SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NO.: 0-18833
CHESTER VALLEY BANCORP INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2598554
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 E. LANCASTER AVE., DOWNINGTOWN, PA 19335
---------------------------------------- ----------
(Address Of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 269-9700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK ($1.00 PAR VALUE) 4,330,358
------------------------------ -----------------------------
(Title of Each Class) (Number of Shares Outstanding
as of November 1, 2001)
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
-----
Page
Number
------
PART 1. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2001 and June 30, 2001 (Unaudited) 1
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2001 and 2000 (Unaudited) 2
STATEMENT OF OTHER COMPREHENSIVE INCOME
Three Months Ended September 30, 2001 and 2000 (Unaudited) 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2001 and 2000 (Unaudited) 4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12-16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16-19
PART 2. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
- ----------
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
SEPTEMBER 30, June 30,
2001 2001
------------- ---------
(Unaudited)
ASSETS $ 5,099 $ 4,214
Cash in banks
Interest-bearing deposits 34,331 19,698
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 39,430 23,912
-------- --------
Trading account securities 21 16
Investment securities available for sale 87,270 113,350
Investment securities (fair value - September 30, 2001, $42,622
June 30, 2001, $41,639 41,989 41,374
Loans held for sale 1,037 2,350
Loans receivable, less allowance for loan losses of $4,399 and $4,264 at
September 30, 2001 and June 30, 2001, respectively 349,491 343,963
Accrued interest receivable 3,164 3,553
Property and equipment - net 10,556 10,340
Other assets 8,285 5,847
-------- --------
TOTAL ASSETS $541,243 $544,705
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $408,156 $413,352
Securities sold under agreements to repurchase 7,389 2,428
Advance payments by borrowers for taxes and insurance 971 2,687
Federal Home Loan Bank advances 80,233 80,237
Other borrowings 245 241
Accrued interest payable 1,199 1,818
Other liabilities 1,428 3,844
-------- --------
TOTAL LIABILITIES 499,621 504,607
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $1.00 par value;
5,000,000 shares authorized; none issued -- --
Common stock - $1.00 par value; 10,000,000 shares authorized;
4,330,654 and 4,123,164 shares issued and outstanding
at September 30, 2001 and June 30, 2001, respectively 4,331 4,123
Additional paid-in capital 26,894 24,207
Retained earnings - partially restricted 11,299 13,136
Treasury stock (296 shares at cost) (5) (5)
Accumulated other comprehensive loss (897) (1,363)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 41,622 40,098
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $541,243 $544,705
======== ========
See accompanying notes to unaudited consolidated financial statements
1
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
---------- ----------
(Unaudited)
INTEREST INCOME:
Loans $ 6,808 $ 6,632
Investment securities and interest-bearing deposits 2,397 2,390
---------- ----------
TOTAL INTEREST INCOME 9,205 9,022
---------- ----------
INTEREST EXPENSE:
Deposits 3,732 4,301
Short-term borrowings 378 613
Long-term borrowings 809 589
---------- ----------
TOTAL INTEREST EXPENSE 4,919 5,503
---------- ----------
NET INTEREST INCOME 4,286 3,519
Provision for loan losses 131 105
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,155 3,414
---------- ----------
OTHER INCOME:
Investment services income 855 935
Service charges and fees 453 421
Gain (loss) on sale of:
Loans 51 (2)
Trading account securities -- 182
Available for sale securities 152 (11)
Other 44 37
---------- ----------
Total other income 1,555 1,562
---------- ----------
OPERATING EXPENSES:
Salaries and employee benefits 2,200 1,980
Occupancy and equipment 578 596
Data processing 251 230
Advertising 17 217
Deposit insurance premiums 21 17
Other 701 802
---------- ----------
Total operating expenses 3,768 3,842
---------- ----------
Income before income taxes 1,942 1,134
Income tax expense 480 139
---------- ----------
NET INCOME $ 1,462 $ 995
========== ==========
EARNINGS PER SHARE (1)
Basic $ 0.34 $ 0.23
========== ==========
Diluted $ 0.34 $ 0.23
========== ==========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ 0.10 $ 0.10
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
Basic 4,329,097 4,310,987
========== ==========
Diluted 4,351,573 4,366,735
========== ==========
(1) Earnings per share, dividends per share and weighted average shares
outstanding have been restated to reflect the effects of the 5% stock
dividends paid in September 2001 and 2000.
See accompanying notes to unaudited consolidated financial statements.
2
CHESTER VALLEY BANCORP INC. AND SUBSIDIARY
STATEMENT OF OTHER COMPREHENSIVE INCOME
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
---------- ----------
(Unaudited)
Net income $1,462 $ 995
Other comprehensive income, net of tax:
Net unrealized holding gains on securities available for sale
during the period 500 720
Reclassification adjustment for (gains) losses
included in net income (34) 8
------ ------
COMPREHENSIVE INCOME $1,928 $1,723
====== ======
See accompanying notes to unaudited consolidated financial statements.
3
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2001 2000
- -------------------------------------------------------------------------------------------------- --------------
(Unaudited)
Net income $ 1,462 $ 995
Add (deduct) items not affecting cash flows from (used in) operating activities:
Depreciation 257 251
Provision for loan losses 131 105
Gain on trading account securities -- (182)
(Gain) loss on sale of securities available for sale (152) 11
Originations of loans held for sale (1,067) --
Proceeds from sale of loans held for sale 2,431 --
Gain on sale of loans held for sale (51) --
Amortization of deferred loan fees, discounts and premiums (258) (223)
Increase in trading account securities (5) 6,312
Decrease in accrued interest receivable 389 80
Increase in other assets (2,733) (149)
Decrease in other liabilities (2,416) (262)
Decrease in accrued interest payable (619) (29)
- --------------------------------------------------------------------------------------------------------------
Net cash flows (used in) provided by operating activities (2,631) 6,909
- --------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investment activities:
Capital expenditures (473) (400)
Net increase in loans (5,520) (2,579)
Purchase of investment securities (15,410) (2,011)
Proceeds from maturities, payments and calls of investment securities 14,830 59
Purchase of securities available for sale (20,680) --
Proceeds from sales and calls of securities available for sale 47,757 1,675
- --------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investment activities 20,504 (3,256)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase in deposits before interest credited (8,842) 12,005
Interest credited to deposits 3,646 3,990
Increase in securities sold under agreements to repurchase 4,961 --
Proceeds from FHLB advances -- 17,500
Repayments of FHLB advances (4) (33,006)
Net increase in other borrowings 4 98
Decrease in advance payments by borrowers for taxes and insurance (1,716) (1,892)
Cash dividends on common stock (411) (352)
Common stock repurchased as treasury stock -- (220)
Payment for fractional shares (5) (7)
Stock options exercised 12 146
- --------------------------------------------------------------------------------------------------------------
Net cash flows used in financing activities (2,355) (1,738)
- --------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 15,518 1,915
CASH AND CASH EQUIVALENTS:
Beginning of period 23,912 13,082
-------------------------
End of period $ 39,430 $ 14,997
=========================
SUPPLEMENTAL DISCLOSURES:
Cash payments during the year for:
Taxes $ 115 $ 77
Interest $ 5,538 $ 5,532
NON-CASH ITEMS:
Stock dividend issued $ 2,882 $ 3,344
Net unrealized gain on investment securities available for sale, net of tax $ 466 $ 728
Transfer of investment securities from held to maturity to available for sale
due to the adoption of FAS 133. $ -- $ 5,319
See accompanying notes to unaudited consolidated financial statements.
4
CHESTER VALLEY BANCORP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Chester Valley Bancorp Inc. (the "Holding Company") was incorporated in the
Commonwealth of Pennsylvania in August 1989. The business of the Holding Company
and its subsidiaries (collectively, the "Company") consists of the operations of
First Financial Bank ("First Financial" or the "Bank"), a Pennsylvania-chartered
commercial bank founded in 1922 as a Pennsylvania-chartered savings association,
and Philadelphia Corporation for Investment Services ("PCIS"), a full service
investment advisory and securities brokerage firm. Effective September 1, 2001,
the Bank converted to a Pennsylvania-chartered commercial bank under the same
corporate title. As a consequence of such charter conversion, the Holding
Company became a bank holding company that has also been designated as a
financial holding company. Prior to such conversion, the Holding Company was a
unitary thrift holding company. The Bank provides a wide range of banking
services to individual and corporate customers through its eight full-service
branch offices in Chester County, Pennsylvania. The Bank provides residential
real estate, commercial real estate, commercial and consumer lending services,
funding these activities primarily with retail and business deposits and
borrowings. PCIS is a registered broker/dealer in all 50 states and the District
of Columbia and it is also registered as an investment advisor with the
Securities and Exchange Commission ("SEC"). 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. PCIS' offices are located in Wayne and Philadelphia, Pennsylvania.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Bank and PCIS. The accounts of
the Bank include its wholly-owned subsidiary, D & S Service Corp., which owns
D & F Projects and Wildman Projects, Inc., both of which are wholly-owned
subsidiaries thereof. All material inter-company balances and transactions have
been eliminated in consolidation. Prior period amounts are reclassified when
necessary to conform with the current period's presentation.
5
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. However, such information
reflects all adjustments, which are, in the opinion of management, necessary for
a fair presentation of results for the unaudited interim periods.
The results of operations for the three-month period ended September 30, 2001,
are not necessarily indicative of the results to be expected for the fiscal year
ending June 30, 2002. The consolidated financial statements presented herein
should be read in conjunction with the audited consolidated financial statements
and the notes thereto included in the Company's Annual Report to Stockholders
for the fiscal year ended June 30, 2001.
EARNINGS PER SHARE
The dilutive effect of stock options is excluded from the computation of basic
earnings per share but included in the computation of diluted earnings per
share. Earnings per share and weighted average shares outstanding for the
periods presented herein have been adjusted to reflect the effects of the 5%
stock dividends paid in September 2001 and 2000.
6
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2001 2000
------------ -------------
(Dollars in Thousands,
Except Per Share Amounts)
Numerator:
Net income $ 1,462 $ 995
========== ==========
Denominator:
Denominator for basic per share-
weighted average shares 4,329,097 4,310,987
Effect of dilutive securities:
Stock options 22,476 55,748
---------- ----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 4,351,573 4,366,735
========== ==========
Basic earnings per share $ .34 $ .23
========== ==========
Diluted earnings per share $ .34 $ .23
========== ==========
The number of antidilutive stock options included was 367,898 and 0 for the
three month periods ended September 30, 2001 and 2000, respectively.
7
NOTE 2 - LOANS RECEIVABLE
Loans receivable, including loans held for sale, are summarized as follows:
SEPTEMBER 30, June 30,
2001 2001
------------- --------
(Dollars in Thousands)
First mortgage loans:
Residential $148,670 $151,155
Construction-residential 19,813 18,191
Land acquisition and development 13,793 11,492
Commercial 91,309 82,890
Construction-commercial 11,929 16,560
Commercial business 30,484 27,653
Consumer 65,256 64,756
-------- --------
TOTAL LOANS 381,254 372,697
-------- --------
Less:
Undisbursed loan proceeds:
Construction-residential (19,792) (13,752)
Construction-commercial (4,893) (6,776)
Deferred loan fees - net (1,642) (1,592)
Allowance for loan losses (4,399) (4,264)
-------- --------
NET LOANS $350,528 $346,313
======== ========
For purposes of applying the measurement criteria for impaired loans, the
Company excludes large groups of smaller balance homogeneous loans, primarily
consisting of residential real estate loans and consumer loans as well as
commercial business loans with principal balances of less than $100,000. For
applicable loans, the Company evaluates the need for impairment recognition when
a loan becomes non-accrual or earlier if, based on management's assessment of
the relevant facts and circumstances, it is probable that the Company will be
unable to collect all proceeds due under the contractual terms of the loan
agreement. At and during the three month period ended September 30, 2001, the
recorded investment in impaired loans was not material.
8
NOTE 3 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $4.45 million as of
September 30, 2001, of which $1.39 million was for variable-rate loans. The
balance of the commitments represents $3.06 million of fixed-rate loans
(primarily consisting of single-family residential mortgages) bearing interest
rates of between 6.00% and 9.25%. At September 30, 2001, the Company had $24.69
million of undisbursed construction loan funds as well as $26.06 million of
undisbursed remaining consumer and commercial line balances.
NOTE 4 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
adjusted total assets (as defined). At September 30, 2001 and June 30, 2001 the
Bank was in compliance with all such requirements and is deemed a
"well-capitalized" institution for regulatory purposes. There are no conditions
or events since September 30, 2001 that management believes have changed the
institution's category.
9
The Bank's regulatory capital amounts and ratios are presented in the table as
follows (dollars in thousands):
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
AS OF SEPTEMBER 30, 2001:
Total Capital
(to Risk-Weighted Assets) $42,928 12.31% $27,894 8.00% $34,868 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $38,569 11.06% $13,947 4.00% $20,921 6.00%
Tier 1 Capital
(to Adjusted Total Assets) $38,569 7.55% $20,442 4.00% $25,552 5.00%
AS OF JUNE 30, 2001:
Total Capital
(to Risk-Weighted Assets) $41,319 12.61% $26,220 8.00% $32,775 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $37,220 11.36% $13,110 4.00% $19,665 6.00%
Tier 1 Capital
(to Adjusted Total Assets) $37,220 6.85% $21,725 4.00% $27,157 5.00%
NOTE 5 - SEGMENT REPORTING
The Company has two reportable segments: First Financial and PCIS. First
Financial operates a branch bank network with eight full-service banking offices
and provides deposit and loan services to customers. Additionally, the Bank
offers trust services at its Downingtown headquarters. PCIS operates a
full-service investment advisory and securities brokerage firm through two
offices. Both segments operate in southeastern Pennsylvania.
The Company evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses. There are no material
intersegment sales or transfers.
The Company's reportable segments have traditionally been two independent
financial services institutions. PCIS was acquired by the Company on May 29,
1998. The two segments are managed separately. All senior officers from PCIS
prior to the acquisition have been retained to manage the segment.
10
The following table highlights income statement and balance sheet information
for each of the segments at or for September 30, 2001 and 2000:
AT AND DURING THE THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ----------------------------------------
2001 2000
---------------------------------------- ----------------------------------------
BANK PCIS TOTAL Bank PCIS Total
-----------------------------------------------------------------------------------
(Dollars in Thousands)
Net interest income $ 4,268 $ 18 $ 4,286 $ 3,496 $ 23 $ 3,519
Other income 721 834 1,555 695 867 1,562
Total net income 1,374 88 1,462 899 96 995
Total assets 539,701 1,542 541,243 505,074 1,770 506,844
Total interest-
bearing deposits 33,142 1,189 34,331 8,359 1,165 9,524
Total trading securities -- 21 21 6,546 228 6,774
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
On July 6, 2001, the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin ("SAB"') No. 102, Selected Loan Loss Allowance Methodology
and Documentation Issues. The guidance contained in the SAB is effective
immediately. This SAB expresses the views of the SEC staff regarding a
registrant's development, documentation, and application of a systematic
methodology for determining the allowance fox loan and lease losses, as required
by SEC Financial Reporting Release No. 28. The guidance in SAB No. 102 focuses
on the documentation the SEC staff normally expects registrants to prepare and
maintain in support of the allowance for loans and lease losses.
Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies
(the Federal Deposit Insurance Corporation, the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency and the
Office of Thrift Supervision represented by the Federal Financial Institutions
Examination Council) issued an interagency policy statement entitled "Allowance
for Loan and Lease Losses Methodologies and Documentation for Banks and Savings
Institutions" (the "Policy Statement"). SAB No. 102 and the Policy Statement
were the result of an agreement between the SEC and the federal banking agencies
in March 1999 to provide guidance on allowance for loan and lease methodologies
and supporting documentation.
The guidance contained in SAB No. 102 does not prescribe specific allowance
estimation methodologies registrants should employ in estimating their allowance
for loan and lease losses, but rather emphasizes the need for a systematic
methodology that is properly designed and implemented by registrants.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
In this Report, the Company has included certain "forward looking statements"
concerning the future operations of the Company. It is management's desire to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing the Company of the protections of such safe harbor with respect to all
"forward looking statements" contained in this Report. The Company may have
expressed or implied "forward looking statements" to describe the future plans
and strategies and future financial results. Management's ability to predict the
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Chester County, the mid-Atlantic region and the
United States as a whole, loan delinquency rates, changes in federal and state
regulation, and other uncertainties described in the Company's filings with the
SEC. These factors should be considered in evaluating the "forward looking
statements", and undue reliance should not be placed on such statements.
FINANCIAL CONDITION
-------------------
The Company's total assets decreased $3.46 million to $541.24 million at
September 30, 2001, from $544.71 million at June 30, 2001, principally due to
decreases in investment securities available for sale of $26.08 million and
loans held for sale of $1.31 million. These decreases were partially offset by a
$15.52 million increase in cash and equivalents and an increase in loans of
$5.53 million. Total liabilities decreased $4.99 million, which reflected the
effect of a $4.96 million increase in securities sold under agreements to
repurchase, which was partially offset by decreases of $5.20 million in
deposits, a decrease of $2.42 million in other liabilities and a decrease of
$1.72 million in advance payments by borrowers for taxes and insurance.
Stockholders' equity increased $1.52 million to $41.62 million at September 30,
2001 from $40.10 million at June 30, 2001, primarily as a result of a decrease
in net unrealized losses on securities available for sale of net of taxes
$466,000, net income for the period of $1.46 million and the exercise of stock
options of $12,256. These increases were offset in part by the payment of a
$0.10 cash dividend of $411,000, the payment of fractional shares of $4,747
related to cash-in-lieu payments as part of the Company's most recent stock
dividend.
12
RESULTS OF OPERATIONS
---------------------
INTEREST INCOME AND INTEREST SPREAD ANALYSIS
- --------------------------------------------
The following table sets forth, for the periods indicated, information on a tax
equivalent basis regarding (1) the total dollar amount of interest income of the
Company from interest-earning assets and the resultant average yields; (2) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (3) net interest income; (4) interest rate spread; and
(5) net interest-earning assets and their net yield. Average balances are
determined on a daily basis.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
(Dollars in Thousands)
AVERAGE YIELD/ Average Yield/
BALANCE INTEREST RATE Balance Interest Rate
--------- ---------- -------- --------- ---------- -------
ASSETS:
Loans and loans held for sale (1) $ 350,338 $ 6,838 7.81% $ 330,632 $ 6,656 8.05%
Securities and
Other investments (1) 172,404 2,582 5.99% 146,655 2,649 7.23%
-----------------------------------------------------------------
Total interest-earning assets 522,742 9,420 7.21% 477,287 9,305 7.80%
------- -------
Non-interest earning assets 25,182 33,322
--------- ---------
TOTAL ASSETS $ 547,924 $ 510,609
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits and repurchase agreements (2) $ 413,359 3,732 3.58% $ 373,154 4,301 4.57%
FHLB advances and other borrowings (2) 80,476 1,187 5.85% 76,875 1,202 6.20%
-----------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 493,835 4,919 3.95% 450,029 5,503 4.85%
-----------------------------------------------------------------
Non-interest-bearing liabilities 12,971 22,474
Stockholders' equity 41,118 38,106
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 547,924 $ 510,609
========= =========
NET INTEREST INCOME/INTEREST RATE SPREAD $ 4,501 3.26% $ 3,802 2.95%
================= ================
NET INTEREST INCOME/AVERAGE
INTEREST-EARNING ASSETS (2) $ 28,907 3.42% $ 27,258 3.17%
========= ==== ========= ====
RATIO OF AVERAGE INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES 106% 106%
==== ====
(1) Yield calculated using 30/360 day basis.
(2) Yield calculated based on actual number of days.
Net interest income, on a fully tax equivalent basis, increased 18.4% to $4.50
million for the three-month period ended September 30, 2001, compared to $3.80
million for the same period in 2000. Total interest income, on a fully tax
equivalent basis, increased to $9.42 million for the three-month period ended
September 30, 2001, from $9.31 million for the same period in 2000, primarily as
a result of the effect of an increase in the average balance of interest-earning
assets which was offset in part because of a decrease in interest rates from
7.80% to 7.21% or 59 basis-points.
The average balance of interest-earning assets increased to $522.74 million for
the three-month period ended September 30, 2001, from $477.29 million for the
same period in 2000. The increase was primarily due to a $19.71 million increase
in the average balance of loans and an increase of $25.75 million in the average
balance of securities and other investments when comparing to the same period in
2000.
13
Total interest expense decreased 10.6% to $4.92 million for the three-month
period ended September 30, 2001, compared to $5.50 million for same period in
2000. This was primarily due to a 90 basis point decrease in the average rate
paid on such liabilities from 4.85% in the 2000 period to 3.95% for the same
period in 2001, even though interest bearing liabilities increased $43.81
million for the three months ended September 30, 2001 compared to the same
quarter in 2000.
The tax equivalent interest rate spread increased to 3.26% from 2.95%, and the
average tax equivalent net yield on interest-earning assets increased to 3.42%
from 3.17% for the three-month periods ended September 30, 2001 and 2000,
respectively, due to the reasons discussed above.
PROVISION FOR LOAN LOSSES
The Company provided $131,000 for loan losses during the three-month period
ended September 30, 2001, which is $26,000 or 24.8% higher when compared to the
same period in 2000. This provision was added to the Company's allowance for
loan losses due to current economic conditions and management's assessment of
the known and inherent risk of loss existing in the loan portfolio. At September
30, 2001, the allowance for loan losses totaled $4.40 million or 1.26% of net
loans (before allowance), compared to $4.26 million or 1.24% of net loans at
June 30, 2001. As a percentage of non-performing assets, the allowance for loan
losses was 323% at September 30, 2001 compared to 364% at June 30, 2001, and
further compared to 499% at September 30, 2000.
OTHER INCOME
Total other income decreased $7,000 to $1.555 million during the three-month
period ended September 30, 2000 as compared to $1.562 million during the same
period in 2000. Investment services income decreased 8.56% during the
three-month period ended September 30, 2001, compared to the same period in 2000
due to a decrease in commission income resulting from a depressed market.
OPERATING EXPENSES
Total operating expenses decreased $74,000 to $3.77 million for the three-month
period ended September 30, 2001 as compared to the same period in 2000. The
decrease in operating expenses for the three-month period in fiscal 2001 was due
to a decrease of $200,000 in advertising expenses and a decrease of other
non-operating expenses primarily made up of a decline of $96,000 in consulting
expenses. The decrease in operating expenses was partially offset by an increase
in compensation and benefits of $220,000.
INCOME TAX EXPENSE
Income tax expense was $480,000 for the three-month period ended September 30,
2001, compared to $139,000 for the same period in 2000. The increase in income
tax expense for the three-month period ended September 30, 2001 was due to an
increase in taxable income and a decrease in tax free income as compared to the
same period in 2000.
14
ASSET QUALITY
Non-performing assets are comprised of non-accrual loans and real estate owned
("REO") and totaled $1.37 million and $1.17 million at September 30, 2001 and
June 30, 2001 respectively. Non-accrual loans are loans on which the accrual of
interest has ceased because the collection of principal or interest payments is
determined to be doubtful by management. It is the policy of the Company to
discontinue the accrual of interest when principal or interest payments are
delinquent 90 days or more (unless the loan principal and interest are
determined by management to be fully secured and in the process of collection),
or earlier, if the financial condition of the borrower raises significant
concern with regard to the ability of the borrower to service the debt in
accordance with the current loan terms. Interest income is not accrued until the
financial condition and payment record of the borrower once again demonstrate
the borrower's ability to service the debt. At September 30, 2001, the Company
did not have any loans greater than 90 days delinquent, which were accruing
interest. Non-performing assets to total assets and non-performing loans to
total assets were .25% at September 30, 2001 compared to .22% at June 30, 2001,
and .16% at September 30, 2000. Non-performing assets, which totaled $1.37
million at September 30, 2001 consisted of 14 single-family residential mortgage
loans aggregating $1.08 million and non-performing consumer and commercial
business loans totaling $283,000.
At September 30, 2001 the Company's classified assets, which consisted of assets
classified as substandard, doubtful or loss, as well as REO, totaled $10.10
million compared to $4.84 million at June 30, 2001, and further compared to
$1.49 million at September 30, 2000. Included in assets classified substandard
at September 30, 2001 and 2000, and at June 30, 2001, were all loans 90 days
past due and loans which were less than 90 days delinquent but inadequately
protected by the current paying capacity of the borrower or of the collateral
pledged, or which were subject to one or more well-defined weaknesses which may
jeopardize the satisfaction of the debt. Also included as substandard at
September 30, 2001 are two loans totaling approximately $3.41 million, which are
current but have been listed as substandard and are being closely monitored.
LIQUIDITY AND CAPITAL RESOURCES
Management monitors liquidity daily and maintains funding sources to meet
unforeseen changes in cash requirements. The Company's primary sources of funds
are deposits, borrowings, repayments, prepayments and maturities of outstanding
loans and mortgage-backed securities, sales of assets available for sale,
maturities of investment securities and other short-term investments, and funds
provided from operations. While scheduled loan and mortgage-backed securities
repayments and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by the movement of interest rates in general, economic
conditions and competition. The Company manages the pricing of its deposits to
maintain a deposit balance deemed appropriate and desirable. Although the
Company's deposits represent the majority of its total liabilities, the Company
has also utilized other borrowing sources, namely FHLB advances.
15
Liquidity management is both a daily and long-term function. Excess liquidity is
generally invested in short-term investments such as FHLB overnight deposits. On
a longer term basis, the Company maintains a strategy of investing in various
lending and investment securities products. The Company uses its sources of
funds to primarily fund loan commitments and maintain a substantial portfolio of
investment securities, and to meet its ongoing commitments to pay maturing
savings certificates and other deposits. At September 30, 2001, the Company had
$4.45 million in commitments to fund loan originations. In addition, at such
date the Company had undisbursed loans in process for construction loans of
$24.69 million and $26.06 million in undisbursed lines of credit. Management of
the Company believes that the Company has adequate resources, including
principal prepayments and repayments of loans and investment securities and
borrowing capacity, to fund all of its commitments to the extent required.
The Company's current dividend policy is to declare a regular quarterly dividend
with the intent that the level of the dividend per share be reviewed by the
Board of Directors on a quarterly basis. Dividends will be in the form of cash
and/or stock after giving consideration to all aspects of the Company's
performance for the current and prior quarter and other relevant aspects. On
August 15, 2001, the Board of Directors declared a 5% stock dividend and a
quarterly cash dividend of $.10 per share, both of which were paid on September
14, 2001, to stockholders of record as of September 1, 2001. 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from the interest rate risk inherent
in its lending, investments and deposit taking activities. To that end,
management actively monitors and manages its interest rate risk exposure. At
September 30, 2001, the Company's management believes that the interest rate
exposure has not significantly changed since disclosed at June 30, 2001.
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.
16
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Company's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by management.
Changing the relative proportions of fixed-rate and adjustable-rate assets and
liabilities is one of the primary strategies utilized by the Company to
accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
To provide a more accurate one-year gap position of the Company, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that money
market, NOW and savings deposits are sensitive to interest rate changes.
Accordingly, some of the interest sensitive portions of such liabilities are
classified in the less than one year categories with the remainder placed in the
over five years category. Deposit products with interest rates based on a
particular index are classified according to the specific repricing
characteristic of the index. Deposit rates other than time deposit rates are
variable, and changes in deposit rates are typically subject to local market
conditions and management's discretion and are not indexed to any particular
rate.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates.
Even assets and liabilities, which contractually reprice within the same period
may not, in fact, reprice at the same price or the same time or with the same
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as the Company adjusts its interest
sensitivity position throughout the year. Although interest rate sensitivity gap
is a useful measurement and contributes towards effective asset/liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure. An alternative methodology is to estimate the changes in
the Company's portfolio equity over a range of interest rate scenarios.
The Company periodically identifies certain loans as held for sale at the time
of origination, primarily consisting of fixed-rate, single-family residential
mortgage loans which meet the underwriting characteristics of certain
government-sponsored enterprises (conforming loans). The Company regularly
re-evaluates its policy and revises it as deemed necessary. The majority of
loans sold to date have consisted of sales to Freddie Mac of whole loans and 95%
participation interests
17
in long-term, fixed-rate, single-family residential mortgage loans in
furtherance of the Company's goal of better matching the maturities and
interest-rate sensitivity of its assets and liabilities. When selling loans, the
Company has generally retained servicing in order to increase its non-interest
income. At September 30, 2001, the Company serviced $13.86 million of mortgage
loans for others. Sales of loans produce future servicing income and provide
funds for additional lending and other purposes.
The following is an interest rate sensitivity analysis for the Bank at September
30, 2001.
18
INTEREST RATE SENSITIVITY ANALYSIS AT SEPTEMBER 30, 2001
(Dollars in thousands)
MORE THAN MORE THAN MORE THAN
THREE MONTHS SIX MONTHS ONE YEAR
THREE MONTHS THROUGH THROUGH THROUGH
OR LESS SIX MONTHS ONE YEAR THREE YEARS
-----------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans: (1)
Real estate (2) $ 31,256 $ 17,362 $ 43,200 $ 92,921
Commercial 19,706 1,489 3,065 4,553
Consumer 11,447 2,380 4,830 16,758
Securities and interest-bearing deposits 81,656 7,750 11,942 16,281
-------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $144,065 $ 28,981 $ 63,037 $130,513
-------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 501 $ 501 $ 998 $ --
NOW accounts 450 450 900 --
Money market accounts 68,019 -- -- --
Certificate accounts 109,642 46,553 32,606 29,511
Borrowings 9,218 14 30 8,177
-------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $187,830 $ 47,518 $ 34,534 $ 37,688
-------------------------------------------------------------------
Cumulative (deficit) excess of interest-earning
assets to interest-bearing liabilities $(43,765) $(62,302) $(33,799) $ 59,026
======== ======== ======== ========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 76.7% 73.5% 87.5% 119.2%
======== ======== ======== ========
CUMULATIVE DIFFERENCE AS A PERCENTAGE OF
TOTAL ASSETS (8.1%) (11.6%) (6.3%) 11.0%
======== ======== ======== ========
MORE THAN
THREE YEARS
THROUGH MORE THAN
FIVE YEARS FIVE YEARS TOTAL
-----------------------------------------------
INTEREST-EARNING ASSETS:
Loans: (1)
Real estate (2) $ 35,718 $ 40,371 $260,828
Commercial 1,480 191 30,484
Consumer 11,656 18,185 65,256
Securities and interest-bearing deposits 12,551 30,479 160,659
--------------------------------------------
TOTAL INTEREST-EARNING ASSETS $ 61,405 $ 89,226 $517,227
--------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ -- $ 23,439 $ 25,439
NOW accounts -- 44,941 46,741
Money market accounts -- -- 68,019
Certificate accounts 6,066 3,894 228,272
Borrowings 1,992 68,191 87,622
--------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 8,058 $140,465 $456,093
--------------------------------------------
Cumulative (deficit) excess of interest-earning
assets to interest-bearing liabilities $112,373 $ 61,134 $ 61,134
======== ======== ========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 135.6% 113.4% 113.4%
======== ======== ========
CUMULATIVE DIFFERENCE AS A PERCENTAGE OF
TOTAL ASSETS 20.9% 11.4% 11.4%
======== ======== ========
(1) Net of undisbursed loan proceeds.
(2) Includes commercial mortgage loans.
Certain shortcomings are inherent in the method of analysis presented in the
table above. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features, which restrict changes in interest rates both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.
19
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on
October 24, 2001. The following matters were presented for
stockholder action at such meeting:
(1) To elect three directors for a term of three years or
until their successors have been elected and qualified:
Name Votes For Votes Withheld
------------------------------ --------- --------------
Donna M. Coughey 3,404,420 319,560
John J. Cunningham, III 3,443,718 280,262
William M. Wright 3,433,188 290,792
(2) To ratify the appointment of KPMG LLP as the Company's
independent auditors for the fiscal year ending June
30, 2002:
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
3,709,012 5,676 9,291
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chester Valley Bancorp Inc.
Date 11/14/01 /s/ Donna M. Coughey
-------------------------------- -------------------------------------
Donna M. Coughey
President and Chief Executive Officer
Date 11/14/01 /s/ Albert S. Randa
-------------------------------- -------------------------------------
Albert S. Randa, CPA
CFO and Treasurer
21