UNITED STATES
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996, 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. 0-12870.
FIRST WEST CHESTER CORPORATION
------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2288763
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
----------------------------------------------- -----
(Address of principal executive office) (Zip code)
(610) 692-1423
--------------
(Registrant's telephone number, including area code)
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
---
The number of shares outstanding of Common Stock of the Registrant as of April
1, 1996 was 1,712,941.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INDEX
-----
PAGE
----
Part I. FINANCIAL INFORMATION
Consolidated Statements of Condition
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income
Three-Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Stockholder's Equity 5
Consolidated Statements of Cash Flows
Three-Months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-19
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K 20-22
Signatures 23
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
Unaudited
(Dollars in thousands) March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,207 $ 19,944
Federal funds sold 16,500 24,700
----------- ----------
Total cash and cash equivalents 33,707 44,644
----------- ----------
Interest bearing deposits with banks 1,000 --
----------- ----------
Investment securities held-to-maturity (market value of $19,845 and
$23,213 at March 31, 1996 and December 31, 1995, respectively) 19,794 23,048
----------- ----------
Investment securities available-for-sale at market value 76,033 70,463
----------- ----------
Loans 246,824 242,587
Less allowance for possible loan losses (4,667) (4,506)
----------- ----------
Net loans 242,157 238,081
----------- ----------
Premises and equipment 5,909 5,521
Other assets 7,422 6,743
----------- ----------
TOTAL ASSETS $ 386,022 $ 388,500
========== =========
LIABILITIES
Deposits
Non-interest bearing $ 54,908 $ 63,393
Interest-bearing 283,697 280,533
---------- ---------
Total deposits 338,605 343,926
Securities sold under repurchase agreements 11,078 8,858
Other liabilities 5,420 5,024
---------- ---------
Total liabilities 355,103 357,808
---------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1 - authorized, 5,000,000 shares;outstanding
1,712,941 at March 31, 1996 and December 31, 1995, respectively;
excluding shares in treasury 87,000 at March 31, 1996 and
December 31, 1995 1,800 1,800
Additional paid-in capital 3,301 3,301
Retained earnings 28,148 27,542
Net unrealized loss on securities available-for-sale (444) (65)
Treasury stock, at cost (1,886) (1,886)
---------- ---------
Total stockholders' equity 30,919 30,692
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 386,022 $ 388,500
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share)
Three Months Ended
March 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 5,556 $ 5,577
Investment securities 1,438 1,169
Federal funds sold 221 5
Deposits in banks 3 --
-------- --------
Total interest income 7,218 6,751
-------- -------
INTEREST EXPENSE
Deposits 2,959 2,420
Securities sold under repurchase agreements 83 90
Other borrowings -- 59
-------- --------
Total interest expense 3,042 2,569
-------- --------
Net interest income 4,176 4,182
Provision for loan losses 276 349
-------- --------
Net interest income after provision
for possible loan losses 3,900 3,833
-------- --------
NON-INTEREST INCOME
Financial Management Services 453 459
Service charges on deposit accounts 201 230
Other 179 139
-------- --------
Total non-interest income 833 828
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,902 1,728
Net occupancy and equipment 569 592
FDIC deposit insurance 1 169
Bank shares tax 77 75
Other 710 703
-------- --------
Total non-interest expense 3,259 3,267
-------- --------
Income before income taxes 1,474 1,394
INCOME TAXES 474 418
-------- --------
NET INCOME $ 1,000 $ 976
======== ========
PER SHARE DATA
Net income $ 0.58 $ 0.54
======== ========
Dividends declared $ 0.23 $ 0.20
======== ========
Weighted average shares outstanding 1,713,654 1,799,901
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
--------- --------
<S> <C> <C>
Balance at January 1, $ 30,692 $ 28,299
Net income to date 1,000 976
Cash dividends declared (394) (360)
Net unrealized gain (loss) on securities available-for-sale (379) 742
------- -------
Balance at March 31, $ 30,919 $ 29,657
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
-------------------------------
(Dollars in thousands) 1996 1995
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,000 $ 976
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 160 152
Provision for loan losses 276 349
Amortization of investment security premiums
and accretion of discounts 66 62
Amortization of deferred fees on loans 9 24
Increase in other assets (483) (882)
Increase in other liabilities 447 901
------- -------
Net cash provided by operating activities 1,475 1,582
------- -------
INVESTING ACTIVITIES
Increase in interest bearing deposits in banks (1,000) --
Increase in loans (4,361) (9,385)
Proceeds from maturities of investment securities available-for-sale 3,824 2,514
Proceeds from maturities of investment securities held-to-maturity 3,231 328
Purchases of investment securities available-for-sale (10,012) (2,160)
Purchase of premises and equipment, net (548) (87)
------- -------
Net cash used in investing activities (8,866) (8,790)
------- -------
FINANCING ACTIVITIES
Increase (decrease) in deposits (5,321) (858)
Increase in securities sold under repurchase agreements 2,220 3,383
Cash dividends (445) (384)
------- -------
Net cash provided by (used in) financing activities (3,546) 2,141
------- -------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (10,937) (5,067)
Cash and cash equivalents at beginning of year 44,644 21,981
------- -------
Cash and cash equivalents at end of period $ 33,707 $ 16,914
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of
operations for the interim period presented have been included. For
further information, refer to the consolidated financial statements
and footnotes thereto included in First West Chester Corporation and
Subsidiaries' (the "Corporation") Annual Report on Form 10-K for the
year ended December 31, 1995.
2. The results of operations for the three-month period ended March 31,
1996 are not necessarily indicative of the results to be expected for
the full year.
3. Per share data is based on the weighted average number of shares of
common stock outstanding during the period.
4. On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting for Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." SFAS No. 114 requires that a creditor measure
impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a
loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. Regardless of the measurement
method, a creditor must measure impairment based on the fair value of
the collateral when the creditor determines that foreclosure is
probable. SFAS No. 118 allows creditors to use existing methods for
recognizing interest income on impaired loans.
The Bank has identified a loan as impaired when it is probable that
interest and principal will not be collected according to the
contractual terms of the loan agreement. The accrual of interest is
discontinued in such loans and no income is recognized until all
recorded amounts of interest and principal are recovered in full.
Loan impairment is measured by estimating the expected future cash
flows and discounting them at the respective effective interest rate
or by valuing the underlying collateral. The recorded investment in
these loans and the valuation for credit losses related to loan
impairment are as follows:
(Dollars in thousands) March 31, 1996 December 31, 1995
-------------- -----------------
Principal amount of impaired loans $ 500 $ 590
Less valuation allowance 380 433
---- ----
$ 120 $ 157
===== =====
7
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
The activity in the valuation allowance for the quarters ending March
31, are as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Valuation allowance at beginning of period $ 433 $ 380
Provision for loan impairment - -
Direct charge-offs (84) -
Recoveries 31 -
---- ----
Valuation allowance at end of period $ 380 $ 380
==== ====
</TABLE>
Total cash collected on impaired loans during the quarter ended March
31, 1996 was $5 thousand, all of which was credited to the principal
balance outstanding on such loans and none was recognized as interest
income. Interest that would have been accrued on impaired loans
during the quarter ended March 31, 1996 was $12 thousand. Interest
income recognized during the quarter ended March 31, 1996 was $0
thousand.
Total cash collected on impaired loans during the quarter ended March
31, 1995 was $1,393 thousand, of which $1,221 thousand was credited
to the principal balance outstanding on such loans and $172 thousand
was recognized as interest income. Interest that would have been
accrued on impaired loans during the quarter ended March 31, 1995 was
$44 thousand.
During the quarter ended March 31, 1995, two impaired loans totaling
$699 thousand were transferred to Other Real Estate Owned and one
impaired loan for $500 thousand was transferred to the Corporation's
real estate subsidiary, 323 East Gay Street Corp ("EGSC"), as an
equity investment. The $500 thousand impaired loan that was
transferred to EGSC in the first quarter of 1995 was liquidated in
May 1996. The proceeds from the liquidation were in excess of
$600,000.
5. The Financial Accounting Standards Board issued a new standard, SFAS
No. 123, "Accounting for Stock-Based Compensation," which contains a
fair-value based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting
for employees stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock
options using APB Opinion 25 are required to make pro forma
disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been
applied. The Corporation has not determined which method it will
follow in the future, but anticipates following APB Opinion 25. The
Corporation will be required to adopt the new standard for its year
ended December 31, 1996.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for the three months ended March 31, 1996 was $1,000 thousand,
an increase of $24 thousand or 2.5% from $976 thousand for the same period in
1995, primarily the result of an industry wide decrease in FDIC insurance
premiums and a lower provision for loan losses, partially offset by tighter net
interest margins and increased operating expenses. Earnings per share for the
three months ending March 31, 1996 were $0.58 per share, a $0.04 or 7.4%
increase over the same period in 1995. Performance ratios for the quarter ended
March 31, 1996 decreased compared to the same ratios for the quarter ended March
31, 1995 as shown below due to growth in average deposits and tighter net
interest margins. There has been a noticeable increase in pricing and fee
competition on loans over $500,000 (new and renewals) during the past 60 days.
It is anticipated that this pricing pressure along with increased operating
costs relating to building improvements and technology projects (see page 19)
will affect net income over the next 12 months. Cash dividends declared during
the first quarter of 1996 increased to $0.23 per share, a 15.0% increase
compared to $0.20 per share in the first quarter of 1995. Over the past ten
years, the Corporation's practice has been to pay a dividend of at least 35.0%
of net income.
<TABLE>
<CAPTION>
March December
------------------------------ ----------
1996 1995 1995
---- ---- --------
PERFORMANCE RATIOS
------------------
<S> <C> <C> <C>
Return on average assets 1.05% 1.12% 1.14%
Return on average equity 12.99% 13.64% 13.68%
Earnings retained 60.60% 63.11% 62.05%
Dividend payout ratio 39.40% 36.89% 37.95%
Book value per share $18.05 $16.47 $17.92
</TABLE>
NET INTEREST INCOME
Net interest income is the difference between interest income on earning
assets and interest expense on interest-bearing liabilities. Net interest income
for the three-month period ended March 31, 1996, on a tax equivalent basis, was
$4,234 thousand, compared to $4,244 thousand for the same period in 1995. Net
yield on interest earning assets, on a tax equivalent basis was 4.75% for the
three-month period ended March 31, 1996 compared to 5.24% for the same period in
1995. Average interest earning assets increased approximately $32.5 million to
$356.4 million during the twelve month period ending March 31, 1996 compared to
$323.9 million in the same period last year. The increase in average earnings
assets was a direct result of certificate of deposit growth during the twelve
month period ending March 31, 1996. This inflow of funds was directed into
investments and federal funds sold rather than higher yielding loans. As a
result, the overall net yield on interest earning assets declined. The
Corporation anticipates continued pressure on net yield on interest earning
assets as competition for new loan business remains very strong and incremental
deposit growth becomes more rate sensitive.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three-Months
Ended March 31,
---------------
YIELD ON 1996 1995
- -------- ------ ------
Interest Earning Assets 8.17% 8.41%
Interest Bearing Liabilities 4.18% 3.89%
---- ----
Net Interest Spread 3.99% 4.52%
Contribution of Interest Free Funds 0.76% 0.72%
----- ----
Net Yield on Interest Earning Assets 4.75% 5.24%
==== ====
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold for the three-month period ended
March 31, 1996 increased $216 thousand to $221 thousand when compared to the
same period in 1995. The increase in 1996's first quarter federal funds sold
interest income is primarily attributable to a $15.9 million increase in average
balances and a 15-basis point (a basis point equals one hundredth of one
percent) increase in rates compared to the same period in 1995.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased $263 thousand or 22.2% for the three-month period ended March 31, 1996
to $1,450 thousand compared to the same period in 1995. The increase is due to
an increase in average balances of $16.5 million and a 6-basis point increase in
the yield earned on securities. The $16.5 million increase in investment
securities is a result of certificate of deposit growth in conjunction with
reduced loan demand.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio decreased $19 thousand or 0.3% to $5,602 thousand
for the three-month period ended March 31, 1996, compared to $5,621 thousand for
the three-month period ended March 31, 1995. The decrease in interest income for
the three-month period ended March 31, 1996 is attributable to a $131 thousand
decrease in average loans outstanding and a 2-basis point decrease in rates
earned. Competition for new and existing loan relationships has been very strong
throughout 1995 and 1996. There has been a noticeable increase in pricing and
fee competition on large (over $500,000) loans (new and renewals) during the
past 60 days. It is anticipated that this pricing pressure will reduce overall
loan yields and net interest margins. Fee reductions will affect non-interest
income and non-interest expenses.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts increased $539 thousand or 22.3% for
the three-month period ended March 31, 1996 to $2,959 thousand, compared to the
same period in 1995. The increase is a result of a 32-basis point increase in
the rates paid on interest-bearing deposits and an increase in average
interest-bearing deposits of $32.4 million compared to the same period in 1995.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
While total average interest bearing deposits have grown 13.0% in the
twelve-month period ended March 31, 1996, the components have not grown
proportionately. During the twelve-month period ended March 31, 1996, average
savings, NOW and money market deposits declined $547 thousand, while average
certificates of deposit and other time deposits increased $32.9 million. The
Corporation's effective rate on interest bearing deposits increased from 3.89%
in the first quarter of 1995 to 4.21% in the first quarter of 1996. Steps are
being taken to try to reduce interest expense without causing deposit run-off.
Competition for deposits from non-banking institutions such as mutual fund
companies continues to grow.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements decreased
$7 thousand or 7.8% to $83 thousand for the three-month period ended March 31,
1996 compared to $90 thousand for the three-month period ended March 31, 1995.
The decrease is attributable to a $1,205 thousand decrease in average securities
sold under repurchase agreements outstanding, partially offset by a 10-basis
point increase in rates paid on securities sold under repurchase agreements.
INTEREST EXPENSE ON OTHER BORROWINGS
Interest expense on other borrowings was $0 thousand for the three-month
period ended March 31, 1996 compared with $59 thousand in the same period in
1995. There were no other borrowings in the first quarter of 1996 compared to
$3,848 thousand in average other borrowings outstanding during the first quarter
of 1995. The Corporation met its short-term funding requirements through the
increase in deposits during the first quarter of 1996.
PROVISION FOR POSSIBLE LOAN LOSSES
During the first quarter of 1996, the Corporation recorded a $276
thousand provision for possible loan losses compared to $349 thousand in 1995.
The allowance for possible loan losses as a percentage of total loans was 1.89%
as of March 31, 1996 compared to 1.45% as of March 31, 1995. The Corporation
continues to deal with non-performing loans by building up the allowance for
possible loan losses and aggressively charging-off loans deemed uncollectible.
See the section titled "Allowance For Possible Loan Losses" for additional
discussion.
NON-INTEREST INCOME
Total non-interest income increased $5 thousand or 0.6% to $833 thousand
for the three months ended March 31, 1996, compared to $828 thousand for the
same period in 1995. The primary component of non-interest income is Financial
Management Services revenue, which decreased $6 thousand or 1.3% to $453
thousand for the three months ended March 31, 1996 from $459 thousand for the
three months ended March 31, 1995. The decrease in Financial Management Services
revenue is a result of the loss of one account relationship, partially offset by
new business development. Market value of Financial Management Services assets
under management grew $1.5 million or 0.6% from $256.9 million at March 31, 1995
to $258.3 million at March 31, 1996. Growth in Financial Management Services
assets under management is primarily the result of market appreciation,
partially offset by the loss of one account relationship.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
------------------------------- --------------------------------
Daily Daily
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 16,271 $ 221 5.43% $ 379 $ 5 5.28%
Interest bearing deposits in banks 187 3 6.42% -- -- --
Investment securities
Taxable 92,564 1,405 6.07% 74,876 1,120 5.98%
Tax-exempt(1) 2,637 45 6.83% 3,815 67 7.02%
------- ----- ------- -----
Total investment securities 95,201 1,450 6.09% 78,691 1,187 6.03%
------- ----- ------- -----
Loans(2)
Taxable 238,009 5,432 9.13% 238,111 5,460 9.17%
Tax-exempt(1) 6,728 170 10.11% 6,757 161 9.53%
------- ----- ------- -----
Total loans 244,737 5,602 9.16% 244,868 5,621 9.18%
------- ----- ------- -----
Total interest earning assets 356,396 7,276 8.17% 323,938 6,813 8.41%
Non-interest earning assets
Allowance for possible loan losses (4,607) (3,381)
Cash and due from banks 16,155 15,989
Other assets 12,630 12,084
------- -------
Total assets $380,574 $348,630
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $163,710 $1,277 3.12% $164,257 $1,356 3.30%
Certificates of deposits and other time 117,531 1,682 5.72% 84,614 1,064 5.03%
------- ----- ------- -----
Total interest bearing deposits 281,241 2,959 4.21% 248,871 2,420 3.89%
Securities sold under repurchase agreements 10,057 83 3.30% 11,262 90 3.20%
Other borrowings -- -- -- 3,848 59 6.13%
------- ----- ------- -----
Total interest bearing liabilities 291,298 3,042 4.18% 263,981 2,569 3.89%
------- ----- ------- -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 53,119 51,636
Other liabilities 5,371 4,390
------- -------
Total liabilities 349,788 320,007
Stockholders' equity 30,786 28,623
------- -------
Total liabilities and stockholders' equity $380,574 $348,630
======== ========
Net interest income $4,234 $4,244
===== =====
Net yield on interest earning assets 4.75% 5.24%
===== =====
<FN>
(1) The indicated income and annual rate are presented on a taxable equivalent
basis using the Federal marginal rate of 34% adjusted for the 20% interest
expense disallowance for 1996 and 1995.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Service charges on deposit accounts decreased $29 thousand or 12.6% to
$201 thousand for the three months ended March 31, 1996 from $230 thousand for
the same period in 1995. This decline relates to increases in the earnings
credit paid to commercial checking customers, partially offset by an internal
review of unprofitable accounts and changes in service charges.
Other non-interest income increased $40 thousand or 28.8% to $179
thousand for the three months ended March 31, 1996 compared to $139 thousand for
the same period in 1995. This increase relates to increases in revenue from the
sale of residential mortgage loans and increases in rental income from other
real estate owned.
NON-INTEREST EXPENSE
Total non-interest expense for the first quarter of 1996 was $3,259
thousand, a decrease of $8 thousand or 0.2% from $3,267 thousand in the same
period in 1995. The various components of non-interest expense changes are
discussed below.
First quarter 1996 salaries and employee benefits increased $174 thousand
or 10.1% to $1,902 thousand compared to $1,728 thousand in first quarter 1995.
Annual employee raises and a staff increase from 172 full-time equivalents
(FTE's) employees in the first quarter of 1995 to 181 FTE's in the first quarter
of 1996 are responsible for the increase. These staffing increases reflect the
Corporation's need for additional sales and marketing personnel. The Corporation
also experienced proportionate increases in employee benefits.
Net occupancy, equipment and data processing expense was $569 thousand
for the three-month period ended March 31, 1996, a decrease of $23 thousand or
3.9% over the same period last year. The decrease in the first quarter 1996 is
primarily a result of decreased costs associated with maintenance contracts on
Bank equipment. Increases in net occupancy, equipment and data processing
expenses are expected when the depreciation changes relating to building
improvements and technology projects (See page 19) start in the second and third
quarters of this year.
FDIC insurance was $1 thousand for the three-month period ended March 31,
1996, a decrease of $168 thousand or 99.4% from $169 thousand in the same period
last year. Effective January 1, 1996, the Federal Deposit Insurance Corporation
("FDIC") reduced the Bank Insurance Fund ("BIF") deposit insurance premiums to
the statutory minimum of $500 per quarter for the best rated banks. From January
1, 1995 to May 31, 1995, the FDIC insurance was calculated based on quarter-end
deposits at a rate of $0.23 per year per $1,000 in deposits for the best rated
banks. Effective June 1, 1995, the FDIC reduced the BIF deposit insurance
premiums to $0.04 per year per $1,000 in deposits for the best rated banks. It
is anticipated that the premium for 1997 will be above the statutory minimum.
Bank shares tax increased $2 thousand or 2.7% to $77 thousand for the
three months ended March 31, 1996 compared to $75 thousand for the three months
ended March 31, 1995. The Pennsylvania Bank Shares Tax is calculated on
quarter-end Bank stockholders' equity and paid annually.
Total other non-interest expense increased $7 thousand or 1.0% to $710
thousand for the three months ended March 31, 1996 compared to $703 thousand for
the same period in 1995. The increase in non-interest
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
expenses is due to increases in professional fees and by a sales tax refund of
approximately $40 thousand received in the first quarter of 1995. The increase
is partially offset by the adoption of SFAS No. 116, "Accounting for
Contributions Received and Contributions Made" on January 1, 1995. The adoption
of SFAS No. 116 required the Corporation to recognize conditional promises to
give when the promises became unconditional. This resulted in an increase in
other non-interest expenses during the first quarter of 1995 by $117 thousand.
INCOME TAXES
Income tax expense for the three-month period ended March 31, 1996 was
$474 thousand, compared to $418 thousand in the same period last year. This
represents an effective tax rate of 32% and 30% for the first quarter of 1996
and 1995, respectively. The primary reason for the increase in the effective tax
rate is a decrease in tax-exempt instruments as a percentage of total assets.
Average tax-exempt assets as a percentage of total average assets was 2.5% and
3.0% at March 31, 1996 and 1995, respectively.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Corporation's ability to meet deposit withdrawals either on demand or at
contractual maturity, to repay borrowings as they mature and to make new loans
and investments as opportunities arise. Liquidity is managed on a daily basis
enabling Senior Management to effectively monitor changes in liquidity and to
react accordingly to fluctuations in market conditions. The primary source of
liquidity for the Corporation is its available-for-sale portfolio of liquid
investment grade securities. Funding sources include NOW, money-market, savings
and smaller denomination certificates of deposit accounts. The Corporation
considers funds from such sources to comprise its "core" deposit base because of
the historical stability of such sources of funds. Additional funding comes from
the Corporation's non-interest bearing demand deposit accounts. Other deposit
sources include a three-tiered savings product and certificates of deposit in
excess of $100,000. Details of core deposits, non-interest bearing demand
deposit accounts and other deposit sources are highlighted in the following
table: `
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1996 December 31, 1995 Average Balance
---------------------- --------------------- ----------------------
Average Effective Average Effective Dollar Percentage
Deposit Type Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $ 45,852 2.26% $ 42,974 2.32% $ 2,878 6.70%
Money Market 27,994 3.42 29,610 3.23 (1,616) (5.46)
Statement Savings 47,102 3.20 46,347 3.64 755 1.63
Other Savings 4,389 2.73 4,657 2.73 (268) (5.75)
CD's Less than $100,000 104,991 5.77 89,866 5.67 15,125 16.83
------- ------- -------
Total Core Deposits 230,328 4.20 213,454 4.15 16,874 7.91
Non-Interest Bearing
Demand Deposit Accounts 53,119 - 52,177 - 942 1.81
------- ------- -------
Total Core and Non-Interest
Bearing Deposits 283,447 - 265,631 - 17,816 6.71
Tiered Savings 38,373 4.10 38,744 4.29 (371) (0.96)
CD's Greater than $100,000 12,540 5.33 11,331 5.11 1,209 10.67
------- -------- -------
Total Deposits $334,360 - $ 315,706 - $ 18,654 5.91
======= ======== =======
</TABLE>
The Bank, as a member of the Federal Home Loan Bank (the "FHLB"),
maintains a line of credit secured by the Bank's mortgage-related assets. As of
March 31, 1996, this line of credit was approximately $8 million. The line of
credit at the FHLB at December 31, 1995 was approximately $34 million. The
reduction in the line of credit available is the result of a system wide policy
change by the FHLB. However, the Bank's overall borrowing capacity at the FHLB
remains unchanged at approximately $84 million. The goal of interest rate
sensitivity management is to avoid fluctuating net interest margins, and to
enhance consistent growth of net interest income through periods of changing
interest rates. Such sensitivity is measured as the difference in the volume of
assets and liabilities in the existing portfolio that are subject to repricing
in a future time period. The Corporation's net interest rate sensitivity gap
within one year is a negative $66.8 million or 17.3% of total assets at March
31, 1996 compared with a negative $45.6 million or 11.7% of total assets at
December 31, 1995. Management is aware of this negative gap position and is
taking steps to maintain net interest margins at acceptable levels.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST SENSITIVITY ANALYSIS
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
One Over
(Dollars in thousands) Within through five Non-rate
one year five years year sensitive Total
-------- ---------- ---- --------- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 16,500 $ -- $ -- $ -- $ 16,500
Investment securities 35,302 47,110 13,415 -- 95,827
Interest bearing deposits in banks 1,000 -- -- -- 1,000
Loans and leases 126,972 107,997 11,855 (4,667) 242,157
Cash and cash equivalents -- -- -- 17,207 17,207
Other assets -- -- -- 13,331 13,331
---------- --------- --------- ---------- --------
Total assets $ 179,774 $ 155,107 $ 25,270 $ 25,871 $ 386,022
========== ========= ========= ========== ========
LIABILITIES AND CAPITAL
Interest bearing deposits $ 235,499 $ 48,198 $ -- $ -- $ 283,697
Non-interest bearing deposits -- -- -- 54,908 54,908
Borrowed funds 11,078 -- -- -- 11,078
Other liabilities -- -- -- 5,420 5,420
Capital -- -- -- 30,919 30,919
---------- --------- --------- ---------- --------
Total liabilities & capital $ 246,577 $ 48,198 $ -- $ 91,247 $ 386,022
========== ========= ========= ========== ========
Net interest rate
sensitivity rate $ (66,803) $ 106,909 $ 25,270 $ (65,376) $ --
========== ========= ========= ========== ========
Cumulative interest rate
sensitivity gap $ (66,803) $ 40,106 $ 65,376 $ -- $ --
========== ========= ========= ========== ========
Cumulative interest rate
sensitivity gap divided
by total assets (17.3%) 10.4% 16.9%
===== ===== =====
</TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is an amount that management
believes will be adequate to absorb possible loan losses on existing loans that
may become uncollectible based on evaluations of the collectibility of loans.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, adequacy of
collateral, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
----------------------------- ------------
1996 1995 1995
----------- ---------- ------------
<S> <C> <C> <C>
Balance at beginning of period $ 4,506 $ 3,303 $ 3,303
--------- -------- ---------
Provision charged to operating expense 276 349 1,666
--------- -------- ---------
Recoveries of loans previously charged-off 34 4 79
Loans charged-off (149) (45) (542)
--------- -------- ---------
Net loans charged-off (115) (41) (463)
--------- -------- ---------
Balance at end of period $ 4,667 $ 3,611 $ 4,506
========= ======== =========
Period-end loans outstanding $ 246,824 $ 248,446 $ 242,587
Average loans outstanding $ 244,737 $ 244,868 $ 243,657
Allowance for possible loan losses as a
percentage of period-end loans outstanding 1.89% 1.45% 1.86%
Ratio of net charge-offs to average loans
outstanding 0.05% 0.02% 0.19%
</TABLE>
Non-performing loans include loans on non-accrual status and loans past
due 90 days or more and still accruing. The Bank's policy to write down all
non-performing loans to net realizable value based on updated appraisals.
Non-performing loans are generally collateralized by real estate and are in the
process of collection. Management is not aware of any loans other than those
included in the following table that would be considered potential problem loans
and cause management to have doubts as to the borrower's ability to comply with
loan repayment terms.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
-------------------------- --------------
1996 1995 1995
----- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 261 $ 369 $ 419
Non-accrual loans 808 837 726
----- ----- -----
Total non-performing loans 1,069 1,206 1,145
Other real estate owned 1,447 1,385 1,447
----- ----- -----
Total non-performing assets $2,516 $2,591 $2,592
===== ===== =====
Non-performing loans as a percentage
of total loans 0.43% 0.49% 0.47%
Allowance for possible loan losses as a
percentage of non-performing loans 436.58% 299.42% 393.54%
Non-performing assets as a percentage of
total loans and other real estate owned 1.01% 1.04% 1.06%
Allowance for possible loan losses as a
percentage of non-performing assets 185.49% 139.37% 173.84%
</TABLE>
The allowance for possible loan losses as a percentage of non-performing
loans indicates that the allowance for possible loan losses is sufficient to
cover the principal of all non-performing loans. Other real estate owned
("OREO") represents residential and commercial real estate written down to
realizable value (net of estimated disposal costs) based on professional
appraisals. Management intends to liquidate OREO in the most expedient and
cost-effective manner. This process could take up to twenty-four months,
although swifter disposition is anticipated.
CHANGES IN EXECUTIVE MANAGEMENT
Effective January 16, 1996, William E. Hughes Sr., Executive Vice
President, assumed all the duties and responsibilities of Richard C. Cloud,
Executive Vice President, who is retiring on June 30, 1996. Mr. Hughes has over
30 years experience in commercial lending and has been with the Bank since 1984.
Effective March 29, 1996, Peter J. D'Angelo assumed Mr. Cloud's duties as
Cashier of the Bank and Corporation. Mr D'Angelo has been Vice President of the
Bank since 1986. Additional personnel changes in the lending functions are
anticipated over the next 12 months. Effective December 15, 1995, J. Duncan
Smith was promoted to Senior Vice President and Comptroller of the Bank. Mr.
Smith has been Vice President and Comptroller of the Bank since 1993. Mr. Smith
also serves as Treasurer of the Corporation.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS
During the second quarter 1996, the Corporation completed renovations to
the first floor of the Miller building at a cost of approximately $408,000. This
building includes a new customer service contact area for the Financial
Management Services Department and a complete renovation of the Market Street
Office. Renovations to the former Commonwealth Bank building, which was
purchased in 1995, are continuing with occupancy expected in the third quarter.
Estimated improvements to the property will cost an estimated $400,000.
The Corporation has two technology projects in process: Branch teller
automation ("BTA") and imaging of customer checking ("ICC"). The BTA project is
expected to cost $500,000 and was scheduled for completion at the end of the
first quarter. Due to a data communications issue, the BTA project has been
delayed and is not expected to be fully operational until the third quarter. The
ICC project, with an initial cost of $450,000, is on schedule and is expected to
be operational in the third quarter.
No depreciation has been taken on any of the above mentioned buildings or
technology projects.
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by
the Federal Reserve Board for bank holding companies. The Bank is also subject
to similar capital requirements adopted by the Office of the Comptroller of the
Currency. Under these requirements, the regulatory agencies have set minimum
thresholds for Tier I Capital, Total Capital, and Leverage ratios. At March 31,
1996, both the Corporation's and the Bank's capital exceeded all minimum
regulatory requirements, and were considered "well capitalized" as defined in
the regulations issued pursuant to the FDIC Improvement Act of 1992. The
Corporation's Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.
<TABLE>
<CAPTION>
March 31, December 31,
RISK-BASED ------------------------ ------------ "Well Capitalized"
CAPITAL RATIOS 1996 1995 1995 Requirements
- -------------- ---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Leverage Ratio 8.19% 8.71% 8.47% 5.00%
Tier I Capital Ratio 11.70% 11.0 11.51% 6.00%
Total Risk-Based Capital Ratio 12.95% 12.34% 12.77% 10.00%
</TABLE>
The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current recommendations by the regulatory authorities which,
if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
for the Corporation was 9.84%, 8.52% for the three months ended March 31, 1996
and 1995, respectively.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Various actions and proceedings are presently pending to which
the Corporation is a party. These actions and proceedings
arise out of routine operations and, in management's opinion,
will not, either individually or in the aggregate, a material
adverse effect on the consolidated financial position of the
Corporation and its subsidiaries.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
The Annual Meeting (the "Meeting") of the Shareholders of
First West Chester Corporation (the "Corporation") was held on
March 19, 1996. Notice of the Meeting was mailed to
shareholder of record on or about February 28, 1996, together
with proxy solicitation materials prepared in accordance with
Section 14(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder.
The matters submitted to a vote of Shareholders at the meeting
were the following:
(1) The election of four Class III directors,
with each director to serve until the 1999
Annual Meeting of the Shareholders and until
the election and qualification of his
respective successor;
(2) The ratification of the Corporation's 1995
Stock Option Plan; and
(3) The ratification of the appointment of Grant
Thornton, LLP as the Corporation's
independent public accountants for the year
ending December 31, 1996.
There was no solicitation in opposition to the nominees of the
Board of Directors for election to the Board of Directors and
all such nominees were elected. The number of votes cast for
or withheld, as well as the number of abstentions and broker
non-votes for each of the nominees for election to the Board
of Directors were as follows:
20
<PAGE>
PART II - OTHER INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Abstentions and
Nominee For Withheld Broker Non-Votes
------- --- -------- ----------------
<S> <C> <C> <C>
Richard M. Armstrong 1,241,380 182,907 0
John A. Featherman, III 1,252,233 172,054 0
John S. Halsted 1,252,533 171,754 0
Devere Kauffman 1,246,330 177,957 0
</TABLE>
The names of the other directors whose terms of office as
Directors continued after the Meeting are as follows: Charles
E. Swope, John J. Ciccarone, M. Robert Clarke, Edward J.
Cotter, Clifford E. DeBaptiste, J. Carol Hanson, David L.
Peirce and John B. Waldron.
There was no solicitation in opposition to the 1995 Stock
Option Plan to approve the Corporation's 1995 Stock Option
Plan, and the Plan was ratified. The number of votes cast for
or against as well as the number of abstentions and broker
non-votes, for the proposal were as follows:
For Against Abstentions Broker non-votes
--- ------- ----------- ----------------
1,397,671 21,112 5,504 0
There was no solicitation in opposition to the appointment of
Grant Thornton, LLP as the Corporation's independent public
accountants for the year ending December 31, 1996 to approve
Grant Thornton, LLP as the Corporation's independent public
accountants, and the appointment was ratified. The number of
votes cast for or against as well as the number of abstentions
and broker non-votes, for the ratification were as follows:
For Against Abstentions Broker non-votes
--- ------- ----------- ----------------
1,401,465 75 22,747 0
There was no other business that came before the Annual
Meeting or matters incident to the conduct of the Annual
Meeting.
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
The following is a list of the exhibits incorporated by
reference into this Report:
21
<PAGE>
PART II - OTHER INFORMATION - CONTINUED
3(a). Certificate of Incorporation.
----------------------------
(i) Copy of the Corporation's Certificate of Incorporation,
filed on March 9, 1984, is incorporated by reference to Exhibit 3(a)(iii) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1988.
(ii) Copy of the Corporation's Certificate of Amendment to
Certificate of Incorporation filed with the Secretary of the Commonwealth of
Pennsylvania on March 23, 1984, is incorporated by reference to Exhibit 3(a)(ii)
to the Corporation's Annual Report on Form 10-K for the year ended December 31,
1988.
(iii) Copy of the Corporation's Certificate of Amendment to
Certificate of Incorporation filed with the Secretary of the Commonwealth of
Pennsylvania on April 2, 1986, is incorporated by reference to Exhibit 3(a)(i)
to the Corporation's Annual Report on Form 10-K for the year ended December 31,
1988.
3(b). Bylaws of the Corporation, as amended. Copy of the Corporation's
--------------------------------------
Bylaws, as amended, is incorporated by reference to Exhibit 3(b) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1988.
10. Material contracts.
------------------
(a) Copy of the Corporation's 1995 Stock Option Plan, filed on
March 28, 1996, is incorporated by reference to Exhibit 10(i) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1995.
(b) Reports on Form 8-K
-------------------
No report was filed during the quarter ended March 31, 1996.
22
<PAGE>
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.
FIRST WEST CHESTER CORPORATION
Charles E. Swope
/s/ Charles E. Swope
--------------------
DATE: May 14, 1996 Charles E. Swope
President
J. Duncan Smith
/s/ J. Duncan Smith
-------------------
J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This is Exhibit 27 of First West Chester Corporation's Form 10-Q
for the quarter ended March 31, 1996
</LEGEND>
<CIK> 0000744126
<NAME> FIRST WEST CHESTER CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 17,207
<INT-BEARING-DEPOSITS> 1,000
<FED-FUNDS-SOLD> 16,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,033
<INVESTMENTS-CARRYING> 19,794
<INVESTMENTS-MARKET> 19,845
<LOANS> 246,824
<ALLOWANCE> 4,667
<TOTAL-ASSETS> 386,022
<DEPOSITS> 338,605
<SHORT-TERM> 11,078
<LIABILITIES-OTHER> 5,420
<LONG-TERM> 0
0
0
<COMMON> 1,800
<OTHER-SE> 29,119
<TOTAL-LIABILITIES-AND-EQUITY> 386,022
<INTEREST-LOAN> 5,556
<INTEREST-INVEST> 1,438
<INTEREST-OTHER> 224
<INTEREST-TOTAL> 7,218
<INTEREST-DEPOSIT> 2,959
<INTEREST-EXPENSE> 3,042
<INTEREST-INCOME-NET> 4,176
<LOAN-LOSSES> 276
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,259
<INCOME-PRETAX> 1,474
<INCOME-PRE-EXTRAORDINARY> 1,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,000
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 4.75
<LOANS-NON> 808
<LOANS-PAST> 261
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,506
<CHARGE-OFFS> 149
<RECOVERIES> 34
<ALLOWANCE-CLOSE> 4,667
<ALLOWANCE-DOMESTIC> 4,667
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
