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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Fiscal Period Ended: June 30, 1998
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 (IRS 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
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value Per Share
---------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]
State issuer's revenues for its most recent fiscal year. $30,370,584
As of September 1, 1998, the aggregate value of the 1,883,657 shares of Common
Stock of the registrant which were issued and outstanding on such date,
excluding 444,685 shares held by all directors and officers of the registrant as
a group, was approximately $54.63 million. This figure is based on the closing
sales price of $29.00 per share of the registrant's Common Stock on September 1,
1998.
Number of shares of Common Stock outstanding as of September 1, 1998: 2,328,342
Transitional Small Business Disclosure Format. YES [ ] NO [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(1) Portions of the Annual Report to shareholders for the year ended June 30,
1998, are incorporated into Part II, Items 5 - 7 of this Form 10-K.
(2) Portions of the Definitive Proxy Statement for the 1998 annual meeting of
shareholders are incorporated into Part III, Items 10-13 of this Form 10-K.
PART I.
ITEM 1. BUSINESS
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 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, 1998. These factors should be considered in evaluating the
"forward looking statements", and undue reliance should not be placed on such
statements.
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 the Holding Company 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. On May 29, 1998, the
Holding Company acquired PCIS in a transaction accounted for as a pooling of
interests. As of June 30, 1998 PCIS had assets of $1.86 million, revenues of
$3.17 million and net income of $430,500. The financial condition, equity and
results of operations of the Company are presented on a consolidated basis and
all prior period amounts have been restated to reflect the acquisition. The Bank
provides a wide range of banking services to individual and corporate customers
through its seven, soon to be eight, branch banks 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. PCIS is a registered broker/dealer in all
50 states and Washington, DC and it is also registered as an investment advisor
with the Securities and Exchange Commission. PCIS provides many additional
services, including self-directed and managed retirement accounts, safekeeping,
daily sweep money market funds, portfolio and estate valuations, life insurance
and annuities, and margin accounts, to individuals and smaller corporate
accounts. PCIS' offices are located in Wayne and Philadelphia, Pennsylvania.
The Company experienced substantially increased net income of $3.63
million, or $1.57 per share, for the fiscal year ended June 30, 1998, compared
to $3.07 million or $1.34 per share for fiscal 1997, excluding the one-time
Savings Institutions Insurance Fund ("SAIF") special assessment. This represents
an 18.2% increase in earnings. In fiscal 1997, the pre-tax effect of the SAIF
assessment was $1.39 million resulting in an after tax charge to earnings of
approximately $832,000, or $.36 per share. After recognition of this assessment,
the Company earned net income of $2.24 million, or $.98 per share, for the
fiscal year ended June 30, 1997.
The Company's earnings depend primarily on the difference between the
yield earned on its loan and securities portfolios and its cost of funds,
consisting primarily of the interest paid on deposits and, to a lesser extent,
on borrowings ("interest rate spread"). During fiscal year 1998 the Company's
interest rate spread averaged 3.28% compared to 3.37% and 3.20% in fiscal years
1997 and 1996, respectively. Net interest income, on a fully tax equivalent
basis, increased 12.1% or $1.39 million to $12.80 million in 1998 from $11.41
million in 1997, compared to a 13.7% or $1.37 million increase from 1996 to
1997. Net interest margin, on a fully tax equivalent basis, was 3.94% for the
year ended 1998, compared to 4.03% in 1997 and 3.87% in 1996.
Total other income increased $968,800 or 26.6% to $4.62 million for the
year ended June 30, 1998 as compared to fiscal 1997. Investment services income
increased $488,400 or 21.2% to $2.80 million as the result of PCIS' increased
commission income due to the 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 opening of the Bank's Investment Services and
Trust Division in the second quarter of fiscal 1998 also contributed to the
increase in investment services income for fiscal 1998. This division provides
both individual and corporate clients an array of money management, trust and
investment services including portfolio management, estate and retirement
planning, and self directed IRA's. 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 $139,700 in service charges and fees
in fiscal 1998. The Company recognized gains on trading account securities of
$337,500 during fiscal 1998 compared to $15,700 during fiscal 1997.
Total other income increased $293,700 or 8.8% to $3.65 million for the
year ended June 30, 1997 as compared to fiscal 1996. Investment services income
increased $87,300 during fiscal 1997 mainly due to an increase in advisory fee
income earned by PCIS. An increase of $44,200 in service charges and fees in
fiscal 1997 as the result of an increase in commissions earned on the sale of
disability and life insurance to the Bank's loan customers, an increase in the
number of safe deposit boxes rented, and fees earned on the Bank's debit card
contributed to the increase in other income. The Bank recognized a gain of
$2,400 on the sale of real estate owned during fiscal 1997 compared to a loss of
$51,600 during the prior fiscal year. In addition, during fiscal 1997 the Bank
purchased properties surrounding its main office in order to expand its
facilities to accommodate its growth. The rental income from these properties
contributed to the increase in other income during fiscal 1997.
Total operating expenses increased $1.78 million or 18.1% to $11.64
million for the year ended June 30, 1998 as compared to fiscal 1997, 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 established in the first quarter of fiscal 1998 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 due 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 Division. Also contributing to the
increase in operating expenses during fiscal 1998 was a $291,400 donation to a
project to provide low income housing for the elderly located in the Bank's
primary market area. As an offset to the donation, the Bank received a state tax
credit in the amount of $145,700 through the Neighborhood Assistance Act which
was recorded as a reduction to income tax expense in fiscal 1998.
Excluding the $1.39 million one-time SAIF assessment, operating
expenses totaled $9.86 million for fiscal year 1997, an increase of $857,200 or
9.5% over fiscal 1996. The one-time assessment was part of legislation adopted
to recapitalize the SAIF and required the Bank to pay 65.7 cents for every $100
of deposits. As a result of the special assessment, the Bank's federal insurance
premiums decreased from $0.23 per $100 of deposits to $0.06 per $100 of deposits
in the third fiscal quarter of 1997. The increase in operating expenses over the
prior fiscal year was primarily due to a $548,600 or 11.6% increase in salaries
and employee benefits related to general salary increases, additional staff for
a new branch office, Brandywine Square, opened in the first quarter of fiscal
1997 and additional staff for the Bank's commercial loan department. Also
contributing to the increase in other operating expenses was a $185,200 or 12.7%
increase in occupancy and furniture and equipment costs associated with the
opening of the Brandywine Square branch office.
The Company's assets totaled $377.01 million at June 30, 1998, as
compared with $325.20 million at June 30, 1997. This 15.9% increase in assets
was primarily funded by an increase in deposits of $37.44 million or 14.4% from
$260.75 million at June 30, 1997, to $298.19 million at June 30, 1998, and an
increase in Federal Home Loan Bank ("FHLB") advances of $10.74 million from
$30.20 million to $40.94 million at June 30, 1997 and 1998, 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
$257.04 million at June 30, 1997, to $273.13 million at June 30, 1998. In
addition, the Company's securities portfolios along with its interest-bearing
deposits increased, in the aggregate, from $55.19 million to $86.12 million at
June 30, 1997 and 1998, respectively.
In September 1997 and 1996 the Company paid 5% common stock dividends
in the amounts of 102,606 and 77,731 shares, respectively, from authorized but
unissued common stock, with fractional shares paid in the form of cash. In March
1997 the Company paid a five-for-four stock split effected in the form of a
dividend in the amount of 414,188 shares, with fractional shares paid in the
form of cash.
The Bank's primary market area includes Chester County and sections of
the four contiguous counties (Delaware, Montgomery, Berks, and Lancaster) in
Pennsylvania. Chester County, in which all of the Bank's offices are located,
continues to grow in terms of economic development and population growth.
Customer deposits with First Financial are insured to the maximum
extent provided by law by the Federal Deposit Insurance Corporation ("FDIC")
through the SAIF. The Bank is subject to examination and comprehensive
regulation by the FDIC, the Office of Thrift Supervision ("OTS"), and the
Pennsylvania Department of Banking ("Department"). It is a member of the FHLB of
Pittsburgh ("FHLBP"), which is one of the 12 regional banks comprising the FHLB
System. The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") governing reserves required
to be maintained against deposits and certain other matters.
Lending Activities
Loan Portfolio Composition. The Company's net loan portfolio (net of
undisbursed proceeds, deferred fees and allowance for loan losses) totaled
$274.23 million at June 30, 1998, representing approximately 72.7% of the
Company's total assets of $377.01 million at that date.
The following table presents information regarding the Company's loan portfolio
by type of loan indicated.
(Dollars in Thousands)
At June 30,
------------------------------------------------------------------------------------------
1998 1997 1996 1995
-------------------- ----------------- --------------------- --------------------
% of % of % of % of
Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans
--------- ---- --------- ---- --------- ---- --------- ----
Real estate loans:
Residential:
Single-family ................. $ 154,755 53.3% $ 158,537 58.4% $ 147,274 62.6% $ 150,639 66.0%
Multi-family .................. 873 0.3 893 0.3 1,256 0.5 1,359 0.6
Commercial ......................... 41,002 14.1 33,981 12.5 22,552 9.6 22,433 9.8
Construction and land acquisition(1) 30,646 10.5 22,907 8.5 17,028 7.2 13,120 5.7
--------- ---- --------- ---- --------- ---- --------- ----
Total real estate loans .. 227,276 78.2 216,318 79.7 188,110 79.9 187,551 82.1
Commercial business loans(2) ....... 11,437 3.9 7,863 2.9 5,701 2.4 4,039 1.8
Consumer loans(3) .................. 51,829 17.9 47,343 17.4 41,486 17.7 36,634 16.1
--------- ---- --------- ---- --------- ---- --------- ----
Total loans receivable .... 290,542 100.0% 271,524 100.0% 235,297 100.0% 228,224 100.0%
===== ===== ===== =====
Less:
Loans in process ................... (12,380) (10,092) (7,134) (3,385)
Allowance for loan losses .......... (3,414) (2,855) (2,667) (2,449)
Deferred loan fees ................. (1,620) (1,537) (1,533) (1,574)
--------- --------- --------- ---------
Net loans receivable ...... 273,128 257,040 223,963 220,816
--------- --------- --------- ---------
Loans held for sale, single-family
residential mortgages .............. 1,101 106 -- 142
--------- --------- --------- ---------
Net loans receivable and
loans held for sale ....... $ 274,229 $ 257,146 $ 223,963 $ 220,958
========= ========= ========= =========
June 30,
--------------------
1994
--------------------
% of
Total
Amount Loans
--------------------
Residential:
Single-family ...................... $ 130,808 63.8%
Multi-family ....................... 1,562 0.8
Commercial ............................ 16,853 8.2
Construction and land acquisition(1)... 17,631 8.6
--------- -----
Total real estate loans .. 166,854 81.4
Commercial business loans(2) ....... 3,581 1.8
Consumer loans(3) .................. 34,512 16.8
--------- -----
Total loans receivable .... 204,947 100.0%
=====
Less:
Loans in process ................... (6,941)
Allowance for loan losses .......... (2,199)
Deferred loan fees ................. (1,514)
----------
Net loans receivable ...... 194,293
Loans held for sale, single-family
residential mortgages .............. --
----------
Net loans receivable and
loans held for sale ....... $ 194,293
==========
(1) Includes construction loans for both residential and commercial real estate
properties. (2) Consists primarily of secured equipment loans. (3) Consists
primarily of home equity loans and lines of credit, home improvement,
automobile and other personal loans.
Contractual Maturities. The following table sets forth the contractual
principal repayments of the total loan portfolio, including loans in process, of
the Company as of June 30, 1998, by categories of loans. All loans are included
in the period in which they mature. Loans held for sale are not included.
Principal Repayments
Contractually Due in Year(s) Ended June 30,
-------------------------------------------------
(Dollars in Thousands)
Total
Outstanding
at 2004
June 30, 2000- and
1998 1999 2003 Thereafter
-------- -------- -------- --------
Real estate loans:
Residential(1) .................. $155,628 $ 1,166 $ 3,370 $151,092
Commercial ...................... 41,002 641 3,203 37,158
Construction and land acquisition 30,646 13,021 12,337 5,288
Commercial business loans ......... 11,437 6,743 3,943 751
Consumer loans .................... 51,829 6,016 22,624 23,189
-------- -------- -------- --------
Total loans ............... $290,542 $ 27,587 $ 45,477 $217,478
======== ======== ======== ========
(1) Includes mortgages on both single-family and multi-family (more than four
units) residential properties.
The following table sets forth, as of June 30, 1998, the dollar amount of all
loans contractually due after June 30, 1999, which have fixed interest rates and
floating or adjustable rates.
Contractual Obligations
Due After June 30, 1999
-----------------------
Floating/
Fixed Adjustable
Rates Rates
-------- --------
(Dollars in Thousands)
Real estate loans:
Residential .............................. $ 84,462 $ 70,000
Commercial ............................... 7,992 32,369
Construction and land acquisition ........ 5,421 12,204
Commercial business loans ........................ 4,217 477
Consumer loans ................................... 40,253 5,560
======== ========
Total loans ............................... $142,345 $120,610
======== ========
Contractual principal repayments of loans do not necessarily reflect
the actual term of the Company's loan portfolio. The average life of mortgage
loans is substantially less than their contractual terms because of loan
prepayments and because of enforcement of due-on-sale clauses, which give the
Company the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates substantially exceed rates
on existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans substantially exceed current mortgage loan rates. The Company
experienced significant refinancings of its loan portfolio during fiscal 1998
due to the declining interest rate environment and leveling of the yield curve.
Origination, Purchase and Sale of Loans. As a Pennsylvania-chartered
savings institution, First Financial has general authority pursuant to the
Savings Association Code of 1967, as amended ("State Code"), to originate and
purchase loans secured by real estate located throughout the United States. Due
to the Company's strong community orientation, substantially all of the
Company's total mortgage loan portfolio is secured by real estate located in its
primary market area.
Residential and commercial real estate loans are originated directly by
the Bank through salaried loan officers. In addition, from time to time the Bank
utilizes third-party originators who use the same credit guidelines and
standards as the Bank to originate residential loans. Residential and commercial
real estate loan originations are normally attributable to referrals from real
estate brokers and builders and other financial institutions, mortgage brokers,
depositors and walk-in customers. Consumer loan originations are primarily
attributable to existing customers and referrals, as well as third party auto
loans originated through dealers.
The Bank periodically identifies certain loans as held for sale at the
time of 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). The majority of
conforming loans sold to date have consisted of sales to Freddie Mac ("FHLMC")
of fixed-rate mortgage loans in furtherance of the Company's goal of better
matching the maturities and interest-rate sensitivity of its assets and
liabilities. In selling conforming loans, the Bank has retained the servicing
thereon in order to increase its non-interest income. At June 30, 1998, the Bank
serviced $28.87 million of mortgage loans for others. Sales of loans produce
future servicing income and provide funds for additional lending and other
purposes. The Bank is a qualified servicer for FHLMC, Fannie Mae ("FNMA"), and
Ginnie Mae ("GNMA").
The following table shows total loans and loans held for sale originated,
purchased, sold and repaid during the periods indicated.
Year Ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Total loans receivable and loans held for sale
at beginning of period ............................. $271,630 $235,297 $228,366
Real estate loan originations: ............ 39,329 31,031 23,340
Residential(1) ...................... 9,398 10,018 3,674
Commercial .......................... 21,057 21,740 13,305
Construction and land acquisition(2)
-------- -------- --------
Total real estate
loan originations .......... 69,784 62,789 40,319
Consumer loans(2) ......................... 24,771 19,163 19,044
Commercial business loans ................. 11,896 5,150 4,977
-------- -------- --------
Total loan
originations .............. 106,451 87,102 64,340
-------- -------- --------
Principal loan repayments ................. 77,481 45,846 54,611
Sales of loans ............................ 8,957 4,923 2,798
-------- -------- --------
Total principal
repayments
and sales ................ 86,438 50,769 57,409
-------- -------- --------
Net increase in
loans and loans
held for sale ............ 20,013 36,333 6,931
-------- -------- --------
Total loans receivable and loans
held for sale at end of period ................. $291,643 $271,630 $235,297
======== ======== ========
(1) Includes both single-family and multi-family residential loans.
(2) Includes construction loans for both residential and commercial real estate
properties.
Loans on Existing Single-Family Residential Properties. The Bank
currently offers adjustable-rate mortgages ("ARMs") which have up to 30-year
terms and interest rates which adjust either annually or every three years, or
which are fixed initially for the first three years, five years, seven years, or
ten years, and adjust annually thereafter, based upon changes in an index based
on the weekly average yield on United States Treasury securities adjusted to a
constant maturity of one year or three years, respectively, as made available by
the Federal Reserve Board plus a margin. The amount of any increase or decrease
in the interest rate for ARMs is limited to 1% or 2% per year and 6% over the
life of the loan. Although the Bank has originated a small amount of ARMs which
include the ability to be converted to a fixed-rate loan, substantially all of
the ARMs originated cannot be converted to fixed-rate loans. The interest rates
of ARMs may not adjust as rapidly as changes in the Company's cost of funds. In
order to minimize risk, one year ARM borrowers are qualified at the rate which
would be in effect after the first interest rate adjustment, if that rate is
higher than the initial rate. The Bank's adjustable rate loans require that any
payment adjustment resulting from a change in the interest rate of an
adjustable-rate loan be sufficient to result in full amortization of the loan by
the end of the loan term and, thus, do not permit any of the increased payment
to be added to the principal amount of the loan, or so-called negative
amortization. Due to the declining interest rate environment and leveling of the
yield curve, the Bank experienced significant refinancings of its adjustable
rate portfolio into its fixed rate product.
Fixed-rate residential mortgage loans currently originated generally
have 30-year terms, although some have 15-year terms with commensurately lower
interest rates. The Bank also offers a bi-weekly mortgage which is a fixed-rate
loan with bi-weekly payments. Based on current interest rates, it is repaid in
approximately 22 years. Substantially all of the Bank's long-term, fixed-rate
residential mortgage loans and ARMs include "due on sale" clauses.
The Bank also makes second mortgage loans and home equity loans. See
"Lending Activities - Consumer Loans."
Loans on Existing Commercial and Multi-Family Properties. During the
past several years, the Bank has originated permanent loans secured by
multi-family and income-producing properties such as condominiums, apartment
buildings, office buildings and, to a lesser extent, hotels and small shopping
centers. The Bank intends to increase its emphasis on the origination of
commercial real estate loans and, accordingly, has increased its commercial
lending staff. The Bank's Commercial Loan Department consists of seven loan
officers, all but one of whom joined the Bank's staff with substantial prior
commercial lending experience. The origination of multi-family residential and
commercial real estate loans has resulted in the shortening of the average
maturity and an increase in the interest rate sensitivity of the Bank's loan
portfolio as well as to generate increased fee income. All of the Bank's
multi-family residential and commercial real estate loan portfolio is secured by
properties located in the Company's primary market area. As of June 30, 1998,
commercial and multi-family real estate loans, excluding construction loans for
such properties, amounted to $41.88 million, or 14.4% of the total loan
portfolio.
Commercial real estate loans have interest rates which adjust annually
after an initial three- or five-year term by a margin over the corresponding
United States Treasury yield for securities with the same term. These loans
typically have amortization periods of up to 20 years, but occasionally provide
that the loans can be called by the Bank prior to the end of the amortization
period, generally at three, five, seven or ten years after origination.
Commercial and multi-family residential real estate lending entails
significant additional risks as compared with single-family residential property
lending. Commercial and multi-family residential real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans is typically dependent on the successful
operation of the business or real estate project. The success of such projects
is sensitive to changes in supply and demand conditions in the market for
commercial and multi-family residential real estate as well as economic
conditions generally.
The Bank seeks to ensure that the property securing these loans will
generate sufficient cash flow to adequately cover operating expenses and debt
service payments. To this end, permanent commercial and multi-family residential
real estate loans generally are made with a loan-to-value ratio of 75% or less.
In underwriting commercial and multi-family residential real estate loans,
consideration is given to the property's operating history, future operating
projections, current and projected occupancy, position in the local and regional
market, location and physical condition. The underwriting analysis also includes
credit checks and a review of the financial condition of the borrower. The Bank
usually obtains full or partial loan guarantees from the principal(s) involved.
Construction Loans. The Bank also offers both fixed-rate and
adjustable-rate residential and commercial construction loans. Residential
construction loans are offered to individuals building their primary or
secondary residence as well as to selected local developers to construct up to
four-family dwellings. Advances are made on a percentage of completion basis,
usually consisting of six draws. Residential construction loans convert to
permanent loans at the end of 12 months or upon completion of construction,
whichever occurs first. The Bank will only make construction loans to a
developer if 25% of the ground cost has been paid. At June 30, 1998, $24.12
million or 8.3% of the Company's total loan portfolio consisted of construction
loans including loans in process. Loans in process related to such loans totaled
$11.63 million at June 30, 1998.
The Bank has been active in construction lending for many years and
intends to continue its involvement in such lending in the future. Construction
lending is generally considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Risk of loss on
construction loans is dependent largely upon the accuracy of the initial
appraisal of the property's projected value at completion of construction as
well as the estimated cost, including interest, of construction. During the
construction phase, a number of factors could result in delays and cost
overruns. If either estimate proves to be inaccurate and the borrower is unable
to provide additional funds, the lender may be required to advance funds beyond
the amount originally committed to permit completion of the project and/or be
confronted at the maturity of the construction loan with a project whose value
is insufficient to assure full repayment.
Land Acquisition and Development Loans. The Bank also offers land
acquisition and development loans. These types of loans are generally provided
only to local developers with strong financial positions and with whom the Bank
is familiar. These loans typically have terms of one to three years and carry a
floating interest rate normally indexed to the Wall Street Journal Prime. The
Bank will lend up to 75% of the appraised value of the project. At June 30,
1998, $6.53 million, or 2.2% of the Company's total loan portfolio consisted of
land acquisition and development loans, including loans in process. Loans in
process on such loans totaled $749,000 at June 30, 1998. Like construction
lending, these loans generally are considered to involve a higher degree of risk
of loss than long-term financing on approved occupied real estate. The Bank is
actively pursuing developers who can both demonstrate the ability to meet cash
flow projections in order to repay the loan through a very strong financial
position and have a reputation for successfully completing such projects in
similar situations with the Bank.
Consumer Loans. The Bank offers a wide variety of consumer loans,
including home equity loans, home improvement loans, equity lines of credit,
secured and unsecured personal loans and automobile loans. The Bank has
aggressively marketed consumer loans in order to provide a wider range of
financial services to its customers and because of the shorter terms and
normally higher interest rates on such loans. As of June 30, 1998, consumer
loans amounted to $51.83 million or 17.9% of the total loan portfolio.
The Bank's home equity lines of credit currently provide for terms of
up to 10 years. The interest rate on the "Prime Line" adjusts monthly to the
Prime Rate. The regular equity line of credit adjusts monthly at 1.50% above the
Prime Rate. The limit of such loan is the borrower's equity in his residence,
subject to certain income qualifications. The Bank also makes fixed-rate,
fixed-term home equity loans on which it takes a first- or second-mortgage lien
on the borrower's property. These loans have terms of up to 15 years. The
balance of the mortgages on the properties cannot exceed 80% of the appraised
value of the properties. Home equity lines of credit and fixed-rate home equity
loans amounted to $5.97 million and $39.95 million, respectively, as of June 30,
1998. The Bank also originates fixed-rate bridge loans with loan-to-value ratios
no greater than 80% of the value of the secured real estate and at a maximum
term of twelve months. At June 30, 1998, the balance on these loans totaled
$284,000.
At June 30, 1998, the balance was $414,700 for fixed-rate loans
secured by certificates of deposit or marketable securities. Unsecured personal
loans amounted to $421,600 at June 30, 1998 and consisted of fixed-rate loans
with maximum loan balances of $5,000 and terms no greater than 48 months. The
Bank also originates fixed-rate loans on new and used automobiles. The terms of
such loans do not exceed 60 months on new cars and 48 months on used cars.
Automobile loans amounted to $4.16 million at June 30, 1998. The Bank's current
line of credit provides for unsecured loans of up to $1,000 for terms of up to
36 months with an interest rate set at 6.0% over the Prime Rate adjusted
monthly. Such loans have a floor of 10.0% and a ceiling of 18.0% and totaled
$305,800 at June 30, 1998. In addition, the Bank originates Visa and MasterCard
credit card loans with up to $5,000 lines of credit and at an interest rate set
at 6.0% over the Prime Rate. At June 30, 1998, the Company had $327,900 in
credit card loans outstanding.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The Bank believes
that the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans and that consumer loans are
important to its efforts to increase the interest rate sensitivity and shorten
the average maturity of its loan portfolio.
Commercial Business Loans. The Bank makes commercial business loans
directly to businesses located in its market area. The Bank targets small and
medium sized businesses with the majority of the loans being less than $750,000.
Applications for commercial business loans are obtained primarily from existing
customers, branch referrals and direct inquiry. As of June 30, 1998, commercial
business loans totaled $11.44 million or 3.9% of the total loan portfolio.
Commercial business loans originated by the Bank generally have terms
of five years or less and fixed interest rates or adjustable interest rates tied
to the Wall Street Journal Prime plus a margin. Such loans are generally secured
by real estate, receivables, equipment, or inventory and are generally backed by
the personal guarantees of the principals of the borrower. Commercial business
loans generally have shorter terms to maturity and provide higher yields than
residential mortgage loans. Although commercial business loans generally are
considered to involve greater credit risk than certain other types of loans,
management intends to continue to offer commercial business loans to small
medium sized businesses in an effort to better serve our community's needs,
obtain core non-interest bearing deposits, and increase the Company's interest
rate spread.
Regulatory Requirements and Underwriting Policies. Under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and
pursuant to the parity provisions of the State Code, the aggregate loans that
the Company may make to any borrower and its affiliates is limited to 15% of
unimpaired capital for unsecured loans and 25% of capital for loans secured by
readily marketable collateral. At June 30, 1998, pursuant to such provisions,
the Bank was permitted to extend credit to any one borrower totaling $4.81
million. Special rules applicable to savings associations' provide authority to
loan up to $500,000 to a single borrower for any purpose and to develop domestic
residential housing units up to the lesser of 30% of the savings association's
unimpaired capital and unimpaired surplus or $30.0 million, if: (a) the purchase
price of a single-family unit does not exceed $500,000; (b) the savings
association is in compliance with the fully phased-in capital standards; (c) the
OTS director, by order, authorizes the higher limit; (d) the loans made to all
borrowers in the aggregate do not exceed 150% of the savings association's
unimpaired capital and unimpaired surplus; and (e) all loans comply with
applicable loan-to-value requirements. At June 30, 1998, the Bank's largest loan
or group of loans to one borrower, including related entities, aggregated $4.50
million, and is in conformity with the current loans to one borrower regulations
described above.
The Bank is currently permitted to lend up to 100% of the appraised
value of the real property securing a loan; however, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
the Bank is required by federal regulations, the State Code and Department
regulations to obtain private mortgage insurance on the portion of the principal
amount of the loan that exceeds 80% of the appraised value of the security
property. Pursuant to underwriting guidelines adopted by the Board of Directors,
private mortgage insurance must be obtained on all residential loans whose
loan-to-value ratios exceed 80%. The Bank will generally lend up to 97% of the
appraised value of one-to four-family owner-occupied residential dwellings when
the required private mortgage insurance is obtained. The Bank generally
originates loans of up to 75% of the appraised value of the properties securing
its commercial real estate and commercial business loans and 75% of the
appraised value upon completion or sale price, whichever is lower, for
construction loans. With respect to construction loans for owner-occupied
properties made in connection with the providing of the permanent financing, the
Bank will lend up to 90% of the appraised value when the required private
mortgage insurance is obtained.
In the loan approval process, the Bank assesses both the borrower's
ability to repay the loan and the adequacy of the proposed security. In
connection therewith, the Bank obtains an appraisal of the security property and
information concerning the income, financial condition, employment and credit
history of the applicant. Loans must be approved at various management levels,
including the Board of Directors, depending on the amount of the loan.
Residential mortgage loans, commercial business and commercial real estate
loans, and consumer loans in excess of $1 million require approval by the Board
of Directors. In addition, any loan in excess of $500,000 which exhibit certain
characteristics concerning the borrower or the project requires approval by the
Board of Directors.
For mortgage loans the Bank requires title insurance insuring the
priority of its lien, as well as fire and extended coverage casualty insurance,
in order to protect the properties securing its real estate loans. Borrowers
must also obtain flood insurance policies where the property is in a flood plain
as designated by the Federal Emergency Management Agency. Borrowers may be
required to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage loan account from which the Company makes
disbursements for items such as real estate taxes, hazard insurance premiums and
private mortgage insurance premiums as they fall due.
Loan Fee and Servicing Income. In addition to interest earned on loans,
the Bank receives income through servicing of loans and fees in connection with
loan originations, loan modifications, late payments, prepayments, repayments
and changes of property ownership and for miscellaneous services related to its
loans. Income from these activities varies from period to period with the volume
and type of loans made.
Loan origination fees and certain related direct loan origination costs
are offset and the resulting net amount is deferred and amortized over the life
of the related loans as an adjustment to the yield of such related loans.
However, in the event the related loan is sold, any deferred loan fees or costs
remaining with respect to such loan should be taken into income.
The Bank currently charges loan origination fees which are calculated
as a percentage of the amount of the loan. The fees received in connection with
the origination of commercial real estate loans have generally amounted to two
points (one point being equivalent to 1% of the principal amount of the loan).
In addition, the Bank typically receives fees from two to three points in
connection with the origination of new, conventional, one-to four-family
mortgages and 3.5 points in connection with the origination of construction
loans.
At June 30, 1998, the Bank was servicing $28.87 million of loans for
others, substantially all of which were whole loans sold by the Bank to the
FHLMC. The Bank receives a servicing fee of approximately 1/4 or 3/8 of 1% on
such loans.
Non-Performing Loans and Real Estate Owned ("REO"). When a borrower
fails to make a required loan payment, the Bank attempts to cause the default to
be cured by contacting the borrower. In general, contacts are made after a
payment is more than 15 days past due, at which time a late charge is assessed.
Defaults are cured promptly in most cases. If the delinquency on a mortgage loan
exceeds 90 days and is not cured through the Bank's normal collection
procedures, or an acceptable arrangement is not worked out with the borrower,
the Company will institute measures to remedy the default, including commencing
a foreclosure action or, in special circumstances, accepting from the mortgagor
a voluntary deed of the secured property in lieu of foreclosure. The remedies
available to the Bank in the event of a default or delinquency with respect to
certain residential mortgage loans, and the procedures by which such remedies
may be exercised, are subject to Pennsylvania law and regulations. Under
Pennsylvania law, a lender is prohibited from accelerating the maturity of a
residential mortgage loan, commencing any legal action (including foreclosure
proceedings) to collect on such loan, or taking possession of any loan
collateral until the lender has first provided the delinquent borrower with at
least 30 days prior written notice specifying the nature of the delinquency and
the borrower's right to correct such delinquency. In addition, the lender's
ability to exercise any remedies it may have with respect to loans for one- or
two-family principal residences located in Pennsylvania is further restricted
(including the lender's right to foreclose on such property) until the lender
has provided the delinquent borrower with written notice detailing the
borrower's rights to seek consumer credit counseling and state financial
assistance and until the borrower has exhausted or failed to pursue such rights.
These provisions of Pennsylvania law may delay for several months the Bank's
ability to foreclose upon residential loans secured by real estate located in
the Commonwealth of Pennsylvania. In addition, the uniform FNMA/FHLMC lending
documents used by the Bank, as well as most other residential lenders in
Pennsylvania, requires notice and a right to cure similar to that provided under
Pennsylvania law.
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. When a
loan is placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income. Non-real estate consumer loans more than 120 days
delinquent are required to be written off in accordance with federal
regulations.
If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate property is then included in the Company's
"real estate owned" account until it is sold. When property is acquired, it is
recorded at the lower of carrying or fair value at the date of acquisition and
any write-down resulting therefrom is charged to the allowance for loan losses.
Interest accrual ceases on the date of acquisition and all costs incurred in
maintaining the property from that date forward are expensed. Costs incurred for
the improvement or development of such property are capitalized to the extent
they do not exceed the property's fair value. No loss reserves are maintained on
REO and future write-downs for cost beyond the fair value are expensed. The
Company is permitted under Department and OTS regulations to finance sales of
REO by "loans to facilitate," which may involve more favorable interest rates
and terms than generally would be granted under the Bank's underwriting
guidelines. However, at June 30, 1998, the Company did not have any loans to
facilitate.
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 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 due according to the contractual terms of the loan
agreement. At and during the twelve-month period ended June 30, 1998, 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 above. 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.
The following table sets forth information regarding non-accrual loans and REO
held by the Company at the dates indicated. The Company did not have any (i)
loans which are 90 days or more delinquent but on which interest is being
accrued or (ii) loans which were classified as restructured troubled debt at any
of the dates presented.
Year Ended June 30,
------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars In Thousands)
Non-accrual loans:
Residential real estate loans $ 771 $ 417 $1,166 $2,029 $1,552
Commercial real estate loans -- -- -- 28 295
Construction and land loans . 55 -- 737 294 354
Commercial business loans ... -- -- 18 10 63
Consumer loans .............. 420 331 297 549 358
------ ------ ------ ------ ------
Total non-accrual loans ..... $1,246 $ 748 $2,218 $2,910 $2,622
====== ====== ====== ====== ======
Total non-accrual loans
to total assets ........... .33% .23% .81% 1.10% 1.07%
Total REO ................... -- -- $ 121 $ 157 $ 885
Total non-accrual loans and
REO to total assets ....... .33% .23% .85% 1.16% 1.43%
At June 30, 1998, non-accrual real estate loans included ten
residential mortgage loans and one construction loan aggregating $826,000, all
secured by single-family residential properties.
The total amount of non-performing loans was $1.25 million, $748,000
and $2.22 million at June 30, 1998, 1997 and 1996, 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 1998, 1997, and 1996 that would have been recorded for these loans was
$111,800, $71,400 and $210,400. Interest income on these non-performing loans
included in income for fiscal 1998, 1997, and 1996 amounted to $57,560, $35,200
and $91,900, respectively.
Allowances for Losses on Loans and Classified Assets. 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. Management may
in the future further increase the level of its allowance for loan losses as a
percentage of total loans and non-performing loans in the event the level of
multi-family residential and commercial real estate loans (which generally are
considered to have a greater risk of loss than single-family residential
mortgage loans) as a percentage of its total loan portfolio continues to
increase. 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. At June
30, 1998, the Bank's allowance for loan losses was $3.41 million or 1.23% of
total net loans receivable and 274.0% of total non-performing loans compared to
$2.86 million or 1.10% of net loans and 381.7% of total non-performing loans at
June 30, 1997.
The Company monitors the quality of its assets on a regular basis.
Under regulations of the OTS, all of the Company's assets are subject to being
classified under a classification system that has three categories: (i)
substandard, (ii) doubtful and (iii) loss. An asset may fall within more than
one category and a portion of the asset may remain unclassified. The Company is
required to review the classification of its assets on a regular basis. In
addition, in connection with the examinations of First Financial by the OTS, the
FDIC, and the Department, the examiners have the authority to identify problem
assets and, if appropriate, classify them and/or require adjustments to the
carrying value of such assets.
Assets classified substandard are considered inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Assets so classified must have a well-defined weakness or
weaknesses. They are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Assets classified doubtful are considered to have all the weaknesses
inherent in those classified substandard with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Assets classified loss are considered uncollectable and of such little
value that their continuance as assets without establishment of a specific
reserve is not warranted. This classification does not mean that an asset has
absolutely no recovery or salvage value, but rather, that it is not practical or
desirable to defer writing off a basically worthless asset even though partial
recovery may be affected in the future.
At June 30, 1998 and 1997, the Company's classified assets, which
consisted of assets classified as substandard, doubtful, and REO, totaled $1.47
million and $1.40 million, respectively. The Company did not have any REO at
June 30, 1998 and 1997. Included in the assets classified substandard at June
30, 1998 and 1997, 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, and have a well-defined weakness that
may jeopardize the liquidation of the debt. The majority of loans which are
classified but otherwise performing are residential mortgage loans.
Other loans designated as special mention by the Company amounted to
$971,700 and $88,000 at June 30, 1998 and 1997, respectively. Included in the
special mention category at June 30, 1998 was one loan with a balance of
$910,300 which was performing in accordance with the terms and conditions of the
loan but had characteristics which warranted management to classify it special
mention. Although these loans are not considered or classified as substandard,
doubtful or loss, they do have a potential weakness which may, if not corrected,
result in increased risk at some future date.
The following table summarizes activity in the Company's allowance for
loan losses during the periods indicated.
As of June 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in Thousands)
Allowance at beginning of period ....... $ 2,855 $ 2,667 $ 2,449 $ 2,199 $ 1,770
Loans charged off against the allowance:
Residential real estate ............ (12) (117) (101) (54) --
Construction and land .............. -- (177) -- (5) --
Commercial business ................ -- (1) (2) (201) (160)
Consumer ........................... (69) (82) (43) (69) (85)
------- ------- ------- ------- -------
(81) (377) (146) (329) (245)
Recoveries:
Residential real estate ............ 21 37 -- -- --
Construction and land .............. -- 4 16 -- --
Commercial business ................ -- -- -- 93 --
Consumer ........................... 13 1 8 31 47
------- ------- ------- ------- -------
34 42 24 124 47
Net charge-offs ........................ (47) (335) (122) (205) (198)
Provision for loan losses
charged to operating expenses ........ 606 523 340 455 627
------- ------- ------- ------- -------
Allowance at year end .................. $ 3,414 $ 2,855 $ 2,667 $ 2,449 $ 2,199
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding ............ .02% .13% .05% .10% .11%
======= ======= ======= ======= =======
Ratio of allowance to period-end
net loans ............................ 1.23% 1.10% 1.18% 1.10% 1.12%
======= ======= ======= ======= =======
The following table presents information regarding the Company's total allowance
for losses on loans as well as the allocation of such amounts to the various
categories of the loan portfolio.
(Dollars in Thousands)
At June 30,
---------------------------------------------------------------------
1998 1997 1996
------------------ ---------------------- --------------------
% of % of % of
Loans Loans Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
Residential real estate loans .... $ 789 53.6% $ 778 58.7% $ 898 63.1%
Commercial real estate loans ..... 1,050 14.1 871 12.5 585 9.6
Construction and land loans ...... 201 10.5 139 8.5 280 7.2
Commercial business loans ........ 357 3.9 278 2.9 207 2.4
Consumer loans ................... 1,017 17.9 789 8.5 697 17.7
------ ===== ------ ===== ------ =====
Total allowance for loan losses $3,414 100.0% $2,855 100.0% $2,667 100.0%
====== ===== ====== ===== ====== =====
Total allowance for loan losses
to total non-performing loans .. 274.0% 381.7% 120.2%
====== ====== ======
Total non-performing loans........ $1,246 $ 748 $2,218
====== ====== ======
At June 30,
----------------------------------------------------
1995 1994
--------------------- -------------------------
% of % of
Loans Loans
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
Residential real estate loans .... $ 1,077 66.6% $ 791 64.6%
Commercial real estate loans ..... 428 9.8 507 8.2
Construction and land loans ...... 309 5.7 340 8.6
Commercial business loans ........ 105 1.8 112 1.8
Consumer loans ................... 530 16.1 449 16.8
Total allowance for loan losses $ 2,449 100.0% $ 2,199 100.0%
========== ===== ========= =====
Total allowance for loan losses
to total non-performing loans .. 84.2% 83.9%
========== =========
Total non-performing loans........ $ 2,910 $ 2,622
========== =========
Securities Activities
Historically, interest and dividends on securities have provided the
Company with a significant source of revenue. At June 30, 1998, the Company's
securities portfolios and interest-bearing deposits aggregated $86.12 million or
22.8% of its total assets. First Financial's securities and interest-bearing
deposits are used to meet certain federal liquidity ratios. The liquidity ratios
are met in part by investing in securities that qualify as liquid assets under
OTS regulations. (See "Regulation - Regulation of the Bank - Liquidity
Requirements"). Such securities include obligations issued or fully guaranteed
by the United States Government, certain federal agency obligations, certain
time deposits and negotiable certificates of deposit issued by commercial banks
and other specified investments, including commercial paper and other
securities. Investment decisions are made by members of senior management within
guidelines approved by the Company's Board of Directors.
The Company divides its securities portfolio into three segments: (a)
held to maturity; (b) available for sale; and (c) trading. Securities in the
held to maturity category are accounted for at amortized cost. Trading
securities are accounted for at quoted market prices with changes in market
values being recorded as gain or loss in the income statement. All other
securities are included in the available for sale category and are accounted for
at fair value with unrealized gains or losses, net of tax, being reflected as
adjustments to equity. At June 30, 1998, the Company had a net unrealized gain
on securities available for sale, net of taxes, of $291,909.
The following table sets forth the Company's securities portfolios and
interest-earning deposits at carrying value at the dates indicated.
At June 30,
-------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
Interest-bearing deposits ......................... $11,861 $ 7,901 $ 9,817
Trading account securities ........................ 20,352 252 343
Investment securities held to maturity:
U.S. Government and agency obligations ........ 4,500 5,500 5,500
Municipal notes and bonds ..................... 7,394 10,986 15,950
Mortgage-backed securities .................... 1,123 1,473 1,729
Other ......................................... 2,583 1,510 1,414
------- ------- -------
Total investment securities held to maturity 15,600 19,469 24,593
------- ------- -------
Investment securities available for sale:
U.S. Government and agency obligations ........ 12,296 18,217 6,049
Municipal notes and bonds ..................... 15,173 4,128 81
Mortgage-backed securities .................... 9,431 5,054 --
Equity securities ............................. 1,096 167 29
Debt securities ............................... 307 -- --
------- ------- -------
Total investment securities available
for sale ................................. 38,303 27,566 6,159
======= ======= =======
Total securities and interest-bearing
deposits ................................. $86,116 $55,188 $40,912
======= ======= =======
The contractual maturity or repricing characteristics of the Company's
investment portfolio is considerably more interest rate sensitive than that of
its loan portfolio. Consequently, the investment portfolio provides a
significant source of liquidity and protection against interest rate risk. The
weighted average term to maturity or repricing of the Company's investment
securities held to maturity was 5.5 years at June 30, 1998 and 5.6 years at June
30, 1997.
The amortized cost and estimated fair value of investment securities at June 30,
1998, by contractual maturity, are shown below.
Estimated Weighted
Amortized Fair Average
Cost Value Yield
-------- ------- -------
(Dollars in Thousands)
Held to Maturity
Due in one year or less .................... $ 3,186 $ 3,192 6.11%
Due after one year through five years ...... 3,798 3,826 6.69
Due after five years through ten years ..... 2,000 2,008 6.60
Due after ten years ........................ 4,033 4,062 7.11
No stated maturity ......................... 2,583 2,584 6.50
------- ------- ------
Total held to maturity ..................... $15,600 $15,672 6.64%
======= ======= ======
Available for Sale
Due in one year or less .................... $ 1,201 $ 1,206 6.74%
De after one year through five years ....... 2,900 2,902 6.35
Due after five years through ten years ..... 5,833 5,831 6.67
Due after ten years ........................ 26,979 27,268 7.68
No stated maturity ......................... 886 1,096 1.55
------- ------- ------
Total available for sale ................... $37,799 $38,303 7.25%
======= ======= ======
The weighted average yield, based on amortized cost, is presented on a
taxable equivalent basis.
As of June 30, 1998, investments in the debt and/or equity securities
of any one issuer (excluding U.S. Government and federal agencies) did not
exceed 10% of the Company's stockholders' equity.
Sources of Funds
General. Deposits obtained through branch offices have traditionally
been the principal source of the Company's funds for use in lending and for
other general business purposes. The Company also derives funds from
amortization and prepayments of outstanding loans and sales of loans. From time
to time, the Company also may borrow funds from the FHLBP and other sources.
Borrowings may be used on a short-term basis to compensate for seasonal or other
reductions in deposits or other inflows at less than projected levels, as well
as on a longer term basis to support expanded lending and investment activities.
Deposits. The Company obtains deposits primarily from residents of
Chester County, and to a lesser extent Berks, Delaware, Lancaster and Montgomery
Counties, Pennsylvania. Currently, the principal methods used by First Financial
to attract deposit accounts include the offering of services and accounts,
competitive interest rates, and convenient office locations and service hours.
Other than during times of inverse or flat yield curves, the Bank has adopted a
pricing program for its certificate accounts which provides for higher rates of
interest on its longer term certificates in order to encourage depositors to
invest in certificates with longer maturities, thus reducing the interest rate
sensitivity of the Company's deposit portfolio. First Financial also offers a
tiered money market account that pays higher interest on higher balances so as
to maintain a relatively stable core of deposits even when its certificate
accounts mature.
Market conditions have caused First Financial to rely primarily on
short-term certificate accounts and other deposit alternatives that are more
responsive to market interest rates than passbook accounts and regulated
fixed-rate, fixed-term certificates that were historically the Company's primary
sources of deposits. First Financial's current deposit products include
non-interest-bearing accounts, passbook/statement savings accounts, NOW checking
accounts, money market deposit accounts, certificates of deposit ranging in
terms from 30 days to five years and certificates of deposit in denominations of
$100,000 or more ("jumbo certificates"). Included among these deposit products
are individual retirement account certificates ("IRA certificates") and Keogh
accounts.
The following table shows the balances of the Company's deposits as of
the dates indicated:
At June 30,
------------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- -----------------------
(Dollars in Thousands)
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
-------- ----- -------- ----- -------- -----
Non-interest-bearing accounts ... $ 32,361 10.9% $ 21,493 8.2% $ 18,653 8.2%
NOW checking accounts ........... 31,770 10.6 27,625 10.6 22,332 9.8
Savings accounts ................ 27,164 9.1 26,474 10.2 25,070 10.9
Money market accounts ........... 35,610 11.9 29,887 11.5 23,856 10.5
Certificates of deposit less than
$100,000...................... 133,801 44.9 124,636 47.8 116,158 50.9
Certificates of deposit with
$100,000 minimum balance ...... 37,485 12.6 30,635 11.7 22,137 9.7
-------- ----- -------- ----- -------- -----
Total deposits ............ $298,191 100.0% $260,750 100.0% $228,206 100.0%
======== ===== ======== ===== ======== =====
The following table shows the weighted average interest rate of the
Company's deposits by type of account at June 30, 1998:
Weighted
Amount Avg. Rate
-------- ---------
(Dollars in Thousands)
Non-interest-bearing accounts ................. $ 32,361 0.00%
NOW checking accounts ......................... 31,770 1.55
Savings accounts .............................. 27,164 2.39
Money market accounts ......................... 35,610 3.77
Certificates of deposit less than
$100,000 .................................... 133,801 5.64
Certificates of deposit with
$100,000 minimum balance .................... 37,485 5.73
-------- ----
Total deposits .......................... $298,191 4.08%
======== ====
The following table sets forth the net deposit flows of the Company for
the periods indicated:
Year Ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
Increase before interest credited ....... $27,568 $23,848 $ 1,754
Interest credited ....................... 9,873 8,696 8,471
------- ------- -------
Net deposit increase .............. $37,441 $32,544 $10,225
======= ======= =======
The following table shows the balances of certificates of deposit with balances
of $100,000 or greater which mature during the periods indicated and the balance
at June 30, 1998.
Balances at June 30, 1998, Maturing
--------------------------------------------------------------------
(Dollars in Thousands)
At Within Three Six to After
June 30, Three to Six Twelve Twelve
1998 Months Months Months Months
------- ------- ------- ------- -------
Certificates of deposit with $100,000
minimum balance $37,485 $13,166 $11,530 $ 5,484 $ 7,305
======= ======= ======= ======= =======
The following table presents the average balance by type of deposit and the
average rate paid by type of deposit for the periods indicated.
Year Ended June 30,
-----------------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- ------------------------
(Dollars in Thousands)
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
NOW checking accounts $29,328 1.81% $23,986 1.92% $ 20,464 2.20%
Savings accounts 25,991 2.67 25,067 2.87 25,080 2.89
Money market accounts 29,847 3.57 26,084 3.42 24,638 3.35
Certificates of deposit
less than $100,000 126,286 5.90 119,679 5.81 112,745 5.86
Certificates of deposit with
$100,000 minimum balance 35,725 4.94 26,990 4.91 25,325 5.33
The greater variety of deposit accounts offered by First Financial has
increased its ability to retain deposits and has allowed it to be more
competitive in obtaining new funds, although the threat of disintermediation
(the flow of funds away from savings institutions into direct investment
vehicles such as government and corporate securities) still exists. However,
these types of accounts have been and continue to be more costly than
traditional accounts during periods of high interest rates. In addition, First
Financial has become much more susceptible to short-term fluctuations in deposit
flows, as customers have become more rate conscious and willing to move funds
into higher-yielding accounts. Thus, both the ability of First Financial to
attract and maintain deposits as well as its cost of funds have been, and will
continue to be, affected significantly by economic market conditions.
In an effort to attract increasing amounts of non-interest-bearing
deposits, First Financial offers a basic checking account which features no-fee
checking with a minimum balance of $50.
First Financial also offers a business checking account which grants credits
against service charges based on the average daily balance. It is management's
belief that such accounts represent an excellent source of deposits that are not
affected by interest rates.
First Financial attempts to control the flow of deposits by pricing its
accounts to remain generally competitive with other financial institutions in
its primary market area, but does not necessarily seek to match the highest
rates paid by competing institutions.
First Financial's deposits are obtained primarily from persons who are
residents of Pennsylvania. First Financial does not advertise for deposits
outside of Pennsylvania or accept brokered deposits, and management believes
that an insignificant amount of First Financial's deposits were held by
non-residents of Pennsylvania at June 30, 1998.
Borrowings. First Financial may obtain advances from the FHLBP upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans, provided certain standards related to credit worthiness have
been met. See "Regulation - Regulation of the Bank - Federal Home Loan Bank
System." Such advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. FHLBP advances
are generally available to meet seasonal and other withdrawals of deposit
accounts and to expand lending and investment activities, as well as to aid the
efforts of members to establish better asset and liability management through
the extension of maturities of liabilities. At June 30, 1998, the Company had
$40.94 million in FHLBP advances outstanding. The Company has available to it an
annually renewable line of credit not to exceed 10% of the Company's maximum
borrowing capacity. The line of credit was $11.67 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, 1998, there was no balance
outstanding on the line of credit.
The following tables present certain information regarding short-term
borrowings (borrowings with a maturity of one year or less) for the periods
indicated:
Year Ended June 30,
----------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
Short-term borrowings:
Balance outstanding at end
of period ................ $17,601 $18,325 $ 1,416
Weighted average interest rate
at end of period ......... 5.28% 5.91% 5.87%
Average balance outstanding ....... $16,417 $ 6,152 $ 3,562
Maximum amount outstanding at
any month-end during the
period .................... $25,323 $19,046 $ 5,716
Weighted average interest rate
during the period ......... 5.58% 5.97% 5.28%
Yields Earned and Rates Paid
The largest components of the Company's total income and total expense
are interest income and interest expense. As a result, the Company's earnings
are dependent primarily upon net interest income, which is determined by the
Company's net interest rate spread (i.e., the difference between the yields
earned on interest-earning assets and the rates paid on interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities.
Interest Income and Interest Spread Analysis
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
interest-earning assets and their net yield. Average balances are determined on
a monthly basis which are representative of operations.
Year Ended June 30,
--------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance(2) Interest(1) Rate(1) Balance(2) Interest(1) Rate(1)
---------- ----------- ------- ---------- ----------- -------
Assets:
Loans and loans
held for sale $264,106 $22,298 8.44% $240,858 $20,452 8.49%
Securities and
other investments $60,777 $3,906 6.43% $42,566 $2,465 5.79%
------- ------ ------- ------
Total interest-
earning assets $324,883 $26,204 8.07% $283,424 $22,917 8.09%
----- -----
Non-interest earning assets $15,141 $11,388
------- -------
Total assets $340,024 $294,812
======== ========
Liabilities and Stockholders' Equity:
Deposits and repurchase agreements $247,903 $11,476 4.63% $223,048 $10,338 4.63%
FHLB advances and
other borrowings $31,813 $ 1,933 6.08% $20,942 $1,169 5.58%
------- ------- ------- ------
Total interest-
bearing liabilities $279,716 $13,409 4.79% $243,990 $11,507 4.72%
----- -----
Non-interest-bearing liabilities $30,167 $23,603
Stockholders' equity $30,141 $27,219
------- -------
Total liabilities and stockholders' equity $340,024 $294,812
======== ========
Net interest income/interest rate spread $12,795 3.28% $11,410 3.37%
======= ==== =======
Net interest-earning assets/net yield on
interest-earning assets $ 45,167 3.94% $ 39,434 4.03%
======== ==== ======== ====
Ratio of average interest-earning assets to
interest-bearing liabilities 116% 116%
==== ====
----------------------------------------
1996
----------------------------------------
Average Yield/
Balance (2) Interest(1) Rate(1)
----------- ----------- --------
Assets:
Loans and loans
held for sale $218,702 $18,368 8.40%
Securities and
other investments $40,480 $2,557 6.32%
------- ------
Total interest-
earning assets $259,182 $20,925 8.07%
-----
Non-interest earning assets $11,102
-------
Total assets $270,284
========
Liabilities and Stockholders' Equity:
Deposits and repurchase agreements $207,978 $9,919 4.77%
FHLB advances and
other borrowings $15,611 $968 6.20%
------- ----
Total interest-
bearing liabilities $223,589 $10,887 4.87%
-----
Non-interest-bearing liabilities $20,725
Stockholders' equity $25,970
-------
Total liabilities and stockholders' equity $270,284
========
Net interest income/interest rate spread $10,038 3.20%
=======
Net interest-earning assets/net yield on
interest-earning assets $35,593 3.87%
======= =====
Ratio of average interest-earning assets to
interest-bearing liabilities 116%
=====
(1) The indicated interest and annual yield and rate are presented on a taxable
equivalent basis using the Federal marginal rate of 34% adjusted for the
20% interest expense disallowance (27.2%) for 1998, 1997, and 1996.
(2) Non-accruing loans are included in the average balance.
Rate/Volume Analysis
The following table presents certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
Interest income and the annual rate are calculated on a taxable equivalent basis
using the Federal marginal rate of 34% adjusted for the 20% interest expense
disallowance (27.2%). For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in volume (change in volume multiplied by old rate),
(2) changes in rate (change in rate multiplied by old volume) and (3) changes in
rate/volume (change in rate multiplied by change in volume).
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------- ---------------------------------------------------------
(Dollars in Thousands)
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------- ------- ------- ------- ------- ------- ------- -------
Interest income on interest-
earning assets:
Loans and loans
held for sale ........... $ 1,974 ($ 117) ($ 11) $ 1,846 $ 1,861 $ 203 $ 20 $ 2,084
Securities and
other investments ....... $ 1,055 $ 271 $ 115 $ 1,441 $ 132 ($ 213) ($ 11) ($ 92)
------- ------- ------- ------- ------- ------- ------- -------
Total interest income . $ 3,029 $ 154 $ 104 $ 3,287 $ 1,993 ($ 10) $ 9 $ 1,992
------- ------- ------- ------- ------- ------- ------- -------
Interest expense on interest-
bearing liabilities:
Deposits and repurchase
agreements ............ $ 1,152 ($ 13) ($ 1) $ 1,138 $ 719 ($ 279) ($ 21) $ 419
FHLB advances and other
borrowings ............. $ 607 $ 103 $ 54 $ 764 $ 331 ($ 97) ($ 33) $ 201
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense $ 1,759 $ 90 $ 53 $ 1,902 $ 1,050 ($ 376) ($ 54) $ 620
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income ........................ $ 1,270 $ 64 $ 51 $ 1,385 $ 943 $ 366 $ 63 $ 1,372
======= ======= ======= ======= ======= ======= ======= =======
Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from the interest rate
risk inherent in its lending and deposit taking activities. To that end,
management actively monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest
rates. A sudden and substantial change in interest rates may adversely impact
the Company's earnings to the extent that the yields on interest-sensitive
assets and interest-sensitive liabilities do not change at the same speed, to
the same extent, or on the same basis. The Company monitors the impact of
changes in interest rates between assets and liabilities as shown in the
Company's Interest Rate Sensitivity Analysis under the Asset/Liability
Management caption in the Company's 1998 Annual Report (see Exhibit 13 hereto).
Although interest rate sensitivity gap is a useful measurement tool and
contributes towards effective asset liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. An
alternative methodology is to estimate the impact on net interest income and on
net portfolio value of an immediate change in interest rates in 100 basis point
increments. Net portfolio value ("NPV") is defined as the net present value of
assets, liabilities, and off-balance sheet contracts. The chart below is the
estimated effect of immediate changes in interest rates at the specified levels
at June 30, 1998, calculated in compliance with Thrift Bulletin No. 13:
Change in Interest Estimate Net Market Value
Rates in Basis Points of Portfolio Equity NPV as % of PV of Average Assets
--------------------- ------------------- --------------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change
------------ ------ -------- -------- --------- ------
(Dollars in Thousands)
400 $13,309 $(25,522) (66)% 3.80% (629)
300 19,803 (19,028) (49) 5.52 (457)
200 26,430 (12,401) (32) 7.19 (290)
100 32,950 (5,881) (15) 8.75 (134)
Static 38,831 -- -- 10.09 --
(100) 43,815 4,984 13 11.16 108
(200) 47,587 8,756 23 11.92 184
(300) 52,555 13,724 35 12.91 282
(400) 58,828 19,997 51 14.13 404
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV table presented above assumes that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV table provides an indication of the
Company's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and will differ from actual results.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset/liability
structure to obtain the maximum yield/cost spread on that structure. The Company
relies primarily on its asset/liability structure to control interest rate risk.
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost-effective
and, therefore, has focused its efforts on increasing the Company's yield/cost
spread through wholesale and retail opportunities.
Ratios
The following table shows certain income and financial condition ratios
for the periods indicated. All averages are based on month-end balances.
Year Ended June 30,
-------------------------------------------------
1998 1997 1996
---- ---- -----
Return on average assets (income
excluding the special SAIF
assessment of $832,000 net of
taxes divided by average total
assets) 1.07% 1.04% 1.01%
Return on average assets
(income divided by average
total assets) 1.07% .76% 1.01%
Return on average equity
(income excluding the special
SAIF assessment of $832,000
net of taxes divided by
average equity) 12.03% 11.28% 10.52%
Return on average equity
(income divided by average equity) 12.03% 8.22% 10.52%
Equity-to-assets ratio
(average equity divided by
average assets) 8.86% 9.23% 9.61%
Dividend pay-out ratio 33.90% 47.46% 31.07%
Subsidiaries of First Financial
At June 30, 1998, the Bank was permitted by regulations to invest up to
2% of assets in the capital stock of, and secured and unsecured loans to,
subsidiary corporations or service corporations and under certain circumstances
may make conforming loans to service corporations in greater amounts. As a
Pennsylvania-chartered savings institution, the Bank may diversify into any
business activity approved in advance by the Department. In addition, First
Financial could invest up to 30% of its assets in finance subsidiaries. Such
subsidiaries must be limited purpose subsidiaries whose sole purpose is to issue
debt or equity securities that the parent association is authorized to issue
directly and to remit the proceeds of such issuance to the parent association.
Effective with the enactment of FIRREA, state-chartered savings
institutions may not acquire any equity investment not permissible for
federally-chartered savings institutions. Divestiture was required by July 1,
1994. Under limited conditions, state-chartered savings institutions may
continue to have equity investments in service corporations engaged in
activities the FDIC determines pose no significant risk to its fund. The Bank
was not required to divest any of its equity investments due to this change in
regulations.
The Bank operates (as a wholly owned subsidiary) D & S Service
Corporation ("D & S Service"), which has participated in the development for
sale of residential properties, in particular condominium conversions and also
the development of commercial properties in order for the Bank to expand its
facilities to accommodate its growth. All of such projects have either been
located in or within close proximity to the Bank's primary market area. D & S
Service operates two wholly owned subsidiaries: Wildman Projects and D & F
Projects, Inc.
At June 30, 1998, the Bank was authorized to have a maximum investment
of $7.47 million in its one first-tier wholly-owned subsidiary, D & S Service.
As of such date, the Bank had invested $1.17 million in this subsidiary.
Recent 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. As of June 30, 1998 PCIS had assets of $1.86
million, revenues of $3.17 million and net income of $430,500.
Competition
First Financial encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from commercial banks, other
savings and loan associations, savings banks and credit unions conducting
business in its primary market area. The Bank also encounters competition for
deposits from money market and other mutuals funds, as well as corporate and
government securities and insurance companies. The principal methods used by the
Bank to attract deposit accounts include offering a variety of services and
interest rates and providing convenient office locations and expanded banking
hours. The Bank's competition for real estate and other loans comes principally
from other savings institutions, credit unions, commercial banks, mortgage
banking companies, insurance companies, and other institutional lenders. First
Financial competes for loans through interest rates, loan maturities, loan fees
and the quality of service extended to borrowers and real estate brokers.
Employees
The Company had 117 full-time employees and 30 part-time employees as
of June 30, 1998. None of these employees are represented by a collective
bargaining agent and the Company believes that it enjoys good relations with its
personnel.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank as in effect as of
the date of this Annual Report on Form 10-K. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
In recent periods there have been various legislative proposals in the
U.S. Congress to eliminate the thrift charter and the OTS. Although the Company
currently is unable to predict whether the existence of the thrift charter and
the OTS may be the subject of future legislation and, if so, what the final
contents of such legislation will be and their effects, if any, on the Company
and the Bank, such legislation could result in, among other things, the Company
becoming subject to the same regulatory capital requirements, activities
limitations and other requirements which are applicable to bank holding
companies under the Bank Holding Company Act of 1956 ("BHCA"). Unlike savings
and loan holding companies, bank holding companies are subject to regulatory
capital requirements, which generally are comparable to the regulatory capital
requirements which are applicable to the Bank, and unlike unitary savings and
loan holding companies such as the Company, which generally are not subject to
activities limitations, bank holding companies generally are prohibited from
engaging in activities or acquiring or controlling, directly or indirectly, the
voting securities or assets of any company engaged in any activity other than
banking, managing or controlling banks and bank subsidiaries or other activities
that the Federal Reserve Board has determined, by regulation or otherwise, to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.
Regulation of the Company
Federal Regulation-General. The Company is a registered savings and
loan holding company within the meaning of the Home Owners' Loan Act. As such,
the Company is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association; (ii)
transactions between the savings association and its affiliates; and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") test, then such unitary holding company shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings association re-qualifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- Regulation of the
Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings associations) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings association shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof any business activity, upon prior
notice to, and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings association; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing or liquidating
assets owned by or acquired from a subsidiary savings association; (iv) holding
or managing properties used or occupied by a subsidiary savings association; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple savings and loan
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
Federal Limitations on Transactions with Affiliates. Transactions
between savings associations and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings association is any
company or entity which controls, is controlled by or is under common control
with the savings association. As a result, the Company and PCIS are affiliates
of the Bank. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Sections 22(g) and (h) of the Federal Reserve Act places
restrictions on loans by savings associations to executive officers, directors
and principal stockholders of the Company and the Bank. Under Section 22(h),
loans to a director, an executive officer and to a greater than 10% stockholder
of a savings association or the company that controls the savings association,
and certain affiliated interests of such insiders (i) may not exceed, together
with all other outstanding loans to such person and affiliated interests, the
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus) (ii) must be made on terms
substantially the same as offered in comparable transactions to other persons,
provided the Bank is not prohibited from extending credit pursuant to a benefit
or compensation program widely available to employees of the Bank and the
Company and that does not give preference to any officer, director or principal
stockholder over other employees thereof, and (iii) may in certain cases,
require prior board approval. In addition, the aggregate amount of extensions of
credit by a savings association to all insiders cannot exceed the association's
unimpaired capital and surplus. Furthermore, Section 22(g) places certain
additional restrictions on loans to executive officers. At June 30, 1998, the
Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987, (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA)", or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered associations or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings associations).
Regulation of PCIS
General. In the United States, a number of federal regulatory agencies
are charged with safeguarding the integrity of the securities and other
financial markets and with protecting the interest of customers participating in
those markets. The SEC is the federal agency that is primarily responsible for
the regulation of broker-dealers and investment advisers doing business in the
United States, and the Federal Reserve Board promulgates regulations applicable
to securities credit transactions involving broker-dealers and certain other
institutions in the Unites States. Much of the regulation of broker-dealers,
however, has been delegated to self-regulatory organizations ("SROs"),
principally the National Association of Securities Dealers, Inc. ("NASD") (and
its subsidiaries NASD Regulation, Inc. and the Nasdaq Stock Market), and the
national securities exchanges. These SROs and exchanges adopt rules (which are
subject to approval by the SEC) that govern the industry, monitor daily activity
and conduct periodic examinations of member broker-dealers. While PCIS is not a
member of the New York Stock Exchange (the "NYSE"), PCIS' business is impacted
by the NYSE rules.
Securities firms are also subject to regulation by state securities
commissions in the states in which they are required to be registered. PCIS is
registered as a broker-dealer with the SEC and in all 50 states and in the
District of Columbia, and is a member of, and subject to regulation by, a number
of SROs, including the NASD.
As a result of federal and state registration and SRO memberships, PCIS
is subject to overlapping schemes of regulation which cover all aspects of its
securities business. Such regulations cover matters including capital
requirements, uses and safe-keeping of clients' funds, conduct of directors,
officers and employees, record-keeping and reporting requirements, supervisory
and organizational procedures intended to assure compliance with securities laws
and to prevent improper trading on material nonpublic information,
employee-related matters, including qualification and licensing of supervisory
and sales personnel, limitations on extensions of credit in securities
transactions, clearance and settlement procedures, requirements for the
registration, underwriting, sale and distribution of securities, and rules of
the SROs designed to promote high standards of commercial honor and just and
equitable principles of trade. A particular focus of the applicable regulations
concerns the relationship between broker-dealers and their customers. As a
result, the many aspects of the broker-dealer customer relationship are subject
to regulation including, in some instances, "suitability" determinations as to
certain customer transactions, limitations on the amounts that may be charged to
customers, timing of proprietary trading in relation to customers' trades and
disclosures to customers.
PCIS also is subject to "Risk Assessment Rules" imposed by the SEC
which require, among other things, that certain broker-dealers maintain and
preserve certain information, describe risk management policies and procedures
and report on the financial condition of certain affiliates whose financial and
securities activities are reasonably likely to have a material impact on the
financial and operational condition of the broker-dealers. Certain "Material
Associated Persons" (as defined in the Risk Assessment Rules) of the
broker-dealers and the activities conducted by such Material Associated Persons
may also be subject to regulation by the SEC.
PCIS is registered as an investment adviser with the SEC. As an
investment adviser registered with the SEC, it is subject to the requirements of
the Investment Advisers Act of 1940 and the SEC's regulations thereunder, as
well as certain state securities laws and regulations. Such requirements relate
to, among other things, limitations on the ability of an investment adviser to
charge performance-based or non-refundable fees to clients, record-keeping and
reporting requirements, disclosure requirements, limitations on principal
transactions between an adviser or its affiliates and advisory clients, as well
as general anti-fraud prohibitions. The state securities law requirements
applicable to registered investment advisers are in certain cases more
comprehensive than those imposed under the federal securities laws.
In the event of non-compliance with an applicable regulation,
governmental regulators and the NASD may institute administrative or judicial
proceedings that may result in censure, fine, civil penalties (including treble
damages in the case of insider trading violations), the issuance of
cease-and-desist orders, the deregistration or suspension of the non-compliant
broker-dealer or investment adviser, the suspension or disqualification of the
broker-dealer's officers or employees or other adverse consequences. The
imposition of any such penalties or orders on PCIS could have a material adverse
effect on PCIS' (and thus the Company's) operating results and financial
condition.
Net Capital Requirements. As a broker-dealer registered with the SEC
and as a member firm of the NASD, PCIS is subject to the capital requirements of
the SEC and the NASD. These capital requirements specify minimum levels of
capital, computed in accordance with regulatory requirements, that PCIS is
required to maintain and also limit the amount of leverage that each firm is
able to obtain in its respective business.
"Net capital" is essentially defined as net worth (assets minus
liabilities, as determined under generally accepted accounting principles), plus
qualifying subordinated borrowings, less the value of all of a broker-dealer's
assets that are not readily convertible into cash (such as goodwill, furniture,
prepaid expenses and unsecured receivable), and further reduced by certain
percentages (commonly called "haircuts") of the market value of a
broker-dealer's positions in securities and other financial instruments.
Compliance with regulatory net capital requirements could limit those operations
that require the intensive use of capital, such as underwriting and trading
activities.
The SEC's capital rules also (i) require that broker-dealers notify it,
in writing, two business days prior to making withdrawals or other distributions
of equity capital or lending money to certain related persons if those
withdrawals would exceed, in any 30-day period, 30% of the broker-dealer's
excess net capital, and that they provide such notice within two business days
after any such withdrawal or loan that would exceed, in any 30-day period, 20%
of the broker-dealer's excess net capital, (ii) prohibit a broker-dealer from
withdrawing or otherwise distributing equity capital or making related party
loans if after such distribution or loan, the broker-dealer has net capital of
less than $300,000 or if the aggregate indebtedness of the broker-dealer's
consolidated entities would exceed 1,000% of the broker-dealer's net capital and
in certain other circumstances, and (iii) provide that the SEC may, by order,
prohibit withdrawals of capital from a broker-dealer for a period of up to 20
business days, if the withdrawals would exceed, in any 30-day period, 30% of the
broker-dealer's excess net capital and if the SEC believes such withdrawals
would be detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer's ability to pay its customer claims or other
liabilities.
As of June 30, 1998, PCIS was required to maintain minimum net capital,
in accordance with SEC rules, of $250,000 and had total net capital of
$1,277,990, or $1,027,990 in excess of the minimum amount required. PCIS is
required to maintain a net capital ratio, in accordance with SEC rules, not to
exceed 15 to 1. At June 30, 1998 PCIS' net capital ratio was .04 to 1.
A failure of a broker-dealer to maintain its minimum required net
capital or net capital ratio would require it to cease executing customer
transactions until it came back into compliance, and could cause it to lose its
NASD membership, its registration with the SEC or require its liquidation.
Further, the decline in a broker-dealer's net capital below certain "early
warning levels," even though above minimum net capital requirements, could cause
material adverse consequences to the broker-dealer.
PCIS is a member of the Securities Investor Protection Corporation
("SIPC") which is a non-profit corporation that was created by the United States
Congress under the Securities Protection Act of 1970. SIPC protects customers of
member broker-dealers against losses caused by the financial failure of the
broker-dealer but not against a change in the market value of securities in
customers' accounts at the broker-dealer. In the event of the inability of a
member broker-dealer to satisfy the claims of its customers in the event of its
failure, the SIPC's funds are available to satisfy the remaining claims up to
maximum of $500,000 per customer, including up to $100,000 on claims for cash.
In addition, PCIS' clearing broker carries private insurance which provides
similar coverage up to $25 million per customer.
Regulation of the Bank
General. The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally chartered savings associations and may also apply to state-chartered
savings associations. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS's enforcement authority over all savings associations and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
Insurance of Accounts. The deposits of the Bank are insured up to
$100,000 per depositor (as defined by law and regulation) by the SAIF, which is
administered by the FDIC, and are backed by the full faith and credit of the
United States Government. As insurer, the FDIC is authorized to conduct
examinations of, and to require reporting by, FDIC-insured institutions, such as
the Bank. It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to
the FDIC. The FDIC also has the authority to initiate enforcement actions where
the OTS has failed or declined to take such action after receiving a request to
do so from the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
On September 30, 1996, President Clinton signed into law legislation to
eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio of 1.25% of insured deposits. The legislation provided that the holders of
SAIF-assessable deposits pay a one-time special assessment to recapitalize the
SAIF.
Effective October 8, 1996, the FDIC imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996. The Bank's one-time
special assessment amounted to $1.39 million. Net of related tax benefits, the
one-time special assessment amounted to $832,000. The payment of the special
assessment reduced the Bank's capital by the amount of the assessment.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by Bank Insurance Fund ("BIF") and SAIF members. Beginning
October 1, 1996, effective SAIF rates range from zero basis points to 27 basis
points which is the same range of premiums as paid by insured institutions
insured by the BIF administered by the FDIC. From 1997 through 1999,
SAIF-insured institutions will pay 6.4 basis points of their SAIF-assessable
deposits to fund the Financing Corporation.
Regulatory Capital Requirements - General. Federally insured savings
associations are required to maintain minimum levels of regulatory capital.
These standards generally must be no less stringent than the capital
requirements applicable to national banks. The OTS also is authorized to impose
capital requirements in excess of these standards on individual associations on
a case-by-case basis.
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of adjusted
total assets (as defined in the regulations), core capital equal to 3% of
adjusted total assets and total capital (a combination of core and supplementary
capital) equal to 8% of risk-weighted assets. For purposes of the regulation,
tangible capital is core capital less all intangibles other than qualifying
mortgage servicing rights, and any investment in non-permissible subsidiaries,
which are subsidiaries which are not engaged in permissible activities. Core
capital includes common stockholders' equity, non-cumulative perpetual preferred
stock and related surplus, minority interest in the equity accounts of fully
consolidated subsidiaries and certain non-withdrawable accounts and pledged
deposits. Core capital generally is reduced by the amount of a savings
association's intangible assets other than qualifying mortgage servicing rights.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt which meets specified
requirements and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items, are
multiplied by a risk-weight based on the risk inherent in the type of assets.
The risk weights assigned by the OTS for principal categories of assets
currently range from 0% to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax
assets under SFAS No. 109 that may be included in regulatory capital. (Net
deferred tax assets represent deferred tax assets, reduced by an valuation
allowances, in excess of deferred tax liabilities.) Application of the limit
depends on the possible sources of taxable income available to an institution to
realize deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited: taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and carryforwards),
or its tax-planning strategies, such deferred tax assets are limited for
regulatory capital purposes to the lesser of the amount that can be realized
within one year of the quarter-end report date or 10% of core capital. The
foregoing considerations did not affect the calculation of the Bank's regulatory
capital at June 30, 1998.
In April 1991 the OTS proposed to modify the 3% of adjusted total
assets core capital requirement in the same manner as was done by the
Comptroller of the Currency for national banks. Under the OTS proposal, only
savings associations rated composite 1 under the CAMEL rating system will be
permitted to operate the regulatory minimum core capital ratio of 3%. For all
other savings associations, the minimum core capital ratio will be 3% plus at
least an additional 100 to 200 basis points, which thus will increase the core
capital ratio requirement to 4% to 5% of adjusted total assets or more. In
determining the amount of additional capital, the OTS will assess both the
quality of risk management systems and the level of overall risk in each
individual savings association through the supervisory process on a case-by-case
basis.
The following table sets forth a reconciliation between the Bank's
stockholder's equity and each of its three capital requirements at June 30,
1998.
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
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%
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. See "- Prompt Corrective
Regulatory Action."
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 4%. At June 30, 1998, the Bank's liquidity ratio was 19.71% and
its short-term liquidity ratio was 19.65%.
Real Estate Lending Standards. Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the federal banking
agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set
forth, pursuant to the mandates of the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA"), uniform regulations prescribing standards for real
estate lending which is defined as extension of credit secured by liens on
interests in real estate or made for the purpose of financing the construction
of a building or other improvements to real estate, regardless of whether a lien
has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The Guidelines, among other things, establish the
following supervisory LTV limits: raw land (65%); land development (75%);
construction (commercial, multi-family and nonresidential) (80%); improved
property (85%) and one-to-four family residential (owner occupied) (no maximum
ratio, although any LTV ratio in excess of 90% should require appropriate
insurance or readily marketable collateral).
Certain institutions can make real estate loans that do not conform with
the established LTV ratio limits up to 100% of the institution's total capital.
Within this aggregate limit, total loans for all commercial, agricultural,
multi-family and other non-one-to-four family residential properties should not
exceed 30% of total capital. An institution will come under increased
supervisory scrutiny as the total of such loans approaches these levels. Certain
loans are exempt from the LTV ratios (e.g. those guaranteed by a government
agency, loans to facilitate the sale of REO, loans renewed, refinanced or
restructured by the original lender(s) to the same borrower(s) where there is no
advancement of new funds, etc.).
Accounting Requirements. Applicable OTS accounting and reporting
requirements incorporates the following standards: (i) regulatory reports will
incorporate generally accepted accounting principles ("GAAP") when GAAP is used
by federal banking agencies; (ii) savings association transactions, financial
condition and regulatory capital must be reported and disclosed in accordance
with OTS regulatory reporting requirements that will be at least as stringent as
for national banks; and (iii) the director of the OTS may prescribe regulatory
reporting requirements more stringent than GAAP whenever the director determines
that such requirements are necessary to ensure the safe and sound reporting and
operation of savings association.
In February 1997 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings
Per Share" (EPS). This statement, which supersedes APB Opinion No. 15,
simplifies the standards for computing EPS and makes them comparable to
international standards. SFAS No. 128 replaces the "primary" and "fully diluted"
earnings per share with "basic" and "diluted" earnings per share. Basic EPS is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock,
or resulted in the issuance of common stock that then shared in the earnings of
the company. Diluted EPS is computed similarly to fully diluted EPS pursuant to
APB Opinion No. 15. SFAS No. 128 became effective for financial statements
issued for the periods ending December 31, 1997, and retroactive restatement of
prior period results is required. Accordingly, all EPS information has been
restated to comply with this new standard.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". According to the statement, all items of comprehensive income are to be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Along with net income, examples
of comprehensive income include foreign currency translation adjustments,
unrealized holding gains and losses on available-for-sale securities, changes in
the market value of a futures contract that qualifies as a hedge of an asset
reported at fair value, and minimum pension liability adjustments. Currently,
the comprehensive income of the Company would consist primarily of net income
and unrealized holding gains and losses on available-for-sale securities. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". This statement, which
supersedes SFAS No. 14, requires public companies to report financial and
descriptive information about their reportable operating segments on both an
annual and interim basis. SFAS No. 131 mandates disclosure of a measure of
segment profit/loss, certain revenue and expense items and segment assets. In
addition, the statement requires reporting information on the entity's products
and services, countries in which the entity earns revenues and holds assets, and
major customers. This statement requires changes in disclosures only and would
not affect the financial condition, equity or operating results of the Company.
This statement is effective for fiscal years beginning after December 15, 1997.
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 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. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. 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.
Prompt Corrective Regulatory Action. Under Section 38 of the FDIA, as
added by FDICIA, each appropriate agency and the FDIC is required to take prompt
corrective action to resolve the problems of insured depository institutions
that do not meet minimum capital ratios. Such action must be accomplished at the
least possible long-term cost to the appropriate deposit insurance fund.
The federal banking agencies, including the OTS, adopted substantially
similar regulations in order to implement Section 38 of the FDIA, which
regulations became effective in December 1992. Under the regulations, an
institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0%
under certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).
The Bank complies with the requirements to be classified as well
capitalized.
Safety and Soundness. On November 18, 1993, a joint notice of proposed
rule making was issued by the OTS, the FDIC, the Office of the Comptroller of
the Currency, and the Federal Reserve Board (collectively, the "agencies")
concerning standards for safety and soundness required to be prescribed by
regulation pursuant to the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and earnings; and (3)
compensation. Legislation enacted in 1994: (1) authorizes the agencies to
establish safety and soundness standards by regulation or guideline for all
insured depository institutions; (2) gives the agencies greater flexibility in
prescribing asset quality and earnings standards by eliminating the requirement
that agencies establish quantitative standards; and (3) eliminates the
requirement that the standards referenced above apply to depository institution
holding companies. The agencies have published a final rule and interagency
guidelines ("Guidelines") as well as proposed asset quality and earning
standards which will be added to the Guidelines when finalized. The final rule
and Guidelines became effective in August 1995.
Under the Guidelines and final rule of the OTS, if an insured savings
institution fails to meet any of the standards promulgated by Guidelines, then
the OTS may require such institution to submit a plan within 30 days (or such
different period specified by the OTS) specifying the steps it will take to
correct the deficiency. In the event that an institution fails to submit or
fails in any material respect to implement a compliance plan within the time
allowed by the OTS, the OTS must order the institution to correct the deficiency
and may (1) restrict asset growth; (2) require the institution to increase its
ratio of tangible equity to assets; (3) restrict the rates of interest that the
institution may pay; or (4) take any other action that would better carry out
the purpose of prompt corrective action. The Bank believes that it is in
compliance with each of the standards as adopted.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a
qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the Code as a "domestic building and loan association." The
Bank is a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assents, plus an
additional 10 percent for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and education loans)
are now included without limit with other assets that, in the aggregate, may
account for up to 20% of total assets. At June 30, 1998, under the expanded QTL
test, approximately 86.6% of the Bank's portfolio assets were qualified thrift
investments.
Restrictions on Capital Distributions. The OTS has adopted a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest payments
on certain convertible debt and other transactions charged to the capital
account of a savings association to make capital distributions. Generally, the
regulation creates a safe harbor for specified levels of capital distributions
from associations meeting at least their minimum capital requirements, so long
as such associations notify the OTS and receive no objection to the distribution
from the OTS. Savings associations and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making any capital
distributions. The Bank currently is a Tier 1 institution for purposes of the
regulation dealing with capital distributions.
Generally, Tier 1 associations, which are savings associations that
before and after the proposed distribution meet or exceed their fully phased-in
capital requirements, may make capital distributions during any calendar year
equal to the greater of 100% of net income for the calendar year-to-date plus
50% of its "surplus capital ratio" at the beginning of the calendar year or 75%
of net income over the most recent four quarter period. The "surplus capital
ratio" is defined to mean the percentage by which the association's ratio of
total capital to assets exceeds the ratio of its fully phased-in capital
requirement to assets, and "fully phased-in capital requirement" is defined to
mean an association's capital requirement under the statutory and regulatory
standards to be applicable on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirements imposed upon an association.
In December 1994 the OTS published a notice of proposed rule making to
amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined above under "Prompt Corrective Action." Because the
Bank is a subsidiary of a holding company, the proposal would require the Bank
to provide notice to the OTS of its intent to make a capital distribution. The
Bank does not believe that the proposal will adversely affect its ability to
make capital distributions if it is adopted substantially as proposed.
Federal Home Loan Bank System. The Bank is a member of the FHLBP, which
is one of 12 regional FHLBs that administers the home financing credit function
of savings associations and commercial banks. Each FHLB serves as a source of
liquidity for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by its Board of Directors. As of June 30, 1998, the
Bank's advances from the FHLBP amounted to $40.94 million.
As a member, the Bank is required to purchase and maintain stock in the
FHLBP in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At June 30, 1998, the Bank
had $2.58 million in FHLB stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future. For the year ended June 30,
1998, dividends paid by the FHLBP to the Bank totaled approximately $126,900.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and super NOW checking accounts) and non-personal time deposits.
At June 30, 1998, the Bank was in compliance with such requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
non-interest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an association's earning assets. The amount of
funds necessary to satisfy this requirement has not had a material affect on the
Bank's operations.
Interstate Acquisitions
The Commonwealth of Pennsylvania adopted legislation on 1986 ("1986
Act") regarding the acquisition of financial institutions located in
Pennsylvania by institutions located outside of Pennsylvania. The 1986 Act: (1)
permits federal or state savings and loan associations, federal savings banks
and bank or savings and loan holding companies (collectively, "Thrift Entities")
that are "located" (as defined below) in a state that offers reciprocal rights
to similar Thrift Entities located in Pennsylvania, to acquire 5% or more of a
Pennsylvania Thrift Entity's voting stock, merge or consolidate with a
Pennsylvania Thrift Entity or purchase the assets and assume the liabilities of
the Pennsylvania Thrift Entity and (2) permits a federal or state savings and
loan association or federal savings bank to establish and maintain branches in
Pennsylvania, provided that the state where such foreign Thrift Entity is
located offers reciprocal rights to similar entities located in Pennsylvania and
provided that each state where any bank holding company or savings and loan
holding company owning or controlling 5% or more of the foreign Thrift Entity's
shares is also located in a state that offers reciprocal rights. Under the
Pennsylvania Act, a depository is "located" where its deposits are largest and a
holding company is generally "located" where the aggregate deposits of its
subsidiaries are largest. Whether a foreign state's laws are "reciprocal" is
determined by the Pennsylvania Department, which may impose limitations and
conditions on the branching and acquisition activities of a Thrift Entity
located in a foreign state in order to make the laws of such state reciprocal to
Pennsylvania law with respect to the type of transaction at issue.
TAXATION
Federal and State Taxation
General. The Company and the Bank are subject to the corporate tax
provisions of the Internal Revenue Code of 1986 (the "Code"), as well as certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of tax matter is intended only
as a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Company and the Bank.
Bad Debt Reserves. Legislation enacted under the Small Business Job
Protection Act of 1996 (the "Act") provided for the Bank to recapture into
income, over a six-year period, only the portion of its tax bad debt reserves as
of June 30, 1996, that exceed its base year reserves (i.e., tax reserves for
years beginning before 1988). Under the Act, the amount of the excess base year
reserves subject to recapture would be suspended for each of two successive tax
years beginning July 1, 1996, in which the Bank originates a minimum amount of
certain residential loans based upon the average of the principal amounts of
such loans the Bank made during its six preceding tax years. The Bank's total
tax bad debt reserves at June 30, 1998, are approximately $3.13 million, of
which $2.64 million represents the base year amount and $488,000 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. 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 to certain distributions. Under the provisions of
the Act, the Bank is considered a "small bank" (i.e., a bank that has total
assets under $500 million) and may claim its tax bad debt for tax years
beginning after December 31, 1995, using a six-year average of its loan
charge-offs to total loans.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of
20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The alternative minimum tax is
payable to the extent such AMTI is in excess of an exemption amount. The Code
provides that an item of tax preference is the excess of bad debt deduction
allowable for a taxable year over the amount allowable under the experience
method. The other items of tax preference that constitute AMTI include (a)
tax-exempt interest on a newly issued (generally, issued on or after August 8,
1986) privately activity bonds other than certain qualified bonds and (b) for
taxable years beginning after 1989, 75% of the excess (if any) of (i) adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses). Net
operating losses can offset no more than 90% of AMTI. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. In addition, for taxable years after 1986 and beginning before
January 1, 1996, the Company is also subject to an environmental tax equal to
0.12% of the excess of AMTI for the taxable year over $2.0 million.
IRS Examinations. The Company's consolidated federal income tax returns
for taxable years through June 30, 1993, have been closed for the purposes of
examination by the IRS.
State Taxation. The Company and its non-thrift Pennsylvania subsidiaries
are subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and
Franchise Tax. The Corporate Net Income Tax rate for 1998 is 9.99% and is
imposed on the Company's and its non-thrift subsidiaries' unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at the rate of 1.275% of a corporation's
capital stock value, which is determined in accordance with a fixed formula.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax
Act (the "MTIT"), as amended to include thrift institutions having capital
stock. Pursuant to the MTIT, the Company's tax rate is 11.5%. The MTIT exempts
the Company from all other taxes imposed by the Commonwealth of Pennsylvania for
state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principals ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on Pennsylvania and
federal obligations, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those obligations to
the overall interest income of the Company. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes.
ITEM 2. PROPERTIES
Offices and Other Material Properties
At June 30, 1998, the Bank conducted its business from its main office
in Downingtown, Pennsylvania and six full-service branch offices. In fiscal 1998
the Company purchased land and a building in Devon, Pennsylvania for the Bank's
eighth branch. Demolition and construction has begun with the anticipated
opening of the branch in fall of 1998. PCIS conducts its business from two
offices.
The following table sets forth certain information with respect to the
offices of the Company as of June 30, 1998:
Net Book Value of
Lease Property and Leasehold
Owned or Expiration Improvements at
Leased Date June 30, 1998 Deposits
------ ---- ------------- --------
(In Thousands)
First Fianancial Bank:
Main Office:
100 E. Lancaster Avenue
Downingtown PA 19335 Own -- $ 991 $85,517
Branch Offices:
Exton-Lionville
601 N. Pottstown Pike
Exton PA 19341 Own -- 429 61,045
Frazer-Malvern
200 W. Lancaster Avenue
Frazer PA 19355 Own -- 1,311 37,645
Thorndale
3909 Lincoln Highway
Downingtown PA 19335 Lease 9/30/2000 45 42,072
Westtown
1197 Wilmington Pike
West Chester PA 19382 Lease 10/31/99 124 47,075
Airport Village
102 Airport Road Own Building
Coatesville PA 19320 Lease Land 11/30/04 342 13,490
Brandywine Square
82 Quarry Road
Downingtown PA 19335 Lease 8/14/11 97 11,267
Devon
414 Lancaster Avenue
Devon PA 19333 Own -- 786 80
------ --------
$4,125 $298,191
====== ========
PCIS:
Philadelphia
One Liberty Place, Suite 3050
1650 Market Street,
Philadelphia PA 19103 Lease 5/31/99
Wayne
485 Devon Park Dr. Suite 109
Wayne PA 19087 Lease 11/30/02
In addition, the Company currently owns two developed properties
adjacent to its main office. These properties are being held for possible use as
future office facilities and expansion of the main office. One of the properties
is currently being leased to other users. The net book value of each of the two
parcels at June 30, 1998 was approximately $11,100 and $90,400.
In September 1989 the Bank entered into a 10-year operating lease for
the Bank's Westtown office. The lease contains two five-year options to renew.
In October 1990 the Bank entered into a 10-year lease agreement in
connection with the relocation of its existing branch in Thorndale to a new site
in the Thorndale area. The lease includes two five-year options to extend the
lease.
In May 1994 the Bank entered into a 10-year lease agreement for land in
connection with the construction of the Airport Village branch. The lease
includes three five-year options to extend the lease.
In April 1995 the Bank entered into a 15-year lease agreement for the
Bank's Brandywine Square office.
First Financial operates and participates in the MAC(R) Money Access
Service shared Automated Teller Machine ("ATM") network system. In addition,
First Financial operates six office ATMs under the MAC(R) system.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine, non-material legal proceedings occurring in the ordinary course of
business which management believes will not have a material adverse effect on
the financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from
"Market Information" on page 24 of the Company's 1998 Annual Report to
Stockholders included herein as Exhibit 13 hereto ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from page 3
of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required herein is incorporated by reference from pages
18 to 25 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein can be found on pages 30 to 31 of this
10K document.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required herein are
incorporated by reference from pages 26 to 42 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from pages
2 to 7 of the Company's Definitive Proxy Statement which will be filed with the
SEC within 120 days of the end of the Company's fiscal year ("Definitive Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from pages
9 to 10 of the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from pages
1 to 9 of the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from page 7
of the Company's Definitive Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The following financial statements are incorporated by reference
into Item 8 hereof from pages 26 to 42 of the Annual Report,
Exhibit 13 hereto:
Consolidated Statements of Financial Condition at June 30, 1998
and 1997 Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997, and 1996 Consolidated Statements of
Stockholders' Equity for the Years Ended June 30, 1998, 1997, and
1996 Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1997, and 1996.
Notes to Consolidated Financial Statements.
(2) Financial statement schedules for which provision is made in the
applicable accounting regulations of the SEC are omitted because
of the absence of the conditions under which they are required or
because the required information is set forth in the Consolidated
Financial Statements or Notes thereto.
(b) Reports on Form 8-K
None
(c) The following exhibits are filed as a part of this form 10-K and this
list includes the Index to Exhibits.
Index to Exhibits
Number Description of Documents
- ------ ------------------------
3a Restated Articles of Incorporation**
3b Bylaws, as amended***
4 Specimen Stock Certificate*
10a Key Employee Stock Compensation Program, as amended**
10b Employee Stock Ownership Plan**
10c Employment Agreement By and Between the Holding Company, the Bank
and Ellen Ann Roberts**
10e Employment Agreement By and Between the Holding Company, the Bank
and Colin N. Maropis*
10f Employment Agreement By and Between the Holding Company, the Bank
and Anthony J. Biondi**
10h Amendment No. 1 to the Employment Agreement By and Between the
Holding Company, the Bank and Ellen
Ann Roberts****
10j Amendment No. 1 to the Employment Agreement By and Between the
Holding Company, the Bank and Colin
N. Maropis ****
10k Amendment No. 1 to the Employment Agreement By and Between the
Holding Company, the Bank and Anthony
J. Biondi****
101 1997 Stock Option Plan
10m 1993 Stock Option Plan as Amended*****
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant - Reference is made to Item, 1,
Business - Subsidiaries," for the required information
23 Consent of Independent Auditors
(*) Incorporated herein by reference from the Company's Registration
Statement on Form S-4 (33-30433) dated August 10, 1989
(**) Incorporated herein by reference from the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1990
(***) Incorporated herein by reference from the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1991
(****) Incorporated herein by reference from the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1992
(*****) Incorporated herein by reference from the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
September 25, 1998 By: /s/ Ellen Ann Roberts
---------------------
Ellen Ann Roberts
Director, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Ellen Ann Roberts September 25, 1998
- ----------------------
Ellen Ann Roberts
Director, Chairman of the Board
and Chief Executive Officer
/s/ Anthony J. Biondi September 25, 1998
- ---------------------
Anthony J. Biondi
President and
Chief Operating Officer
/s/ Edward T. Borer September 25, 1998
- -------------------
Edward T. Borer
Director
__________________ September 25, 1998
Robert J. Bradbury
Director
_______________________ September 25, 1998
John J. Cunningham, III
Director
___________________ September 25, 1998
Gerard F. Griesser
Director
_________________ September 25, 1998
James E. McErlane
Director and Secretary
/s/ Richard L. Radcliff September 25, 1998
- ------------------------
Richard L. Radcliff
Director
/s/ Emory S. Todd September 25, 1998
- ------------------
Emory S. Todd
Director
/s/ William M. Wright September 25, 1998
- ----------------------
William M. Wright
Director
/s/ Christine N. Dullinger September 25, 1998
- --------------------------
Christine N. Dullinger
Chief Financial Officer
and Treasurer