $139,700 in fiscal 1998. The Company recognized gains on trading
account securities of $337,500 during fiscal 1998 compared to $15,700 during
fiscal 1997.
Other Operating Expenses
Total operating expenses increased $1.09 million or 9.4% to $12.73 million
for the year ended June 30, 1999 compared to the same period in fiscal 1998. The
increase in operating expenses over the prior fiscal year was primarily due to a
$1.04 million or 17.6% increase in salaries and employee benefits related to
general salary increases and increased number of staff associated with the
Bank's Call Center and its Investment Services and Trust Division established
during the summer and fall of 1997, respectively. Also, in the winter of 1999,
the Bank opened its eighth branch office in Devon, Pennsylvania which further
contributed to an increase in staff. Occupancy and equipment expenses increased
$190,000 or 10.1% to $2.08 million for the year ended June 30, 1999 compared to
the same period in 1998 as a result of the opening of the Bank's branch office
in Devon and capital expenditures associated with technology upgrades and
enhancements. During fiscal 1998 the Bank made a $291,000 donation in relation
to a project to provide low income housing for the elderly. As an offset to the
donation, the Bank received a state tax credit in the amount of $146,000 through
the Neighborhood Assistance Act which was recorded as a reduction to income tax
expense in fiscal 1998.
Total operating expenses increased $1.78 million or 18.1% to $11.64 million
for the year ended June 30, 1998, from the comparable prior period, excluding
the $1.39 million one-time SAIF assessment in fiscal 1997. The increase in
operating expenses over the prior fiscal year was primarily due to a $632,500 or
12.0% increase in salaries and employee benefits related to general salary
increases and increased number of staff associated with the addition of the
Bank's new Call Center and its new Investment Services and Trust Division. In
addition, occupancy and equipment expenses increased $246,900 or 15.1% to $1.89
million for the year ended June 30, 1998, from the comparable prior period
related to the refurbishment of the Bank's Operation Center and the renovations
required to provide accommodations for the Bank's new Call Center and Trust
Department. Also contributing to the increase in operating expenses during
fiscal 1998 was the previously mentioned $291,000 donation to a project to
provide low income housing for the elderly.
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Income Taxes
The Company incurred income tax expense of $1.57 million during the year
ended June 30, 1999, compared to $1.09 million during fiscal 1998. The primary
reason for the increase in income tax expense was due to a 22.7% increase in
income before taxes in fiscal 1999. Income tax expense for fiscal 1998 includes
a $146,000 state tax credit through the Neighborhood Assistance Act relating to
a donation the Bank made to provide low income housing for the elderly. For
periods ending prior to May 29, 1998, no expense has been made for income taxes
for PCIS since PCIS had elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code and similar state provisions. Under these
provisions, PCIS does not pay income taxes on its taxable income. Instead, the
former stockholders of PCIS are liable for individual income taxes based on
their respective shares of PCIS's taxable income. As a result of all of PCIS's
stock being purchased by Chester Valley Bancorp Inc. on May 29, 1998, PCIS is no
longer eligible to be taxed under the provisions of Subchapter S of the Internal
Revenue Code.
The Company incurred income tax expense of $757,400 during fiscal 1997. The
primary reason for the increase in income tax expense in fiscal 1998 compared to
fiscal 1997 was due to the increase in income before taxes in fiscal 1998 to
$4.71 million from $2.99 million during fiscal 1997. The increase in income tax
expense in fiscal 1998 was partially offset by the $146,000 state tax credit
through the Neighborhood Assistance Act donation mentioned earlier.
Capital Resources
The Company's assets totaled $451.16 million at June 30, 1999, as compared
with $377.01 million as of June 30, 1998. This 19.7% increase in assets was
primarily funded by an increase in deposits of $61.32 million or 20.6% from
$298.19 million at June 30, 1998, to $359.51 million at June 30, 1999, and an
increase in Federal Home Loan Bank advances of $9.44 million from $40.94 million
to $50.38 million at June 30, 1998 and 1999, respectively. The increase in
deposits and advances was used in part to fund loan originations during the
period, which contributed to an increase in net loans receivable from $273.13
million at June 30, 1998, to $291.39 million at June 30, 1999. In addition, the
Company's securities portfolios along with its interest-bearing deposits
increased from $86.12 million to $140.03 million at June 30, 1998 and 1999,
respectively.
Stockholders' equity inceased to $33.85 million at June 30, 1999, from
$31.85 million at June 30, 1998, as a result of net income earned of $4.21
million during fiscal 1999, the reduction in the principal balance of the
Employee Stock Ownership Plan ("ESOP") debt by $147,000 (See Note 13 of the
Notes to the Consolidated Financial Statements), proceeds from stock options
exercised during the 1999 period of $168,000, and proceeds totaling $514,000
from the issuance of common stock. The increase in stockholders' equity was
offset in part by a change in net unrealized value of securities available for
sale of $1.84 million from a gain of $292,000 at June 30, 1998 to a net
unrealized loss of $1.55 million at June 30, 1999, and also offset in part by
the payment of cash dividends of $1.15 million and the repurchase of $24,000 of
common stock, as well as the payment of $16,000 in lieu of fractional shares in
connection with the 5% stock dividend paid during fiscal 1999.
Asset Quality
Non-performing assets are comprised of non-performing loans and REO and
totaled $933,000 at June 30, 1999, compared to $1.25 million at June 30, 1998.
Non-accrual loans are loans on which the accrual of interest ceases when
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 term.
Interest income is not accrued until the financial condition and payment record
of the borrower once again demonstrate the ability to service the debt.
Non-performing assets to total assets was .21% at June 30, 1999, compared to
.33% at June 30, 1998. Non-performing loans of $933,000 at June 30, 1999,
consisted of six residential mortgage loans in the amount of $568,000, two
commercial loans for $258,000 and $107,000 in consumer loans.
At June 30, 1999 and 1998, the Company's classified assets, which consisted
of assets classified as substandard, doubtful, loss, and REO, totaled $1.24
million and $1.47 million, respectively. Included in the assets classified
substandard at June 30, 1999, were all loans 90 days past due and loans which
are less than 90 days delinquent, but inadequately protected by the current
paying capacity of the borrower or of the collateral pledged, as well as a
well-defined weakness that may jeopardize the liquidation of the debt.
Liquidity and Committed 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
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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. In addition to its ability to obtain advances
from the FHLB under several different credit programs, the Company has
established a line of credit with the FHLB, in an amount not to exceed 10% of
the Company's maximum borrowing capacity, which borrowing capacity was $13.13
million at the time the commitment was executed, and subject to certain
conditions, including the holding of a pre-determined amount of FHLB stock as
collateral. This line of credit is used from time to time for liquidity
purposes. At June 30, 1999 there was no outstanding balance on this line of
credit.
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. During the year ended
June 30, 1999, the Company used 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. As of June 30, 1999, the Company had $7.77 million in commitments
to fund loan originations. The majority of these commitments are anticipated to
be funded by December 31, 1999. In addition, as of June 30, 1999, the Company
had undisbursed loans in process for construction loans of $11.39 million and
$17.10 million in undisbursed lines of credit. In addition, the Company has
issued $40,000 in commercial letters of credit fully secured by deposit accounts
or real estate. The 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.
For regulatory purposes, liquidity is defined as a ratio of cash and
certain marketable securities that can be readily converted into cash to total
deposits and short-term borrowings. At June 30, 1999, liquidity for the Bank as
defined under these guidelines was 18.34%, which exceeded the regulatory minimum
requirement of 4.0%.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Related Notes presented elsewhere
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP") which generally require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike many industrial companies, substantially all of the assets and
liabilities of the Company on a consolidated basis are monetary in nature. As a
result, interest rates have a more significant impact on the Company's
performance than the general level of inflation. Over a short period of time,
interest rates may not necessarily move in the same direction or with the same
magnitude of inflation.
Year 2000 Issues
In order to be ready for the year 2000 (the "Year 2000 Issue"), the Company
has developed a Year 2000 Action Plan (the "Action Plan") which was presented
and approved by the Company's Board of Directors in December 1998. The Action
Plan was developed using both the guidelines outlined in the Federal Financial
Institutions Examination Council's ("FFIEC") "The Effect of 2000 on Computer
Systems" as well as guidance provided by the Securities and Exchange Commission
(the "SEC"). The Company's Board of Directors assigned responsibility for the
Action Plan to the Year 2000 Project Team chaired by the Company's President and
Chief Operating Officer who reports to the Board of Directors with respect to
the status of the implementation of the Action Plan on a monthly basis. The
Action Plan recognizes that the Company's operating, processing and accounting
operations are computer reliant and could be significantly affected by the Year
2000 Issue. The Company is primarily reliant on third party vendors for its
computer output and processing, as well as other significant functions and
services (i.e., securities transactional and safekeeping services, securities
pricing information, etc.). The Year 2000 Project Team is currently working with
these third party vendors to assess their Year 2000 readiness and are performing
Year 2000 testing as required. Based on an ongoing assessment management
presently believes that with the recent conversions and modifications to the
Company's software and hardware, including a conversion by the Bank to a new
core data processing system in October 1998, the Company and its third party
vendors are taking the appropriate steps to ensure critical systems will
function properly.
Company's State of Readiness
The Bank has identified five mission critical systems (without which the
Bank cannot operate) and critical applications (necessary applications but the
Company can function for a moderate amount of time without such applications
being Year 2000 compliant) operated or supported by third party vendors. These
five mission critical systems include: 1) the core data service processing
system for deposit, loan and general ledger account processing; 2) the
Electronic Network which controls the Bank's ATMs and telephone voice response
units, as well as processes its ATM cards and debit cards; 3) the equipment and
software that processes the Bank's item processing and check inclearing; 4) the
Wide Area Network ("WAN") which facilitates electronic commu-
20
nications between the Bank's branches and its core processor; and 5) the
software that processes the backroom statement operations for the Bank's Trust
Department. Of such mission critical systems and critical applications, the
Company has been informed by a substantial majority of its vendors that they are
either Year 2000 compliant or that they will be compliant and are in the process
of revising and testing their systems for Year 2000 compliance. The most
critical system for the Bank is its core data processing service which is
provided by a third party vendor ("DPS Provider"). The DPS Provider services
over 1,000 banks nationally. In May 1998, the Bank entered into an agreement
with the DPS Provider whereby the DPS Provider warranted certain conditions
regarding Year 2000 compliance. The DPS Provider has informed the Bank that it
has completed the majority of its testing of its systems. The Bank has received
and will continue to receive and review carefully the results of the DPS
Provider testing. Phase I and Phase II of testing of the DPS Provider system was
completed in July 1998 and December 1998, respectively, with substantially all
such systems evidencing Year 2000 compliance.
All of the Company's vendors of its mission critical systems and critical
applications have provided written assurances that their products and services
will be Year 2000 compliant. As of June 30, 1999, the Company successfully
completed the majority of its mission critical modifications and conversions and
related testing of all mission critical and non-mission critical systems.
The Year 2000 issues also affect certain of the Bank's customers,
particularly in the areas of access to funds and additional expenditures to
achieve compliance. As of September 30, 1998, Bank personnel had contacted all
commercial credit customers regarding the customers' awareness of the Year 2000
Issue. At that time the Bank adopted the FFIEC Millennium Risk Evaluation
Package ("FFIEC Package") as the standard for evaluating the Bank risk in
relation to Year 2000 issues. From the customer responses, the Bank identified
42 potential risk customers whose operations were considered to be heavy users
of computer based systems or considered a risk either by virtue of their
business complexity or the complexity of their borrowings. The officer of record
was given the responsibility of determining the risk level that each client
posed using the FFIEC Package. The risk level was considered to be low on all
but three of these clients and these three were considered to have medium risk.
Those identified to be anything but low risk will be monitored quarterly by the
officer of record. While no assurance can be given that its customers will be
Year 2000 compliant, management believes, based on representations of such
customers and reviews of their operations (including assessments of the
borrowers' level of sophistication and data and record keeping requirements),
that the customers are either addressing the appropriate issues to insure
compliance or that they are not faced with material Year 2000 issues. The
respondents stated that they were, at the very least, sufficiently compliant to
avoid disruption of the cash flow stream necessary to service debt. In addition,
in substantially all cases the credit extended to such borrowers is
collateralized by real estate or business assets which inherently minimizes the
Bank's exposure in the event that such borrowers do experience problems or
delays becoming Year 2000 compliant.
PCIS, pursuant to Section 240.17a-5(e)(5)(iii) of the Securities Exchange
Act of 1934, filed Part I and Part II of Form BD-Y2K with the SEC which applies
to brokers with minimum net capital of $100,000 or more. Part I and Part II of
Form BD-Y2K was filed in August 1998 and included PCIS's Year 2000 Action Plan,
including contingency planning and timeline. Part I and Part II of Form BD-Y2K
were also required to be filed with the SEC by April 30, 1999 and included an
update for PCIS's Year 2000 planning as of March 15, 1999. PCIS has identified
three mission critical systems within its operations. These three mission
critical systems include: 1) clearing brokerage service, client account
statement production and client account maintenance; 2) investment market
services including stock and bond quote information as well as newswire
informational service; and 3) the internal personal computer Local Area Network
("LAN") system. The two vendors which provide the clearing brokerage services
and the investment market services have upgraded to Year 2000 certified software
which PCIS installed during the first quarter of calendar 1999. The contracts
signed with both vendors include Year 2000 compliance assurances. Industry
related testing has begun, and PCIS testing will begin once installation is
completed. The LAN networks are also being replaced with software that is
assured to be Year 2000 compliant. Virtually all the personal computer equipment
was replaced as a result of the new specification requirements dictated by the
clearing brokerage and investment market service vendors, and is Year 2000
compliant certified. PCIS is a member of the National Association of Securities
Dealers, Inc. (the "NASD") and as such is required to report to the NASD on a
regular basis. This reporting process is done electronically through software
that the NASD provides. PCIS has been informed by the NASD that the software is
Year 2000 compliant.
Risks of Year 2000
While the Company has received assurances from such vendors as to
compliance, such assurances are not guarantees and may not be enforceable, or
often limit the warrantor's liability or excluded liability for consequential
damages. The Company's existing older contracts with such vendors do not include
Year 2000 certifications or warranties. Thus, in the event such vendors'
products and/or services are not Year 2000 compliant, the Company's recourse in
the event of such failure may be limited. If the required modifications and
conversions are not made, or are not completed on a timely basis, the Year 2000
Issue could have a material impact on the operations of the Company. There can
be no assurance that potential systems interruptions or unanticipated
21
additional expense incurred to obtain Year 2000 compliance would not have a
material adverse effect on the Company's business, financial condition, results
of operations and business prospects. Nevertheless, the Company does not believe
that the cost of addressing the Year 2000 issues will be a material event or
uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions, nor
does it believe that the costs or the consequences of incomplete or untimely
resolution of its Year 2000 issues represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
Contingency Plans
The Company's Year 2000 Action Plan included its own company-wide Year 2000
contingency plan. Individual contingency plans concerning specific software and
hardware issues and operational plans for continuing operations were completed
for a substantial majority of its mission critical hardware and software
applications as of December 31, 1998, with the remainder completed by March 31,
1999. The Year 2000 Project Team is reviewing substantially all mission critical
test plans and contingency plans to ensure the reasonableness of the plans. The
Company's contingency plans also include plans which address operational
policies and procedures in the event of data processing, electric power supply
and/or telephone service failures associated with the Year 2000. Such
contingency plans provide, to the best of the Company's ability, documented
actions to allow the Company to maintain and/or resume normal operations in the
event of the failure of mission critical and critical applications. Such plans
identify participants, processes and equipment that will be necessary to permit
the Company to continue operations on a limited basis. Such plans may include
providing off-line system processing, back-up electrical and telephone systems
and other methods to ensure the Company's ability to continue to operate.
Costs of Year 2000
The costs of modifications to the existing software are being primarily
absorbed by the third party vendors. However, the Company recognizes that the
need exists to purchase new hardware and software. Based upon current estimates,
the Company has identified approximately $649,000 in total costs, including
hardware, software, and other items, expected to be or already incurred in order
to complete the Year 2000 project. The Company expended substantially all of
this amount during fiscal 1999. Expenditures for software are typically
depreciated over three years while expenditures for hardware are typically
depreciated over five years. Of the estimated $649,000 in total Year 2000
expenditures, $585,000 is associated with the replacement of systems that were
not Year 2000 compliant, but would have been replaced anyway as a result of the
Company's aggressive Strategic Technology Plan which is designed to maintain
competitiveness within the industry and to increase the efficiency of the
Company's operations. The remaining $64,000 will be expensed as incurred for
matters directly related to the Year 2000 issue, including promotional material
for consumer and employee awareness and replacement of non-compliant Year 2000
software and hardware.
FORWARD LOOKING STATEMENTS
In this Report, the Company has included certain "forward looking
statements" concerning the future operations of the Company. It is management's
desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This statement is for the express
purpose of availing the Company of the protections of such safe harbor with
respect to all "forward looking statements" contained in this Report. The
Company has used "forward looking statements" to describe the future plans and
strategies including management's expectations of the Company's Year 2000
readiness and future financial results. Management's ability to predict 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 country as a
whole, loan delinquency rates, changes in federal and state regulation, Year
2000 uncertainties discussed previously and other uncertainties described in the
Company's filings with the Securities and Exchange Commission, including its
Form 10K for the year ended June 30, 1999. These factors should be considered in
evaluating the "forward looking statements", and undue reliance should not be
placed on such statements.
OTHER INFORMATION
Description of Stock
The holders of the Common Stock of the Holding Company possess exclusive
voting rights in the corporation. Each holder of shares of Common Stock is
entitled to one vote for each share held, in accordance with the charter and
bylaws, including voting on the election of directors. Of the 10.00 million
shares of Common Stock authorized by the Holding Company, 6.29 million shares
remain unissued. In addition, none of the 5.00 million shares of Preferred Stock
authorized has been issued.
Dividend Policy
The Board of Directors of Chester Valley Bancorp Inc. intends to continue
the policy of paying dividends when the directors deem it prudent to do so. The
Board of Directors will consider
22
payment of dividends on a quarterly basis, after giving consideration to the
level of the profit for the prior quarter and other relevant aspects. On August
18, 1999, the Board of Directors of the Holding Company declared a $.09 per
share cash dividend and a 5% stock dividend based on the financial results of
the quarter ended June 30, 1999. The cash dividend will be calculated on shares
held before the issuance of the stock dividend. During fiscal 1999, 1998, and
1997 the Holding Company paid a total of $1.15 million, $1.23 million, and $1.06
million, respectively, in cash dividends and a 5% stock dividend in each year.
Cash dividends from the Holding Company are primarily dependent upon dividends
paid to it by First Financial, which, in turn, are subject to certain
restrictions established by federal regulators and Pennsylvania law. (See Note
10 to Notes to Consolidated Financial Statements.)
Market Information
As of August 1, 1999, the Holding Company's Common Stock was held by
approximately 2,000 shareholders, including shares held in nominee name. Any
broker or any NASDAQ member can be contacted for the latest quotations of the
Holding Company's Common Stock. Upon the reorganization into a holding company
structure in May 1990, the stock of the Holding Company was approved for
inclusion in NASDAQ's National Market System. The Holding Company's NASDAQ
symbol is "CVAL". The transfer agent for the stock is American Stock Transfer
and Trust Company, New York, New York. During fiscal 1999 and 1998 the Holding
Company paid dividends of $.31 and $.30 per share, respectively, adjusted for
stock dividends and stock splits during those periods.
The following table sets forth the high and low closing prices for the
periods described. For comparability purposes, the closing prices shown below
have been adjusted to reflect the 5% stock dividends paid in fiscal 1999 and
1998.
Fiscal 1999 Low High
- --------------------------------------------------------------------------------
First Quarter $ 17.33 $ 20.24
Second Quarter 17.33 20.33
Third Quarter 18.25 19.50
Fourth Quarter 16.25 18.50
Fiscal 1998 Low High
- --------------------------------------------------------------------------------
First Quarter $ 12.25 $ 14.60
Second Quarter 13.49 18.57
Third Quarter 18.41 23.49
Fourth Quarter 20.16 22.22
Recent Accounting Pronouncements
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Postretirement Benefits." This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when "FASB Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions," were
issued. This statement requires changes in disclosures and would not affect the
financial condition, equity or operating results of the Corporation. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement (as amended by SFAS No. 137
in June, 1999) establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of certain
foreign currency exposures. SFAS No. 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier adoption
is permitted. The Company has not yet determined the impact, if any, of this
statement, including its provisions for the potential reclassifications of
investments securities, on operations, financial condition or equity.
23
Consolidated Statements Of Financial Condition
At June 30,
--------------------------------
1999 1998
------------- -------------
Assets
Cash in banks $ 5,193,447 $ 4,043,627
Interest-bearing deposits 13,408,911 11,861,301
Trading account securities 9,221,027 20,351,747
Investment securities available for sale 109,599,940 38,302,791
Investment securities held to maturity (fair value -
June 30, 1999, $7,816,320
June 30, 1998, $15,672,486) 7,801,383 15,600,347
Loans receivable, less allowance for loan
losses of $3,650,893 and $3,413,830 at
June 30, 1999 and 1998, respectively 291,387,858 273,127,856
Loans held for sale -- 1,101,071
Accrued interest receivable 2,460,823 2,486,224
Property and equipment - net 8,199,882 7,093,850
Other assets 3,884,333 3,043,102
------------- -------------
Total Assets $ 451,157,604 $ 377,011,916
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 359,513,516 $ 298,191,412
Securities sold under agreements to repurchase -- 144,417
Advance payments by borrowers for taxes and insurance 3,055,229 2,962,637
Employee Stock Ownership Plan ("ESOP") debt -- 146,618
Federal Home Loan Bank advances 50,375,002 40,935,822
Other borrowings 653,061 708,409
Accrued interest payable 1,573,007 968,544
Other liabilities 2,135,280 1,105,214
------------- -------------
Total Liabilities 417,305,095 345,163,073
Commitments and contingencies (Note 8)
Stockholders' Equity: -- --
Preferred stock - $1.00 par value; 5,000,000 shares
authorized; none issued
Common stock - $1.00 par value; 10,000,000 shares
authorized; 3,707,460 and
3,552,458 shares issued at
June 30, 1999 and June 30, 1998, respectively 3,707,460 3,552,458
Additional paid-in capital 17,903,651 14,383,521
Common stock acquired by ESOP -- (146,618)
Retained earnings - partially restricted 13,794,043 13,767,573
Accumulated other comprehensive (loss) income (1,552,645) 291,909
------------- -------------
Total Stockholders' Equity 33,852,509 31,848,843
------------- -------------
Total Liabilities and Stockholders' Equity $ 451,157,604 $ 377,011,916
============= =============
24
Consolidated Statements Of Operations
Year Ended June 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Interest Income:
Loans $ 22,772,277 $ 22,190,864 $ 20,388,526
Mortgage-backed securities 981,906 530,425 227,293
Interest-bearing deposits 717,474 253,558 280,490
Investment securities:
Taxable 3,512,158 1,857,376 1,104,410
Non-taxable 1,401,577 920,792 620,703
------------ ------------ ------------
Total interest income 29,385,392 25,753,015 22,621,422
------------ ------------ ------------
Interest Expense:
Deposits 12,702,540 11,467,998 10,285,725
Securities sold under agreements to repurchase 8,356 7,636 51,801
Short-term borrowings 999,857 971,431 386,958
Long-term borrowings 1,970,833 961,952 782,218
------------ ------------ ------------
Total interest expense 15,681,586 13,409,017 11,506,702
------------ ------------ ------------
Net interest income 13,703,806 12,343,998 11,114,720
Provision for loan losses 390,000 605,672 523,413
------------ ------------ ------------
Net interest income after provision for loan losses 13,313,806 11,738,326 10,591,307
------------ ------------ ------------
Other Income:
Investment services income, net 3,257,647 2,797,436 2,309,032
Service charges and fees 1,471,192 1,116,876 977,145
Gain on trading account securities 171,496 337,509 15,682
Gain on sale of assets available for sale 110,977 166,240 161,303
Other 185,532 199,508 185,621
------------ ------------ ------------
Total other income 5,196,844 4,617,569 3,648,783
------------ ------------ ------------
Operating Expenses:
Salaries and employee benefits 6,953,188 5,914,592 5,282,068
Occupancy 1,108,823 1,060,628 993,530
Furniture and equipment 967,245 825,228 645,403
Data processing 739,725 722,479 605,149
SAIF special assessment -- -- 1,386,516
Deposit insurance premiums 175,487 160,994 309,689
Other 2,786,101 2,959,189 2,023,193
------------ ------------ ------------
Total operating expenses 12,730,569 11,643,110 11,245,548
------------ ------------ ------------
Income before income taxes 5,780,081 4,712,785 2,994,542
Income tax expense 1,567,580 1,086,755 757,434
------------ ------------ ------------
Net income $ 4,212,501 $ 3,626,030 $ 2,237,108
============ ============ ============
Earnings per common share(*):
Basic $ 1.14 $ 1.00 $ 0.62
Diluted $ 1.13 $ 0.98 $ 0.62
Weighted average number of shares outstanding(*):
Basic 3,682,104 3,632,624 3,600,693
Diluted 3,720,631 3,682,358 3,619,618
Other Comprehensive Income, Net of Tax:
Net income $ 4,212,501 $ 3,626,030 $ 2,237,108
Net unrealized holding gains (losses) on securities
available for sale during the period (1,784,750) 400,068 203,194
Less reclassification adjustment for gains included
in net income (59,804) (110,873) (103,258)
------------ ------------ ------------
Comprehensive Income $ 2,367,947 $ 3,915,225 $ 2,337,044
============ ============ ============
25
Consolidated Statements of Changes in Stockholders' Equity
Common Retained Accumulated
Additional Stock Earnings Other Total
Common Paid-in Acquired Partially Comprehensive Treasury Treasury
Stock Capital by ESOP Restricted Income Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1996 $ 3,361,854 $ 10,322,860 $ (510,740) $13,883,220 $ (97,222) $ (193,473) $ 26,766,499
Net income 2,237,108 2,237,108
Cash dividends paid (1,061,628) (1,061,628)
Principal payments
on ESOP debt 177,250 177,250
Issuance of stock
dividend 77,731 1,438,024 (1,515,755) --
Cash payment for
fractional shares (6,140) (9,787) (15,927)
Stock options exercised 78,958 258,083 337,041
Common stock issued 586 4,213 85,382 90,181
Common stock repurchased (351) (2,849) (348,679) (351,879)
Change in unrealized gain
(loss) on securities
available for sale 99,936 99,936
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1997 3,439,820 11,835,066 (333,490) 13,533,158 2,714 (198,687) 28,278,581
Net income 3,626,030 3,626,030
Cash dividends paid (1,229,256) (1,229,256)
Principal payments
on ESOP debt 186,872 186,872
Issuance of stock
dividend 102,606 2,052,120 (2,154,726) --
Cash payment for
fractional shares (7,633) (7,633)
Stock options exercised 15,167 268,232 156,703 440,102
Common stock issued 6,811 325,769 207,283 539,863
Common stock repurchased (11,946) (97,666) (165,299) (274,911)
Change in unrealized gain
(loss) on securities
available for sale 289,195 289,195
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
June 30, 1998 3,552,458 14,383,521 (146,618) 13,767,573 291,909 -- 31,848,843
Net income 4,212,501 4,212,501
Cash dividends paid (1,153,622) (1,153,622)
Principal payments
on ESOP debt 146,618 146,618
Issuance of stock
dividend 116,034 2,900,850 (3,016,884) --
Cash payment for
fractional shares (15,525) (15,525)
Stock options exercised 11,468 132,333 23,800 167,601
Common stock issued 27,500 486,947 514,447
Common stock repurchased (23,800) (23,800)
Change in unrealized gain
(loss) on securities
available for sale (1,844,554) (1,844,554)
Balance at
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1999 $ 3,707,460 $ 17,903,651 $ -- $13,794,043 $ (1,552,645) $ -- $33,852,509
===================================================================================================================================
26
Consolidated Statements Of Cash Flows
Year Ended June 30,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,212,501 $ 3,626,030 $ 2,237,108
Add (deduct) items not affecting cash flows from operating activities:
Depreciation 878,957 725,434 584,337
Provision for loan losses 390,000 605,672 523,413
Gain on trading account securities (171,496) (337,509) (15,682)
Gain on sale of securities available for sale (90,612) (167,989) (156,451)
Loss (gain) on sale of loans held for sale (20,365) 1,749 (2,445)
Loss (gain) on sale of real estate owned -- -- (2,407)
Amortization of deferred loan fees, discounts and premiums (753,969) (586,088) (530,806)
Decrease (increase) in trading account securities 11,302,216 (19,762,661) 106,902
Decrease (increase) in accrued interest receivable 25,401 (375,638) (489,124)
(Increase) in other assets (841,231) (406,987) (661,282)
Increase (decrease) in other liabilities 1,030,066 (235,232) 259,335
Increase in accrued interest payable 604,463 180,285 134,901
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (used in) operating activities 16,565,931 (16,732,934) 1,987,799
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investment activities:
Capital expenditures (1,984,989) (2,348,274) (1,691,371)
Net increase in loans and loans held for sale (17,256,008) (23,344,652) (34,923,474)
Proceeds from sale of loans held for sale 1,601,138 6,023,850 1,257,348
Proceeds from real estate owned -- -- 571,834
Purchase of investment securities (2,397,400) (1,073,100) (115,645)
Proceeds from maturities, payments and calls of investment securities 10,187,442 4,929,360 5,237,914
Purchase of securities available for sale (108,846,839) (51,554,985) (124,134,642)
Proceeds from sales and calls of securities available for sale 34,684,943 41,504,286 103,031,326
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investment activities (84,011,713) (25,863,515) (50,766,710)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits before interest credited 50,464,992 27,568,357 23,847,975
Interest credited to deposits 10,857,112 9,872,744 8,696,779
(Decrease) increase in securities sold under agreements to repurchase (144,417) 132,331 12,086
Proceeds from FHLB advances 13,599,000 32,024,225 29,914,500
Repayments of FHLB advances (4,159,820) (21,286,650) (13,688,530)
Increase in other borrowings (55,348) 207,655 157,268
Net decrease in advance payments by borrowers for taxes and insurance 92,592 (36,044) (16,413)
Cash dividends on common stock (1,153,622) (1,229,256) (1,061,628)
Repayments of principal on ESOP debt (146,618) (186,872) (177,250)
Common stock repurchased (23,800) (274,911) (351,879)
Payment for fractional shares (15,525) (7,633) (15,927)
Stock options exercised 167,601 440,102 337,041
Reduction of common stock acquired by ESOP 146,618 186,872 177,250
Common stock issued 514,447 539,863 90,181
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 70,143,212 47,950,783 47,921,453
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,697,430 5,354,334 (857,458)
Cash and cash equivalents:
Beginning of period 15,904,928 10,550,594 11,408,052
- ------------------------------------------------------------------------------------------------------------------------------------
End of period $ 18,602,358 $ 15,904,928 $ 10,550,594
====================================================================================================================================
Supplemental disclosures:
Cash payments during the year for:
Taxes $ 1,553,000 $ 1,379,000 $ 757,000
====================================================================================================================================
Interest $ 15,077,123 $ 13,228,732 $ 11,371,801
====================================================================================================================================
Non-cash items:
Acquisition of real estate in settlement of loans $ -- $ -- $ 448,427
====================================================================================================================================
Stock dividend issued $ 3,016,884 $ 2,154,726 $ 1,515,755
====================================================================================================================================
Net change in unrealized gain (loss) on investment securities
available for sale $ (3,004,159) $ 471,001 $ 151,727
====================================================================================================================================
Tax effect on unrealized gain (loss) on investment securities
available for sale $ (1,159,605) $ 181,806 $ 51,791
====================================================================================================================================
27
Notes To Consolidated Financial Statements
1 - Summary of Significant Accounting Policies
Business
Chester Valley Bancorp Inc. (the "Holding Company") is a unitary thrift
holding company, incorporated in the Commonwealth of Pennsylvania in August
1989. The business of Chester Valley Bancorp Inc. and its subsidiaries (the
"Company") 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 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 that
complement these products. The Bank is subject to competition from other
financial institutions and other companies that provide financial services.
Philadelphia Corporation for Investment Services 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 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 smaller corporate accounts. The Company is subject to the regulations of
certain federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
Principles of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of
Chester Valley Bancorp Inc. and its wholly-owned subsidiaries, First Financial
Bank and Philadelphia Corporation for Investment Services. 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. All material inter-company balances and transactions have been
eliminated in consolidation. Prior period amounts are reclassified when
necessary to conform with the current year's presentation.
The Company follows accounting principles and reporting practices which
are in accordance with generally accepted accounting principles. In preparing
the consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate owned. Management believes that the allowance for
loan losses and the valuation of real estate owned are adequate. Various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and valuations of
real estate owned. Such agencies may require the Bank to recognize additions to
the allowance or adjustments to the valuations based on their judgments about
information available to them at the time of their examination.
Cash and Cash Equivalents
For the purpose of the consolidated statements of cash flows, cash and
cash equivalents include cash and interest-bearing deposits with an original
maturity of generally three months or less.
Securities
The Company divides its securities portfolio into three segments: (a) held
to maturity; (b) available for sale; and (c) trading. At the time of purchase,
the Company makes a determination on whether or not it will hold the investments
to maturity, based upon an evaluation of the probability of the occurrence of
future events. Securities classified as held to maturity category are accounted
for at amortized cost adjusted for amortization of premiums and accretion of
discounts using a method which approximates a level yield, based on the
Company's intent and ability to hold the securities until maturity. Trading
securities are accounted for at quoted market prices with changes in market
values thereof being recorded as gain or loss in the income statement. All other
securities, including investment securities which the Company believes may be
involved in interest rate risk, liquidity, or other asset-liability management
decisions which might reasonably result in such securities not being held until
maturity, are included in the available for sale category and are accounted for
at fair value with unrealized gains or losses, net of taxes, being reflected as
adjustments to equity. If investment securities are sold, any gain or loss is
determined by specific identification and reflected in the operating results for
the period in which the sale occurs.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an evaluation of
known and inherent risks in the loan portfolio. Management's evaluation is based
upon, among other things, delinquency trends, the volume of non-performing
loans, prior loss experience of the portfolio, current economic conditions and
other relevant factors. Although management believes it has used the best
information available to it in making such determinations, and that the present
allowance for loan losses is adequate, future adjustments to the allowance may
be necessary, and net income may be adversely affected if circumstances differ
substantially from the assumptions used in determining the level of the
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination. The allowance is increased by the provision for
loan losses which is charged to operations. Loan losses, other than those
incurred on loans held for sale, are charged directly against the allowance and
recoveries on previously charged-off loans are generally added to the allowance.
28
1 - Summary of Significant Accounting Policies (Continued)
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 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 twelve-month periods ended June 30, 1999, 1998, and 1997, the
recorded investment in impaired loans was not material. The Company's policy for
the recognition of interest income on impaired loans is the same as for
non-accrual loans discussed below. Impaired loans are charged off when the
Company determines that foreclosure is probable and the fair value of the
collateral is less than the recorded investment of the impaired loan.
Loans, Loan Origination Fees and Uncollected Interest
Loans (other than loans held for sale) are recorded at cost net of
unearned discounts, deferred fees and allowances. Discounts and premiums on
purchased loans are amortized using the interest method over the remaining
contractual life of the portfolio, adjusted for actual prepayments. Loan
origination fees and certain direct origination costs are deferred and amortized
over the life of the related loans as an adjustment of the yield on the loans.
Uncollected interest receivable on loans is accrued to income as earned.
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 on such loans is not accrued until the financial condition and
payment record of the borrower once again demonstrate the ability to service the
debt.
Loans Held for Sale
The Company periodically identifies certain loans as held for sale at the
time of their origination. These loans consist primarily of fixed-rate,
single-family residential mortgage loans which meet the underwriting
characteristics of certain government-sponsored enterprises (conforming loans).
Loans held for sale are carried at the lower of aggregate cost or fair value,
with any resulting loss included in other income for the period. Realized gains
or losses are included in other income for the period.
Real Estate Owned ("REO")
Real estate acquired through foreclosure or by deed in lieu of foreclosure
is classified as REO. REO is carried at the lower of cost (lesser of carrying
value of the loan or fair value of the property at date of acquisition) or fair
value less selling expenses. Costs relating to the development or improvement of
the property are capitalized; holding costs are charged to expense.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts. The
cost of maintenance and repairs is charged to expense as incurred and renewals
and betterments are capitalized.
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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 have been adjusted to reflect
the effects of the 5% stock dividends paid in September 1998 and 1997, the
three-for-two stock split effected in the form of a dividend in December 1998
and the five-for-four stock split effected in the form of a dividend in March
1997.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year Ended June 30,
1999 1998 1997
------ ------ ------
Numerator:
Net income $4,213 $3,626 $2,237
====== ====== ======
Denominator:
Denominator for basic
earnings per share-weighted
average shares 3,682 3,632 3,601
Effect of dilutive securities:
Employee stock options 39 50 19
------ ------ ------
Denominator for diluted earnings
per share-adjusted weighted
average shares and
assumed exercise 3,721 3,682 3,620
------ ------ ------
Basic earnings per share $ 1.14 $ 1.00 $ 0.62
------ ------ ------
Diluted earnings per share $ 1.13 $ 0.98 $ 0.62
====== ====== ======
29
2 - Investment Securities
- -------------------------
Investment securities are summarized as follows:
At June 30,
----------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------ --------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------ -------- ----------- ------------ ----------- -------- -------- ------------
Held to Maturity:
U.S. Government
agency notes
and bonds $ -- $ -- $ -- $ -- $ 4,500,000 $ 8,630 $ (4,737) $ 4,503,893
Federal Home
Loan Bank of
Pittsburgh stock 3,781,100 -- -- 3,781,100 2,583,100 -- -- 2,583,100
Municipal notes
and bonds 3,229,291 11,229 (2,013) 3,238,507 7,394,443 47,512 (12,021) 7,429,934
Mortgage-Backed
securities 790,960 9,061 (4,146) 795,875 1,122,772 32,052 -- 1,154,824
Other 32 806 -- 838 32 703 -- 735
------------ -------- ----------- ------------ ----------- -------- -------- ------------
Total held to maturity $ 7,801,383 $ 21,096 $ (6,159) $ 7,816,320 $15,600,347 $ 88,897 $(16,758) $ 15,672,486
============ ======== =========== ============ =========== ======== ======== ============
Available for sale:
U.S. Government
agency notes
and bonds $ 48,286,934 $ 3,504 $(1,048,381) $ 47,242,057 $12,298,216 $ 7,334 $ (9,959) $ 12,295,591
Municipal notes
and bonds 27,975,449 492,308 (1,089,658) 27,378,099 15,072,678 136,492 (36,458) 15,172,712
Mortgage-Backed
securities 16,231,504 103,505 (518,476) 15,816,533 9,228,956 202,553 -- 9,431,509
Equity securities 1,450,316 110,733 (224,500) 1,336,549 886,230 222,522 (12,419) 1,096,333
Debt securities 15,848,975 18,906 (438,008) 15,429,873 313,223 -- (6,577) 306,646
Other 2,335,500 61,329 -- 2,396,829 -- -- -- --
------------ -------- ----------- ------------ ----------- -------- -------- ------------
Total available for sale $112,128,678 $790,285 $(3,319,023) $109,599,940 $37,799,303 $568,901 $(65,413) $ 38,302,791
============ ======== =========== ============ =========== ======== ======== ============
The amortized cost and estimated fair value of investment securities at June 30,
1999, by contractual maturity, are shown below.
Estimated Weighted
Amortized Fair Average
Cost Value Yield
------------ ------------ ----
Held to Maturity:
Due in one year or less $ 1,839,873 $ 1,848,119 7.22%
Due after one year through five years 1,087,374 1,087,730 6.27%
Due after five years through ten years -- -- --
Due after ten years 1,093,004 1,098,533 6.96%
No stated maturity 3,781,132 3,781,938 0.00%
------------ ------------ ----
Total held to maturity $ 7,801,383 $ 7,816,320 3.55%
============ ============ ====
Available for Sale:
Due in one year or less $ 339,808 $ 341,366 5.52%
Due after one year through five years 25,804,961 25,528,208 6.28%
Due after five years through ten years 27,982,555 27,312,878 6.36%
Due after ten years 56,551,038 55,080,939 6.97%
No stated maturity 1,450,316 1,336,549 0.00%
------------ ------------ ----
Total available for sale $112,128,678 $109,599,940 6.56%
============ ============ ====
Expected maturities may differ from contractual maturities because
borrowers generally have the right to call or prepay obligations without
prepayment penalties. The weighted average yield, based on amortized cost, is
presented on a taxable equivalent basis using the Federal marginal rate of 34%
adjusted for the 20% interest expense disallowance (27.2%). Proceeds from sales
and calls of investment securities available for sale during fiscal 1999, 1998,
and 1997 were $34.68 million, $41.50 million, and $103.03 million, respectively.
Gains of $94,247, $171,135, and $162,284 in fiscal 1999, 1998, and 1997,
respectively, and gross losses of $3,635, $3,146, and $5,833 in fiscal 1999,
1998, and 1997, respectively, were realized on those sales. Accrued interest
receivable on investments amounted to $1,035,000 and $703,800 at June 30, 1999
and 1998, respectively. At June 30, 1999, $53.23 million of investment
securities were pledged as collateral for Municipal savings deposits with the
Bank, for securities sold under agreements to repurchase, and for the Bank's
treasury, tax and loan account with the Federal Reserve.
30
3 - Loans Receivable
- --------------------
Loans receivable are summarized as follows:
At June 30,
----------------------------------
1999 1998
------------- -------------
First mortgage loans:
Residential $ 157,341,833 $ 155,627,889
Construction-residential 14,469,204 13,501,993
Land acquisition and
development 5,075,535 6,529,495
Commercial 55,197,514 41,001,909
Construction-commercial 9,793,986 10,614,137
Commercial business 14,708,274 11,437,190
Consumer 51,416,108 51,828,965
------------- -------------
Total loans 308,002,454 290,541,578
Less:
Undisbursed loan proceeds:
Construction-residential (8,711,869) (7,915,210)
Construction-commercial (2,681,071) (4,464,863)
Deferred loan fees (1,570,763) (1,619,819)
Allowance for loan losses (3,650,893) (3,413,830)
------------- -------------
Net loans $ 291,387,858 $ 273,127,856
============= =============
Accrued interest receivable on loans amounted to $1,353,118 and $1,387,721
at June 30, 1999 and 1998, respectively. At June 30, 1999, 1998, and 1997, the
Company serviced loans for others of $26.74 million, $28.87 million, and $24.89
million, respectively.
The aggregate amount of loans by the Company to its directors and
executive officers was $4,294,400 and $3,789,600 at June 30, 1999 and 1998,
respectively. These loans were made in the ordinary course of business at
substantially the same terms and conditions as those with other borrowers.
An analysis of the activity of these loans follows:
Balance at July 1, 1998 $3,789,600
New Loans 784,700
Repayments 279,900
----------
Balance at June 30, 1999 $4,294,400
==========
The total amount of non-performing loans was $933,000, $1.25 million, and
$748,000 at June 30, 1999, 1998 and 1997, respectively. If these non-performing
loans had been current in accordance with their original terms and had been
outstanding throughout the period, the gross interest income for fiscal 1999,
1998, and 1997 that would have been recorded for these loans was $75,200,
$111,800, and $71,400. Interest income on these non-performing loans included in
income for fiscal 1999, 1998, and 1997 amounted to $26,100, $57,560, and
$35,200, respectively. At June 30, 1999, and throughout fiscal 1999, there were
no loans for which impairment was required to be recognized.
The activity in the allowance for loan losses was as follows:
Year Ended June 30,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Balance, beginning of period $ 3,413,830 $ 2,855,003 $ 2,667,104
Provision for loan losses 390,000 605,672 523,413
Loans charged off (177,287) (81,411) (377,923)
Recoveries 24,350 34,566 42,409
----------- ----------- -----------
Balance, end of period $ 3,650,893 $ 3,413,830 $ 2,855,003
=========== =========== ===========
31
4 - Property and Equipment
- --------------------------
Property and equipment by major classification are summarized as follows:
At June 30,
-------------------------------
1999 1998
------------ ------------
Land $ 1,263,160 $ 1,096,715
Buildings and Improvements 6,237,529 5,878,644
Furniture, Fixtures and Equipment 4,212,324 3,980,286
------------ ------------
Total 11,713,013 10,955,645
Less Accumulated Depreciation (3,513,131) (3,861,795)
------------ ------------
Net $ 8,199,882 $ 7,093,850
============ ============
5 - Deposits
- ------------
Deposits consist of the following major classifications:
At June 30,
------------------------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Total Rate Amount Total
---- ------------ ----- ---- ------------ -----
Non-interest bearing -- % $33,007,163 9.2% -- % $32,361,445 10.9%
---- ------------ ----- ---- ------------ -----
Interest-bearing:
NOW checking accounts 1.47 36,011,370 10.0 1.55 31,769,680 10.6
Money market deposit accounts 3.82 47,464,015 13.2 3.77 35,609,735 11.9
Savings accounts 1.87 29,033,243 8.1 2.39 27,163,761 9.1
Certificates less than $100,000 5.36 137,558,712 38.2 5.64 133,801,531 44.9
Certificates $100,000 and greater 5.07 76,439,013 21.3 5.73 37,485,260 12.6
---- ------------ ----- ---- ------------ -----
Total interest-bearing 4.33 326,506,353 90.8 4.58 265,829,967 89.1
---- ------------ ----- ---- ------------ -----
Total deposits 3.93% $359,513,516 100.0% 4.08% $298,191,412 100.0%
==== ============ ===== ==== ============ =====
While the certificates frequently are renewed at maturity rather than paid out,
a summary of certificates by contractual maturity at June 30, 1999 is as
follows:
Years Ending June 30, Amount
--------------------- ------
2000 $ 131,158,982
2001 22,518,824
2002 48,751,670
2003 4,511,095
2004 4,714,419
2005 and thereafter 2,342,735
----------------
$ 213,997,725
================
Interest expense on deposits is comprised of the following:
Year Ended June 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
NOW Checking Accounts $ 491,758 $ 530,069 $ 461,510
Money Market Deposit Accounts 1,281,591 1,048,056 875,546
Savings Accounts 569,724 694,306 719,751
Certificates Less than $100,000 7,627,071 7,079,114 6,639,858
Certificates $100,000 & Greater 2,732,396 2,116,453 1,589,060
----------- ----------- -----------
Total $12,702,540 $11,467,998 $10,285,725
=========== =========== ===========
32
6 - Advances From Federal Home Loan Bank of Pittsburgh ("FHLBP")
Under terms of its collateral agreement with the FHLBP, the Company
maintains otherwise unencumbered qualifying assets (principally 1-4-family
residential mortgage loans and U.S. Government & Agency notes and bonds) in the
amount of at least as much as its advances from the FHLBP. The Company's FHLBP
stock is also pledged to secure these advances. At June 30, 1999 and 1998, such
advances mature as follows:
Weighted Weighted
Average June 30, Average June 30,
Due by June 30, Rate 1999 Due by June 30, Rate 1998
- ---------------------------------------------------------- ---------------------------------------------------------
2000 6.42% $ 3,241,147 1999 5.63% $ 3,284,594
2001 5.76 5,526,281 2000 6.33 3,517,372
2002 5.75 4,316,269 2001 5.76 5,526,281
2003 5.86 7,351,822 2002 5.75 4,316,268
2004 5.79 701,878 2003 5.86 7,351,822
Thereafter 5.31 29,237,605 Thereafter 5.36 16,939,485
- ---------------------------------------------------------- ---------------------------------------------------------
Total FHLBP advances 5.55% $ 50,375,002 Total FHLBP advances 5.65% $ 40,935,822
========================================================== =========================================================
Included in the table above at June 30, 1999 are convertible advances
whereby the FHLBP has the option at a predetermined time to convert the fixed
interest rate to an adjustable rate tied to LIBOR. The Bank then has the option
to prepay these advances if the FHLBP converts the interest rate. These advances
are included in the year in which they mature.
The Company has available an annually renewable line of credit not to
exceed 10% of the Company's maximum borrowing capacity which was $13.13 million
at the time the commitment was executed. The Company, from time to time, has
used the line of credit to meet liquidity needs. At June 30, 1999 and 1998,
there were no balances outstanding on the line of credit.
7 - Income Taxes
- ----------------
The provision (and benefit) for income taxes is summarized as follows:
Year Ended June 30,
-------------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
Current:
Federal $ 1,388,865 $ 1,177,200 $ 753,774
State 304,209 75,547 144,145
Deferred - Federal (125,494) (165,992) (140,485)
-------------- --------------- --------------
Total $ 1,567,580 $ 1,086,755 $ 757,434
============== =============== ==============
The provision for income taxes differs from the statutory rate due to the
following:
Year Ended June 30,
------------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
Federal income taxes at statutory rate $ 1,965,228 $ 1,602,347 $ 1,018,144
Tax exempt interest, net (509,621) (367,469) (222,162)
State taxes net of Federal benefit 201,372 50,454 95,136
Non-taxable S Corp income -- (212,735) (105,892)
Non-deductible merger expenses -- 71,484 --
Other, net (89,399) (57,326) (27,792)
-------------- --------------- --------------
Total $ 1,567,580 $ 1,086,755 $ 757,434
============== =============== ==============
33
7 - Income Taxes (Continued)
- ----------------------------
The deferred tax assets and liabilities at June 30, 1999 and 1998, consisted of
the following:
At June 30,
------------------------
1999 1998
---------- ----------
Deferred tax assets:
Allowance for loan losses $1,241,304 $1,135,202
Deferred loan fees 51,656 75,841
Uncollected interest 52,172 35,172
Net unrealized loss on securities available for sale 976,093 --
Other 22,524 40,393
---------- ----------
Gross deferred tax assets 2,343,749 1,286,608
Deferred tax liabilities:
Tax bad debt reserves 138,297 165,957
Loan discount 115,732 129,586
Depreciation 12,065 14,998
Net unrealized gain on securities available for sale -- 183,512
---------- ----------
Gross deferred tax liabilities 266,094 494,053
---------- ----------
Net deferred tax assets $2,077,655 $ 792,555
========== ==========
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that the Company will realize the benefits of these
deferred tax assets.
For periods ending prior to May 29, 1998, no provision has been made for
income taxes for PCIS since PCIS had elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code and similar state provisions. Under
these provisions, PCIS does not pay income taxes on its taxable income. Instead,
the former stockholders of PCIS are liable for individual income taxes based on
their respective shares of PCIS's taxable income. As a result of all of PCIS's
stock being purchased by Chester Valley Bancorp Inc. on May 29, 1998, PCIS is no
longer eligible to be taxed under the provisions of Subchapter S of the Internal
Revenue Code.
The Small Business Job Protection Act of 1996 ("Act"), enacted on August
20, 1996, provides for the repeal of the tax bad debt deduction computed under
the percentage of taxable income method. The repeal of the use of this method is
effective for tax years beginning after December 31, 1995. Prior to the change
in law, the Bank had qualified under the provisions of the Internal Revenue Code
which permitted it to deduct from taxable income an allowance for bad debts
based on 8% of taxable income.
Upon repeal, the Bank is required to recapture into income, over a
six-year period, the portion of its tax bad debt reserves that exceed its base
year reserves (i.e., tax reserves for tax years beginning before 1988). The base
year tax reserves, which may be subject to recapture if the Bank ceases to
qualify as a bank for federal income tax purposes, are restricted with respect
to certain distributions. The Bank's total tax bad debt reserves at June 30,
1999, are approximately $3.04 million, of which $2.64 million represents the
base year amount and $407,000 is subject to recapture. The Company has
previously recorded a deferred tax liability for the excess base year reserves
to be recaptured; therefore, this recapture will not impact the statement of
operations.
8 - Commitments And Contingencies
- ---------------------------------
Financial instruments with off-balance-sheet risk:
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
Commitments to originate loans amounted to $7.77 million as of June 30, 1999, of
which $6.08 million was for variable-rate loans. The balance of the commitments
represent fixed-rate loans with interest rates ranging from 6.38% to 9.00%. At
June 30, 1999, the Company had undisbursed loans in process for construction
loans of $11.39 million and $17.10 million in undisbursed lines of credit. In
addition, the Company has issued $40,000 in commercial letters of credit fully
secured by deposit accounts or real estate.
Concentration of credit risk:
The Company is principally a local lender and therefore has a significant
concentration of residential and commercial real estate loans as well as
consumer and commercial business loans to borrowers who reside in and/or which
are collateralized by real estate located primarily in Chester County,
Pennsylvania. The ability of such customers to honor these obligations is
dependent, to varying degrees, on the overall economic performance of this
diversified region.
Other commitments:
The Bank and PCIS have entered into operating leases for several of their
branch and office facilities. The minimum annual rental payments under these
leases at June 30, 1999, are as follows:
Year Minimum Lease Payments
---- ----------------------
2000 $407,112
2001 295,862
2002 289,601
2003 264,360
2004 237,919
2005 and after 922,081
Rent expense under these leases for each of the years ended June 30, 1999,
1998, and 1997, was $536,694, $521,175, and $499,213, respectively.
34
9 - Affiliated Transactions
- ---------------------------
During fiscal 1999, 1998 and 1997 the Company entered into an agreement
with one of the directors of the Company to perform reviews of appraisals in
connection with the origination of residential mortgage loans. During fiscal
1997 the Company entered into an agreement with another director of the Company
for the improvement and renovation of certain of the Bank's offices, for the
performance of routine maintenance and repair at all of the Bank's offices, and
for the inspection services performed in connection with loans. The Board of
Directors approved the agreements with both directors, one a general contractor
and the other an architect. The total paid was $4,625 in 1999, $5,060 in 1998,
and $26,638 in 1997.
Two directors of the Company are a principal and a partner in law firms
which the Company retained during fiscal years 1999, 1998, and 1997, and which
the Company intends to retain during fiscal year 2000. During the year ended
December 31, 1998, the amount of legal fees paid to the law firms did not exceed
5% of those firms' gross revenues for such fiscal year.
A director of the Company is an executive officer, director and principal
of an investment banking firm from which the Company purchased and sold
investment securities during fiscal years 1999, 1998, and 1997. The Company
intends to continue the business relationship during fiscal 2000. The purchases
of investment securities from the investment banking firm amounted to $343.29
million, $321.78 million, and $119.11 million and the sales amounted to $240.74
million, $272.34 million, and $103.03 million during fiscal years 1999, 1998 and
1997, respectively. These securities were purchased and sold at market rates and
on terms no more favorable to the investment banking firm than those obtainable
on an arm's-length basis. The investment banking firm receives income on these
transactions as a result of a spread differential (on a net yield basis). During
the year ended December 31, 1998, the amount of income earned by the investment
banking firm related to the investment activity with the Company did not exceed
5% of that firm's gross revenues for such fiscal year.
A director of the Company is a director and president of a mortgage
banking firm from which the Company purchased single-family residential mortgage
loans during fiscal years 1999, 1998, and 1997, and the Company intends to
continue the business relationship during fiscal year 2000. During fiscal 1999,
1998 and 1997, the purchases of loans from the mortgage banking firm amounted to
$4.73 million, $7.28 million, and $16.32 million, respectively, with fees of
$50,471, $93,314, and $135,061, respectively, paid to the firm. The loans were
purchased at market rates and terms no more favorable to the mortgage banking
firm than those obtainable on an arm's-length basis.
During fiscal 1999, 1998 and 1997 the Company entered into an agreement
with one of the directors of the Company to perform reviews of appraisals in
connection with the origination of residential mortgage loans. During fiscal
1997 the Company entered into an agreement with another director of the Company
for the improvement and renovation of certain of the Bank's offices, for the
performance of routine maintenance and repair at all of the Bank's offices, and
for the inspection services performed in connection with loans. The Board of
Directors approved the agreements with both directors, one a general contractor
and the other an architect. The total paid was $4,625 in 1999, $5,060 in 1998,
and $26,638 in 1997.
Two directors of the Company are a principal and a partner in law firms
which the Company retained during fiscal years 1999, 1998, and 1997, and which
the Company intends to retain during fiscal year 2000. During the year ended
December 31, 1998, the amount of legal fees paid to the law firms did not exceed
5% of those firms' gross revenues for such fiscal year.
A director of the Company is an executive officer, director and principal
of an investment banking firm from which the Company purchased and sold
investment securities during fiscal years 1999, 1998, and 1997. The Company
intends to continue the business relationship during fiscal 2000. The purchases
of investment securities from the investment banking firm amounted to $343.29
million, $321.78 million, and $119.11 million and the sales amounted to $240.74
million, $272.34 million, and $103.03 million during fiscal years 1999, 1998 and
1997, respectively. These securities were purchased and sold at market rates and
on terms no more favorable to the investment banking firm than those obtainable
on an arm's-length basis. The investment banking firm receives income on these
transactions as a result of a spread differential (on a net yield basis). During
the year ended December 31, 1998, the amount of income earned by the investment
banking firm related to the investment activity with the Company did not exceed
5% of that firm's gross revenues for such fiscal year.
A director of the Company is a director and president of a mortgage
banking firm from which the Company purchased single-family residential mortgage
loans during fiscal years 1999, 1998, and 1997, and the Company intends to
continue the business relationship during fiscal year 2000. During fiscal 1999,
1998 and 1997, the purchases of loans from the mortgage banking firm amounted to
$4.73 million, $7.28 million, and $16.32 million, respectively, with fees of
$50,471, $93,314, and $135,061, respectively, paid to the firm. The loans were
purchased at market rates and terms no more favorable to the mortgage banking
firm than those obtainable on an arm's-length basis.
10 - Stockholders' Equity
- -------------------------
At the time of its conversion from a state-chartered mutual association to
a state-chartered capital stock association, the Bank established a liquidation
account in an amount equal to $4,845,000 at September 30, 1986. The liquidation
account is maintained for the benefit of eligible savings account holders who
have maintained their savings account in the Bank after conversion. In the
unlikely event of a complete liquidation, each eligible savings account holder
will be entitled to receive a liquidation distribution from the liquidation
account, in the amount of the then current adjusted sub-account balance for
savings accounts held, before any liquidation distribution may be made with
respect to capital stock.
Except for the repurchase of stock and payment of dividends by the Bank,
the existence of the liquidation account does not restrict the use or
application of such net worth. The Company may not declare or pay a cash
dividend on, or repurchase, any of its common stock if the effect thereof would
cause the net worth of the Bank to be reduced below either the amount required
for the liquidation account or the net worth requirements imposed by the Office
of Thrift Supervision.
In September 1998 and 1997 the Company paid 5% common stock dividends in
the amounts of 116,034 and 102,606 shares, respectively, from authorized but
unissued common stock with fractional shares paid in the form of cash. In
December 1998 the Company paid a three-for-two stock split effected in the form
of a dividend in the amount of 1,224,980 shares, with fractional shares paid in
the form of cash.
35
11 - Regulatory Capital
- -----------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). At June 30, 1999 and 1998 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 June 30, 1999 that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table as
follows (dollars in thousands):
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ----------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1999:
Total Capital (to Risk Weighted Assets) $ 34,005 13.05% $ 20,848 8.00% $ 26,060 10.00%
Tier 1 Capital (to Risk Weighted Assets) $ 30,768 11.81% $ 10,424 4.00% $ 15,636 6.00%
Tier 1 Capital (to Average Assets) $ 30,768 6.86% $ 17,934 4.00% $ 22,418 5.00%
As of June 30, 1998:
Total Capital (to Risk Weighted Assets) $ 31,328 14.18% $ 17,678 8.00% $ 22,098 10.00%
Tier 1 Capital (to Risk Weighted Assets) $ 28,560 12.92% $ 8,839 4.00% $ 13,259 6.00%
Tier 1 Capital (to Average Assets) $ 28,560 7.64% $ 14,945 4.00% $ 18,682 5.00%
12 - Fair Value Of Financial Instruments
- ----------------------------------------
The Company is required to disclose estimated fair values for its
financial instruments.
Limitations
Estimates of fair value are made at a specific point in time, based upon,
where available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparts, future expected loss
experience and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and therefore
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies are likely to result in significantly different
fair value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking, or other businesses, existing
customer relationships, extensive branch banking network, property, equipment,
goodwill or certain tax implications related to the realization of unrealized
gains or losses. Also, the fair value of non-interest bearing demand deposits,
savings and NOW accounts and money market deposit accounts is equal to the
carrying amount because these deposits have no stated maturity. This approach to
estimating fair value excludes the significant benefit that results from the
low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of individual
assets and liabilities may not be reflective of the fair value of a banking
organization that is a going concern.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at June 30, 1999 and 1998:
Cash and cash equivalents:
Current carrying amounts approximate estimated fair value.
36
12 - Fair Value Of Financial Instruments (Continued)
- ----------------------------------------------------
Trading account securities, securities held to maturity and securities available
for sale:
Current quoted market prices were used to determine fair value.
Loans:
Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type, and each loan category was
further segmented by fixed- and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
through the estimated maturity and prepayment speeds while using estimated
market discount rates that reflected credit and interest risk inherent in the
loans. The estimate of the maturities and prepayment speeds was based on the
Company's historical experience. Cash flows were discounted using market rates
adjusted for the various types of loan portfolios.
Deposits:
The fair value of deposits with no stated maturity, such as non-interest
bearing deposits, savings, NOW and money market accounts, as well as repurchase
agreements, is equal to the amount payable on demand. The fair value of
certificates of deposit was estimated by discounting the contractual cash flows
using current market rates offered in the Company's market area for deposits
with comparable terms and maturities.
Borrowed Funds:
The fair value of borrowings was estimated using rates currently available
to the Company for debt with similar terms and remaining maturities.
Commitments to extend credit:
The majority of the Company's commitments to extend credit carry current
market interest rates if converted to loans. Because commitments to extend
credit are generally unassignable by either the Company or the borrower, they
only have value to the Company and the borrower. The estimated fair value
approximates the recorded deferred fee amounts.
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
At June 30,
----------------------------------------------------------------------------------
1999 1998
---------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- --------- --------- ----------
Financial Assets:
Cash and cash equivalents $ 18,602 $ 18,602 $ 15,905 $ 15,905
Trading account securities 9,221 9,221 20,352 20,352
Investment securities available for sale 109,600 109,600 38,303 38,303
Investment securities 7,801 7,816 15,600 15,672
Loans receivable, net 291,388 289,314 274,229 275,243
Accrued interest receivable 2,461 2,461 2,486 2,486
--------- --------- --------- ----------
Total financial assets $ 439,073 $ 437,014 $ 366,875 $ 367,961
========= ========= ========= ==========
Financial Liabilities:
Deposits and repos $ 359,514 $ 360,037 $ 298,336 $ 299,123
Borrowed funds 51,028 51,322 41,791 41,893
Accrued interest payable 1,573 1,573 969 969
--------- --------- --------- ----------
Total financial liabilities $ 412,115 $ 412,932 $ 341,096 $ 341,985
========= ========= ========= ==========
13 - Employee Benefits
- ----------------------
Stock Compensation Program
The Company has two stock option plans (collectively, the "Plans") -- the
1993 Plan and the 1997 Plan. An aggregate of 179,477 and 236,250 authorized but
unissued shares of common stock of the Company, adjusted for the 5% stock
dividends in September 1998, 1997, 1996 and 1995, and the December 1998
three-for-two stock split and the March 1997 five-for-four stock split, were
reserved for issuance under the 1993 Plan and the 1997 Plan, respectively. As of
June 30, 1999 there were 155,908 and 33,762 options granted under the 1993 and
1997 Plans, respectively. Under the Plans, the option price per share for
incentive options granted may not be less than the fair market value of the
common stock on the date of grant. Options may be granted under the 1993 Plan
and the 1997 Plan during the ten-year periods ending 2003 and 2007,
respectively, and options granted under the Plans are exercisable up to ten
years from the date of grant. Rights to exercise options under the Plans may be
limited by imposition of vesting schedules at the time the options are granted.
37
The following table is a summary of option transactions since June 30,
1997. These options and option prices for the years 1997, 1998, and 1999 have
been adjusted to reflect the stock dividends in fiscal 1997, 1998 and 1999 and
the stock splits in fiscal 1997 and fiscal 1999:
Year Ended June 30,
--------------------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 84,182 $ 9.08 117,188 $ 8.58 138,675 $ 7.50
Granted 97,059 20.40 10,336 14.51 20,734 8.51
Exercised (14,810) 8.99 (31,705) 8.60 (29,284) 3.40
Forfeited (8,095) 19.10 (11,637) 10.23 (12,937) 8.64
-------- -------- --------
Outstanding at end of year 158,336 15.51 84,182 9.08 117,188 8.58
Exercisable at end of year 90,635 52,989 46,023
Weighted-average fair value
of options granted $ 6.75 $ 4.90 $ 2.89
At June 30, 1999, the range of exercise prices was $8.41 - $20.40 and the
weighted average remaining contractual life of the outstanding options was 7.6
years. The Black-Scholes option-pricing model was used to determine the
grant-date fair value of options. Significant assumptions used in the model
included a weighted average risk free rate of return of 5.81% in 1999, 6.39% in
1998 and 6.49% in 1997; expected option life of 6 years for 1999, 1998 and 1997
options; expected stock price volatility of 29.73% for 1999, 27.64% for 1998 and
28.04% in 1997 and expected dividends of 1.82%, 1.51%, and 1.82% for 1999, 1998,
and 1997, respectively.
The Company, as permitted, has elected not to adopt the fair value
accounting provisions of SFAS 123 "Accounting for Stock-based Compensation", and
has instead continued to apply APB Opinion 25 and related Interpretations in
accounting for plans and provide the required proforma disclosures of SFAS 123.
Had the grant-date fair-value provisions of SFAS 123 been adopted, the Company
would have recognized $126,109 in 1999 and $26,500 in 1998 in compensation
expense related to its Option Plans. As a result, proforma net income of the
Company would have been $4,086,400 in 1999 and $3,599,500 in 1998 and proforma
diluted earnings per share would have been $1.10 in 1999 and $.98 in 1998.
The effects of proforma net income and diluted earnings per share of
applying the disclosure requirements of SFAS 123 in past years may not be
representative of the future proforma effects on net income and EPS due to the
vesting provisions of the options and future awards that are available to be
granted.
Employee Stock Ownership Plan
The Bank maintains an ESOP for all employees of the Bank with at least one
year of credited service. Benefits become 20% vested after three years of
service, increasing to 100% after seven years. Forfeitures are reallocated among
remaining participating employees. Vested benefits are generally payable upon
retirement, disability or separation from service.
The ESOP is subject to the requirements of the Employee Retirement Income
Security Act of 1974, as amended, and the regulations of the Internal Revenue
Service and the Department of Labor.
The ESOP is funded by the Bank's contributions, and all contributions to
date have been used to pay principal, interest and other fees associated with
the ESOP's loan referred to below. Benefits to participants are normally paid in
whole shares of common stock.
The ESOP borrowed funds to acquire the initial 78,125 shares of common
stock at $5.76 per share, adjusted for the subsequent stock splits effected in
the form of dividends. The ESOP purchased an additional 101,544 shares of the
common stock at a weighted average price of $8.69 per share, also adjusted for
the subsequent stock splits effected in the form of dividends. Funds necessary
to purchase such shares were borrowed from an independent third-party lender.
The Company has not guaranteed the debt but anticipates contributing sufficient
funds to the ESOP to enable it to meet its debt service requirements. The
outstanding loan balance has been reflected as a liability and a reduction of
stockholders' equity in the consolidated statements of financial condition.
Shares purchased with such loan proceeds are held in a suspense account for
allocation among members as the loan is repaid. Contributions to the ESOP and
shares released from the suspense account are allocated among members on the
basis of compensation and years of service. A total of 57,901, 85,094, and
27,928, shares were allocated in fiscal 1999, 1998, and 1997, respectively.
Contributions by the Bank to the ESOP in fiscal 1999, 1998 and 1997
amounted to $128,609, $173,957, and $181,240, respectively, and are included in
the accompanying consolidated statements of operations in salaries and employee
benefits. Interest expense paid during 1999, 1998, and 1997 by the ESOP for the
loan amounted to $10,568, $19,839, and $34,298, respectively.
The interest rate on the ESOP loan is fixed at 7.50% until maturity with
interest expense being computed on the unpaid principal balance. As principal
payments are made by the ESOP, the corresponding liability is reduced and
stockholders' equity is increased. Principal payments and cash dividends paid on
the common stock held by the ESOP in fiscal 1999 amounted to $146,618, on the
loan which matured on April 1, 1999.
Pension Plan
The Bank has a noncontributory defined benefit pension plan which is fully
funded through a multi-employer investment trust covering qualified salaried
employees. Costs recognized for the years ended June 30, 1999, 1998 and 1997,
totaled $5,158, $3,884, and $4,953, respectively. Information relative to the
financial status of the Bank's portion of the Plan is not currently available.
38
14 - Acquisition
- ----------------
On May 29, 1998, the Company acquired Philadelphia Corporation for
Investment Services, a full-service investment advisory and securities brokerage
firm. The transaction was accounted for as a pooling of interests and the
shareholders of PCIS received 23.4239 shares of Chester Valley Bancorp Inc.
stock for each share of PCIS stock. Approximately 134,000 shares of CVAL stock
were issued in the exchange.
The results of operations previously reported by the separate companies
and the combined amounts presented in the accompanying consolidated financial
statements are summarized in the Segment Reporting footnote (see footnote 15).
15 - Segment Reporting
- ----------------------
The Company has two reportable segments: First Financial Bank ("FFB") and
Philadelphia Corporation for Investment Services ("PCIS"). FFB operates a branch
bank network with eight full-service banking offices and provides deposits and
loan services to customers. Additionally, FFB offers trust services at its
Downingtown headquarters. PCIS operates a full service investment advisory and
securities brokerage firm through two offices. Both segments operate in
southeastern Pennsylvania.
The Company evaluates performance based on profit or loss from operations
before income taxes not including nonrecurring gains and losses. There are no
material intersegment sales or transfers.
The Company's reportable segments have traditionally been two independent
financial services institutions. PCIS was acquired by the Company on May 29,
1998. The two segments are managed separately. All senior officers from PCIS
prior to the acquisition have been retained to manage the segment.
The following table highlights income statement and balance sheet
information for each of the segments at or for the years ended June 30, 1999,
1998 and 1997 (in thousands):
For The Year Ended June 30, 1999
- ---------------------------------------------------------------
FFB PCIS Total
- ---------------------------------------------------------------
Net interest income $ 13,633 $ 71 $ 13,704
Other income 2,056 3,141 5,197
Total net income 3,855 358 4,213
Total assets 448,901 2,257 451,158
Total interest-bearing deposits 11,971 1,438 13,409
Total trading securities 8,815 406 9,221
==============================================================
For The Year Ended June 30, 1998
- --------------------------------------------------------------
FFB PCIS Total
- --------------------------------------------------------------
Net interest income $ 12,291 $ 53 $ 12,344
Other income 1,851 2,767 4,618
Total net income 3,196 430 3,626
Total assets 375,153 1,859 377,012
Total interest-bearing deposits 10,643 1,218 11,861
Total trading securities 19,944 408 20,352
==============================================================
For The Year Ended June 30, 1997
- --------------------------------------------------------------
FFB PCIS Total
- --------------------------------------------------------------
Net interest income $ 11,066 $ 49 $ 11,115
Other income 1,324 2,325 3,649
Total net income 1,926 311 2,237
Total assets 323,673 1,528 325,201
Total interest-bearing deposits 6,844 1,057 7,901
Total trading securities -- 252 252
==============================================================
16 - Summarized Quarterly Financial Data For Fiscal 1999 and 1998 (Unaudited)
- ----------------------------------------------------------------------------
(Dollars in thousands except per share data)
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income $ 6,990 $ 7,172 $ 7,354 $ 7,869 $ 6,310 $ 6,377 $ 6,404 $ 6,662
Interest expense 3,771 3,783 3,909 4,218 3,267 3,355 3,278 3,509
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,219 3,389 3,445 3,651 3,043 3,022 3,126 3,153
Provision for loan losses 45 45 45 255 120 120 201 165
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,174 3,344 3,400 3,396 2,923 2,902 2,925 2,988
Other income 1,386 1,387 1,170 1,254 1,115 1,004 1,349 1,150
Operating expenses(1) 2,989 3,028 3,263 3,450 2,674 2,659 2,870 3,440
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,571 1,703 1,307 1,200 1,364 1,247 1,404 698
Income tax expense(1) 472 535 288 273 360 338 346 43
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,099 $ 1,168 $ 1,019 $ 927 $ 1,004 $ 909 $ 1,058 $ 655
=================================================================================================================================
Earnings per common share(2)
Basic $ 0.30 $ 0.32 $ 0.28 $ 0.24 $ 0.28 $ 0.25 $ 0.29 $ 0.18
=================================================================================================================================
Diluted $ 0.30 $ 0.31 $ 0.27 $ 0.25 $ 0.27 $ 0.25 $ 0.29 $ 0.17
=================================================================================================================================
(1) The fourth quarter of fiscal 1998 includes PCIS acquisition costs of $.21
million in addition to a charitable donation of $.29 million which resulted
in a $.15 million state tax credit.
(2) Earnings per share have been restated to reflect the effects of the 5%
stock dividend paid in September 1998 and 1997 and the three-for-two stock
split effected in the form of a dividend in December 1998.
39
17 - Parent Company Financial Information
- -----------------------------------------
Financial information of Chester Valley Bancorp Inc. (parent company only)
follows:
Statements of Financial Condition
- ---------------------------------
At June 30,
---------------------------
1999 1998
----------- -----------
Assets
On deposit with subsidiaries $ 782,599 $ 375,801
Securities available for sale 1,962,797 1,402,979
Investment in subsidiaries 31,051,563 30,274,690
Other assets 55,550 25,523
----------- -----------
Total Assets $33,852,509 $32,078,993
=========== ===========
Liabilities
ESOP debt $ -- $ 146,618
Other liabilities -- 83,532
----------- -----------
Total Liabilities -- 230,150
Stockholders' Equity 33,852,509 31,848,843
----------- -----------
Total Liabilities and Stockholders' Equity $33,852,509 $32,078,993
=========== ===========
Statements of Operations
- ------------------------
Year Ended June 30,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Income
Distributed income from subsidiaries $1,796,652 $2,188,259 $1,049,582
Interest income 98,020 28,490 16,598
Equity in undistributed income of subsidiaries 2,329,245 1,587,662 1,188,273
---------- ---------- ----------
Expense
Other expense 11,416 178,381 17,345
---------- ---------- ----------
Net Income $4,212,501 $3,626,030 $2,237,108
========== ========== ==========
Statements of Cash Flows
- ------------------------
Year Ended June 30,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Operating activities:
Net income $ 4,212,501 $ 3,626,030 $ 2,237,108
Add (deduct) items not affecting cash flows
from operating activities:
Equity in undistributed income of subsidiaries (2,329,245) (1,587,662) (1,188,273)
Increase in other assets (30,027) (22,169) --
Increase (decrease) in other liabilities (83,532) 83,532 --
Reduction of common stock acquired by ESOP 146,618 186,872 177,250
----------- ----------- -----------
Net cash flows from operating activities 1,916,315 2,286,603 1,226,085
----------- ----------- -----------
Investment activities:
Purchase of securities available for sale (908,446) (1,402,979) --
Proceeds from sales and calls of securities available for sale 99,900 --
----------- ----------- -----------
Net cash flows used in investment activities (808,546) (1,402,979) --
----------- ----------- -----------
Financing activities:
Income tax benefit on exercise of stock options (43,454) (98,270) (92,246)
Cash dividends (1,153,622) (1,229,256) (1,061,628)
Payment for fractional shares (15,525) (7,633) (15,927)
Common stock repurchased (23,800) (274,911) (351,879)
Repayments of principal on ESOP debt (146,618) (186,872) (177,250)
Proceeds from exercise of stock options 167,601 440,102 337,041
Proceeds from issuance of common stock 514,447 539,863 90,181
----------- ----------- -----------
Net cash flows used in financing activities (700,971) (816,977) (1,271,708)
----------- ----------- -----------
Net increase (decrease) in cash 406,798 66,647 (45,623)
Cash and cash equivalents:
Beginning of period 375,801 309,154 354,777
----------- ----------- -----------
End of period $ 782,599 $ 375,801 $ 309,154
=========== =========== ===========
Non-cash items:
Net unrealized gain (loss) on investment securities
available for sale, net of taxes $(1,844,554) $ 289,195 $ 99,936
Stock dividend issued $ 3,016,884 $ 2,154,726 $ 1,515,755
=========== =========== ===========
40
Independent Auditors' Report
[GRAPHIC-LOGO FOR KPMG]
To the Board of Directors and Stockholders of
Chester Valley Bancorp Inc:
We have audited the accompanying consolidated statements of financial
condition of Chester Valley Bancorp Inc. and subsidiaries as of June 30, 1999
and 1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chester
Valley Bancorp Inc. and subsidiaries as of June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1999, in conformity with generally accepted
accounting principles.
/s/KPMG LLP
- -----------
KPMG LLP
Philadelphia, Pennsylvania
July 22, 1999
41
[GRAPHIC-PHOTOS OF BOARD OF DIRECTORS]
42
Directors Serving in the
Same Capacity for Chester Valley Bancorp Inc. and
First Financial Bank:
Anthony J. Biondi
Director, President, and
Chief Operating Officer
of the Company and the Bank
Edward T. Borer
Chairman
Philadelphia Corporation
for Investment Services
Robert J. Bradbury
Co-chairman
Dolphin & Bradbury Incorporated
John J. Cunningham, III, Esquire
Partner
Schnader Harrison Segal & Lewis LLP
Gerard F. Griesser
President
Trident Financial Group
James E. McErlane, Esquire
Partner
Lamb, Windle & McErlane, PC
Richard L. Radcliff
President and Co-owner (Retired)
Radcliff & Sipe Architectural Firm
Ellen Ann Roberts
Director, Chairman, and
Chief Executive Officer
of the Company and the Bank
Emory S. Todd
Certified Public Accountant
William M. Wright
Retired General Manager
Malcolm Wright Buick Olds, Inc.
Directors on the Board of Philadelphia Corporation for Investment Services:
Philip J. Baldassari
Senior Vice President
Anthony J. Biondi
Director, President, and
Chief Operating Officer
of the Company and the Bank
Frederick A. Bluefeld
Vice President
Edward T. Borer
Chairman
Robert J. Bradbury
Co-chairman
Dolphin & Bradbury Incorporated
A. Louis Denton
President and Chief Executive Officer
James E. McErlane, Esquire
Partner
Lamb, Windle & McErlane, PC
R. Wayne Raffety
Senior Vice President
Ellen Ann Roberts
Director, Chairman, and
Chief Executive Officer
of the Company and the Bank
Vernon C. Walker
Senior Vice President
Spencer D. Wright, III
Chairman Emeritus
Executive Officers of Chester Valley Bancorp Inc:
Ellen Ann Roberts
Chairman and Chief Executive Officer
Anthony J. Biondi
President and Chief Operating Officer
James E. McErlane, Esquire
Secretary
Colin N. Maropis
Executive Vice President
Executive Officers of
First Financial Bank:
Ellen Ann Roberts
Chairman and Chief Executive Officer
Anthony J. Biondi
President and Chief Operating Officer
Steven C. Cunningham
Vice President
Kay B. Falkow
Vice President
Edward S. Lawrence
Senior Vice President
Colin N. Maropis
Executive Vice President
David L. Summers
Vice President
Other Officers of
First Financial Bank:
Frank J. Baldassarre
Vice President
C. Ward Braceland
Vice President
Shelley A. Castrinoes
Assistant Vice President
Pamela M. Collins
Secretary
Arlene S. Cunningham
Assistant Vice President
Assistant Secretary
Linda B. Draper
Assistant Vice President
Romaine R. Dunlap
Assistant Vice President
William G. Eads, Jr.
Vice President
Veronica Gilken
Assistant Vice President
Michelle L. Guerrero
Assistant Vice President
Anne S. Johnson
Assistant Vice President
Kelly L. Laurento
Assistant Vice President
Celeste L. Moore
Assistant Vice President
Cheryl M. Owens
Assistant Vice President
Carol F. Reichard
Assistant Vice President
Paula D. Stevens
Assistant Vice President
Joseph M. Swarr
Assistant Vice President
Phillis D. Weidenhammer
Vice President
Jo Ann Willenbrock
Assistant Vice President
Paige M. Willover
Assistant Vice President
Executive and Administrative Officers of Philadelphia
Corporation for Investment Services:
Edward T. Borer
Chairman
A. Louis Denton
President and Chief Executive Officer
Mary Kay Greenwood
Assistant Vice President and Secretary
Kathleen D. Hartung
Treasurer
43
First Financial Bank
Advisory Board Members:
Coatesville Advisory Board:
Milton Allen
Albert W. Eastburn
Nicholas J. Fantanarosa, Jr.
Dr. Louis M. Laurento
Aleda P. Loughman
John H. Newton, Jr.
Devon Advisory Board:
Matthew DiDomenico
Alan F. Hark
William T. McDonnell
Dennis C. Reardon, LL.M.
Exton Advisory Board:
William E. Augustine
Raymond H. Carr
Carl K. Croft, CPA
Jay G. Fischer
Kevin Holleran, Esquire
James Knipe, Sr.
Frazer Advisory Board:
Timothy O. Fanning
David M. Frees, III
Florence D. Hunt
Albert P. Massey, Jr.
R. Wayne Raffety
A. Joseph Rubino
Westtown Advisory Board:
Wayne W. Grafton
Charles A. Hackett, CPA
Marita M. Hutchinson, Esquire
Conrad E. Muhly, III
Earl Stoltzfus
John R. Williams
George C. Zumbano, Esquire
CORPORATE INFORMATION:
Annual Meeting
The Annual Meeting of Stockholders will be held at 10 AM on Wednesday, October
27, 1999, at:
Chester Valley Golf and Country Club
430 Swedesford Road
Malvern, Pennsylvania 19355
Stock Listing
Chester Valley Bancorp Inc. Stock is traded on the NASDAQ National Market System
under the symbol "CVAL".
Market Makers:
F. J. Morrissey & Co., Inc.
Philadelphia, Pennsylvania
(215) 563-8500
Herzog Heine & Geduld, Inc.
Philadelphia, Pennsylvania
(800) 462-0443
Janney Montgomery Scott
Philadelphia, Pennsylvania
(215) 563-8671
Knight Securities LP
Jersey City, NJ 07310
Hopper Soliday Division of Tucker Anthony
Lancaster, Pennsylvania
(800) 456-9234
Spear, Leeds & Kellog
Jersey City, NJ 07302
Investor Information:
Patricia A. Ferretti
Shareholder Relations Administrator
Chester Valley Bancorp Inc.
100 E. Lancaster Avenue
Downingtown, Pennsylvania 19335
(610) 269-9700
Transfer Agent, Registrar and Dividend Disbursing Agent:
American Stock Transfer and Trust Co.
40 Wall Street, 46th Floor
New York, New York 10005
(212) 936-5100
Form 10-K
Subsequent to the required filing with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, the Company will furnish to any
shareholder, without charge, a copy of the Company's Annual Report on Form 10-K
for the year ended June 30, 1999 and the exhibits thereto, upon written request
to Patricia A. Ferretti, Shareholder Relations Administrator.
Auditors:
KPMG LLP
1600 Market Street
Philadelphia, Pennsylvania 19103
Counsel:
Lamb, Windle & McErlane, PC
24 E. Market Street
West Chester, Pennsylvania 19381
Schnader Harrison Segal & Lewis LLP
1600 Market Street
Suite 3600
Philadelphia, Pennsylvania 19103
Elias, Matz, Tiernan & Herrick
The Walker Building, 12th Floor
734 15th Street, NW
Washington DC 20005
Executive Office:
Chester Valley Bancorp Inc.
100 E. Lancaster Avenue
Downingtown, Pennsylvania 19335
(610) 269-9700