SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NO.: 0-18833
CHESTER VALLEY BANCORP INC.
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2598554
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 E. LANCASTER AVENUE, DOWNINGTOWN, PA 19335
---------------------------------------- ------
(Address Of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 269-9700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK ($1.00 PAR VALUE) 4,546,827
------------------------------ -----------------------------
(Title of Each Class) (Number of Shares Outstanding
as of February 1, 2003)
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
-----
PAGE
PART 1. FINANCIAL INFORMATION NUMBER
- ------------------------------ ------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2002 and June 30, 2002 (Unaudited) 1
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, 2002 and 2001 (Unaudited) 2
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2002 and 2001 (Unaudited) 3
STATEMENTS OF OTHER COMPREHENSIVE INCOME
Three and Six Months Ended December 31, 2002 and 2001 (Unaudited) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2002 and 2001 (Unaudited) 5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14 - 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 26 - 28
ITEM 4. CONTROLS AND PROCEDURES 29
PART 2. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS 30
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 30
ITEM 5. OTHER INFORMATION 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURES 31
- ----------
CERTIFICATIONS 32 - 35
- --------------
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
DECEMBER 31, JUNE 30,
2002 2002
------------ ----------
(UNAUDITED)
ASSETS $ 3,765 $ 10,232
Cash and due from banks
Interest-bearing deposits 13,617 29,163
---------- ----------
TOTAL CASH AND CASH EQUIVALENTS 17,382 39,395
---------- ----------
Trading account securities 16 16
Investment securities available for sale 138,467 101,393
Investment securities held to maturity (fair value -
December 31, 2002, $34,521; June 30, 2002, $41,439) 34,252 41,180
Loans held for sale 1,893 138
Loans receivable 380,680 369,685
Deferred fees (1,324) (1,533)
Allowance for loan losses (4,829) (4,588)
---------- ----------
Loans receivable, net 374,527 363,564
---------- ----------
Accrued interest receivable 2,313 2,543
Property and equipment - net 12,589 12,765
Bank owned life insurance 5,026 --
Other assets 6,038 5,038
---------- ----------
TOTAL ASSETS $ 592,503 $ 566,032
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 404,509 $ 385,980
Securities sold under agreements to repurchase 17,655 18,249
Advance payments by borrowers for taxes and insurance 1,666 2,831
Federal Home Loan Bank advances 109,506 102,454
Accrued interest payable 887 882
Trust preferred securities 10,000 10,000
Other liabilities 1,534 1,465
---------- ----------
TOTAL LIABILITIES 545,757 521,861
---------- ----------
Commitments and contingencies (Note 4)
Stockholders' Equity:
Preferred stock - $1.00 par value;
5,000,000 shares authorized; none issued -- --
Common stock - $1.00 par value;
10,000,000 shares authorized;
4,551,581 and 4,335,183 shares issued at December 31,
2002 and June 30, 2002, respectively 4,552 4,335
Additional paid-in capital 30,138 26,885
Retained earnings - partially restricted 12,600 14,115
Treasury stock (4,754 and 33,753 shares at December 31, 2002
and June 30, 2002, respectively, at cost) (69) (515)
Accumulated other comprehensive loss, net of tax (475) (649)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 46,746 44,171
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 592,503 $ 566,032
========== ==========
See accompanying notes to unaudited consolidated financial statements.
1
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2002 2001
-------------- -------------
(Unaudited)
INTEREST INCOME:
Loans $ 6,592 $ 6,749
Interest-bearing deposits 75 116
Investment securities:
Taxable 917 1,303
Non-taxable 463 480
----------- -----------
TOTAL INTEREST INCOME 8,047 8,648
----------- -----------
INTEREST EXPENSE:
Deposits 2,141 2,883
Securities sold under agreements to repurchase 53 43
Short-term borrowings 127 340
Long-term borrowings 1,388 864
----------- -----------
TOTAL INTEREST EXPENSE 3,709 4,130
----------- -----------
NET INTEREST INCOME 4,338 4,518
Provision for loan losses 101 147
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,237 4,371
----------- -----------
OTHER INCOME:
Investment services income 952 1,000
Service charges and fees 787 510
Gain on the sale of:
Loans 36 45
Available for sale securities 203 121
Other 98 42
----------- -----------
TOTAL OTHER INCOME 2,076 1,718
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 2,496 2,330
Occupancy and equipment 684 519
Data processing 270 275
Advertising 43 35
Deposit insurance premiums 16 18
Other 887 939
----------- -----------
TOTAL OPERATING EXPENSES 4,396 4,116
----------- -----------
Income before income taxes 1,917 1,973
Income tax expense 494 496
----------- -----------
NET INCOME $ 1,423 $ 1,477
=========== ===========
EARNINGS PER SHARE (1)
Basic $ 0.31 $ 0.32
=========== ===========
Diluted $ 0.30 $ 0.32
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
Basic 4,541,482 4,547,254
=========== ===========
Diluted 4,703,221 4,572,304
=========== ===========
(1) Earnings per share and weighted average shares outstanding have been
restated to reflect the effects of the 5% stock dividends paid in September
2002 and 2001.
See accompanying notes to unaudited consolidated financial statements.
2
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2002 2001
------------- -------------
(Unaudited)
INTEREST INCOME:
Loans $ 13,204 $ 13,557
Interest-bearing deposits 166 366
Investment securities:
Taxable 2,166 2,955
Non-taxable 931 975
----------- -----------
TOTAL INTEREST INCOME 16,467 17,853
----------- -----------
INTEREST EXPENSE:
Deposits 4,374 6,615
Securities sold under agreements to repurchase 112 74
Short-term borrowings 437 687
Long-term borrowings 2,563 1,673
----------- -----------
TOTAL INTEREST EXPENSE 7,486 9,049
----------- -----------
NET INTEREST INCOME 8,981 8,804
Provision for loan losses 242 278
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,739 8,526
----------- -----------
OTHER INCOME:
Investment services income 1,844 1,855
Service charges and fees 1,501 963
Gain on the sale of:
Loans 45 96
Available for sale securities 319 273
Other 140 86
----------- -----------
TOTAL OTHER INCOME 3,849 3,273
----------- -----------
OPERATING EXPENSES:
Salaries and employee benefits 4,976 4,530
Occupancy and equipment 1,390 1,097
Data processing 527 526
Advertising 78 52
Deposit insurance premiums 32 39
Other 1,714 1,640
----------- -----------
TOTAL OPERATING EXPENSES 8,717 7,884
----------- -----------
Income before income taxes 3,871 3,915
Income tax expense 983 976
----------- -----------
NET INCOME $ 2,888 $ 2,939
=========== ===========
EARNINGS PER SHARE (1)
Basic $ 0.64 $ 0.65
=========== ===========
Diluted $ 0.62 $ 0.64
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
Basic 4,535,106 4,546,403
=========== ===========
Diluted 4,643,995 4,570,728
=========== ===========
(2) Earnings per share and weighted average shares outstanding have been
restated to reflect the effects of the 5% stock dividends paid in September
2002 and 2001.
See accompanying notes to unaudited consolidated financial statements.
3
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
STATEMENTS OF OTHER COMPREHENSIVE INCOME
(Dollars in Thousands)
THREE MONTHS ENDED
DECEMBER 31,
--------------------
2002 2001
--------------------
(Unaudited)
NET INCOME $ 1,423 $ 1,477
Other comprehensive income, net of tax:
Net unrealized holding losses on securities available
for sale during the period (291) (793)
Reclassification adjustment for gains included in net income (134) (79)
-------- --------
COMPREHENSIVE INCOME $ 998 $ 605
======== ========
SIX MONTHS ENDED
DECEMBER 31,
--------------------
2002 2001
--------------------
(Unaudited)
NET INCOME $ 2,888 $ 2,939
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) on securities available
for sale during the period 385 (226)
Reclassification adjustment for gains included in net income (211) (180)
-------- --------
COMPREHENSIVE INCOME $ 3,062 $ 2,533
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
SIX MONTHS ENDED
DECEMBER 31,
---------------------
2002 2001
- -----------------------------------------------------------------------------------------------------
(Unaudited)
Net income $ 2,888 $ 2,939
Add (deduct) items not affecting cash flows provided by (used in)
operating activities:
Depreciation 539 464
Provision for loan losses 242 278
Gain on sale of securities available for sale (319) (273)
Originations of loans held for sale (12,514) (7,192)
Proceeds from sale of loans held for sale 10,804 8,339
Gain on sale of loans held for sale (45) (96)
Amortization of deferred loan fees, discounts and premiums (107) (343)
Decrease in trading account securities -- (29)
Decrease in accrued interest receivable 230 1,011
Increase in other assets (1,335) (486)
Increase (decrease) in accrued interest payable 5 (633)
Increase (decrease) in other liabilities 69 (2,432)
- -----------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 457 1,547
- -----------------------------------------------------------------------------------------------------
Cash flows provided by (used in) investment activities:
Capital expenditures (363) (2,026)
Net increase in loans (10,840) (17,990)
Purchase of investment securities held to maturity (6,147) (20,984)
Proceeds from maturities, payments and calls of investment securities
held to maturity 13,071 28,168
Purchase of securities available for sale (78,287) (44,943)
Proceeds from sales and calls of securities available for sale 41,787 60,543
Increase in bank owned life insurance (5,026) --
- -----------------------------------------------------------------------------------------------------
Net cash flows (used in) provided by investment activities (45,805) 2,768
- -----------------------------------------------------------------------------------------------------
Cash flows provided by (used in) financing activities
Net increase (decrease) in deposits before interest credited 14,716 (42,851)
Interest credited to deposits 3,813 5,905
(Decrease) increase in securities sold under agreements to repurchase (594) 11,074
Proceeds from FHLB advances 8,000 17,926
Repayments of FHLB advances (948) (1,824)
Net increase in other borrowings -- 28
Decrease in advance payments by borrowers for taxes and insurance (1,165) (912)
Cash dividends on common stock (885) (845)
Treasury stock issued 398 --
Payment for fractional shares -- (5)
Stock options exercised -- 27
- -----------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) financing activities 23,335 (11,477)
- -----------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (22,013) (7,162)
CASH AND CASH EQUIVALENTS:
Beginning of period 39,395 23,912
-------- --------
End of period $ 17,382 $ 16,750
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash payments during the year for:
Taxes $ 915 $ 717
Interest $ 7,481 $ 9,682
NON-CASH ITEMS:
Stock dividend issued $ 3,518 $ 2,882
Net unrealized gain on investment securities available for sale, net of tax $ 174 $ (406)
See accompanying notes to unaudited consolidated financial statements.
5
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Chester Valley Bancorp Inc. (the "Holding Company") was incorporated in the
Commonwealth of Pennsylvania in August 1989. The business of the Holding Company
and its subsidiaries (collectively, the "Company") consists of the operations of
First Financial Bank ("First Financial" or the "Bank"), a Pennsylvania-chartered
commercial bank founded in 1922 as a Pennsylvania-chartered savings association,
and Philadelphia Corporation for Investment Services ("PCIS"), a full service
investment advisory and securities brokerage firm. Effective September 1, 2001,
the Bank converted to a Pennsylvania-chartered commercial bank. As a consequence
of such charter conversion and with the approval by the Federal Reserve Bank of
Philadelphia under delegated authority from the Board of Governors of the
Federal Reserve System ("FRB"), the Holding Company became a bank holding
company that has also been designated by the FRB as a financial holding company.
Prior to such conversion, the Holding Company was a unitary thrift holding
company.
The Bank provides a wide range of banking services to individual and corporate
customers through its nine full-service branch offices located in Chester
County, Pennsylvania. The Bank provides residential real estate, commercial real
estate, commercial and consumer lending services, funding these activities
primarily with retail and business deposits and borrowings. PCIS is a registered
broker/dealer in all 50 states and the District of Columbia and it is also
registered as an investment advisor with the Securities and Exchange Commission
(the "SEC"). PCIS provides many additional services, including self-directed and
managed retirement accounts, safekeeping, daily sweep money market funds,
portfolio and estate valuations, life insurance and annuities, and margin
accounts, to individuals and smaller corporate accounts. PCIS' offices are
located in Wayne and Philadelphia, Pennsylvania.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, the Bank and PCIS. The accounts of
the Bank include its wholly-owned subsidiaries, First Financial Investments Inc.
and D & S Service Corp., which owns D & F Projects and Wildman Projects, Inc.,
both of which are wholly-owned subsidiaries thereof. All material inter-company
balances and transactions have been eliminated in consolidation. Prior period
amounts are reclassified when necessary to conform with the current period's
presentation.
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America ("GAAP") for complete financial
statements. However, such information reflects all adjustments, which are, in
the opinion of management, necessary for a fair presentation of results for the
three- and six-month unaudited interim periods.
6
The results of operations for the three-month and six-month periods ended
December 31 2002 are not necessarily indicative of the results to be expected
for the entire fiscal year ending June 30, 2003. The consolidated financial
statements presented herein should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report to Stockholders for the fiscal year ended June 30, 2002.
EARNINGS PER SHARE
The dilutive effect of stock options is excluded from the computation of basic
earnings per share but included in the computation of diluted earnings per
share. Earnings per share and weighted average shares outstanding for the
periods presented herein have been adjusted to reflect the effects of the 5%
stock dividends paid in September 2002 and 2001.
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
(Dollars in thousands, except per share amounts)
Numerator:
Net income $ 1,423 $ 1,477 $ 2,888 $ 2,939
============== ============== ============== ==============
Denominator:
Denominator for basic per share-
weighted average shares 4,541,482 4,547,254 4,535,106 4,546,403
Effect of dilutive securities:
Stock options 161,739 25,050 108,889 24,325
-------------- -------------- -------------- --------------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 4,703,221 4,572,304 4,643,995 4,570,728
============== ============== ============== ==============
Basic earnings per share $ 0.31 $ 0.32 $ 0.64 $ 0.65
============== ============== ============== ==============
Diluted earnings per share $ 0.30 $ 0.32 $ 0.62 $ 0.64
============== ============== ============== ==============
The number of antidilutive stock options excluded was 0 for the three-month and
six-month periods ended December 31, 2002 was 369,094 and 386,734 for the same
periods in 2001.
7
STOCK-BASED COMPENSATION
At December 31, 2002, the Company has two stock-based option plans, which are
described more fully in Note 14 of the Company's Annual Report on Form 10-K for
the year ended June 30, 2002. The Company accounts for those plans under the
recognition and measurement principles (intrinsic value) of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income, as reported $ 1,423 $ 1,477 $ 2,888 $ 2,939
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (64) (44) (347) (233)
------------- ------------- ------------- -------------
Pro forma net income $ 1,359 $ 1,433 $ 2,541 $ 2,706
============= ============= ============= =============
Earnings per share:
Basic - as reported $ 0.31 $ 0.32 $ 0.64 $ 0.65
============= ============= ============= =============
Basic - pro forma $ 0.30 $ 0.32 $ 0.56 $ 0.60
============= ============= ============= =============
Diluted - as reported $ 0.30 $ 0.32 $ 0.62 $ 0.64
============= ============= ============= =============
Diluted - pro forma $ 0.29 $ 0.31 $ 0.55 $ 0.59
============= ============= ============= =============
8
NOTE 2 - LOANS RECEIVABLE
Loans receivable, excluding loans held for sale, are summarized as follows:
DECEMBER 31, JUNE 30,
2002 2002
------------------------
(In thousands)
First mortgage loans:
Residential (single and multi-family) $123,027 $133,751
Construction-residential 22,374 19,190
Land acquisition and development 15,855 16,707
Commercial 117,501 103,985
Construction-commercial 17,129 12,573
Commercial business 37,655 36,774
Consumer 73,439 69,538
---------- ----------
TOTAL LOANS 406,980 392,518
---------- ----------
Less:
Undisbursed loan proceeds:
Construction-residential and land acquisition (22,605) (17,277)
Construction-commercial (3,695) (5,556)
Deferred loan fees - net (1,324) (1,533)
Allowance for loan losses (4,829) (4,588)
---------- ----------
NET LOANS $374,527 $363,564
========== ==========
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that represents
management's best estimate of known and inherent losses, which are probable and
reasonably determinable based upon an evaluation of the loan portfolio.
Homogeneous portfolios of loans, which include residential mortgage, home equity
and other consumer loans, are evaluated as a group. Commercial business,
commercial mortgage and construction loans are evaluated individually. Specific
portions of the allowance are developed by analyzing individual loans for
adequacy of collateral, cash flow and other risks of loss, which may be unique
to that particular loan. General portions of the allowance are developed by
grading individual loans in the commercial and construction portfolios and
applying loss factors by grade. The general portion of the allowance also
includes loss factors applied to the homogeneous portfolios as a group. Loss
factors are applied to homogeneous and graded loans based upon prior loss
experience of the portfolio, delinquency trends, the volume of non-performing
loans and micro and macro economic conditions. 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 management's best estimate of
known and inherent losses, future adjustments to the allowance may be necessary,
and net income may be adversely affected if circumstances differ substantially
from the assumptions used in determining the level of the allowance. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for losses on loans. Such
agencies may require the Bank 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 added to the allowance.
9
For purposes of applying the measurement criteria for impaired loans, the
Company includes large loans and groups of smaller balance homogeneous loans,
primarily consisting of residential mortgage, home equity and other consumer
loans as well as commercial business loans with balances of less than $100
thousand. For applicable loans, the Company evaluates the need for impairment
recognition when a loan becomes non-accrual or earlier if, based on management's
assessment of the relevant facts and circumstances, it is probable that the
Company will be unable to collect all proceeds under the contractual terms of
the loan agreement. At December 31, 2002 and June 30, 2002, the recorded
investment in impaired loans was $1.15 million and $944 thousand. The Company's
policy for the recognition of interest income on impaired loans is to put them
on non-accrual status. A portion of an impaired loan is charged off when the
Company determines that foreclosure is probable and the fair value of the
collateral is less than the recorded investment in the impaired loan. At
December 31, 2002 and June 30, 2002 there was no valuation allowance against
these impaired loans.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Commitments to potential mortgagors of the Bank amounted to $2.70 million as of
December 31, 2002 of which $961 thousand was for variable-rate loans. The
balance of the commitments represents $1.74 million of fixed-rate loans
(primarily consisting of single-family residential mortgages) bearing interest
rates of between 5.25% and 7.50%. At December 31, 2002, the Company had $26.30
million of undisbursed construction loan funds as well as an aggregate of $46.19
million of undisbursed remaining consumer and commercial business lines of
credit.
NOTE 5 - TRUST PREFERRED SECURITIES
On March 26, 2002, the Company issued $10.31 million of Junior Subordinated
Debentures to Chester Valley Statutory Trust, a Pennsylvania Business Trust, in
which the Company owns all of the common equity. The Trust then issued $10.00
million of Trust Preferred Securities, which adjusts and pays interest quarterly
based on three month LIBOR plus 360 basis points, to investors and are secured
by the Junior Subordinated Debentures and the guarantee of the Company. The
Junior Subordinated Debentures are treated as debt of the Company but they
qualify as Tier I capital, subject to certain limitations, under the risk-based
capital guidelines of the Federal Reserve. The Trust Preferred Securities can be
redeemed by the Company on March 26, 2007, or at any time in the event the
deduction of related interest for federal income taxes is prohibited, the
treatment as Tier I capital is no longer permitted or under certain other
circumstances. The Trust Preferred Securities must be redeemed by the Company
upon maturity of the debentures in 2032.
10
NOTE 6 - REGULATORY CAPITAL
The Holding Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Holding Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Holding Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the Holding Company's
and the Bank's assets, liabilities, and certain off balance sheet items as
calculated under regulatory accounting practices. The Holding Company and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Holding Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average total assets (as defined). At December 31, 2002 and June 30,
2002 the Holding Company and the Bank were in compliance with all such
requirements and are deemed "well-capitalized" for regulatory purposes. There
are no conditions or events since December 31, 2002 that management believes
have changed such characterization.
The Holding Company's and the Bank's regulatory capital amounts and ratios are
presented in the table as follows (dollars in thousands):
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ---------- ----------- --------- ----------- ----------
AS OF DECEMBER 31, 2002:
HOLDING COMPANY
Total Capital
(to Risk-Weighted Assets) $61,999 15.24% $32,555 8.00% $40,694 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $57,170 14.05% $16,277 4.00% $24,416 6.00%
Tier 1 Capital
(to Average Assets) $57,170 9.90% $23,103 4.00% $28,879 5.00%
BANK
Total Capital
(to Risk-Weighted Assets) $58,235 14.36% $32,442 8.00% $40,553 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $53,406 13.17% $16,221 4.00% $24,332 6.00%
Tier 1 Capital
(to Average Assets) $53,406 9.31% $22,941 4.00% $28,677 5.00%
AS OF JUNE 30, 2002:
HOLDING COMPANY
Total Capital
(to Risk-Weighted Assets) $59,353 15.99% $29,697 8.00% $37,121 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $54,765 14.75% $14,848 4.00% $22,272 6.00%
Tier 1 Capital
(to Average Assets) $54,765 9.97% $21,966 4.00% $27,457 5.00%
BANK
Total Capital
(to Risk-Weighted Assets) $55,582 15.04% $29,558 8.00% $36,947 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $50,994 13.80% $14,779 4.00% $22,168 6.00%
Tier 1 Capital
(to Average Assets) $50,994 9.35% $21,807 4.00% $27,259 5.00%
NOTE 7 - SEGMENT REPORTING
The Company has two reportable segments: First Financial and PCIS. First
Financial operates a branch bank network with nine full-service banking offices
and provides primarily deposit and loan services to customers. Additionally, the
Bank offers trust services at its Downingtown headquarters. PCIS operates a full
service investment advisory and securities brokerage firm through two offices.
Both segments operate in southeastern Pennsylvania.
The Company evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses. There are no material
intersegment sales or transfers.
The Company's reportable segments have traditionally been two independent
financial services institutions. PCIS was acquired by the Company on May 29,
1998. The two segments are managed separately. All senior officers from PCIS
prior to the acquisition have been retained to manage PCIS.
The following table highlights income statement and balance sheet information
for each of the segments at or for the period ended December 31, 2002 and 2001:
AT AND DURING THE THREE MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2002 2001
------------------------------------------- ------------------------------------------
BANK PCIS TOTAL BANK PCIS TOTAL
------------ ----------- ------------ ----------- ------------ -----------
(In thousands)
Net interest income $ 4,334 $ 4 $ 4,338 $ 4,512 $ 6 $ 4,518
Other income 1,245 831 2,076 790 928 1,718
Total net income 1,341 82 1,423 1,386 91 1,477
Total assets 590,711 1,792 592,503 531,226 1,470 532,696
Total interest-
bearing deposits 12,121 1,496 13,617 11,255 1,124 12,379
Total trading securities -- 16 16 -- 45 45
AT AND DURING THE SIX MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2002 2001
------------------------------------------- ------------------------------------------
BANK PCIS TOTAL BANK PCIS TOTAL
------------ ----------- ------------ ----------- ------------ -----------
(In thousands)
Net interest income $ 8,972 $ 9 $ 8,981 $ 8,780 $ 24 $ 8,804
Other income 2,227 1,622 3,849 1,511 1,762 3,273
Total net income 2,718 170 2,888 2,760 179 2,939
Total assets 590,711 1,792 592,503 531,226 1,470 532,696
Total interest-
bearing deposits 12,121 1,496 13,617 11,255 1,124 12,379
Total trading securities -- 16 16 -- 45 45
12
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS
In October 2002, the FASB issued Statement No. 147, Acquisitions of Certain
Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, SFAS No.144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and FASB Interpretation No. 9.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
No. 72 and Interpretation 9 and requires that those transactions be accounted
for in accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5
of Statement No. 72 to recognize any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset of a business no longer applies
to acquisitions within the scope of this Statement. In addition, this Statement
amends Statement No. 144 to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement No. 144 requires for other long-lived assets that are
held and used.
With some exceptions, the requirements of Statement No. 147 became effective
October 1, 2002. The adoption of this Statement did not have an impact on the
Company's consolidated earnings, financial condition, or equity.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends FASB Statement No. 123,
Accounting for Stock-Based Compensation. This statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
The requirements of Statement No. 148 are effective for financial statements for
fiscal years beginning after December 15, 2002; the disclosure requirements for
the interim period financial statements of the Statement are included in this
report.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
In this Form 10-Q, the Company may have included certain "forward-looking
statements", either express or implied, which concern anticipated 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 Form 10-Q. The Company may have used "forward-looking
statements" to describe certain of its future plans and strategies including
management's current expectations of the Company's future financial results.
Management's ability to predict results or the effect of future plans and
strategy involve certain risks, uncertainties, estimates, and assumptions, many
of which are subject to factors beyond the Company's control. Consequently, the
Company's actual results could differ materially from management's expectations.
Factors that could affect results include, but are not limited to, interest rate
trends, competition, changes in monetary policy, 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, and other
uncertainties described in the Company's filings with the Securities and
Exchange Commission (the "Commission"), including this Form 10-Q. These factors
should be considered in evaluating the "forward-looking statements", and undue
reliance should not be placed on such statements. The Company undertakes no
obligation to update or revise any forward-looking statements, whether written
or oral that may be made from time to time by or on the Company's behalf.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Discussion and analysis of the financial condition and results of operations are
based on the consolidated financial statements of the Company. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. The
Company evaluates estimates on an on-going basis, including those related to the
allowance for loan losses, non-accrual loans, other real estate owned,
other-than-temporary investment impairments, pension and post-retirement
benefits, the stock option plan, recourse liabilities and income taxes. The
Company bases its estimates on historical experience and various other factors
and assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements: allowance for loan losses, income taxes, and
other-than-temporary impairment of investment securities.
14
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that represents
management's best estimate of known and inherent losses, which are probable and
reasonably determinable based upon an evaluation of the loan portfolio.
Homogeneous portfolios of loans, which include residential mortgage, home equity
and other consumer loans, are evaluated as a group. Commercial business,
commercial mortgage and construction loans are evaluated individually. Specific
portions of the allowance are developed by analyzing individual loans for
adequacy of collateral, cash flow and other risks of loss which may be unique to
that particular loan. General portions of the allowance are developed by grading
individual loans in the commercial business, commercial mortgage and
construction portfolios and applying loss factors by grade. The general portion
of the allowance also includes loss factors applied to the homogeneous
portfolios as a group. Loss factors are applied to homogeneous and graded loans
based upon prior loss experience of the portfolio, delinquency trends, the
volume of non-performing loans and micro and macro economic conditions. 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
management's best estimate of known and inherent losses, future adjustments to
the allowance may be necessary, and net income may be adversely affected if
circumstances differ substantially from the assumptions used in determining the
level of the allowance. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
losses on loans. Such agencies may require the Bank 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 added to the allowance.
For purposes of applying the measurement criteria for impaired loans, the
Company includes large loans and groups of smaller balance homogeneous loans,
primarily consisting of residential real estate loans and consumer loans as well
as commercial business loans with principal balances of less than $100 thousand.
For applicable loans, the Company evaluates the need for impairment recognition
when a loan becomes non-accrual or earlier if, based on management's assessment
of the relevant facts and circumstances, it is probable that the Company will be
unable to collect all proceeds under the contractual terms of the loan
agreement. At December 31, 2002 and June 30, 2002, the recorded investment in
impaired loans was $1.15 million and $944 thousand, respectively. The Company's
policy for the recognition of interest income on impaired loans is to put them
on non-accrual status. A portion of an impaired loan is charged off when the
Company determines that foreclosure is probable and the fair value of the
collateral is less than the recorded investment in the impaired loan.
15
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to difference between the financial statement carrying
amounts of existing assets and liabilities and their respective tax base, as
well as tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is established against deferred tax assets when in the
judgment of management, it is more likely than not that such deferred tax assets
will not become available. Based on management's evaluation of the likelihood of
realization, no valuation allowance has been established. Because the judgment
about the level of future taxable income is dependent to a great extent on
matters that may, at least in part, be beyond the Bank's control, it is at least
reasonably possible that management's judgment about the need for a valuation
allowance for deferred taxes could change.
OTHER THAN TEMPORARY IMPAIRMENT OF INVESTMENT SECURITIES
Securities are evaluated periodically to determine whether a decline in their
value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than temporary. The
term "other than temporary" is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support
realizable value equal to or greater than carrying value of the investment. Once
a decline in value is determined to be other than temporary, the value of the
security is reduced and a corresponding charge to earnings is recognized.
GENERAL
The Company's results of operations depend primarily on the Bank's net interest
income, which is the difference between interest income on interest-earning
assets, which consists principally of loans and investment securities, and
interest expense on interest-bearing liabilities, which consist primarily of
deposits and borrowings. Net interest income is determined by the Company's
interest rate spread (the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
The Company's results of operations also are affected by the provision for loan
losses resulting from management's assessment of the allowance for loan losses;
the level of its non-interest income, including investment service fees, account
service fees and related income, and gains and losses from the sales of loans
and securities; the level of its non-interest expense, including salaries and
employee benefits, occupancy and equipment expense, data processing services,
deposit insurance premiums, advertising, other operating costs; and income tax
expense.
The Bank is a community-oriented bank, which emphasizes customer service and
convenience. As part of this strategy, the Bank offers products and services
designed to meet the needs of its customers. The Company generally has sought to
achieve long-term financial growth and strength by increasing the amount and
stability of its net interest income and non-interest income and by maintaining
a high level of asset quality. In pursuit of these goals, the Company has
adopted a business strategy emphasizing growth in basic financial services. The
Company's focus is on expanding its commercial and construction lending
activities, increasing its commercial deposits and treasury management, consumer
deposits and loans as well as expanding its trust and investment management
services.
16
BUSINESS STRATEGY
GROWTH. The Company seeks to increase its assets primarily through internal
growth and by expanding its operations. During fiscal 2003, the Company plans on
opening its tenth branch office, which is scheduled to open in April 2003.
The primary objectives of the fiscal 2003 strategic plan are to increase loans,
in particular commercial real estate, commercial business, construction and
consumer loans, increase core deposits (consisting of all deposits other than
certificates of deposits) and increase trust and investment services income. The
Company's net loans increased by $10.96 million, or 3.02% from $363.56 million
at June 30, 2002 to $374.53 million at December 31, 2002. The growth of core
deposits was $26.46 million or 13.78% from $192.02 million at June 30, 2002 to
$218.48 million at December 31, 2002.
EMPHASIS ON COMMERCIAL LENDING. The Company has been and will continue to seek
to increase its higher yielding portfolios of commercial real estate and
commercial business loans. The Company's commercial real estate, commercial
business and construction and land acquisition loans comprised in the aggregate
51.73% of its total loan portfolio at December 31, 2002 compared to 48.21% at
June 30, 2002. Single-family and multi-family residential loans comprised 30.23%
of the Company's loan portfolio at December 31, 2002 as compared to 34.08% at
June 30, 2002.
MAINTAIN LOAN QUALITY. Management believes that maintaining high loan quality is
essential to achieving and sustaining long-term financial success. Accordingly,
the Company has sought to maintain a high level of loan quality and moderate
credit risk by using underwriting standards which management believes are
conservative and by generally limiting its lending activity to the origination
of loans secured by property located in its market area. The Company's
non-accrual loans increased slightly by $210 thousand to $1.15 million at
December 31, 2002. The Company's ratio of non-performing loans to total loans
was 0.26% and its allowance for loan losses to non-performing loans was 486.02%
at June 30, 2002, while at December 31, 2002 the percentages were 0.30% and
418.46%, respectively.
STABLE SOURCE OF LIQUIDITY. The Company purchases investment securities that
management believes to be appropriate for liquidity, yield and credit quality in
order to achieve a managed and more predictable source of liquidity to meet loan
demand and, to a lesser extent, a stable source of interest income. The
portfolio totaled, in the aggregate, $172.74 million at December 31, 2002,
including $25.00 million in U.S. Treasury Bills that matured on January 2, 2003,
compared to $142.59 million at June 30, 2002. In addition, the Company had
short-term interest-bearing deposits of $13.62 million at December 31, 2002
compared to $29.16 million at June 30, 2002.
17
EMPHASIS ON DEPOSITS AND CUSTOMER SERVICE. The Company, as a community-based
financial institution, is largely dependent upon its base of competitively
priced core deposits to provide a stable source of funding. The Company has
retained many loyal customers over the years through a combination of high
quality service, relatively low service fees, customer convenience, an
experienced staff and a strong commitment to the communities in which it serves.
Core deposits totaled $218.48 million or 60.15% of the Company's total deposits
at December 31, 2002, as compared to $192.02 million or 56.35% at June 30, 2002,
a $26.46 million or 13.78% increase. This increase in core deposits is primarily
attributable to the continuing effort to grow such deposits by increasing
customer contact and marketing to prospective new customers. Pursuant to the
Company's strategy, one of the major focuses in fiscal 2003 is on increasing
commercial and consumer core deposits and relying less on higher rate
certificates of deposit and municipal deposits. In addition, the Company has not
used brokered deposits as a source of funds and presently has no plans to do so
in the future.
ASSET/LIABILITY MANAGEMENT
The primary asset/liability management goal of the Company is to manage and
control the interest rate risk of the Bank, thereby reducing its exposure to
fluctuations in interest rates, and achieving sustainable growth in net interest
income over the long term. Other objectives of asset/liability management
include: (1) ensuring adequate liquidity and funding, (2) maintaining a strong
capital base and (3) maximizing net interest income opportunities.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Bank's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by the Board of
Directors. Changing the relative proportions of fixed-rate and adjustable-rate
assets and liabilities is one of the primary strategies utilized by the Company
to accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
To provide a more accurate one-year gap position of the Company, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that money
market, NOW accounts and savings deposits are partially sensitive to interest
rate changes. Accordingly, the interest-sensitive portions of these deposits are
classified in the less than one year categories with the remainder in the over
five years category. Deposit products with interest rates based on a particular
index are classified according to the specific repricing characteristic of the
index. Deposit rates other than time deposit rates are variable, and changes in
deposit rates are typically subject to local market conditions and management's
discretion and are not indexed to any particular rate. The interest rate
sensitivity analysis at December 31, 2002 is on page 28.
18
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest-sensitivity table on page 28
does not provide a comprehensive representation of the impact of interest rate
changes on net interest income. Each category of assets or liabilities will not
be affected equally or simultaneously by changes in the general level of
interest rates. Even assets and liabilities which contractually reprice within
the same period may not, in fact, reprice to the same degree or at the same time
or with the same frequency. It is also important to consider that the table
represents a specific point in time. Variations can occur as the Company adjusts
its interest-sensitivity position for the Bank throughout the year.
FINANCIAL CONDITION
The Company's total assets increased $26.47 million to $592.50 million at
December 31, 2002 from $566.03 million at June 30, 2002, principally due to a
$30.15 million increase in investments to $172.74 million from $142.59 million
at June 30, 2002 combined with a $10.96 million increase in loans receivable,
net, to $374.53 million from $363.56 million at June 30, 2002 and an increase in
other assets consisting principally of bank owned life insurance of $6.03
million. These increases were partially offset by a $15.55 million decrease in
interest-bearing deposits from $29.16 million at June 30, 2002 to $13.62 million
at December 31, 2002 and a decrease in cash in banks of $6.47 million from
$10.23 million at June 30, 2002 to $3.77 million at December 31, 2002.
Liabilities increased $23.90 million from June 30, 2002 to December 31, 2002
primarily due to an increase in deposits of $18.53 million from $385.98 million
at June 30, 2002 to $404.51 million at December 31, 2002 as well as an increase
in Federal Home Loan Bank advances of $7.05 million.
The increase in investments noted above includes a purchase of $25.00 million of
U.S. Treasury Bills on December 31, 2002, which matured on January 2, 2003. This
purchase was the principal reason for the decrease in interest-bearing deposits
and the increase in borrowings which were used to fund the purchase of the U.S.
Treasury Bills.
Stockholders' equity increased $2.58 million to $46.75 million at December 31,
2002 from $44.17 million at June 30, 2002, primarily as a result of net income
of $2.89 million, a decrease in net unrealized losses on securities available
for sale, net of tax, of $174 thousand and a decrease in Treasury stock of $446
thousand. These increases in stockholders' equity were partially offset by,
among other things, cash dividends of $885 thousand. The increase in common
stock and additional paid in capital and the reduction in retained earnings was
primarily due to a 5% stock dividend paid in September 2002.
RESULTS OF OPERATIONS
The most significant element in the determination of results of operation is net
interest income which is the difference between interest income on loans and
investments and interest expense on deposits and borrowings. Each element is
affected by both rates and volumes.
19
NET INTEREST INCOME AND INTEREST SPREAD ANALYSIS
- ------------------------------------------------
The following table sets forth, for the periods indicated, information on a tax
equivalent basis regarding (1) the total dollar amount of interest income of the
Company from interest-earning assets and the resultant average yields; (2) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (3) net interest income; (4) the interest rate spread;
and (5) net interest margin. Average balances are determined on a daily basis.
THREE MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2001
-------------------------------- --------------------------------
(Dollars in Thousands)
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ----------- --------- ---------- ----------- ---------
ASSETS:
Loans and loans held for sale $ 382,726 $ 6,612 6.91% $ 358,825 $ 6,776 7.55%
Securities and other investments 173,430 1,628 3.75% 149,886 2,078 5.55%
--------------------- ---------------------
Total interest-earning assets 556,156 8,240 5.93% 508,711 8,854 6.96%
-------- -------
Non-interest earning assets 28,933 28,962
--------- ---------
TOTAL ASSETS $ 585,089 $ 537,673
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits and repurchase agreements $ 396,655 2,141 2.14% $ 389,135 2,883 2.94%
FHLB advances and other borrowings 132,771 1,568 4.69% 82,991 1,247 5.96%
--------------------- ---------------------
TOTAL INTEREST-BEARING LIABILITIES 529,426 3,709 2.78% 472,126 4,130 3.47%
--------- -------- ---------------------
Non-interest-bearing liabilities 9,503 23,478
Stockholders' equity 46,160 42,069
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 585,089 $ 537,673
========= =========
NET INTEREST INCOME/INTEREST RATE SPREAD $ 4,531 3.15% $ 4,724 3.49%
================= =================
NET INTEREST MARGIN 3.23% 3.68%
==== ====
RATIO OF AVERAGE INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES 105% 108%
==== ====
SIX MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------------
2002 2001
-------------------------------- --------------------------------
(Dollars in Thousands)
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ----------- --------- ---------- ----------- ---------
ASSETS:
Loans and loans held for sale $ 377,859 $ 13,243 7.01% $ 354,580 $ 13,613 7.68%
Securities and other investments 173,794 3,611 4.16% 161,144 4,660 5.78%
--------------------- ---------------------
Total interest-earning assets 551,653 16,854 6.11% 515,724 18,273 7.09%
-------- --------
Non-interest earning assets 32,750 27,075
--------- ---------
TOTAL ASSETS $ 584,403 $ 542,799
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits and repurchase agreements $ 394,396 4,374 2.20% $ 401,246 6,615 3.27%
FHLB advances and other borrowings 131,489 3,112 4.69% 81,733 2,434 5.91%
--------------------- ---------------------
TOTAL INTEREST-BEARING LIABILITIES 525,885 7,486 2.82% 482,979 9,049 3.72%
--------------------- ---------------------
Non-interest-bearing liabilities 12,839 18,226
Stockholders' equity 45,679 41,594
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 584,403 $ 542,799
========= =========
NET INTEREST INCOME/INTEREST RATE SPREAD $ 9,368 3.29% $ 9,224 3.37%
======== ========
==== ====
NET INTEREST MARGIN 3.37% 3.55%
==== ====
RATIO OF AVERAGE INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES 105% 107%
==== ====
20
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 income tax rate of 34% adjusted for the 20% interest
expense disallowance resulting in an effective tax rate of 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). The changes in rate/volume are allocated to the
change in volume variance and the change in the rate variance on a pro rata
basis.
SIX MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------
2002 COMPARED TO 2001 2001 COMPARED TO 2000
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------------------------------- ---------------------------------
Interest income on interest-
earning assets:
Loans and loans held for sale $ 1,652 $(2,022) $ (370) $ 2,400 $ 142 $ 2,542
Securities and other investments 914 (1,963) (1,049) 1,172 (329) 843
------------------------------- ---------------------------------
Total interest income 2,566 (3,985) (1,419) 3,572 (187) 3,385
------------------------------- ---------------------------------
Interest expense on interest-
bearing liabilities:
Deposits and repurchase agreements (361) (1,880) (2,241) 3,890 31 3,921
FHLB advances and other borrowings 1,991 (1,313) 678 (808) 130 (678)
------------------------------- ---------------------------------
Total interest expense 1,630 (3,193) (1,563) 3,082 161 3,243
------------------------------- ---------------------------------
Net change in net interest income $ 936 $ (792) $ 144 $ 1,490 $ (1,348) $ 142
=============================== =================================
Net interest income, on a fully tax equivalent basis, decreased $193 thousand or
4.09% to $4.53 million and increased $144 thousand or 1.56% to $9.37 million for
the three- and six-month periods ended December 31, 2002, compared to $4.72
million and $9.22 million, respectively, for the same periods in 2001 as the
Company's interest expense decreased at a more rapid rate than its interest
income.
Total interest income, on a fully tax equivalent basis, decreased to $8.24
million and $16.85 million for the three- and six-month periods ended December
31, 2002, from $8.85 million and $18.27 million for the same periods in 2001,
primarily as a result of the effect of decreasing yields as market rates of
interest declined during 2002, which decreases were offset in part by an
increase in the average balance of interest-earning assets.
The average balance of interest-earning assets increased $47.45 million to
$556.16 million and $35.93 million to $551.65 million for the three- and
six-month periods ended December 31, 2002, respectively, from $508.71 million
and $515.72 million, respectively, for the same periods in 2001. The increase
was primarily due to a $23.90 million and $23.28 million increase in the average
balance of loans during the three- and six-month periods in 2002, respectively,
reflecting the continued implementation of the Company's business plan to
increase its loan portfolio. The decrease in interest income also resulted from
103 basis-point or 14.8% and 98 basis-point or 13.8% decreases in the yield to
5.93% and 6.11% on interest-earning assets for the three- and six-month periods
ended December 31, 2002, respectively, as the result of decreasing general
market rates of interest experienced during the periods.
21
Total interest expense decreased to $3.71 million and $7.49 million from $4.13
million and $9.05 million for the respective three- and six-month periods in
2002 and 2001, largely as the result of decreases in the average rate paid on
such liabilities to 2.78% and 2.82% for the three- and six-month periods ended
December 31, 2002, respectively, from 3.47% and 3.72% for the same periods in
2001, resulting primarily from the continued decline in market rates of interest
experienced throughout much of 2002.
The tax equivalent interest rate spread decreased to 3.15% and 3.29% from 3.49%
and 3.37%, respectively, and the average tax equivalent net yield on
interest-earning assets decreased to 3.23% and 3.37% from 3.68% and 3.55% for
the three- and six-month periods ended December 31, 2002 and 2001, respectively,
due to the reasons discussed above.
PROVISION FOR LOAN LOSSES
The Company provided $101,000 and $242,000 for loan losses during the three- and
six-month periods ended December 31, 2002 and $147,000 and $278,000 for the same
periods in 2001, respectively. These provisions have been added to the Company's
allowance for loan losses because of the increase in classified loans and the
Company's focus on building a larger loan portfolio of commercial real estate
and business loans, which typically have a greater risk of loss than the
Company's traditional loan portfolios, such as single-family residential
mortgages and business real estate loans. The change in the character of the
loan portfolio, the current economic conditions and management's assessment of
the inherent risk of loss existing in the loan portfolio determined the amount
necessary to increase the allowance for loan losses to a level to cover known
and inherent losses in the loan portfolio that were both probable and reasonably
estimated based upon the facts and circumstances known to management during such
periods. The amount of the allowance is only an estimate and actual losses may
vary from these estimates. No assurances can be given that additional provisions
will not be required in future periods. At December 31, 2002, the allowance for
loan losses totaled $4.89 million or 1.27% of net loans (before allowance),
compared to $4.59 million or 1.26% of net loans at June 30, 2002. As a
percentage of non-performing assets, the allowance for loan losses was 418% at
December 31, 2002, compared to 486% at June 30, 2002, and further compared to
370% at December 31, 2001.
OTHER INCOME
Total other income increased to $2.08 million and to $3.85 million during the
three- and six-month periods ended December 31, 2002, respectively, as compared
to $1.72 million and $3.27 million during the same periods in 2001. For the
three- and six-month periods respectively, service charges increased $277,000
and $538,000 because of both an introduction of the overdraft shield program
which charges customers a fee for overdraft protection, as well as increases in
the number of accounts and activity. Miscellaneous other income increased
$56,000 and $54,000 and gains on available for sale securities increased $82,000
and $46,000. These increases were offset by a decrease in gains on the sale of
loans of $9,000 and $51,000 and the decrease in investment services income of
$48,000 and $11,000, for the three- and six-month periods.
22
OPERATING EXPENSES
Total operating expenses increased $280,000 and $833,000 to $4.40 million and
$8.72 million, respectively, for the three- and six-month periods ended December
31, 2002 as compared to the same time periods in 2001. The primary reasons for
the increases in operating expenses for the three- and six-month periods in
fiscal 2002 are as follows: (i) salaries and employee benefits increased
$166,000 or 7.12% and $446,000 or 9.85% resulting from normal salary adjustments
effective July 1, 2002, the hiring of additional officer level staff and
increased employee benefit costs; (ii) occupancy and equipment expense increased
$165,000 or 31.79% and $293,000 or 26.71% as a result of the expansion of the
Company's corporate headquarters; (iii) advertising expense increased $8,000 or
22.86% and $26,000 or 50.00% resulting primarily from advertising new customer
programs; and (iv) other costs and expenses decreased $52,000 or 5.54% and
increased by $74,000 or 4.51%.
INCOME TAX EXPENSE
The Company recorded a $494,000 and a $983,000 expense for the three- and
six-month periods ended December 31, 2002, respectively, as compared to $496,000
and $976,000 for the same periods in 2001. For the three- and six-month periods
ended December 31, 2002 the effective tax rate was 25.77% and 25.39%,
respectively, which is less than the statutory rate of 34% because of tax-free
income and low income housing tax credits.
ASSET QUALITY
Classified loans include non-performing loans, which are non-accruing, totaling
$1.15 million and $944 thousand at December 31, 2002 and June 30, 2002,
respectively. Non-accrual loans are loans on which the accrual of interest has
ceased because the collection of principal or interest payments is determined to
be doubtful by management. It is the policy of the Company to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days
or more (unless the loan principal and interest are determined by management to
be fully secured and in the process of collection), or earlier, if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the current loan terms.
Interest income is not accrued until the financial condition and payment record
of the borrower clearly demonstrates the borrower's ability to service the debt.
At December 31, 2002, the Company did not have any loans greater than 90 days
delinquent which were accruing interest. The ratio of non-performing loans to
total assets was .19% at December 31, 2002 compared to .17% at June 30, 2002,
and .23% at December 31, 2001. Non-performing loans, which totaled $1.15 million
at December 31, 2002, consisted of 13 single-family residential mortgage loans
aggregating $1.02 million and non-performing consumer and commercial business
loans totaling $135 thousand.
23
At December 31, 2002 and June 30, 2002, the Company's classified loans, which
consisted of loans classified as special mention, substandard, doubtful and
loss, totaled $20.14 million and $6.24 million, respectively. Included in the
assets classified substandard at December 31, 2002 and June 30, 2002, were all
loans 90 days past due and loans which are less than 90 days delinquent, but
inadequately protected by the current paying capacity of the borrower or of the
collateral pledged, as well as a well-defined weakness that may jeopardize the
liquidation of the debt. Included, as classified loans at December 31, 2002 and
June 30, 2002 are loans totaling approximately $15.52 million and $3.88 million,
respectively, which are current but have been listed as special mention and are
being closely monitored.
In addition to non-performing loans, classified assets include three Municipal
Authority Revenue Bond investments that had an aggregate balance of $6.4 million
at December 31, 2002, after a write-down on two of the bonds totaling $955
thousand as of June 30, 2002. After the write-down, two of the Bonds have a
carrying value of $5.0 million and both of these bonds involve buildings and
related property that are leased to various agencies of the Commonwealth of
Pennsylvania under long-term lease arrangements with renewal options. Of the
total balance of $5.0 million, $200 thousand are interest-bearing bonds and the
remainder of $4.8 million are zero coupon bonds with maturities extending up to
June 2034.
The third classified bond had a balance, after write-down, of $1.5 million, an
interest rate of 6% and matures in June 2019. This bond has been put on
non-accrual status and the interest payment received in December of $59,100 was
applied to the outstanding balance reducing it to $1.4 million. This bond
involves low-income scattered housing located in Chester County under a Housing
and Urban Development Program("HUD"). HUD has indicated that it will provide
funds to build additional housing which would be donated to this bond issue and,
when sold, may reduce the losses incurred on the bonds.
These classified investments are closely monitored and fairly stated at December
31, 2002 based on available information. There can be no assurance that further
subsequent adverse or positive developments may occur; in which case, additional
adjustments to these investments may be forthcoming.
24
LIQUIDITY AND CAPITAL RESOURCES
Management monitors liquidity daily and maintains funding sources to meet
unforeseen changes in cash requirements. The Company's primary sources of funds
are deposits, borrowings, repayments, prepayments and maturities of outstanding
loans and mortgage-backed securities, sales of assets available for sale,
maturities and calls of investment securities and other short-term investments,
and funds provided from operations. While scheduled loan and mortgage-backed
securities repayments and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows, loan
prepayments and callable investments are greatly influenced by the movement of
interest rates in general, economic conditions and competition. The Company
manages the pricing of its deposits to maintain a deposit balance deemed
appropriate and desirable. Although the Company's deposits represent the
majority of its total liabilities, the Company has also utilized other borrowing
sources, namely Federal Home Loan Bank of Pittsburgh ("FHLBP") advances. In
addition to its ability to obtain advances from the FHLBP under several
different credit programs, the Company has established a line of credit with the
FHLBP, in an the amount $10 million. This line of credit is available for
liquidity purposes. At December 31, 2002, there was no outstanding balance on
this line of credit.
Liquidity management is both a daily and long-term function. Excess liquidity is
generally invested in short-term investments such as FHLBP overnight deposits.
On a longer term basis, the Company maintains a strategy of investing in various
lending and investment securities products. During the year ended December 31,
2002, the Company used its sources of funds to primarily fund loan commitments
and maintain a substantial portfolio of investment securities, and to meet its
ongoing commitments to pay maturing savings certificates and savings
withdrawals. As of December 31, 2002, the Company had $2.70 million in
commitments to fund loan originations. In addition, as of December 31, 2002, the
Company had undisbursed loans in process for construction loans of $26.30
million and $46.19 million in undisbursed lines of credit. The Company has also
issued $2.99 million in commercial letters of credit fully secured by deposit
accounts or real estate at December 31, 2002. The management of the Company
believes that the Company has adequate resources, including principal
prepayments and repayments of loans and investment securities and borrowing
capacity, to fund all of its commitments to the extent required.
For regulatory purposes, liquidity is defined as a ratio of cash and certain
marketable securities that can be readily converted into cash to total deposits
and short-term borrowings. At December 31, 2002, liquidity for the Bank as
defined under these guidelines was 32.17%.
The Company's current dividend policy is to declare a regular quarterly dividend
with the intent that the level of the dividend per share be reviewed and
determined by the Board of Directors on a quarterly basis. Dividends will be in
the form of cash and/or stock after giving consideration to all aspects of the
Company's performance for the current and prior quarter and other relevant
aspects. The Board of Directors declared a 5% stock dividend and a quarterly
cash dividend of $.10 per share, both of which were paid in September 2002. The
Board also declared a $.10 per share cash dividend that was paid in December
2002. Cash dividends from the Holding Company are primarily dependent upon
dividends paid to it by First Financial, which, in turn, are subject to certain
restrictions established by federal banking regulators and Pennsylvania law.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from the interest rate risk inherent
in its lending, investments and deposit taking activities. To that end,
management actively monitors and manages its interest rate risk exposure. At
December 31, 2002, the Company's management believes that the interest rate
exposure has not significantly changed from that disclosed as of June 30, 2002.
The primary asset/liability management goal of the Company is to manage and
control its interest rate risk, thereby reducing its exposure to fluctuations in
interest rates, and achieving sustainable growth in net interest income over the
long term. Other objectives of asset/liability management include: (1) ensuring
adequate liquidity and funding, (2) maintaining a strong capital base and (3)
maximizing net interest income opportunities.
In general, interest rate risk is mitigated by closely matching the maturities
or repricing periods of interest-sensitive assets and liabilities to ensure a
favorable interest rate spread. Management regularly reviews the Company's
interest-rate sensitivity, and uses a variety of strategies as needed to adjust
that sensitivity within acceptable tolerance ranges established by management.
Changing the relative proportions of fixed-rate and adjustable-rate assets and
liabilities is one of the primary strategies utilized by the Company to
accomplish this objective.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest-rate sensitive" and by
monitoring an institution's interest-sensitivity gap. An interest-sensitivity
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities repricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
repricing within a defined period.
To provide a more accurate one-year gap position of the Company, certain deposit
classifications are based on the interest-rate sensitive attributes and not on
the contractual repricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that money
market, NOW and savings deposits are partially sensitive to interest rate
changes. Accordingly, some of the interest sensitive portions of such
liabilities are classified in the less than one-year categories with the
remainder placed in the other categories. Deposit products with interest rates
based on a particular index are classified according to the specific repricing
characteristic of the index. Deposit rates other than time deposit rates are
variable, and changes in deposit rates are typically subject to local market
conditions and management's discretion and are not indexed to any particular
rate.
26
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates.
Even assets and liabilities, which contractually reprice within the same period
may not, in fact, reprice to the same degree, at the same time or with the same
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as the Company adjusts its interest
sensitivity position throughout the year. Although interest rate sensitivity gap
is a useful measurement and contributes towards effective asset/liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure. An alternative methodology is to estimate the changes in
the Company's portfolio equity over a range of interest rate scenarios.
The Company originates certain loans that are designated as held for sale at the
time of their origination. These loans are immediately sold with servicing
released and the company does not retain any interest or obligation after the
loans are sold. These loans consist primarily of fixed-rate, single-family
residential mortgage loans which meet the underwriting characteristics of
certain government-sponsored enterprises (conforming loans). Loans held for sale
are carried at the lower of aggregate cost or fair value, with any resulting
loss included in other income for the period. Realized gains or losses are
included in other income for the period. Loans sold prior to 1990 were sold with
servicing retained. The Company recognizes servicing fee income when payments
are received.
The following is an interest rate sensitivity analysis for the Bank at December
31, 2002.
27
INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 2002
(Dollars in thousands)
MORE THAN MORE THAN MORE THAN MORE THAN
THREE MONTHS SIX MONTHS ONE YEAR THREE YEARS
THREE MONTHS THROUGH THROUGH THROUGH THROUGH MORE THAN
OR LESS SIX MONTHS ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans: (1)
Real estate (2) $ 87,182 $ 31,441 $ 48,786 $ 70,296 $ 23,576 $ 8,874 $ 270,155
Commercial business 28,106 1,132 1,963 4,680 1,774 -- 37,655
Consumer 36,784 3,627 6,324 13,360 6,528 6,816 73,439
Securities and interest-bearing deposits (3) 88,288 9,433 8,961 17,952 9,428 49,689 183,751
------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $ 240,360 $ 45,633 $ 66,034 $ 106,288 $ 41,306 $ 65,379 $ 565,000
------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 725 $ 726 $ 1,456 $ 5,878 $ 5,966 $ 15,311 $ 30,062
NOW accounts 1,491 1,493 2,993 12,059 12,198 30,193 60,427
Money market accounts 78,270 -- -- -- -- -- 78,270
Certificate accounts 41,891 39,275 43,084 44,254 9,670 6,699 184,873
Securities sold under agreements to repurchase 17,655 -- -- -- -- -- 17,655
Borrowings 15,596 249 2,606 6,694 2,228 82,133 109,506
------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $ 155,628 $ 41,743 $ 50,139 $ 68,885 $ 30,062 $ 134,336 $ 480,793
------------------------------------------------------------------------------------
Cumulative excess of interest-earning assets
to interest-bearing liabilities $ 84,732 $ 88,622 $104,517 $ 141,920 $ 153,164 $ 84,207 $ 84,207
========= ======== ======== ========= ========= ========= =========
Cumulative ratio of interest rate-sensitive
assets to interest rate-sensitive liabilities 154.4% 144.9% 142.2% 144.9% 144.2% 117.5% 117.5%
========= ======== ======== ========= ========= ========= =========
CUMULATIVE DIFFERENCE AS A PERCENTAGE OF
TOTAL ASSETS 14.4% 15.0% 17.7% 24.1% 26.0% 14.3% 14.3%
========= ======== ======== ========= ========= ========= =========
(1) Net of undisbursed loan proceeds.
(2) Includes residential (single and multi-family) and commercial mortgage
loans.
(3) Excludes SFAS 115 available for sale adjustment.
Certain shortcomings are inherent in the method of analysis presented in the
table above. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features, which restrict changes in interest rates both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.
28
ITEM 4. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls") in accordance with
the provisions of Rules 13a-14 and 13a-15 of the Securities Exchange Act of 1934
(the "Exchange Act"). This evaluation ("Controls Evaluation") was done under the
supervision and with the participation of management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Disclosure Controls are the Company's controls and other procedures that are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files under the Exchange
Act is accumulated and communicated to the Company's management, including its
CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
The Company's management, including the CEO and CFO, does not expect that its
Disclosure Controls or its "internal controls and procedures for financial
reporting" ("Internal Controls" ) will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
CONCLUSIONS. Based upon the Controls Evaluation, the CEO and CFO have concluded
that, subject to the limitations noted above, the Disclosure Controls are
effective to timely alert management to material information relating to the
Company, including its consolidated subsidiaries, during the period for which
its periodic reports are being prepared.
29
In accord with SEC requirements, the CEO and CFO note that, since the date of
the Controls Evaluation to the date of this Quarterly Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of
this Form-10Q
Number Description of Documents
- --------------- ----------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated
February 14, 2003
(b) Reports on Form 8-K
Date Item and Description
---------------- ------------------------------------------
October 25, 2002 9 - The Company announced the Company's
participation in the Mid-Atlantic 2002
Super-Community Bank Conference which
was held in Baltimore, Maryland on
October 28-29, 2002. Included as an
exhibit thereto was a copy of the
slide presentation that was used by
the Company at the conference.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Chester Valley Bancorp Inc.
Date 02/13/03 /s/ Donna M. Coughey
--------------------- -----------------------------------------------
Donna M. Coughey
President and Chief Executive Officer
Date 02/13/03 /s/ Albert S. Randa
--------------------- -----------------------------------------------
Albert S. Randa, CPA
Chief Financial Officer and Treasurer
31
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Albert S. Randa, the Chief Financial Officer of Chester Valley Bancorp Inc.
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chester Valley Bancorp
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
32
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date 02/13/03 /s/ Albert S. Randa
--------------------- -----------------------------------------------
Albert S. Randa
Chief Financial Officer and Treasurer
33
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donna M. Coughey, the President and Chief Executive Officer of Chester Valley
Bancorp Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chester Valley Bancorp
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
34
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 02/13/03 /s/ Donna M. Coughey
----------------------- -----------------------------------------
Donna M. Coughey
President and Chief Executive Officer
35