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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Fiscal Period Ended: June 30, 2000
Or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to _________
Commission File No: 0-18833
Chester Valley Bancorp Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2598554
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 E. Lancaster Ave., Downingtown PA 19335
------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 269-9700
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value Per Share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of September 1, 2000, the aggregate value of the 3,202,820 shares of Common
Stock of the registrant which were issued and outstanding on such date,
excluding 711,233 shares held by all directors and officers of the registrant as
a group, was approximately $ 54.85 million. This figure is based on the closing
sales price of $17.125 per share of the registrant's Common Stock on September
1, 2000.
Number of shares of Common Stock outstanding as of September 1, 2000: 3,914,053
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(1) Portions of the Annual Report to Shareholders for the year ended June 30,
2000, are incorporated into Part II, Items 5 - 8 of this Form 10-K.
(2) Portions of the Definitive Proxy Statement for the 2000 annual meeting of
shareholders are incorporated into Part III, Items 10-13 of this Form
10-K.
INDEX
Page
----
PART I
Item 1. Business........................................................... 1
Item 2. Properties.........................................................45
Item 3. Legal Proceedings..................................................46
Item 4. Submission of Matters to a Vote of Security Holders................46
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................47
Item 6. Selected Financial Data............................................47
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........47
Item 8. Financial Statements and Supplementary Data........................47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................47
PART III
Item 10. Directors and Executive Officers of the Registrant.................47
Item 11. Executive Compensation.............................................48
Item 12. Security Ownership of Certain Beneficial Owners and Management.....48
Item 13. Certain Relationships and Related Transactions.....................48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...49
SIGNATURES ..................................................................50
PART I.
ITEM 1. BUSINESS
Forward Looking Statements
In this Form 10-K, the Company has included certain "forward
looking statements" concerning 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-K or
incorporated. The Company has used "forward looking statements" to describe
certain of its future plans and strategies including management's expectations
of the Company's future financial results. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could affect results include interest rate trends, competition, the
general economic climate in Chester County, the mid-Atlantic region and the
country as a whole, loan delinquency rates, changes in federal and state
regulation, and other uncertainties described in the Company's filings with the
Securities and Exchange Commission, including its Form 10-K for the year ended
June 30, 2000. These factors should be considered in evaluating the "forward
looking statements", and undue reliance should not be placed on such statements.
General
Chester Valley Bancorp Inc. (the "Holding Company") is a unitary
thrift holding company, incorporated in the Commonwealth of Pennsylvania in
August 1989. The business of the Holding Company and its subsidiaries (the
"Company") consists of the operations of First Financial Bank ("First Financial"
or the "Bank"), a Pennsylvania-chartered stock savings and loan association
founded in 1922, and Philadelphia Corporation for Investment Services ("PCIS"),
a full service investment advisory and securities brokerage firm. The Bank
provides a wide range of banking services to individual and corporate customers
through its eight branch banks in Chester County, Pennsylvania. The Bank
provides residential real estate, commercial real estate, commercial and
consumer lending services and funds these activities primarily with retail
deposits and borrowings. PCIS is a registered broker/dealer in all 50 states and
the District of Columbia and it is also registered as an investment advisor with
the Securities and Exchange Commission. PCIS provides many additional services,
including self-directed and managed retirement accounts, safekeeping, daily
sweep money market funds, portfolio and estate valuations, life insurance and
annuities, and margin accounts, to individuals and smaller corporate accounts.
PCIS' offices are located in Wayne and Philadelphia, Pennsylvania.
References to the Company include its wholly owned subsidiaries,
the Bank and PCIS, unless the context of the reference indicates otherwise.
1
Market Area
The Bank's primary market area includes Chester County and
sections of the four contiguous counties (Delaware, Montgomery, Berks, and
Lancaster) in Pennsylvania. Chester County, in which all of the Bank's offices
are located, continues to grow in terms of economic development and population
growth.
Customer deposits with First Financial are insured to the maximum
extent provided by law by the Federal Deposit Insurance Corporation ("FDIC")
through the Savings Associations Insurance Fund ("SAIF"). The Bank is subject to
examination and comprehensive regulation by the FDIC, the Office of Thrift
Supervision ("OTS"), and the Pennsylvania Department of Banking ("Department").
It is a member of the Federal Home Loan Bank ("FHLB") of Pittsburgh ("FHLBP"),
which is one of the 12 regional banks comprising the FHLB System. The Bank is
further subject to regulations of the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") governing reserves required to be maintained
against deposits and certain other matters.
Lending Activities
Loan Portfolio Composition. The Company's net loan portfolio (net
of undisbursed proceeds, deferred fees and allowance for loan losses) totaled
$331.31 million at June 30, 2000, representing approximately 65.3% of the
Company's total assets of $507.15 million at that date.
2
The following table presents information regarding the Company's loan portfolio
by type of loan indicated.
---------------------------------------------------------------------------------
2000 1999
----------------------------------- -------------------------------
% of % of
Total Total
Amount Loans Amount Loans
------ ----- ------ -----
Real estate loans:
Residential:
Single-family $ 167,451 46.8% $156,514 50.8%
Multi-family -- 0.0% 828 .3%
Commercial 66,221 18.5% 55,197 17.9%
Construction and land acquisition(1) 42,372 11.8% 29,339 9.5%
----------------- ---------------- ---------------- --------------
Total real estate loans 276,044 77.1% 241,878 78.5%
Commercial business loans(2) 19,358 5.4% 14,708 4.8%
Consumer loans(3) 62,433 17.5% 51,416 16.7%
----------------- ---------------- ---------------- --------------
Total loans receivable 357,835 100.0% 308,002 100.0%
================ ==============
Less:
Loans in process (20,908) (11,393)
Allowance for loan losses (3,908) (3,651)
Deferred loan fees (1,713) (1,570)
----------------- ----------------
Net loans receivable 331,306 291,388
Loans held for sale, single-family
residential mortgages -- --
----------------- ----------------
Net loans receivable and loans held
for sale $331,306 $291,388
================= ================
At June 30,
-----------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------------- -----------------------------
% of % of % of
Total Total Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Real estate loans:
Residential:
Single-family $154,755 53.3% $158,537 58.4% $147,274 62.6%
Multi-family 873 0.3% 893 0.3% 1,256 0.5%
Commercial 41,002 14.1% 33,981 12.5% 22,552 9.6%
Construction and land acquisition(1) 30,646 10.5% 22,907 8.5% 17,028 7.2%
------------ ----------- -------------------------- ------------------ ---------
Total real estate loans 227,276 78.2% 216,318 79.7% 188,110 79.9%
Commercial business loans(2) 11,437 3.9% 7,863 2.9% 5,701 2.4%
Consumer loans(3) 51,829 17.9% 47,343 17.4% 41,486 17.7%
------------ ----------- -------------------------- ------------------ ---------
Total loans receivable 290,542 100.0% 271,524 100.0% 235,297 100.0%
=========== ========= =========
Less:
Loans in process (12,380) (10,092) (7,134)
Allowance for loan losses (3,414) (2,855) (2,667)
Deferred loan fees (1,620) (1,537) (1,533)
------------ ------------------ ------------------
Net loans receivable 273,128 257,040 223,963
Loans held for sale, single-family
residential mortgages 1,101 106 --
-------------
------------------ ------------------
Net loans receivable and loans held
for sale $274,229 $257,146 $ 223,963
============= ================== ==================
- -----------------
(1) Includes construction loans for both residential and commercial real
estate properties.
(2) Consists primarily of secured equipment loans.
(3) Consists primarily of home equity loans and lines of credit, home
improvement, automobile and other personal loans.
3
Contractual Maturities. The following table sets forth the contractual
principal repayments of the total loan portfolio, including loans in process, of
the Company as of June 30, 2000, by categories of loans. All loans are included
in the period in which they mature. Loans held for sale are not included.
Principal Repayments
Contractually Due in Year(s) Ended June 30,
-------------------------------------------------------------------------
(In Thousands)
Total
Outstanding
at 2006
June 30, 2002-and
2000 2001 2005 Thereafter
-------------- ---------- --------- -----------------
Real estate loans:
Residential $167,451 $ 25,057 $ 32,459 $109,935
Commercial 66,221 2,486 53,909 9,826
Construction and land acquisition 42,372 16,249 12,911 13,212
Commercial business loans 19,358 12,154 5,538 1,666
Consumer loans 62,433 6,680 17,391 38,362
-------------------------------------------------------------------------
Total loans $357,835 $ 62,626 $122,208 $173,001
=========================================================================
The following table sets forth, as of June 30, 2000, the dollar amount of all
loans contractually due after June 30, 2001, which have fixed interest rates and
floating or adjustable rates.
Contractual Obligations
Due After June 30, 2001
--------------------------------
Floating/
Fixed Adjustable
Rates Rates
------------- ----------------
(In Thousands)
Real estate loans:
Residential $ 95,456 $ 46,938
Commercial 9,922 53,813
Construction and land acquisition 3,023 23,100
Commercial business loans 6,960 244
Consumer loans 55,634 119
------------- ----------------
Total loans $ 170,995 $ 124,214
============= ================
4
Contractual principal repayments of loans do not necessarily
reflect the actual term of the Company's loan portfolio. The average life of
mortgage loans is substantially less than their contractual terms because of
loan prepayments and because of enforcement of due-on-sale clauses, which give
the Company the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase, however, when current mortgage loan rates substantially
exceed rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans substantially exceed current mortgage loan rates.
Origination, Purchase and Sale of Loans. As a
Pennsylvania-chartered savings institution, First Financial has general
authority pursuant to the Savings Association Code of 1967, as amended ("State
Code"), to originate and purchase loans secured by real estate located
throughout the United States. Due to the Company's strong community orientation,
substantially all of the Company's total mortgage loan portfolio is secured by
real estate located in its primary market area.
Residential and commercial real estate loans are originated
directly by the Bank through salaried loan officers. In addition, from time to
time the Bank utilizes third-party originators who use the same credit
guidelines and standards as the Bank to originate residential loans. Residential
and commercial real estate loan originations are normally attributable to
referrals from real estate brokers and builders and other financial
institutions, mortgage brokers, depositors and walk-in customers. Consumer loan
originations are primarily attributable to existing customers and referrals, as
well as third party automobile loans originated through dealers.
The Bank periodically identifies certain loans as held for sale
at the time of origination. These loans consist primarily of fixed-rate,
single-family residential mortgage loans which meet the underwriting
characteristics of certain government-sponsored enterprises (conforming loans).
The majority of conforming loans sold to date have consisted of sales to Freddie
Mac ("FHLMC") of fixed-rate mortgage loans in furtherance of the Company's goal
of better matching the maturities and interest-rate sensitivity of its assets
and liabilities. In selling conforming loans, the Bank has retained the
servicing thereon in order to increase its non-interest income. At June 30,
2000, the Bank serviced $23.67 million of mortgage loans for others. Sales of
loans produce future servicing income and provide funds for additional lending
and other purposes. The Bank is a qualified servicer for FHLMC, Fannie Mae
("FNMA"), and Ginnie Mae ("GNMA").
5
The following table shows total loans and loans held for sale
originated, purchased, sold and repaid during the periods indicated.
Year Ended June 30,
-------------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
(In Thousands)
Total loans receivable and loans held for sale at
beginning of period $ 308,002 $291,643 $271,630
Real estate loan originations:
Residential (1)
Commercial 26,926 31,705 39,329
Construction and land acquisition (2) 10,002 18,914 9,398
24,374 21,852 21,057
---------------- -------------- -------------
Total real estate
loan originations 61,302 72,471 69,784
Consumer loans (3) 33,748 24,540 24,771
Commercial business loans 22,551 17,312 11,896
---------------- -------------- -------------
Total loan
originations 117,601 114,323 106,451
---------------- -------------- -------------
Principal loan repayments 67,594 96,487 77,481
Sales of loans 174 1,477 8,957
---------------- -------------- -------------
Total principal
repayments
and sales 67,768 97,964 86,438
---------------- -------------- -------------
Net increase in
loans and loans
held for sale 49,833 16,359 20,013
---------------- --------------
-------------
Total loans receivable and loans
held for sale at end of period $ 357,835 $308,002 $291,643
================ ============== =============
- ---------------
(1) Includes both single-family and multi-family residential loans.
(2) Includes construction loans for both residential and commercial real
estate properties.
(3) Includes home equity loans and lines of credit, home equity improvement,
automobile and other personal loans.
Loans on Existing Single-Family Residential Properties. The Bank
currently offers adjustable-rate mortgages ("ARMs") which have up to 30-year
terms and interest rates which adjust either annually or every three years, or
which are fixed initially for the first three years, five years, seven years, or
ten years, and adjust annually thereafter, based upon changes in an index based
on the weekly average yield on United States Treasury securities adjusted to a
constant maturity of one year or three years, respectively, as made available by
the Federal Reserve Board plus a margin. The amount of any increase or decrease
in the interest rate for ARMs is limited to 1% or 2% per year and 6% over the
life of the loan. Substantially all of the ARMs originated by the Bank cannot be
converted to fixed-rate loans. The interest rates of ARMs may not adjust
6
as rapidly as changes in the Company's cost of funds. In order to minimize risk,
ARM borrowers are qualified at the rate which would be in effect after the first
interest rate adjustment, if that rate is higher than the initial rate. The
Bank's ARMs require that any payment adjustment resulting from a change in the
interest rate of the ARM be sufficient to result in full amortization of the
loan by the end of the loan term and, thus, do not permit any of the increased
payment to be added to the principal amount of the loan, or so-called negative
amortization. Due to the declining interest rate environment and leveling of the
yield curve, the Bank experienced significant refinancings of its ARM portfolio
into its fixed rate mortgage products in 1999 and to a lesser degree in 2000.
Fixed-rate residential mortgage loans currently originated generally
have 30-year terms, although some have 15-year terms with commensurately lower
interest rates. The Bank also offers a bi-weekly mortgage which is a fixed-rate
loan with bi-weekly payments. Based on current interest rates, it is repaid in
approximately 22 years. Substantially all of the Bank's long-term, fixed-rate
residential mortgage loans and ARMs include "due on sale" clauses which the loan
balance becomes due upon the sale of the property.
The Bank also makes second mortgage loans and home equity loans. See
"Lending Activities - Consumer Loans."
Loans on Existing Commercial and Multi-Family Properties. During the
past several years, the Bank has originated permanent loans secured by
multi-family and income-producing properties such as condominiums, apartment
buildings, office buildings and, to a lesser extent, hotels and small shopping
centers. The Bank intends to increase its emphasis on the origination of
commercial real estate loans and, accordingly, intends to increase its
commercial lending staff. The Bank's Commercial Loan Department currently
consists of seven loan officers, all but one of whom joined the Bank's staff
with substantial prior commercial lending experience. The origination of
multi-family residential and commercial real estate loans has resulted in the
shortening of the average maturity and an increase in the interest rate
sensitivity of the Bank's loan portfolio as well as to generate increased fee
income. All of the Bank's multi-family residential and commercial real estate
loan portfolio is secured by properties located in the Company's primary market
area. As of June 30, 2000, commercial and multi-family real estate loans,
excluding construction loans for such properties, amounted to $66.22 million, or
18.5% of the total loan portfolio.
A substantial majority of commercial real estate loans have interest
rates which adjust annually after an initial three- or five-year term by a
margin over the corresponding United States Treasury yield for securities with
the same term. These loans typically have amortization periods of up to 20
years, but occasionally provide that the loans can be called by the Bank prior
to the end of the amortization period, generally at three, five, seven or ten
years after origination.
7
Commercial and multi-family residential real estate lending entails
significant additional risks as compared with single-family residential property
lending. Commercial and multi-family residential real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans is typically dependent on the successful
operation of the business or real estate project. The success of such projects
is sensitive to changes in supply and demand conditions in the market for
commercial and multi-family residential real estate as well as economic
conditions generally.
The Bank seeks to ensure that the property securing these loans will
generate sufficient cash flow to adequately cover operating expenses and debt
service payments. To this end, permanent commercial and multi-family residential
real estate loans generally are made with a loan-to-value ratio of 75% or less.
In underwriting commercial and multi-family residential real estate loans,
consideration is given to the property's operating history, future operating
projections, current and projected occupancy, position in the local and regional
market, location and physical condition. The underwriting analysis also includes
credit checks and a review of the financial condition of the borrower. The Bank
usually obtains full or partial loan guarantees from the principal(s) involved.
Construction Loans. The Bank also offers both fixed-rate and
adjustable-rate residential and commercial construction loans. Residential
construction loans are offered to individuals building their primary or
secondary residence as well as to selected local developers to construct up to
four-family dwellings. Advances are made on a percentage of completion basis,
usually consisting of six draws. Residential construction loans convert to
permanent loans at the end of 12 months or upon completion of construction,
whichever occurs first. At June 30, 2000, $31.41 million or 8.8% of the
Company's total loan portfolio consisted of construction loans including loans
in process. Loans in process related to such loans totaled $16.86 million at
June 30, 2000.
The Bank has been active in construction lending for many years and
intends to continue its involvement in such lending in the future. Construction
lending is generally considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Risk of loss on
construction loans is dependent largely upon the accuracy of the initial
appraisal of the property's projected value at completion of construction as
well as the estimated cost, including interest, of construction. During the
construction phase, a number of factors could result in delays and cost
overruns. If either estimate proves to be inaccurate and the borrower is unable
to provide additional funds, the lender may be required to advance funds beyond
the amount originally committed to permit completion of the project and/or be
confronted at the maturity of the construction loan with a project whose value
is insufficient to assure full repayment.
8
Land Acquisition and Development Loans. The Bank also offers land
acquisition and development loans. These types of loans are generally provided
only to local developers with strong financial positions and with whom the Bank
is familiar. These loans typically have terms of one to three years and carry a
floating interest rate normally indexed to the Wall Street Journal Prime. The
Bank will lend up to 75% of the appraised value of the project. At June 30,
2000, $10.96 million, or 3.1% of the Company's total loan portfolio consisted of
land acquisition and development loans, including loans in process. Loans in
process on such loans totaled $4.05 million at June 30, 2000. Like construction
lending, these loans generally are considered to involve a higher degree of risk
of loss than long-term financing on approved occupied real estate. The Bank is
actively pursuing developers who can both demonstrate the ability to meet cash
flow projections in order to repay loans through a very strong financial
position and have a reputation for successfully completing such projects in
similar situations with the Bank.
Consumer Loans. The Bank offers a wide variety of consumer loans,
including home equity loans, home improvement loans, equity lines of credit,
secured and unsecured personal loans and automobile loans. The Bank has
aggressively marketed consumer loans in order to provide a wider range of
financial services to its customers and because of the shorter terms and
normally higher interest rates on such loans. As of June 30, 2000, consumer
loans amounted to $62.43 million or 17.5% of the total loan portfolio.
The Bank's home equity lines of credit currently provide for terms of
up to 10 years. The interest rate on the "Prime Line" adjusts monthly to the
Wall Street Journal Prime Rate. The regular equity line of credit adjusts
monthly at 1.50% above the Wall Street Journal Prime Rate. The limit of such
loan is the borrower's equity in his residence, subject to certain income
qualifications. The Bank also makes fixed-rate, fixed-term home equity loans on
which it takes a first- or second-mortgage lien on the borrower's property.
These loans have terms of up to 15 years. The balance of the fixed-rate
mortgages on the properties cannot exceed in the aggregate 80% of the appraised
value of the properties. Home equity lines of credit and fixed-rate home equity
loans amounted to $5.50 million and $48.88 million, respectively, as of June 30,
2000. The Bank also originates fixed-rate bridge loans with loan-to-value ratios
of no greater than 80% of the value of the secured real estate and at a maximum
term of twelve months. At June 30, 2000, there was no balance for these loans.
At June 30, 2000, the balance was $494,000 for fixed-rate loans secured
by certificates of deposit or marketable securities. Unsecured personal loans
amounted to $465,000 at June 30, 2000 and consisted of fixed-rate loans with
maximum loan balances of $5,000 and terms no greater than 48 months. The Bank
also originates fixed-rate loans on new and used automobiles. The terms of such
loans do not exceed 60 months on new cars and 48 months on used cars. Automobile
loans amounted to $6.24 million at June 30, 2000. The Bank's current line of
credit provides for unsecured loans of up to $1,000 for terms of up to 36 months
with an interest rate set at 6.0% over the Wall Street Journal Prime Rate
adjusted monthly. Such loans have a floor of 10.0% and a ceiling of 18.0% and
totaled $264,000 at June 30, 2000. In addition, the Bank originates Visa and
MasterCard credit card loans with up to $5,000 lines of credit and at an
interest rate set at 6.0% over the Prime Rate. At June 30, 2000, the Company had
$408,000 in credit card loans outstanding.
9
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The Bank believes
that the generally higher yields earned on consumer loans compensate for the
increased credit risk associated with such loans and that consumer loans are
important to its efforts to increase the interest rate sensitivity and shorten
the average maturity of its loan portfolio.
Commercial Business Loans. The Bank makes commercial business loans
directly to businesses located in its market area. The Bank targets small and
medium sized businesses with the majority of the loans being originated in
amounts of less than $750,000. Applications for commercial business loans are
obtained primarily from existing customers, branch referrals and direct inquiry.
As of June 30, 2000, commercial business loans totaled $19.36 million or 5.4% of
the total loan portfolio.
Commercial business loans originated by the Bank generally have terms
of five years or less and fixed interest rates or adjustable interest rates tied
to the Wall Street Journal Prime plus a margin. Such loans are generally secured
by real estate, receivables, equipment, or inventory and are generally backed by
the personal guarantees of the principals of the borrower. Commercial business
loans generally have shorter terms to maturity and provide higher yields than
residential mortgage loans. Although commercial business loans generally are
considered to involve greater credit risk than certain other types of loans,
management intends to continue to offer commercial business loans to small and
medium sized businesses in an effort to better serve our community's needs,
obtain core non-interest bearing deposits, and increase the Company's interest
rate spread.
Regulatory Requirements and Underwriting Policies. Under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and
pursuant to the parity provisions of the State Code, the aggregate loans that
the Company may make to any borrower and its affiliates is limited to 15% of
unimpaired capital for unsecured loans and 25% of capital for loans secured by
readily marketable collateral. At June 30, 2000, pursuant to such provisions,
the Bank was permitted to extend credit to any one borrower totaling $5.41
million. Special rules applicable to savings associations' provide authority to
develop domestic residential housing units up to the lesser of 30% of the
savings association's unimpaired capital and unimpaired surplus or $30.0
million, if: (a) the purchase price of a single-family unit does not exceed
$500,000; (b) the savings association is in compliance with the fully phased-in
capital standards; (c) the OTS director, by order, authorizes the higher limit;
(d) the loans made to all borrowers in the aggregate do not exceed 150% of the
savings association's unimpaired capital and unimpaired surplus; and (e) all
loans comply with applicable loan-to-value requirements. At June 30, 2000, the
Bank's largest loan or group of loans to one borrower, including related
entities, aggregated $5.26 million, and is in conformity with the current loans
to one borrower regulations described above.
10
The Bank is currently permitted to lend up to 100% of the appraised
value of the real property securing a loan; however, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
the Bank is required by federal regulations, the State Code and Department
regulations to obtain private mortgage insurance on the portion of the principal
amount of the loan that exceeds 80% of the appraised value of the security
property. Pursuant to underwriting guidelines adopted by the Board of Directors,
private mortgage insurance must be obtained on all residential loans whose
loan-to-value ratios exceed 80%. The Bank will generally lend up to 97% of the
appraised value of one-to four-family owner-occupied residential dwellings when
the required private mortgage insurance is obtained. The Bank generally
originates loans of up to 75% of the appraised value of the properties securing
its commercial real estate and commercial business loans and 75% of the
appraised value upon completion or sale price, whichever is lower, for
construction loans. With respect to construction loans for owner-occupied
properties made in connection with the providing of the permanent financing, the
Bank will lend up to 90% of the appraised value when the required private
mortgage insurance is obtained.
In the loan approval process, the Bank assesses both the borrower's
ability to repay the loan and the adequacy of the proposed security. In
connection therewith, the Bank obtains an appraisal of the security property and
information concerning the income, financial condition, employment and credit
history of the applicant. Loans must be approved at various management levels,
including the Board of Directors, depending on the amount of the loan.
Residential mortgage loans, commercial business and commercial real estate
loans, and any other loans in excess of $1.00 million require approval by the
Board of Directors. In addition, any loan in excess of $500,000 which exhibits
certain characteristics concerning the borrower or the project requires approval
by the Board of Directors.
For mortgage loans the Bank requires title insurance insuring the
priority of its lien, as well as fire and extended coverage casualty insurance,
in order to protect the properties securing its real estate loans. Borrowers
must also obtain flood insurance policies where the property is in a flood plain
as designated by the Federal Emergency Management Agency. Borrowers may be
required to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage loan account from which the Company makes
disbursements for items such as real estate taxes, hazard insurance premiums and
private mortgage insurance premiums as they fall due.
Loan Fee and Servicing Income. In addition to interest earned on loans,
the Bank receives income through servicing of loans and fees in connection with
loan originations, loan modifications, late payments, prepayments, repayments
and changes of property ownership and for miscellaneous services related to its
loans. Income from these activities varies from period to period with the volume
and type of loans made.
Loan origination fees and certain related direct loan origination costs
are offset and the resulting net amount is deferred and amortized over the life
of the related loans as an adjustment to the yield of such related loans.
However, in the event the related loan is sold, any deferred loan fees or costs
remaining with respect to such loan should be taken into income.
11
The Bank currently charges loan origination fees which are
calculated as a percentage of the amount of the loan. The fees received in
connection with the origination of commercial real estate loans have generally
amounted to two points (one point being equivalent to 1% of the principal amount
of the loan). In addition, the Bank typically receives fees from two to three
points in connection with the origination of new, conventional, one-to
four-family mortgages and 3.5 points in connection with the origination of
construction loans.
At June 30, 2000, the Bank was servicing $23.67 million of loans
for others, substantially all of which were whole loans sold by the Bank to the
FHLMC. The Bank receives a servicing fee of approximately 1/4 or 3/8 of 1% on
such loans.
Non-Performing Loans and Real Estate Owned ("REO"). When a
borrower fails to make a required loan payment, the Bank attempts to cause the
default to be cured by contacting the borrower. In general, contacts are made
after a payment is more than 15 days past due, at which time a late charge is
assessed. Defaults are cured promptly in most cases. If the delinquency on a
mortgage loan exceeds 90 days and is not cured through the Bank's normal
collection procedures, or an acceptable arrangement is not worked out with the
borrower, the Company will institute measures to remedy the default, including
commencing a foreclosure action or, in special circumstances, accepting from the
mortgagor a voluntary deed of the secured property in lieu of foreclosure. The
remedies available to the Bank in the event of a default or delinquency with
respect to certain residential mortgage loans, and the procedures by which such
remedies may be exercised, are subject to Pennsylvania law and regulations.
Under Pennsylvania law, a lender is prohibited from accelerating the maturity of
a residential mortgage loan, commencing any legal action (including foreclosure
proceedings) to collect on such loan, or taking possession of any loan
collateral until the lender has first provided the delinquent borrower with at
least 30 days prior written notice specifying the nature of the delinquency and
the borrower's right to correct such delinquency. In addition, the lender's
ability to exercise any remedies it may have with respect to loans for one- or
two-family principal residences located in Pennsylvania is further restricted
(including the lender's right to foreclose on such property) until the lender
has provided the delinquent borrower with written notice detailing the
borrower's rights to seek consumer credit counseling and state financial
assistance and until the borrower has exhausted or failed to pursue such rights.
These provisions of Pennsylvania law may delay for several months the Bank's
ability to foreclose upon residential loans secured by real estate located in
the Commonwealth of Pennsylvania. In addition, the uniform FNMA/FHLMC lending
documents used by the Bank, as well as most other residential lenders in
Pennsylvania, requires notice and a right to cure similar to that provided under
Pennsylvania law.
12
Non-accrual loans are loans on which the accrual of interest ceases
when the collection of principal or interest payments is determined to be
doubtful by management. It is the policy of the Company to discontinue the
accrual of interest when principal or interest payments are delinquent 90 days
or more (unless the loan principal and interest are determined by management to
be fully secured and in the process of collection), or earlier, if the financial
condition of the borrower raises significant concern with regard to the ability
of the borrower to service the debt in accordance with the current loan term.
Interest income is not accrued until the financial condition and payment record
of the borrower once again demonstrate the ability to service the debt. When a
loan is placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income. Non-real estate consumer loans more than 120 days
delinquent are required to be written off in accordance with federal
regulations.
If foreclosure is effected, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate property is then included in the Company's
"real estate owned" account until it is sold. When property is acquired, it is
recorded at the lower of carrying value or fair value less disposal cost at the
date of acquisition and any write-down resulting therefrom is charged to the
allowance for loan losses. Interest accrual ceases on the date of acquisition
and all costs incurred in maintaining the property from that date forward are
expensed. Costs incurred for the improvement or development of such property are
capitalized to the extent they do not exceed the property's fair value. No loss
reserves are maintained on REO and future write-downs for cost beyond the fair
value are expensed. The Company is permitted under Department and OTS
regulations to finance sales of REO by "loans to facilitate," which may involve
more favorable interest rates and terms than generally would be granted under
the Bank's underwriting guidelines. However, at June 30, 2000, the Company did
not have any loans to facilitate.
For purposes of applying the measurement criteria for impaired loans,
the Company excludes large groups of smaller-balance homogeneous loans,
primarily consisting of residential real estate loans and consumer loans as well
as commercial loans with balances of less than $100,000. For applicable loans,
the Company evaluates the need for impairment recognition when a loan becomes
non-accrual or earlier if, based on management's assessment of the relevant
facts and circumstances, it is probable that the Company will be unable to
collect all proceeds due according to the contractual terms of the loan
agreement. At June 30, 2000, the Company did not have any impaired loans. The
Company's policy for the recognition of interest income on impaired loans is the
same as for non-accrual loans discussed above. Impaired loans are charged off
when the Company determines that foreclosure is probable and the fair value of
the collateral is less than the recorded investment of the impaired loan.
13
The following table sets forth information regarding non-accrual loans
and REO held by the Company at the dates indicated. The Company did not have any
(i) loans which are 90 days or more delinquent but on which interest is being
accrued or (ii) loans which were classified as restructured troubled debt at any
of the dates presented.
Year Ended June 30,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ------------- ------------- ---------- ----------
(Dollars In Thousands)
Non-accrual loans:
Residential real estate loans $ 735 $ 568 $ 771 $ 417 $ 1,166
Commercial real estate loans -- -- -- -- --
Construction and land loans -- -- 55 -- 737
Commercial business loans -- 258 -- -- 18
Consumer loans 207 107 420 331 297
-------------- ------------- ------------ ---------- -----------
Total non-accrual loans $ 942 $ 933 $ 1,246 $ 748 $ 2,218
============== ============= ============ ========== ===========
Total non-accrual loans
to total assets .19% .21% .33% .23% .81%
Total REO -- -- -- -- $121
Total non-accrual loans and
REO to total assets .19% .21% .33% .23% .85%
At June 30, 2000 non-accrual real estate loans included nine
residential mortgage loans aggregating $735,000, all secured by single-family
residential properties.
The total amount of non-performing loans was $942,000, $933,000 and
$1.25 million at June 30, 2000, 1999 and 1998, respectively. If these
non-performing loans had been current in accordance with their original terms
and had been outstanding throughout the period, the gross amount of interest
income for fiscal 2000, 1999, and 1998 that would have been recorded for these
loans was $82,000, $75,200, and $111,800. Interest income on these
non-performing loans included in income for fiscal 2000, 1999, and 1998,
amounted to $24,000, $26,100, and $57,560, respectively.
Allowances for Losses on Loans and Classified Assets. The allowance for
loan losses is maintained at a level that management considers adequate to
provide for losses based upon an evaluation of known and inherent risks in the
loan portfolio. Management's evaluation is based upon, among other things,
delinquency trends, the volume of non-performing loans, prior loss experience of
the portfolio, current economic conditions and other relevant factors. Although
management believes it has used the best information available to it in making
such determinations, and that the present allowance for loan losses is adequate,
future adjustments to the allowance may be necessary, and net income may be
adversely affected if circumstances differ substantially from
14
the assumptions used in determining the level of the allowance. Management may
in the future further increase the level of its allowance for loan losses as a
percentage of total loans and non-performing loans in the event the level of
multi-family residential and commercial real estate loans (which generally are
considered to have a greater risk of loss than single-family residential
mortgage loans) as a percentage of its total loan portfolio continues to
increase. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for losses on
loans. Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. The allowance is increased by the provision for loan
losses which is charged to operations. Loan losses, other than those incurred on
loans held for sale, are charged directly against the allowance and recoveries
on previously charged-off loans are generally added to the allowance. At June
30, 2000, the Bank's allowance for loan losses was $3.91 million or 1.18% of
total net loans receivable and 414.9% of total non-performing loans compared to
$3.65 million or 1.24% of net loans and 391.3% of total non-performing loans at
June 30, 1999.
The following table summarizes activity in the Company's allowance for
loan losses during the periods indicated.
As of June 30,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- --------------- ---------------- -------------- --------------
(Dollars in Thousands)
Allowance at beginning of period $ 3,651 $ 3,414 $ 2,855 $ 2,667 $ 2,449
Loans charged off against the allowance:
Residential real estate (8) (58) (12) (117) (101)
Construction and land -- -- (177) --
Commercial business (131) -- -- (1) (2)
Consumer (32) (119) (69) (82) (43)
------- ------- ------- ------- -------
Total charge-offs (171) (177) (81) (377) (146)
Recoveries:
Residential real estate -- -- 21 37 --
Construction and land -- -- -- 4 16
Commercial business 2 -- -- -- --
Consumer 6 24 13 1 8
------- ------- ------- ------- -------
Total recoveries 8 24 34 42 24
Net charge-offs (163) (153) (47) (335) (122)
Provision for loan losses
Charged to operating expenses 420 390 606 523 340
------- ------- ------- ------- -------
Allowance at year end $ 3,908 $ 3,651 $ 3,414 $ 2,855 $ 2,667
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding 0.05% 0.05% 0.02% 0.13% 0.05%
======= ======= ======= ======= =======
Ratio of allowance to period-end
net loans 1.18% 1.24% 1.23% 1.10% 1.18%
======= ======= ======= ======= =======
15
The following table presents information regarding the Company's total
allowance for losses on loans as well as the allocation of such amounts to the
various categories of the loan portfolio. (Dollars in Thousands)
At June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998 1997
--------------------- ------------------- -------------------- --------------------
% of % of % of % of
Loans Loans Loans Loans
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
Residential real estate loans $ 700 46.8% $ 638 51.1% $ 789 53.6% $ 778 58.7%
Commercial real estate loans 1,553 18.5% 1,415 17.9% 1,050 14.1% 871 12.5%
Construction and land loans 241 11.8% 194 9.5% 201 10.5% 139 8.5%
Commercial business loans 632 5.4% 726 4.8% 357 3.9% 278 2.9%
Consumer loans 782 17.5% 678 16.7% 1,017 17.9% 789 17.4%
------- ----- ------- ----- ------- ----- ------- -----
Total allowance for loan losses $ 3,908 100.0% $ 3,651 100.0% $ 3,414 100.0% $ 2,855 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Total allowance for loan losses
to total non-performing loans 414.9% 391.3% 274.0% 381.7%
===== ===== ===== =====
Total non-performing loans $ 942 $ 933 $ 1,246 $ 748
====== ====== ======= ======
At June 30,
-------------------
1996
-------------------
% of
Loans
to Total
Amount Loans
------ -----
Residential real estate loans $ 898 63.1%
Commercial real estate loans 585 9.6%
Construction and land loans 280 7.2%
Commercial business loans 207 2.4%
Consumer loans 697 17.7%
-------- ----------
Total allowance for loan losses $ 2,667 100.0%
======== =========
Total allowance for loan losses
to total non-performing loans 120.2%
========
Total non-performing loans $ 2,218
========
16
The Company monitors the quality of its assets on a regular
basis. Under regulations of the OTS, all of the Company's assets are subject to
being classified under a classification system that has three categories: (i)
substandard, (ii) doubtful and (iii) loss. An asset may fall within more than
one category and a portion of the asset may remain unclassified. The Company is
required to review the classification of its assets on a regular basis. In
addition, in connection with the examinations of First Financial by the OTS, the
FDIC, and the Department, the examiners have the authority to identify problem
assets and, if appropriate, classify them and/or require adjustments to the
carrying value of such assets.
Assets classified substandard are considered inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Assets so classified must have a well-defined
weakness or weaknesses. They are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected.
Assets classified doubtful are considered to have all the
weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions, and values, highly
questionable and improbable.
Assets classified loss are considered uncollectable and of such
little value that their continuance as assets without establishment of a
specific reserve is not warranted. This classification does not mean that an
asset has absolutely no recovery or salvage value, but rather, that it is not
practical or desirable to defer writing off a basically worthless asset even
though partial recovery may be affected in the future.
At June 30, 2000 and 1999, the Company's classified assets, which
consisted of assets classified as substandard or doubtful, totaled $1.59 million
and $1.24 million, respectively. The Company did not have any REO at June 30,
2000 and 1999. Included in the assets classified substandard at June 30, 2000
and 1999, were all loans 90 days past due and loans which are less than 90 days
delinquent but inadequately protected by the current paying capacity of the
borrower or of the collateral pledged, and have a well-defined weakness that may
jeopardize the liquidation of the debt. The majority of loans which are
classified but otherwise performing are residential mortgage loans.
The loans designated as special mention by the Company amounted
to $102,300 and $0 at June 30, 2000 and 1999, respectively. The Company also
includes in the special mention category an investment with a balance of $4.37
million to an extended term healthcare provider which was performing but had
characteristics which warranted management to classify it special mention.
Although special mention assets are not considered or classified as substandard,
doubtful or loss, they do have a potential weakness which may, if not corrected,
result in increased risk of loss at some future date.
17
Securities Activities
Historically, interest and dividends on securities have provided the
Company with a significant source of revenue. At June 30, 2000, the Company's
securities portfolio and interest-bearing deposits aggregated $153.29 million or
30.2% of its total assets. First Financial's securities and interest-bearing
deposits are used to meet certain federal liquidity ratios. The liquidity ratios
are met in part by investing in securities that qualify as liquid assets under
OTS regulations. (See "Regulation - Regulation of the Bank - Liquidity
Requirements"). Such securities include obligations issued or fully guaranteed
by the United States Government, certain federal agency obligations, certain
time deposits and negotiable certificates of deposit issued by commercial banks
and other specified investments, including commercial paper and other
securities. Investment decisions are made by members of senior management within
guidelines approved by the Company's Board of Directors.
The Company divides its securities portfolio into three segments: (a)
held to maturity; (b) available for sale; and (c) trading. Securities in the
held to maturity category are accounted for at amortized cost. Trading
securities are accounted for at quoted market prices with changes in market
values being recorded as gain or loss in the income statement. All other
securities are included in the available for sale category and are accounted for
at fair value with unrealized gains or losses, net of taxes, being reflected as
adjustments to equity. At June 30, 2000, the Company had a net unrealized loss
on securities available for sale, net of taxes, of $3.26 million.
18
The following table sets forth the Company's securities portfolio and
interest-earning deposits at carrying value at the dates indicated.
At June 30,
-------------------------------------------------------------------------
2000 1999 1998
---------------------- ------------------ --------------------
(In Thousands)
Interest-bearing deposits $ 8,164 $ 13,409 $ 11,861
Trading account securities 12,838 9,221 20,352
Investment securities held to maturity:
U.S. Government and agency obligations 25,110 -- 4,500
Municipal notes and bonds (1) 8,332 3,229 7,394
Mortgage-backed securities 640 791 1,123
Other 5,739 3,781 2,583
---------------------- ------------------ --------------------
Total investment securities held to
maturity 39,821 7,801 15,600
---------------------- ------------------ --------------------
Investment securities available for sale:
U.S. Government and agency obligations 26,639 47,242 12,296
Municipal notes and bonds (1) 34,160 27,378 15,173
Mortgage-backed securities 13,804 15,817 9,431
Equity securities 858 1,336 1,096
Debt securities 14,798 15,430 307
Other 2,209 2,397 --
---------------------- ------------------ --------------------
Total investment securities available for
sale 92,468 109,600 38,303
---------------------- ------------------ --------------------
Total securities and interest-bearing
deposits $ 153,291 $ 140,031 $ 86,116
====================== ================== ====================
(1) The income from municipal notes and bonds are generally non-taxable for
federal and state purposes.
The contractual maturity or repricing characteristics of the Company's
investment portfolio is considerably more interest rate sensitive than that of
its loan portfolio. Consequently, the investment portfolio provides a
significant source of liquidity and protection against interest rate risk. The
weighted average term to maturity or repricing of the Company's investment
securities held to maturity was 4.8 years at June 30, 2000 and 3.1 years at June
30, 1999.
19
The amortized cost and estimated fair value of investment securities at June 30,
2000, by contractual maturity, are shown below.
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---------------- --------------- ---------------
(Dollars in Thousands)
Held to Maturity
Due in one year or less $ 210 $ 209 4.97%
Due after one year through five years 17,216 17,008 6.37%
Due after five years through ten years 9,130 8,696 6.96%
Due after ten years 7,526 7,367 6.87%
No stated maturity 5,739 5,740 0.00%
---------------- --------------- ---------------
Total held to maturity $ 39,821 $ 39,020 5.65%
================ =============== ===============
Available for Sale
Due in one year or less $ -- $ -- 0.00%
Due after one year through five years 23,058 22,567 6.09%
Due after five years through ten years 14,964 14,341 6.08%
Due after ten years 58,294 54,703 6.75%
No stated maturity 1,453 857 0.00%
--------------- -------------- --------------
Total available for sale $ 97,769 $ 92,468 6.42%
================ =============== ===============
The weighted average yield, based on amortized cost, is presented on a
taxable equivalent basis.
As of June 30, 2000, investments in the debt and/or equity securities
of any one issuer (excluding U.S. Government and federal agencies) did not
exceed 10% of the Company's stockholders' equity.
Sources of Funds
General. Deposits obtained through branch offices have traditionally
been the principal source of the Company's funds for use in lending and for
other general business purposes. The Company also derives funds from
amortization and prepayments of outstanding loans and sales of loans. From time
to time, the Company also may borrow funds from the FHLBP and other sources.
Borrowings may be used on a short-term basis to compensate for seasonal or other
reductions in deposits or other inflows at less than projected levels, as well
as on a longer term basis to support expanded lending and investment activities.
Deposits. The Company obtains deposits primarily from residents of
Chester County, and to a lesser extent Berks, Delaware, Lancaster and Montgomery
Counties, Pennsylvania. Currently, the principal methods used by First Financial
to attract deposit accounts include the offering of services and accounts,
competitive interest rates, and convenient office locations and service hours.
Other than during times of inverse or flat yield curves the Bank has adopted a
pricing program for its certificate accounts which provides for higher rates of
interest on its longer term certificates in order to encourage depositors to
20
invest in certificates with longer maturities, thus reducing the interest rate
sensitivity of the Company's deposit portfolio. First Financial also offers a
tiered money market account that pays higher interest on higher balances so as
to maintain a relatively stable core of deposits even when its certificate
accounts mature.
Market conditions have caused First Financial to rely primarily on
short-term certificate accounts and other deposit alternatives that are more
responsive to market interest rates than passbook accounts and regulated
fixed-rate, fixed-term certificates that were historically the Company's primary
sources of deposits. First Financial's current deposit products include
non-interest-bearing accounts, passbook/statement savings accounts, NOW checking
accounts, money market deposit accounts, certificates of deposit ranging in
terms from 30 days to five years and certificates of deposit in denominations of
$100,000 or more ("jumbo certificates"). Included among these deposit products
are individual retirement account certificates ("IRA certificates") and Keogh
accounts.
The following table shows the balances of the Company's deposits as of
the dates indicated:
At June 30,
-----------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ----------------------
(Dollars in Thousands)
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
Non-interest-bearing accounts $ 38,192 10.1% $ 33,007 9.2% $ 32,361 10.9%
NOW checking accounts 38,652 10.2% 36,012 10.0% 31,770 10.6%
Savings accounts 26,636 7.0% 29,033 8.1% 27,164 9.1%
Money market accounts 41,690 11.0% 47,464 13.2% 35,610 11.9%
Certificates of deposit less than
$100,000 126,910 33.6% 137,559 38.2% 133,801 44.9%
Certificates of deposit with
$100,000 minimum balance 106,398 28.1% 76,439 21.3% 37,485 12.6%
------------ ---------- ---------- ------------ ---------- ---------
Total deposits $ 378,478 100.0% $ 359,514 100.0% $ 298,191 100.0%
============ ========== ========== ============ ========== =========
21
The following table shows the weighted average interest rate of the Company's
deposits by type of account at June 30, 2000:
Weighted
Amount Avg. Rate
------------- ----------
(In Thousands)
Non-interest-bearing accounts $ 38,192 --%
NOW checking accounts 38,652 1.57%
Savings accounts 26,636 1.71%
Money market accounts 41,690 4.00%
Certificates of deposit less than
$100,000 126,910 5.60%
Certificates of deposit with
$100,000 minimum balance 106,398 5.72%
--------- -------
Total deposits $378,478 4.21%
========== =======
The following table sets forth the net deposit flows of the Company for the
periods indicated:
Year Ended June 30,
--------------------------------------
2000 1999 1998
---------- ----------- ----------
(In Thousands)
Increase before interest credited $ 5,089 $ 50,465 $ 27,568
Interest credited 13,875 10,857 9,873
---------- ----------- ----------
Net deposit increase $ 18,964 $ 61,322 $ 37,441
========== =========== ==========
The following table shows the balances of certificates of deposit with balances
of $100,000 or greater which mature during the periods indicated and the balance
at June 30, 2000.
Balances at June 30, 2000 Maturing
=======================================================
(In Thousands)
At Within Three Six to After
June 30, Three to Six Twelve Twelve
2000 Months Months Months Months
---------- ------------ -------- ---------- ---------
Certificates of deposit with $100,000
minimum balance $ 106,398 $ 19,138 $5,677 $ 19,357 $ 62,226
========== ============ ======== ========== =========
22
The following table presents the average balance by type of deposit and the
average rate paid by type of deposit for the periods indicated.
Year Ended June 30,
---------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- -------------------------- -----------------------------
(Dollars in Thousands)
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
NOW checking accounts $ 37,667 1.57% $ 33,278 1.48% $ 29,328 1.81%
Savings accounts 27,017 1.74% 31,392 1.81% 25,991 2.67%
Money market accounts 43,178 3.99% 43,147 3.65% 29,847 3.57%
Certificates of deposit
less than $100,000 130,335 5.35% 149,713 5.55% 126,286 5.90%
Certificates of deposit with 5.17%
$100,000 minimum balance 75,845 5.23% 52,917 35,725 4.94%
The greater variety of deposit accounts offered by First Financial has
increased its ability to retain deposits and has allowed it to be more
competitive in obtaining new funds, although the threat of disintermediation
(the flow of funds away from savings institutions into direct investment
vehicles such as government and corporate securities) still exists. However,
these types of accounts have been and continue to be more costly than
traditional accounts during periods of high interest rates. In addition, First
Financial has become much more susceptible to short-term fluctuations in deposit
flows, as customers have become more rate conscious and willing to move funds
into higher-yielding accounts. Thus, both the ability of First Financial to
attract and maintain deposits as well as its cost of funds have been, and will
continue to be, affected significantly by economic market conditions.
In an effort to attract increasing amounts of non-interest-bearing
deposits, First Financial offers a basic checking account which features no-fee
checking with a minimum balance of $50.
First Financial also offers a business checking account which grants
credits against service charges based on the average daily balance. It is
management's belief that such accounts represent an excellent source of deposits
that are not affected by interest rates.
First Financial attempts to control the flow of deposits by pricing its
accounts to remain generally competitive with other financial institutions in
its primary market area, but does not necessarily seek to match the highest
rates paid by competing institutions.
First Financial's deposits are obtained primarily from persons who are
residents of Pennsylvania. First Financial does not advertise for deposits
outside of Pennsylvania or accept brokered deposits, and management believes
that at June 30, 2000 an insignificant amount of First Financial's deposits were
held by non-residents of Pennsylvania.
23
Borrowings. First Financial may obtain advances from the FHLBP upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans, provided certain standards related to credit worthiness have
been met. See "Regulation - Regulation of the Bank - Federal Home Loan Bank
System." Such advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. FHLBP advances
are generally available to meet seasonal and other withdrawals of deposit
accounts and to expand lending and investment activities, as well as to aid the
efforts of members to establish better asset and liability management through
the extension of maturities of liabilities. At June 30, 2000, the Company had
$86.78 million in FHLBP advances outstanding. 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 amount not to
exceed 10% of the Company's maximum borrowing capacity, which credit line is
$15.45 million, and is subject to certain conditions, including the holding of a
predetermined amount of FHLBP stock as collateral. At June 30, 2000, there was
no balance outstanding on the line of credit.
The following table presents certain information regarding short-term
borrowings (borrowings with a maturity of one year or less) for the periods
indicated:
Year Ended June 30,
-------------------------------------------------------
2000 1999 1998
--------------- -------------- ------------
(Dollars in Thousands)
Short-term borrowings:
Balance outstanding at end
of period $ 46,948 $16,731 $17,601
Weighted average interest rate
at end of period 6.61% 5.43% 5.28%
Average balance outstanding $ 55,753 $18,596 $16,417
Maximum amount outstanding
at any month-end during
the period $79,059 $35,320 $25,323
Weighted average interest rate
during the period 5.96% 5.51% 5.58%
Yields Earned and Rates Paid
The largest components of the Company's total income and total expense
are interest income and interest expense. As a result, the Company's earnings
are dependent primarily upon net interest income, which is determined by the
Company's net interest rate spread (i.e., the difference between the yields
earned on interest-earning assets and the rates paid on interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities.
24
Interest Income and Interest Spread Analysis
The following table sets forth, for the periods indicated,
information regarding (i) the total dollar amount of interest income of the
Company from interest-earning assets and the resultant average yields; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest income; (iv) interest rate spread;
and (v) net interest-earning assets and their net yield. Average balances are
determined on a monthly basis which is representative of operations.
-----------------------------------------------------------------------------------
2000 1999
--------------------------------------- ---------------------------------------
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance(1) Interest(2) Rate(2) Balance(1) Interest(2) Rate(2)
----------- ----------- ------- ---------- ----------- -------
Assets:
Loans and loans held for sale $313,378 $24,689 7.88% $280,544 $22,875 8.15%
Securities and
other investments 145,687 10,298 7.07% 113,110 7,137 6.31%
----------- ------------ ----------- ------------
Total interest-
earning assets 459,065 34,987 7.62% 393,654 30,012 7.62%
------------ ----------- ------------
-
----------- -----------
Total assets $ 482,342 $411,746
=========== ===========
Liabilities and Stockholders' Equity:
Deposits and repurchase agreements $315,962 $13,700 4.34% $287,627 12,711 4.42%
FHLB advances and
other borrowings 90,184 5,275 5.85% 53,595 2,971 5.54%
----------- ------------ ----------- ------------
Total interest-
bearing liabilities $406,146 $18,975 4.67% 341,222 $15,682 4.60%
Non-interest-bearing liabilities 42,033 36,962
Stockholders' equity 34,163 33,562
----------- -----------
Total liabilities and stockholders' equity $482,342 $411,746
=========== ===========
Net interest income/interest rate spread $16,012 2.95% $14,330 3.03%
============ ============
=========== =========
Net interest-earning assets/net yield on
interest-earning assets $52,919 3.49% $52,432 3.64%
=========== =========== =========== =========
Ratio of average interest-earning assets to
interest-bearing liabilities 113% 115%
======= =======
Year Ended June 30,
----------------------------------------------------------
1998
----------------------------------------------------------
Average Yield/
Balance(1) Interest(2) Rate(2)
---------- ----------- -------
Assets:
Loans and loans held for sale $264,106 $22,298 8.44%
Securities and
other investments 60,777 3,906 6.43%
------------ -----------------
Total interest-
earning assets 324,883 26,204 8.07%
-----
Non-interest earning assets 15,141
------------
Total assets $340,024
============
Liabilities and Stockholders' Equity:
Deposits and repurchase agreements $247,903 $11,476 4.63%
FHLB advances and
other borrowings 31,813 1,933 6.08%
------------ -----------------
Total interest-
bearing liabilities 279,716 $13,409 4.79%
Non-interest-bearing liabilities 30,167
Stockholders' equity 30,141
------------
Total liabilities and stockholders' equity $340,024
============
Net interest income/interest rate spread $12,795 3.28%
================= =============
Net interest-earning assets/net yield on
interest-earning assets $45,167 3.94%
============ =============
Ratio of average interest-earning assets to
interest-bearing liabilities 116%
=============
(1) Non-accruing loans are included in the average balance.
(2) The indicated interest and annual yield and rate are presented on a
taxable equivalent basis using the Federal marginal income tax rate of 34%
adjusted for the 20% interest expense disallowance (27.2%) for 2000, 1999,
and 1998.
25
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 (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 (3) is allocated to
the change in volume variance and the change in the rate variance on a pro rated
basis for fiscal 2000.
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------------- ---------------------------------------------
Volume Rate Total Volume Rate Total
------------ ----------- -------------- ------------ ------------ ------------
(In Thousands)
Interest income on interest-
earning assets:
Loans and loans
held for sale $2,594 $(780) $1,814 $1,359 $(782) $ 577
Securities and
other investments 2,230 931 3,161 3,305 (74) 3,231
------ ----- ------ ------ ----- ------
Total interest income 4,824 151 4,975 4,664 (856) 3,808
------ ----- ------ ------ ----- ------
Interest expense on interest-
bearing liabilities:
Deposits and repurchase
agreements 1,225 (236) 989 1,775 (540) 1,235
FHLB advances and other
borrowings 2,129 175 2,304 1,223 (185) 1,038
------ ----- ------ ------ ----- ------
Total interest expense 3,354 (61) 3,293 2,998 (725) 2,273
------ ----- ------ ------ ----- ------
Net change in net interest
Income $1,470 $ 212 $1,682 $1,666 ($131) $1,535
====== ===== ====== ====== ===== ======
26
Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from the interest rate
risk inherent in its lending and deposit taking activities. To that end,
management actively monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest
rates. A sudden and substantial change in interest rates may adversely impact
the Company's earnings to the extent that the yields on interest-sensitive
assets and interest-sensitive liabilities do not change at the same speed, to
the same extent, or on the same basis. The Company monitors the impact of
changes in interest rates between assets and liabilities as discussed in the
Company's Interest Rate Sensitivity Analysis under the Asset/Liability
Management caption in the Company's Annual Report to Shareholders for Fiscal
2000 (see Exhibit 13 hereto). Although interest rate sensitivity gap analysis is
a useful measurement tool and contributes towards effective asset liability
management, it is difficult to predict the effect of changing interest rates
based solely on that measure. An alternative methodology is to estimate the
impact on net interest income and on net portfolio value of an immediate change
in interest rates in 100 basis point increments. Net portfolio value ("NPV") is
defined as the net present value of assets, liabilities, and off-balance sheet
contracts. The chart below is the estimated effect of immediate changes in
interest rates at the specified levels at June 30, 2000 and 1999, calculated in
compliance with Thrift Bulletin No. 13A:
Year Ended June 30, 2000
-------------------------------------------------------------------------------------------------------------------
Change in Interest Estimated Net Market Value
Rates in Basis Points of Portfolio Equity NPV as % of PV of Average Assets
--------------------- ------------------- --------------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change
------------ ------ -------- -------- --------- ------
(Dollars in Thousands)
300 $ 11,239 $ (27,997) -71% 2.42% (535)
200 20,147 (19,089) -49% 4.22% (355)
100 30,107 (9,658) -25% 6.02% (175)
Static 39,236 -- -- 7.77% --
(100) 48,425 9,189 23% 9.34% 157
(200) 56,015 16,779 43% 10.55% 278
(300) 69,669 30,433 78% 12.67% 490
Year Ended June 30, 1999
-------------------------------------------------------------------------------------------------------------------
Change in Interest Estimated Net Market Value
Rates in Basis Points of Portfolio Equity NPV as % of PV of Average Assets
--------------------- ------------------- --------------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change
------------ ------ -------- -------- --------- ------
(Dollars in Thousands)
300 $ 11,975 $ (27,443) -70% 2.86% (580)
200 20,823 (18,595) -47% 4.83% (382)
100 29,578 (9,331) -24% 6.80% (186)
Static 39,418 -- -- 8.66% --
(100) 48,191 8,773 22% 10.31% 166
(200) 56,700 17,282 44% 11.83% 318
(300) 66,518 27,100 69% 13.51% 485
27
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV table presented above assumes that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV table provides an indication of the
Company's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and will differ from actual results.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset/liability
structure to obtain the maximum yield/cost spread on that structure. The Company
relies primarily on its asset/liability structure to control interest rate risk.
The Company continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost-effective
and, therefore, has focused its efforts on increasing the Company's yield/cost
spread through wholesale and retail opportunities.
Ratios
The following table shows certain income and financial condition ratios
for the periods indicated. All averages are based on month-end balances.
Year Ended June 30,
---------- ------------ ------------
2000 1999 1998
---------- ------------ ------------
Return on average assets
(income divided by average
total assets) 0.94% 1.02% 1.07%
Return on average equity
(income divided by average equity) 13.34% 12.55% 12.03%
Equity-to-assets ratio
(average equity divided by
average assets) 7.08% 8.15% 8.86%
Dividend pay-out ratio 30.35% 27.39% 33.90%
28
Subsidiaries of First Financial
At June 30, 2000, the Bank was permitted by regulations to invest up to
2% of assets in the capital stock of, and secured and unsecured loans to,
subsidiary corporations or service corporations and under certain circumstances
may make conforming loans to service corporations in greater amounts. As a
Pennsylvania-chartered savings institution, the Bank may diversify into any
business activity approved in advance by the Department. In addition, First
Financial could invest up to 30% of its assets in finance subsidiaries. Such
subsidiaries must be limited purpose subsidiaries whose sole purpose is to issue
debt or equity securities that the parent association is authorized to issue
directly and to remit the proceeds of such issuance to the parent association.
The Bank operates (as a wholly owned subsidiary) D & S Service
Corporation ("D & S Service"), which has participated in the development for
sale of residential properties, in particular condominium conversions and also
the development of commercial properties in order for the Bank to expand its
facilities to accommodate its growth. All of such projects have either been
located in or within close proximity to the Bank's primary market area. D & S
Service operates two wholly owned subsidiaries: Wildman Projects and D & F
Projects, Inc.
At June 30, 2000, the Bank was authorized to have a maximum investment
of $10.08 million in its one first-tier wholly-owned subsidiary, D & S Service.
As of such date, the Bank had invested $1.01 million in this subsidiary.
Acquisition
On May 29, 1998, the Company acquired PCIS, a full service investment
advisory and securities brokerage firm. The transaction was accounted for as a
pooling of interests and the shareholders of PCIS received 23.4239 shares of
Holding Company common stock for each share of PCIS stock. Approximately 134,000
shares of Holding Company common stock were issued in the exchange.
Competition
First Financial encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from commercial banks, other
savings and loan associations, savings banks and credit unions conducting
business in its primary market area. The Bank also encounters competition for
deposits from money market and other mutual funds, as well as corporate and
government securities and insurance companies. The principal methods used by the
Bank to attract deposit accounts include offering a variety of services and
interest rates and providing convenient office locations and expanded banking
hours. The Bank's competition for real estate and other loans comes principally
from other savings institutions, credit unions, commercial banks, mortgage
banking companies, insurance companies, and other institutional lenders. First
Financial competes for loans through interest rates, loan maturities, loan fees
and the quality of service extended to borrowers and real estate brokers.
29
Employees
The Company had 123 full-time employees and 29 part-time employees as
of June 30, 2000. None of these employees are represented by a collective
bargaining agent and the Company believes that it enjoys good relations with its
personnel.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company and the Bank in effect as of the
date of this Form 10-K. The description of these laws and regulations, as well
as descriptions of laws and regulations contained elsewhere herein, does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of the Company
Federal Regulation-General. The Company is a registered savings and
loan holding company within the meaning of the Home Owners' Loan Act. As such,
the Company is subject to OTS regulations, examinations, supervision and
reporting requirements. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
The Holding Company operates as a unitary savings and loan holding
company. Generally, there are only limited restrictions on the activities of a
unitary savings and loan holding company which applied to become or was a
unitary savings and loan holding company prior to May 4, 1999 (which the