UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
--- Quarterly Report Pursuant to Section 13 or 15(d) of the
| X | Securities Exchange Act of 1934
--- FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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
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(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) 4,859,124
------------------------------ ---------
(Title of Each Class) (Number of Shares Outstanding
as of May 3, 2004)
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
INDEX
-----
Page
PART 1. FINANCIAL INFORMATION Number
------- --------------------- ------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2004 and June 30, 2003 (Unaudited) 1
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003 (Unaudited) 2
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2004 and 2003 (Unaudited) 3
STATEMENT OF OTHER COMPREHENSIVE INCOME
Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2004 and 2003 (Unaudited) 5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6 - 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15 - 24
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 24 - 27
Item 4. CONTROLS AND PROCEDURES 28
PART 2. OTHER INFORMATION
- ------- -----------------
Item 1. LEGAL PROCEEDINGS 29
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29
Item 3. DEFAULTS UPON SENIOR SECURITIES 29
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
Item 5. OTHER INFORMATION 29
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURES 30
- ----------
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
MARCH 31, JUNE 30,
2004 2003
---------- --------
(UNAUDITED)
ASSETS
Cash and due from banks $ 10,274 $ 16,311
Interest-bearing deposits 26,435 9,438
---------- ----------
TOTAL CASH AND CASH EQUIVALENTS 36,709 25,749
---------- ----------
Trading account securities 10 10
Investment securities available for sale 120,983 114,220
Investment securities held to maturity
(fair value - March 31, 2004, $48,336;
June 30, 2003, $34,432) 47,509 33,390
Loans held for sale 376 3,866
Loans receivable 401,687 387,310
Deferred fees (560) (933)
Allowance for loan losses (6,259) (5,415)
---------- ----------
Loans receivable, net 394,868 380,962
---------- ----------
Accrued interest receivable 2,735 2,428
Property and equipment - net 12,988 12,349
Bank owned life insurance 5,357 5,164
Goodwill 1,087 --
Other intangible assets 395 --
Other assets 7,343 6,390
---------- ----------
TOTAL ASSETS $ 630,360 $ 584,528
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 420,068 $ 400,586
Securities sold under agreements to repurchase 18,932 27,358
Advance payments by borrowers for taxes and
insurance 1,322 2,038
Federal Home Loan Bank advances 123,569 94,049
Junior Subordinated Debentures 10,310 10,000
Accrued interest payable 698 652
Other liabilities 2,173 274
---------- ----------
TOTAL LIABILITIES 577,072 534,957
---------- ----------
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;
4,859,707 and 4,570,993 shares
issued at March 31, 2004 and
June 30, 2003, respectively 4,860 4,571
Additional paid-in capital 35,983 30,315
Retained earnings - partially restricted 12,222 14,064
Treasury stock (583 and 556 shares at March
31, 2004 June 30, 2003, respectively, at cost) (13) (13)
Accumulated other comprehensive (loss)
income, net of tax 236 634
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 53,288 49,571
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 630,360 $ 584,528
========== ==========
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 MARCH 31,
----------------------------
2004 2003
--------- ----------
(Unaudited)
INTEREST INCOME:
Loans $ 5,690 $ 6,168
Mortgage-backed securities 396 338
Interest-bearing deposits 16 70
Investment securities:
Taxable 844 615
Non-taxable 423 481
--------- ---------
TOTAL INTEREST INCOME 7,369 7,672
--------- ---------
INTEREST EXPENSE:
Deposits 1,258 1,885
Securities sold under agreements to repurchase 21 32
Short-term borrowings 70 37
Long-term borrowings 1,275 1,338
--------- ---------
TOTAL INTEREST EXPENSE 2,624 3,292
--------- ---------
NET INTEREST INCOME 4,745 4,380
Provision for loan losses 180 (68)
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 4,565 4,448
--------- ---------
OTHER INCOME:
Investment services income 1,096 831
Service charges and fees 716 642
Gain on the sale of:
Loans 15 51
Available for sale 378 114
Other 108 188
--------- ---------
TOTAL OTHER INCOME
2,313 1,826
--------- ---------
OPERATING EXPENSES:
Salaries and employee benefits 2,825 2,441
Occupancy and equipment 752 711
Data processing 278 259
Advertising 89 15
Deposit insurance premiums 15 16
Other 785 943
--------- ---------
TOTAL OPERATING EXPENSES 4,744 4,385
--------- ---------
Income before income taxes 2,134 1,889
Income tax expense 528 408
--------- ---------
NET INCOME $ 1,606 $ 1,481
========= =========
EARNINGS PER SHARE (1)
Basic $ 0.33 $ 0.31
========= =========
Diluted $ 0.32 $ 0.30
========= =========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ 0.11 $ 0.09
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
Basic 4,854,141 4,768,907
========= =========
Diluted 5,079,344 4,996,169
========= =========
(1) Earnings per share, dividends per share and weighted average shares
outstanding have been restated to reflect the effects of the 5% stock
dividends paid in September 2003 and 2002
See accompanying notes to unaudited consolidated financial statements
-2-
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except for Per Share Amounts)
NINE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- -----------
(Unaudited)
INTEREST INCOME:
Loans $ 17,682 $ 19,372
Mortgage-backed securities 1,150 1,035
Interest-bearing deposits 47 236
Investment securities:
Taxable 2,035 2,084
Non-taxable 1,320 1,412
---------- ----------
TOTAL INTEREST INCOME 22,234 24,139
---------- ----------
INTEREST EXPENSE:
Deposits 3,996 6,259
Securities sold under agreements to repurchase 79 144
Short-term borrowings 130 474
Long-term borrowings 3,833 3,901
---------- ----------
TOTAL INTEREST EXPENSE 8,038 10,778
---------- ----------
NET INTEREST INCOME 14,196 13,361
Provision for loan losses 856 174
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 13,340 13,187
---------- ----------
OTHER INCOME:
Investment services income 3,204 2,675
Service charges and fees 2,243 2,143
Gain on the sale of:
Loans 100 96
Available for sale 1,012 433
Other 338 328
---------- ----------
TOTAL OTHER INCOME 6,897 5,675
---------- ----------
OPERATING EXPENSES:
Salaries and employee benefits 7,955 7,417
Occupancy and equipment 2,176 2,101
Data processing 737 786
Advertising 168 93
Deposit insurance premiums 46 48
Other 2,961 2,657
---------- ----------
TOTAL OPERATING EXPENSES 14,043 13,102
---------- ----------
Income before income taxes 6,194 5,760
Income tax expense 1,476 1,391
---------- ----------
NET INCOME $ 4,718 $ 4,369
========== ==========
EARNINGS PER SHARE (1)
Basic $ 0.98 $ 0.92
========== ==========
Diluted $ 0.93 $ 0.89
========== ==========
DIVIDENDS PER SHARE PAID DURING PERIOD (1) $ 0.32 $ 0.27
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
Basic 4,832,674 4,764,176
========== ==========
Diluted 5,051,083 4,916,152
========== ==========
(1) Earnings per share, dividends per share and weighted average shares
outstanding have been restated to reflect the effects of the 5% stock
dividends paid in September 2003 and 2002
See accompanying notes to unaudited consolidated financial statements
-3-
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
STATEMENT OF OTHER COMPREHENSIVE INCOME
(Dollars in Thousands)
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ----------
(Unaudited)
NET INCOME $ 1,606 $ 1,481
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) on securities
available for sale during the period 826 (77)
Reclassification adjustment for (gains)
included in net income (249) (75)
Net unrealized losses on cash flow hedge (97) --
--------- ---------
COMPREHENSIVE INCOME $ 2,086 $ 1,329
========= =========
NINE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ----------
(Unaudited)
NET INCOME $ 4,718 $ 4,369
Other comprehensive income, net of tax:
Net unrealized holding (losses) gains on securities
available for sale during the period 608 308
Reclassification adjustment for (gains)
included in net income (668) (286)
Net unrealized losses on cash flow hedge (338) --
--------- ---------
COMPREHENSIVE INCOME $ 4,320 $ 4,391
========= =========
See accompanying notes to unaudited consolidated financial statements.
-4-
CHESTER VALLEY BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
NINE MONTHS ENDED MARCH 31,
---------------------------
2004 2003
- --------------------------------------------------------------------------------
(Unaudited)
Net income $ 4,718 $ 4,369
Add (deduct) items not affecting cash flows provided
by operating activities:
Depreciation 748 810
Provision for loan losses 856 174
Gain on sale of securities available for sale (1,012) (433)
Originations of loans held for sale (10,975) (20,053)
Proceeds from sale of loans held for sale 14,565 17,984
Gain on sale of loans held for sale (100) (96)
Amortization of deferred loan fees, discounts and
premiums (33) (109)
Increase in accrued interest receivable (292) (163)
Increase in value of bank owned life insurance (193) (95)
Decrease (increase) in other assets (1,894) 702
Deconsolidation of statutory trust 310 --
Increase (decrease) in other liabilities 1,893 (768)
Increase (decrease) in accrued interest payable 11 (56)
- --------------------------------------------------------------------------------
Net cash flows provided by operating activities 8,602 2,266
- --------------------------------------------------------------------------------
Cash flows used in investment activities:
Capital expenditures (837) (506)
Net increase in loans (10,491) (1,709)
Purchase of investment securities (26,458) (11,584)
Proceeds from maturities, payments and calls of
investment securities 12,440 15,700
Purchase of bank owned life insurance -- (5,000)
Purchase of securities available for sale (91,822) (105,723)
Proceeds from sales and calls of securities available
for sale 86,401 98,953
Net cash and cash equivalents received from branch
acquisition 13,437 --
- --------------------------------------------------------------------------------
Net cash flows used in investment activities (17,330) (9,869)
- --------------------------------------------------------------------------------
Cash flows provided by financing activities
Net (decrease) increase in deposits before interest
credited (3,509) 20,460
Interest credited to deposits 3,422 5,344
Decrease in securities sold under agreements to
repurchase (8,426) 3,732
Proceeds from FHLB advances 69,393 8,000
Repayments of FHLB advances (39,873) (16,539)
Decrease in advance payments by borrowers for taxes
and insurance (716) (1,120)
Cash dividends on common stock (1,477) (1,339)
Common stock repurchased as treasury stock -- (452)
Payment for fractional shares (7) --
Stock options exercised 881 719
- --------------------------------------------------------------------------------
Net cash flows provided by financing activities 19,688 18,805
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 10,960 11,202
CASH AND CASH EQUIVALENTS:
Beginning of period 25,749 39,395
--------- ---------
End of period $ 36,709 $ 50,597
========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash payments during the year for:
Taxes $ 1,025 $ 1,663
Interest $ 7,992 $ 10,834
NON-CASH ITEMS:
Stock dividend issued $ 5,075 $ 3,518
Net unrealized (loss) gain on investment securities
available for sale, net of tax $ (60) $ 22
Net unrealized loss on cash flow hedge $ (338) $ --
ACQUISITIONS:
In conjunction with the branch acquisition, liabilities
assumed and assets acquired were as follows:
Assets acquired net of cash and cash
equivalents received $ 6,173 $ --
Cash and cash equivalents received $ 13,437 $ --
Liabilities assumed $ 19,610 $ --
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 ("Phila. Corp."), 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 eleven full-service branch offices in Chester County,
Pennsylvania. The Bank provides a wide range of lending products including
commercial real estate, commercial business, consumer as well residential real
estate. Its lending activities are funded primarily with retail and business
deposits and borrowings. Phila. Corp. is a registered broker/dealer in all 50
states and the District of Columbia and it is also registered as an investment
advisor with the Securities and Exchange Commission ("SEC"). It 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. Phila. Corp.'s offices are located in Wayne and
Philadelphia, Pennsylvania.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company, the Bank and Phila. Corp. 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 to 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 generally accepted accounting
principles in the United States ("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
nine-month unaudited interim periods.
-6-
The results of operations for the three- and nine-month periods ended March 31,
2004 are not necessarily indicative of the results to be expected for the fiscal
year ending June 30, 2004. 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, 2003.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company, as permitted, has elected not to adopt the fair value accounting
provisions of SFAS No. 123 "Accounting for Stock-based Compensation", and has
instead continued to apply APB Opinion 25 and related Interpretations in
accounting for plans and provide the required pro-forma disclosures of SFAS
No.123; accordingly, no expense is recognized in the Consolidated Statement of
Operations.
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 No. 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.
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 (dollars in thousands except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2004 2003 2004 2003
------------------- -------------------
Net income, as reported $ 1,606 $ 1,481 $ 4,718 $ 4,369
Deduct: Total stock-based
compensation expense determined
under fair value based method
for all awards, net of
related tax effects (71) (64) (195) (411)
----------------- -----------------
Pro forma net income $ 1,535 $ 1,417 $ 4,523 $ 3,958
================= ==================
Earnings per share:
Basic - as reported $ 0.33 $ 0.31 $ 0.98 $ 0.92
================= ==================
Basic - pro forma $ 0.32 $ 0.30 $ 0.94 $ 0.83
================= ==================
Diluted - as reported $ 0.32 $ 0.30 $ 0.93 $ 0.89
================= ==================
Diluted - pro forma $ 0.30 $ 0.28 $ 0.90 $ 0.81
================= ==================
-7-
The effects of pro-forma net income and diluted earnings per share of applying
the disclosure requirements of Statement No. 123 and Statement No. 148 for past
fiscal quarters may not be representative of the future pro-forma effects on net
income and earnings per share due to the vesting provisions of the options and
future awards that are available to be granted.
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 2003 and 2002.
The following table sets forth the computation of basic and diluted earnings per
share (dollars in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- ------
Numerator:
Net income $ 1,606 $ 1,481 $ 4,718 $ 4,369
========== ========== ========== ==========
Denominator:
Denominator for basic per share-
weighted average shares 4,854,141 4,768,907 4,832,674 4,764,176
Effect of dilutive securities:
Stock options 225,203 227,262 218,409 151,976
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
exercise 5,079,344 4,996,169 5,051,083 4,916,152
========== ========== ========== ==========
Basic earnings per share $ 0.33 $ 0.31 $ 0.98 $ 0.92
========== ========== ========== ==========
Diluted earnings per share $ 0.32 $ 0.30 $ 0.93 $ 0.89
========== ========== ========== ==========
The number of anti-dilutive stock options was 46,250 for the three- and
nine-month periods ended March 31, 2004 and was 1,050 and 4,095 for the same
periods in 2003.
-8-
NOTE 2 - LOANS RECEIVABLE
Loans receivable are summarized as follows (in thousands):
MARCH 31, June 30,
2004 2003
---------- ---------
First mortgage loans:
Residential real estate $ 80,596 $101,997
Construction-residential 19,886 22,877
Land acquisition and development 12,656 17,964
Commercial real estate 134,328 122,207
Construction-commercial 9,738 16,232
Commercial business 47,267 43,059
Consumer 113,395 88,918
-------- --------
TOTAL LOANS 417,866 413,254
-------- --------
Less:
Undisbursed loan proceeds:
Construction-residential (14,923) (22,359)
Construction-commercial (1,256) (3,585)
Deferred loan fees - net (560) (933)
Allowance for loan losses (6,259) (5,415)
-------- --------
NET LOANS $394,868 $380,962
======== ========
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, and commercial business loans less than $100,000 are
evaluated as a group. Commercial business loans greater than $100,000,
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 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. The loss factors applied to graded
loans were developed based on the Company's loss history for loans with similar
attributes as well as input from the Company's primary banking regulators. Loss
factors are applied to homogeneous loans based upon prior loss experience of the
portfolio, delinquency trends, economic conditions as well as the volume of
non-performing loans. Although management believes it has used the best
information available to it in making such determinations, and that the present
allowance for loan losses is adequate, future adjustments to the allowance may
be necessary, and net income may be adversely affected if circumstances differ
substantially from the assumptions used in determining the level of the
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the 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 excludes large groups of smaller balance homogeneous loans, primarily
consisting of residential real estate loans and consumer loans as well as
commercial business loans with balances of less than $100,000. For applicable
loans, the Company evaluates the need for impairment recognition when a loan
becomes non-accrual or earlier if, based on management's assessment of the
relevant facts and circumstances, it is probable that the Company will be unable
to collect all proceeds under the contractual terms of the loan agreement. At
March 31, 2004 and June 30, 2003, the recorded investment in impaired loans was
$3.6 million and $3.2 million, respectively. The Company's policy for the
recognition of interest income on impaired loans is the same as for non-accrual
loans. Impaired loans are charged off when the Company determines that
foreclosure is probable and the fair value of the collateral is less than the
recorded investment of the impaired loan.
NOTE 4 - COMMITMENTS
Commitments to potential mortgagors of the Bank amounted to $597 thousand as of
March 31, 2004, all of which were fixed-rate loans (primarily consisting of
single-family residential mortgages) bearing interest rates of between 5.50% and
5.75%. At March 31, 2004, the Company had $16.2 million of undisbursed
construction loan funds as well as $74.0 million of undisbursed remaining
consumer and commercial line balances.
NOTE 5 - JUNIOR SUBORDINATED DEBENTURES
On March 26, 2002, the Company issued $10.3 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 $10.0
million of Trust Preferred Securities to investors, which 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 are callable
by the Company on or after 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 their maturity in the year 2032. Effective December 31, 2003, CVAL
deconsolidated the Trust, resulting in a change in the characterization of the
underlying consolidated debt obligations from the previous trust preferred
securities to junior subordinated debentures. The junior subordinated debentures
qualify as a component of capital for regulatory purposes.
NOTE 6 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
-10
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
adjusted total assets (as defined). At March 31, 2004 and June 30, 2003 the Bank
was in compliance with all such requirements and is deemed a "well-capitalized"
institution for regulatory purposes. There are no conditions or events since
March 31, 2004 that management believes have changed the institution's category.
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 MARCH 31, 2004:
HOLDING COMPANY
Total Capital
(to Risk-Weighted Assets) $67,311 14.84% $36,286 8.00% $45,357 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $61,570 13.57% $18,143 4.00% $27,214 6.00%
Tier 1 Capital
(to Average Assets) $61,570 10.34% $23,810 4.00% $29,763 5.00%
BANK
Total Capital
(to Risk-Weighted Assets) $63,900 14.09% $36,274 8.00% $45,343 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $58,225 12.84% $18,137 4.00% $27,206 6.00%
Tier 1 Capital
(to Average Assets) $58,225 9.84% $23,678 4.00% $29,598 5.00%
AS OF JUNE 30, 2003:
HOLDING COMPANY
Total Capital
(to Risk-Weighted Assets) $64,243 15.14% $33,950 8.00% $42,437 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $58,937 13.89% $16,975 4.00% $25,462 6.00%
Tier 1 Capital
(to Average Assets) $58,937 10.29% $22,903 4.00% $28,629 5.00%
BANK
Total Capital
(to Risk-Weighted Assets) $60,424 14.26% $33,901 8.00% $42,377 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $55,126 13.01% $16,951 4.00% $25,426 6.00%
Tier 1 Capital
(to Average Assets) $55,126 9.67% $22,814 4.00% $28,518 5.00%
-11-
NOTE 7 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
The Company may from time to time utilize derivative instruments such as
interest rate swaps, interest rate collars, interest rate floors, interest rate
swaptions or combinations thereof to assist in its asset/liability management.
At March 31, 2004, the Company was positively gapped whereby its
interest-earning assets were re-pricing at a quicker rate than its
interest-bearing liabilities. To partially offset the negative impact of the
current low market interest rate environment, the Company entered into three
separate interest rate swap transactions aggregating $41.0 million notional
amount to hedge certain of its higher rate Federal Home Loan Bank Advances. The
swaps had the effect of converting the higher fixed rate advances to lower
adjustable rate borrowings, which positively impacts the Company's net interest
margin in the current interest rate environment. Further, since the Company is
positively gapped, if the balance sheet were to remain static, future increases
in interest rates would have similar impacts to the earnings and costs of the
interest-earning assets and interest-bearing liabilities. Additionally, in
August 2003, the Company purchased a $30.0 million notional amount 3.50% Three
Month LIBOR interest rate cap while simultaneously selling a $30.0 million
notional amount 6.00% Three Month LIBOR interest rate cap ("Interest Rate
Corridor"). The Company paid a net premium, which entitles it to receive the
difference between Three Month LIBOR from 3.50% up to 6.00% times the $30.0
million notional amount. The Interest Rate Corridor is being used to hedge the
cash flows of $10.0 million in floating rate Trust Preferred Securities as well
as the cash flows of certain borrowings, which could negatively impact earnings
in a rising interest rate environment.
The fair market value of the cap has two components: the intrinsic value and the
time value of the option. The cap is marked-to-market quarterly, with changes in
the intrinsic value of the cap, net of tax, included as a separate component of
other comprehensive income and change in the time value of the option included
directly as interest expense as required under SFAS 133. In addition, the
ineffective portion, if any, would have been expensed in the period in which
ineffectiveness was determined. The fair value of the interest rate cap at March
31, 2004 was $493,000.
NOTE 8 - SEGMENT REPORTING
The Company has two reportable segments: First Financial and Phila. Corp.
First Financial operates a branch bank network with eleven full-service
banking offices and provides primarily deposit and loan services to
customers. Additionally, the Bank offers trust services at its Downingtown
headquarters and at Phila. Corp. Phila. Corp. 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 the net income provided by each of
its reportable segments. There are no material intersegment sales or transfers.
Phila. Corp. was acquired by the Company on May 29, 1998. Since such time, the
Company's reportable segments have been its two independent financial services
institutions.
-12-
The following table highlights income statement and balance sheet information
for each of the segments at or for March 31, 2004 and 2003:
AT AND DURING THE THREE MONTHS ENDED MARCH 31,
2004 2003
------------------------------ ----------------------------
PHILA. PHILA.
BANK CORP. TOTAL BANK CORP. TOTAL
-------- --------- --------- -------- --------- -------
Net interest
Income $ 4,743 $ 2 $ 4,745 $ 4,378 $ 2 $ 4,380
Other income 1,326 987 2,313 1,038 788 1,826
Total net income 1,508 98 1,606 1,432 49 1,481
Total assets 628,295 2,065 630,360 586,475 1,929 588,404
Total interest-
bearing
deposits 24,704 1,731 26,435 44,947 1,573 46,520
Total trading
Securities -- 10 10 -- 16 16
AT AND DURING THE NINE MONTHS ENDED MARCH 31,
2004 2003
------------------------------ ----------------------------
PHILA. PHILA.
BANK CORP. TOTAL BANK CORP. TOTAL
-------- --------- --------- -------- --------- -------
Net interest
Income $14,190 $ 6 $14,196 $13,351 $ 10 $13,361
Other income 4,073 2,824 6,897 3,266 2,409 5,675
Total net income 4,421 297 4,718 4,150 219 4,369
Total assets 628,295 2,065 630,360 586,475 1,929 588,404
Total interest-
bearing
deposits 24,704 1,731 26,435 44,947 1,573 46,520
Total trading
Securities -- 10 10 -- 16 16
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - AMENDMENT OF STATEMENT NO. 133
In April 2003, the FASB issued Statement No.149, Amendment of Statement No.133
on Derivative Instruments and Hedging Activities, which establishes accounting
and reporting standards for derivative instruments, including derivatives
imbedded in other contracts and hedging activities. This Statement amends
Statement No. 133 for decisions made by the FASB as part of its Derivatives
Implementation Group process. This Statement also amends Statement No. 133 to
incorporate clarifications of the definition of a derivative. The Statement is
effective for contracts entered into or modified and hedging relationships
designated after June 30, 2003. The provisions of this Statement did not have a
material impact on the Company's consolidated earnings, financial condition or
equity.
-13-
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Some of the provisions of
this Statement are consistent with the current definition of liabilities in FASB
Concepts Statement No. 6, Elements of Financial Statements. The remaining
provisions of this Statement are consistent with the FASB's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. Effective for
financial instruments entered into or modified after May 31, 2003 and otherwise,
is effective at the beginning of the first interim period after June 15, 2003.
The adoption of this Statement did not have an impact on the Company's financial
position or results of operations.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the Financial Accounting Standards Board revised
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51 (the Interpretation). The
Interpretation requires the consolidation of entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Previously, entities
were generally consolidated by an enterprise when it has a controlling financial
interest through ownership of a majority voting interest in the entity.
Application of this Interpretation is required in financial statements of public
entities that have interests in variable interest entities or potential variable
interest entities commonly referred to as special purpose entities for periods
ending after December 15, 2003. Application by public entities for all other
types of entities is required in financial statements for periods ending after
March 15, 2004. As a result of the adoption of FIN 46, the Company
deconsolidated Chester Valley Statutory Trust in the first quarter of 2004. The
result was an increase in the junior debt of $310 thousand.
NOTE 10 - ACQUISITIONS
Effective March 31, 2004, in order to further enhance its existing branch
network, First Financial Bank acquired the Coatesville, Chester County,
Pennsylvania branch of PNC National Bank. As a result of the acquisition, First
Financial Bank assumed approximately $19.5 million of deposit liabilities and
acquired $4.0 million in consumer and commercial loans and buildings of
$550,000. Additionally, the Company recorded an approximate $400,000 Core
Deposit Intangible and $1.1 million in goodwill. The acquisition was accounted
for using the purchase method of accounting.
-14-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
In this Form 10-Q, the Company has 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 has 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, 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, loan
delinquency rates, changes in federal and state banking regulations,
competition, the general economic climate in Chester County, the mid-Atlantic
region and the country as a whole, and other uncertainties described in the
Company's filings with the Securities and Exchange 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.
GENERAL
The Company's results of operations depend largely on its 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, loan
and deposit 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
focus is on expanding its commercial, construction and consumer lending
activities, increasing its commercial and consumer deposits, treasury management
as well as expanding its trust and investment management services.
-15-
BUSINESS STRATEGY
GROWTH. The Company seeks to increase its assets primarily through internal
growth but will pursue potential acquisition opportunities which would be
accretive to earnings and/or increase its' market share in the regions it
operates.
The two primary objectives of the Company's strategic plan are to increase
loans, in particular commercial business and real estate and construction loans,
consumer loans and core deposits (consisting of all deposits other than
certificates of deposits). The Company's net loans increased by $13.9 million,
or 3.7%, from $381.0 million at June 30, 2003 to $394.9 million at March 31,
2004. Net loans other than residential loans increased by $38.8 million or 14.1%
for the same period in 2003. The growth of core deposits was $55.7 million, or
21.9%, from $254.0 million at June 30, 2003 to $309.7 million at March 31, 2004.
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
53.6% of its total loan portfolio at March 31, 2004 compared to 53.8% at June
30, 2003. Single-family and multi-family residential loans comprised 19.3% of
the Company's loan portfolio at March 31, 2004 as compared to 24.7% at June 30,
2003.
MAINTAIN LOAN QUALITY. Management believes that maintaining high loan quality is
key 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 to $4.4 million at March 31, 2004 compared to $4.2 million at June 30,
2003. Included in the totals at both dates is a single commercial real estate
loan in the amount of $3.2 million. Although the loan has always been current in
the payment of interest as it has been due and the next six month payment of
interest has been prepaid, the loan was placed on non-accrual as principal was
not repaid in accordance with the original stated maturity. The borrower has
encountered financial difficulties, the underlying real estate is outside the
Bank's primary lending area and repayment is dependent upon factors not under
the complete control of the borrower. The increase of non-accrual loans of
$200,000 from June 30, 2003 is attributed to a single borrower who is current in
his debt service payments but has encountered financial difficulties. The loan
was placed on non-accrual and payments received are being applied to reduce
principal, as the underlying collateral may be insufficient to cover the
principal balance of the loans.
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, $168.5 million at March 31, 2004 compared
to $147.6 million at June 30, 2003. This increase was due largely to the
acquisition of agency bonds, variable rate asset-backed securities and
mortgage-backed securities. In addition, the Company had short-term
interest-bearing deposits of $26.4 million at March 31, 2004 compared to $9.4
million at June 30, 2003. This increase was due largely to interest-bearing
deposits received in the acquisition of the Coatesville branch from PNC Bank.
-16-
EMPHASIS ON DEPOSITS AND CUSTOMER SERVICE. The Company, as a community-based
financial institution, is largely dependent upon its base of 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,
competitively priced service fees, customer convenience, an experienced staff
and a strong commitment to the communities in which it serves. Lower costing
core deposits totaled $309.7 million or 73.7% of the Company's total deposits at
March 31, 2004, as compared to $254.0 million or 63.4% at June 30, 2003. This
increase in lower costing deposits is primarily attributable to the continuing
effort to grow core deposits, both internally and through the acquisition of the
Coatesville branch. Pursuant to the Company's strategy, the major focus in 2004
is on increasing commercial and consumer core deposits and relying less on
higher rate certificates of deposits, primarily municipal certificates of
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 its interest rate risk of the bank subsidiary, 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 re-pricing 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 Company may from time to time utilize derivative instruments such as
interest rate swaps, interest rate collars, interest rate floors, interest rate
swaptions or combinations thereof to assist in its asset/liability management.
At March 31, 2004, the Company was positively gapped whereby its
interest-earning assets were re-pricing at a quicker rate than its
interest-bearing liabilities. To partially offset the negative impact of the
current low market interest rate environment, the Company entered into three
separate interest rate swap transactions aggregating $41.0 million notional
amount to hedge certain of its higher rate Federal Home Loan Bank Advances. The
swaps had the effect of converting the higher fixed rate advances to lower
adjustable rate borrowings, which positively impacts the Company's net interest
margin in the current interest rate environment. Further, since the Company is
positively gapped, if the balance sheet were to remain static, future increases
should have similar impacts to the earnings and costs of the interest-earning
assets and interest-bearing liabilities. Additionally, in August 2003, the
Company purchased a $30.0 million notional amount 3.50% Three Month LIBOR
interest rate cap while simultaneously selling a $30.0 million notional amount
6.00% Three Month LIBOR interest rate cap ("Interest Rate Corridor"). The
Company paid a net premium, which entitles it to receive the difference between
Three Month LIBOR from 3.50% up to 6.00% times the $30.0 million notional
amount. The Interest Rate Corridor is being used to hedge the cash flows of
$10.0 million in floating rate Trust Preferred Securities as well as the cash
flows of certain borrowings, which could negatively impact earnings in a rising
interest rate environment.
-17-
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 re-pricing within a
defined period and is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets
re-pricing 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 re-pricing characteristics of these deposits. Management
estimates, based on historical trends of the Bank's deposit accounts, that money
market deposits are 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 re-pricing 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
March 31, 2004 is on page 27.
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 27
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 re-price within
the same period may not, in fact, re-price at the same price or the same time or
with the same frequency. It is also important to consider that the table
represents a specific point in time. Variations can occur as the Company adjusts
its interest-sensitivity position for the Bank throughout the year.
FINANCIAL CONDITION
-------------------
The Company's total assets increased to $630.4 million at March 31, 2004 from
$584.5 million at June 30, 2003, principally due to a $13.9 million increase in
loans receivable to $394.9 million at March 31, 2004 from $381.0 million at June
30, 2003. Net loans other than residential loans increased by $38.8 million or
14.1% for the same period in 2003. In line with its strategy, the growth
occurred principally in the consumer and commercial loan portfolios. Residential
mortgage loans as a percentage of total loans was reduced from 24.7% at June 30,
2003 to 19.3% at March 31, 2004. In addition to the loan growth, investment
securities increased by $20.9 million, primarily through the acquisition of
agency bonds, variable rate asset-backed securities and mortgage-backed
securities. Cash and cash equivalents increased by approximately $11.0 million,
as the proceeds from the assumption of the Coatesville branch deposits from PNC
Bank were not received until March 31, 2004; and therefore were not available to
invest. These increases were offset in part by a reduction in loans held for
sale of $3.5 million. The recent increase in long-term interest rates created
buying opportunities within the investment portfolio while simultaneously
reducing demand for single-family residential loans held for sale.
Deposits increased by $19.5 due primarily to the acquisition of the Coatesville
branch deposits from PNC Bank. The Bank has experienced internal growth within
its core deposits; however, this growth was offset by a reduction in
certificates of deposits, principally higher rate municipal certificates of
deposits. Federal Home Loan Bank Advances increased $29.5 million to fund the
above noted asset growth which occurred prior to the acquisition of the
Coatesville branch.
-18-
Stockholders' equity increased by $3.7 million at March 31, 2004 as compared to
June 30, 2003, primarily as a result of net income of $4.7 million and the
issuance of common stock as a result of the exercise of stock options. These
were partially offset by the payment of cash dividends of $1.5 million and a
change in accumulated other comprehensive income of $398,000 related to
unrealized losses on securities available for sale as well as the change in the
market value of the cash flow hedge, net of tax.
RESULTS OF OPERATIONS
---------------------
INTEREST INCOME AND INTEREST SPREAD ANALYSIS
- --------------------------------------------
The following table sets forth, for the periods indicated, information on a tax
equivalent basis regarding (1) the total dollar amount of interest income of the
Company from interest-earning assets and the resultant average yields; (2) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (3) net interest income; (4) interest rate spread; and
(5) net interest-earning assets and their net yield. Average balances are
determined on a daily basis.
Three Months Ended March 31,
--------------------------------------------------------
2004 2003
------------------------- ----------------------------
(Dollars in Thousands)
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------- ---------------------------
ASSETS:
Loans and loans held for sale (1) $399,542 $ 5,705 5.71% $375,126 $ 6,187 6.60%
Securities and other investments (1) 169,669 1,837 4.33% 163,562 1,684 4.12%
------------------------- ---------------------------
Total interest-earning assets (1) 569,211 7,542 5.30% 538,688 7,871 5.84%
------------------------- ---------------------------
Non-interest earning assets 36,212 47,473
-------- --------
TOTAL ASSETS $605,423 $586,161
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits and repurchase agreements (2) $409,501 1,279 1.26% $417,192 1,917 1.86%
FHLB advances and other borrowings (2) 134,428 1,345 4.02% 105,029 1,375 5.31%
------------------------- ---------------------------
TOTAL INTEREST-BEARING LIABILITIES (2) 543,929 2,624 1.94% 522,221 3,292 2.56%
------------------------- ---------------------------
Non-interest-bearing liabilities 8,820 16,856
Stockholders' equity 52,674 47,084
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $605,423 $586,161
======== ========
NET INTEREST INCOME/INTEREST RATE SPREAD $ 4,918 3.36% $ 4,579 3.28%
======= ===== ======= =====
NET INTEREST INCOME/AVERAGE
INTEREST-EARNING ASSETS (2) 3.48% 3.45%
===== =====
RATIO OF AVERAGE INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES 105% 103%
==== ====
(1) Yield calculated using 30/360 day basis.
(2) Yield/rate calculated based on the actual number of days.
-19-
The following details the tax equivalent adjustments in the above table:
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------
2004 2003
-------------------------------- -----------------------------
INTEREST TAX ADJUSTED INTEREST TAX ADJUSTED
INCOME ADJUSTMENT INCOME INCOME ADJUSTMENT INCOME
------------------------------- -----------------------------
(Dollars in thousands)
Loans $ 5,690 $ 15 $ 5,705 $ 6,168 $ 19 $ 6,187
Investments 1,679 158 1,837 1,504 180 1,684
------------------------------- -----------------------------
Total $ 7,369 $ 173 $ 7,542 $ 7,672 $ 199 $ 7,871
=============================== =============================
NINE MONTHS ENDED MARCH 31,,
--------------------------------------------------------
2004 2003
------------------------- ----------------------------
(Dollars in Thousands)
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------- ---------------------------
ASSETS:
Loans and loans held for sale (1) $402,611 $17,727 5.87% $376,965 $ 19,430 6.87%
Securities and other investments (1) 162,044 5,046 4.15% 164,273 5,295 4.30%
------------------------- --------------------------
Total interest-earning assets (1) 564,655 22,773 5.38% 541,238 24,725 6.09%
------------------------- --------------------------
Non-interest earning assets 36,339 43,751
---------- --------
TOTAL ASSETS $600,994 $584,989
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits and repurchase agreements (2) $417,370 4,075 1.30% $414,842 6,403 2.06%
FHLB advances and other borrowings (2) 125,883 3,963 4.19% 109,839 4,375 5.31%
------------------------- ---------------------------
TOTAL INTEREST-BEARING LIABILITIES (2) 543,253 8,038 1.97% 524,681 10,778 2.74%
------------------------- ---------------------------
Non-interest-bearing liabilities 6,723 14,161
Stockholders' equity 51,018 46,147
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $600,994 $584,989
======== ========
NET INTEREST INCOME/INTEREST RATE SPREAD $14,735 3.41% $13,947 3.35%
============== =============
NET INTEREST INCOME/AVERAGE
INTEREST-EARNING ASSETS (2) 3.47% 3.43%
==== ====
Ratio of average interest-earning assets to
interest-bearing liabilities 104% 103%
==== ====
(1) Yield calculated using 30/360 day basis.
(2) Yield/rate calculated based on the actual number of days.
The following details the tax equivalent adjustments in the above table:
-20-
NINE MONTHS ENDED MARCH 31,
---------------------------------------------------------------
2004 2003
-------------------------------- -----------------------------
INTEREST TAX ADJUSTED INTEREST TAX ADJUSTED
INCOME ADJUSTMENT INCOME INCOME ADJUSTMENT INCOME
------------------------------- -----------------------------
(Dollars in thousands)
Loans $ 17,682 $ 45 $ 17,727 $ 19,372 $ 58 $ 19,430
Investments 4,552 494 5,046 4,767 528 5,295
------------------------------ -----------------------------
Total $ 22,234 $ 539 $ 22,773 $ 24,139 $ 586 $ 24,725
============================== =============================
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.
NINE MONTHS ENDED MARCH 31,
-------------------------------------------------------
2004 COMPARED TO 2003 2003 COMPARED TO 2002
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- --------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------------------------------------------------------
(Dollars in thousands)
Interest income on interest-earning assets:
Loans and loans held for sale $ 1,860 $ (3,563) $ (1,703) $ 1,517 $ (2,283) $ (766)
Securities and other investments (70) (179) (249) 436 (1,741) (1,305)
--------------------------- --------------------------
Total interest income 1,790 (3,742) (1,952) 1,953 (4,024) (2,071)
--------------------------- --------------------------
Interest expense on interest-bearing liabilities:
Deposits and repurchase Agreements 67 (2,395) (2,328) 145 (2,828) (2,683)
FHLB advances and other Borrowings 838 (1,250) (412) 1,836 (1,099) 737
--------------------------- --------------------------
Total interest expense 905 (3,645) (2,740) 1,981 (3,927) (1,946)
--------------------------- --------------------------
Net change in net interest income $ 885 $ (97) $ 788 $ (28) $ (97) $ (125)
=========================== ==========================
Net interest income, on a fully tax equivalent basis, increased $339,000 and
$788,000 for the three-and nine-month periods ended March 31, 2004,
respectively, compared to the same periods in 2003. The net interest margin
increased 3 basis points and 4 basis points over the same three- and nine-month
periods, respectively. Total interest income, on a fully tax equivalent basis,
decreased to $7.5 million for the three-month period ended March 31, 2004, from
$7.9 million for the same period in 2003. Total interest income, on a fully tax
equivalent basis, decreased to $22.8 million for the nine-month period ended
March 31, 2004, from $24.7 million for the same period in 2003. Both declines
were primarily the result of declining market interest rates during the year,
which was partially offset by an increase in average interest-earning assets
during the periods.
-21-
Total interest expense decreased to $2.6 million from $3.3 million for the
three-month period ended March 31, 2004 as compared to the three-month period
ended March 31, 2003. Total interest expense decreased to $8.0 million from
$10.8 million for the nine-month period ended March 31, 2004 as compared to the
nine-month period ended March 31, 2003. The declines are due largely to (a)
general decline in market interest rates over the twelve month period, (b) a
change in the mix of the deposit base from higher costing certificates of
deposits to core deposits (Demand deposits, Savings and Money Market Accounts)
and (c) the conversion of approximately $41.0 million of high costing fixed rate
Federal Home Loan Bank Advances to lower costing variable rates through the use
of interest rate swaps entered into during the period June 2003 through August
2003. Offsetting part of the decrease was an increase in the average balance of
interest-bearing liabilities during both the three and nine month periods.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $248,000 and $682,000, for the three-
and nine-months ended March 31, 2004 as compared to the same three- and
nine-months ended March 31, 2003. The increase is due principally to growth in
the loan portfolio, an increase in non-performing assets, as well as a change in
the mix of the loan portfolio.
OTHER INCOME
Total other income increased $487,000 and $1.2 million for the three- and
nine-months ended March 31, 2004 compared to the same three- and nine-months
ended March 31, 2003. The increases are due principally to (a) increases in
investment services income from Uvest and Phila. Corp. resulting from increased
revenues as brokerage transactions increased year over year, and (b) increased
gains on the sale of securities due primarily to the tender offer for a certain
corporate bond, gains from portfolio restructuring done as part of the Company's
on-going asset/liability management as well as the liquidation of a portion of a
community bank common stock portfolio which was held as an investment at the
holding company.
OPERATING EXPENSES
Total operating expenses increased by $359,000 and $941,000 for the three- and
nine-months ended March 31, 2004 as compared to the three- and nine-months ended
March 31, 2003. These represent 8.2% and 7.2% increases for the three- and
nine-month periods. The increases are due largely to increased costs associated
with checking accounts and other core deposits, a one-time charge for legal
costs associated with a Corporate Governance review, as well as annual salary
increases and the investment in management infrastructure.
INCOME TAX EXPENSE
Income tax expense increased by $85,000 for the nine-month period ended March
31, 2004 as compared to the nine-month period ended March 31, 2003. The increase
was due to higher pre-tax income and was partially offset by a reduction in the
effective tax rate from 24.2% to 23.8% from March 31, 2003 to March 31, 2004.
The reduction in the effective tax rate is the result of a higher percentage of
the Company's income before taxes being derived from tax-exempt investments as
well as various federal tax credits received by the Company. Income tax expense
increased by $120,000 for the three-month period ended March 31, 2004 compared
to the three-month period ended March 31, 2003 due to an increase in pre-tax
income, as well as an increase in the effective tax rate caused by the sale
and/or redemption of a number of tax-free investments.
-22-
ASSET QUALITY
Non-performing loans totaled $4.4 million and $4.2 million at March 31, 2004 and
June 30, 2003, respectively. 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.
Included in the totals at both dates is a single commercial real estate loan in
the amount of $3.2 million. Although the loan is current in the payment of
interest as it has been due and the next six months payment of interest has been
prepaid, the loan was placed on non-accrual as principal was not repaid in
accordance with the original stated maturity. The borrower has encountered
financial difficulties, the underlying real estate is outside the Bank's primary
lending area and repayment is dependent upon factors not under the complete
control of the borrower. The increase of non-accrual loans of $200,000 from June
30, 2003 is attributed to a single borrower who is current in his debt service
payments but has encountered financial difficulties. The loan was placed on
non-accrual and payments received are being applied to reduce principal, as the
underlying collateral may be insufficient to cover the principal balance of the
loans.
At March 31, 2004 and June 30, 2003, the Company's classified loans, which
consisted of loans classified as substandard, doubtful or loss, totaled $10.4
million on both dates. Included in loans classified substandard at March 31,
2004 and June 30, 2003, were all loans 90 days past due and loans which were
less than 90 days delinquent but inadequately protected by the current paying
capacity of the borrower or of the collateral pledged, or which were subject to
one or more well-defined weaknesses which may jeopardize the satisfaction of the
debt. Also included in classified loans at March 31, 2004 were loans totaling
$8.6 million, which are current but have been listed as substandard and are
being closely monitored.
At March 31, 2004, in addition to classified loans, classified assets included
three (four at June 30, 2003) Non-rated Pennsylvania Municipal Authority Bonds
that have been classified as substandard. These bonds were originally purchased
during the period from June 1998 through June 2000. The aggregate book value of
the bonds at March 31, 2004 was $5.7 million ($7.0 million at June 30, 2003).
Two of the three bonds with an aggregate book value of $4.8 million are zero
coupon bonds with maturities extending up to 2034. Both bonds are secured by the
revenue streams of commercial office buildings, which are leased to various
agencies of the Commonwealth of Pennsylvania under long-term lease arrangements
with renewal options.
-23-
A third bond was issued by the Housing Authority of Chester County and had a
book balance of $847,000 at an interest rate of 6% and final maturity in June
2019. This bond involves low-income scattered housing in Chester County under a
program of the Office of Housing and Urban Development ("HUD"). HUD has
committed to provide additional funds to build additional houses, which would be
donated to this bond issues. The retirement of the bond issue is dependent upon
proceeds from either the rental or sale of the existing and additional houses.
Although all principal and interest have been paid per the terms of the bond
indenture, this bond is on non-accrual at March 31, 2004.
The fourth bond was sold in September 2003 resulting in a net after tax loss of
approximately $51,000.
LIQUIDITY AND CAPITAL RESOURCES
Management monitors liquidity daily and maintains funding sources to meet
unforeseen changes in cash requirements. The Company's primary sources of funds
are deposits, borrowings, repayments, prepayments and maturities of outstanding
loans and mortgage-backed securities, sales of assets available for sale,
maturities of investment securities and other short-term investments, and funds
provided from operations. While scheduled loan and mortgage-backed securities
repayments and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by the movement of interest rates in general, economic
conditions and competition. The Company manages the pricing of its deposits to
maintain a deposit balance deemed appropriate and desirable. Although the
Company's deposits represent the majority of its total liabilities, the Company
has also utilized other borrowing sources, namely Federal Home Loan Bank
advances.
Liquidity management is both a daily and long-term function. Excess liquidity is
generally invested in short-term investments such as Federal Home Loan Bank
overnight deposits. On a longer-term basis, the Company maintains a strategy of
investing in various lending and investment securities products. The Company
uses its sources of funds to primarily fund loan commitments and maintain a
substantial portfolio of investment securities, and to meet its ongoing
commitments to pay maturing savings certificates and other deposits. At March
31, 2004, the Company had $597 thousand in commitments to fund loan
originations. In addition, at such date the Company had undisbursed loans in
process for construction loans of $16.2 million and $74.0 million in undisbursed
lines of credit. Management of the Company believes that the Company has
adequate resources, including principal prepayments and repayments of loans and
investment securities and borrowing capacity, to fund all of its commitments to
the extent required.
The Company's current dividend policy is to declare a regular quarterly dividend
with the intent that the level of the dividend per share be reviewed 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. On August 14, 2003, the Board of Directors declared a 5% stock dividend
and a quarterly cash dividend of $.105 per share, both of which were paid on
September 15, 2003. Additional cash dividends of $.105 per share were declared
and paid in December 2003 and March 2004. Cash dividends from the Holding
Company are primarily dependent upon dividends paid to it by First Financial
and/or Phila. Corp., which, in turn, are subject to certain restrictions
established by federal regulators and Pennsylvania law.
-24-
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
March 31, 2004, the Company's management believes that the interest rate
exposure has not significantly changed since disclosed at June 30, 2003.
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 deposits are sensitive to interest rate changes. Accordingly, some of the
interest sensitive portions of such liabilities are classified in the less than
one-year categories with the remainder placed in the 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.
Generally, during a period of rising interest rates, a positive gap would result
in an increase in net interest income while a negative gap would adversely
affect net interest income. However, the interest sensitivity table does not
provide a comprehensive representation of the impact of interest rate changes on
net interest income. Each category of assets or liabilities will not be affected
equally or simultaneously by changes in the general level of interest rates.
Even assets and liabilities, which contractually reprice within the same period
may not, in fact, reprice at the same price or the same time or with the same
frequency. It is also important to consider that the table represents a specific
point in time. Variations can occur as the Company adjusts its interest
sensitivity position throughout the year. Although interest rate sensitivity gap
is a useful measurement and contributes towards effective asset/liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure. An alternative methodology is to estimate the changes in
the Company's portfolio equity over a range of interest rate scenarios.
-25-
The Company periodically identifies certain loans as held for sale at the time
of origination, primarily consisting of fixed-rate, single-family residential
mortgage loans which meet the underwriting characteristics of certain
government-sponsored enterprises (conforming loans). The Company regularly
re-evaluates its policy and revises it as deemed necessary. The majority of
loans sold to date have consisted of sales to Freddie Mac of whole loans and 95%
participation interests in long-term, fixed-rate, single-family residential
mortgage loans in furtherance of the Company's goal of better matching the
maturities and interest-rate sensitivity of its assets and liabilities. When
selling loans, the Company has generally retained servicing in order to increase
its non-interest income. At March 31, 2004, the Company serviced $3.3 million of
mortgage loans for others. Sales of loans produce future servicing income and
provide funds for additional lending and other purposes.
The following is an interest rate sensitivity analysis for the Bank at March 31,
2004:
-26-
INTEREST RATE SENSITIVITY ANALYSIS AT MARCH 31, 2004
(Dollars in thousands)
MORE THAN MORE THAN MORE THAN
THREE MORE THAN ONE YEAR THREE
THREE MONTHS SIX MONTHS THROUGH YEARS MORE THAN
MONTHS THROUGH THROUGH THREE THROUGH FIVE
OR LESS SIX MONTHS ONE YEAR YEARS FIVE YEARS YEARS TOTAL
-----------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Loans: (1)
Real estate (2) $ 72,788 $ 20,039 $ 30,335 $ 68,274 $ 43,546 $ 5,859 $240,841
Commercial business 35,267 1,141 2,086 6,166 2,607 -- 47,267
Consumer 47,927 4,551 8,272 24,190 14,260 14,195 113,395
Securities and interest-bearing
deposits (3) 71,174 11,929 12,982 37,409 30,042 28,110 191,646
---------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $227,156 $ 37,660 $ 53,675 $136,039 $ 90,455 $ 48,164 $593,149
---------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts $ 1,653 $ 1,654 $ 3,310 $ 13,280 $ 13,342 $ -- $33,239
NOW accounts 1,626 1,627 3,257 13,068 13,131 33,103 65,812
Money market accounts 123,670 1,782 3,573 10,811 7,322 - 147,158
Certificate accounts 29,277 12,486 20,343 27,393 16,722 4,168 110,389
Repo sweep 18,932 -- - -- -- -- 18,932
Borrowings 41,778 2,027 13,069 12,489 24,495 29,711 123,569
----------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES $216,936 $ 19,576 $ 43,552 $ 77,041 $ 75,012 $ 66,982 $499,099
----------------------------------------------------------------------------------------
Cumulative (deficit) excess of
interest-earning assets
to interest-bearing liabilities $ 10,220 $ 28,304 $ 38,427 $ 97,425 $122,868 $ 94,050 $ 94,050
======== ======== ======== ======== ======== ======== ========
Cumulative ratio of interest
rate-sensitive assets to interest
rate-sensitive liabilities 104.7% 112.0% 113.7% 127.3% 126.1% 118.8% 118.8%
======== ======== ======== ======== ======== ======== ========
CUMULATIVE DIFFERENCE AS A
PERCENTAGE OF TOTAL ASSETS 1.6% 4.5% 6.1% 15.5% 18.0% 15.0% 15.0%
======== ======== ======== ======== ======== ======== ========
(1) Net of undisbursed loan proceeds.
(2) Includes 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.
-27-
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. This evaluation ("Controls Evaluation") was done under the supervision and
with the participation of management, including the Chief Executive Officer and
Chief Financial Officer.
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.
Based upon the Controls Evaluation, the CEO and CFO have concluded that 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.
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.
-28-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as described in the Company's Form 10-K as of June 30, 2003 (with
respect to certain litigation, which there has been no material
development), the Company is involved in legal proceedings occurring in
the ordinary course of business which management believes will not have a
material adverse effect on the financial condition or operations of the
Company.
Item 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 part of this Form 10-Q.
INDEX TO EXHIBITS
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
31.1 Certification of the Chief Executive Officer 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 dated May
13, 2004
31.2 Certification of the Chief Financial Officer 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 dated May
13, 2004
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 dated May 13, 2004
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 dated May 13, 2004
(b) Reports on Form 8-K
(1) Form 8-K, filed January 28, 2004 - Results of Operations and
Financial Condition at December 31, 2003 (Items 7 and 9).
-29-
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 05/13/04 /s/ Donna M. Coughey
-------------------------- --------------------------------------
Donna M. Coughey
President and Chief Executive Officer
Date 05/13/04 /s/ Joseph T. Crowley
-------------------------- --------------------------------------
Joseph T. Crowley
CFO and Treasurer
-30-