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 September 30, 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 October
1, 1996 was 1,714,441.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INDEX
-----
PAGE
----
Part I. FINANCIAL INFORMATION
Consolidated Statements of Condition
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-20
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 21-22
Signatures 23
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Dollars in thousands)
Unaudited
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,578 $ 19,944
Federal funds sold 7,800 24,700
--------- ---------
Total cash and cash equivalents 25,378 44,644
--------- ---------
Interest bearing deposits with banks 1,000 --
--------- ---------
Investment securities held-to-maturity (market value of $16,816
and $23,213 at September 30, 1996 and December 31,
1995, respectively) 15,800 23,048
--------- ---------
Investment securities available-for-sale at market value 83,930 70,463
--------- ---------
Loans 251,192 242,587
Less allowance for possible loan losses (5,025) (4,506)
--------- ---------
Net loans 246,167 238,081
Premises and equipment 6,499 5,521
Other assets 6,944 6,743
--------- ---------
TOTAL ASSETS $ 385,718 $ 388,500
========= =========
LIABILITIES
Deposits
Non-interest bearing $ 57,500 $ 63,393
Interest bearing 280,532 280,533
--------- ---------
Total deposits 338,032 343,926
Securities sold under repurchase agreements 9,394 8,858
Other liabilities 6,077 5,024
--------- ---------
Total liabilities 353,503 357,808
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1-authorized, 5,000,000 shares;
outstanding 1,714,441 at September 30, 1996 and 1,712,941
at December 31, 1995; excluding shares in treasury 85,500
at September 30, 1996 and 87,000 at December 31, 1995 1,800 1,800
Additional paid-in capital 3,303 3,301
Retained earnings 29,479 27,542
Net unrealized loss on securities available-for-sale (514) (65)
Treasury stock, at cost (1,853) (1,886)
--------- ---------
Total stockholders' equity 32,215 30,692
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 385,718 $ 388,500
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $5,704 $5,638 $16,912 $17,059
Investment securities 1,523 1,367 4,447 3,732
Federal funds sold 202 206 623 388
Deposits in banks 15 -- 32 --
----- ----- ------ ------
Total interest income 7,444 7,211 22,014 21,179
----- ----- ------ ------
INTEREST EXPENSE
Deposits 2,940 2,917 8,855 8,120
Securities sold under repurchase agreements 89 119 248 313
Other borrowings -- -- -- 59
----- ----- ------ ------
Total interest expense 3,029 3,036 9,103 8,492
----- ----- ------ ------
Net interest income 4,415 4,175 12,911 12,687
Provision for loan losses 249 400 801 1,184
----- ----- ------ ------
Net interest income after provision
for possible loan losses 4,166 3,775 12,110 11,503
----- ----- ------ ------
NON-INTEREST INCOME
Financial Management Services 453 459 1,358 1,377
Service charges on deposit accounts 207 225 627 678
Other 229 150 663 427
----- ----- ------ -----
Total non-interest income 889 834 2,648 2,482
----- ----- ------ -----
NON-INTEREST EXPENSE
Salaries and employee benefits 1,942 1,781 5,793 5,306
Net occupancy and equipment 714 585 1,936 1,741
FDIC deposit insurance 1 (19) 2 318
Bank shares tax 77 75 231 222
Other 766 604 2,139 1,911
----- ----- ------ -----
Total non-interest expense 3,500 3,026 10,101 9,498
----- ----- ------ -----
Income before income taxes 1,555 1,583 4,657 4,487
INCOME TAXES 498 498 1,504 1,399
----- ----- ------ -----
NET INCOME $1,057 $1,085 $ 3,153 $3,088
===== ===== ====== =====
PER SHARE DATA
Net income $0.61 $0.63 $1.84 $1.75
==== ==== ==== =====
Dividends declared $0.25 $0.23 $0.71 $0.63
==== ==== ==== =====
Weighted average shares outstanding 1,718,952 1,716,130 1,716,819 1,765,522
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
-------- -------
<S> <C> <C>
Balance at January 1, $30,692 $28,299
Net income to date 3,153 3,088
Cash dividends declared (1,216) (1,108)
Net unrealized gain (loss) on securities available-for-sale (449) 1,461
Treasury stock transactions 35 (1,886)
------ ------
Balance at September 30, $32,215 $29,854
====== ======
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
(Dollars in thousands) 1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,153 $ 3,088
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 560 455
Provision for loan losses 801 1,184
Amortization of investment security premiums
and accretion of discounts 132 165
Amortization of deferred fees on loans 18 103
Decrease (increase) in other assets 30 (404)
Increase in other liabilities 1,070 1,296
Investment securities losses, net 3 --
--------- ---------
Net cash provided by operating activities 5,767 5,887
--------- ---------
INVESTING ACTIVITIES
Purchase of interest bearing deposit in bank (1,000) --
Increase in loans (8,905) (1,988)
Proceeds from maturities of investment securities available-for-sale 12,825 7,428
Proceeds from maturities of investment securities held-to-maturity 9,216 5,262
Proceeds from sales of investment securities available-for-sale 100 --
Purchases of investment securities available-for-sale (27,176) (21,037)
Purchases of investment securities held-to-maturity (1,999) (999)
Purchase of premises and equipment, net (1,538) (974)
--------- ---------
Net cash used in investing activities (18,477) (12,308)
--------- ---------
FINANCING ACTIVITIES
Decrease (increase) in deposits (5,894) 15,791
Increase in securities sold under repurchase agreements 536 452
Cash dividends (1,233) (1,104)
Treasury stock transactions, net 35 (1,886)
--------- ---------
Net cash (used in) provided by financing activities (6,556) 13,253
---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (19,266) 6,832
Cash and cash equivalents at beginning of period 44,644 21,981
--------- ---------
Cash and cash equivalents at end of period $ 25,378 $ 28,813
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
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 and nine-month periods
ended September 30, 1996 and 1995 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 loan impairment to be measured
based on the present value of expected future cash flows discounted
at the loan's effective interest rate, except as a practical
expedient, a creditor may measure impairment based on a loan's
desirable 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 identifies 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 on 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:
1996
-------------------------------
(Dollars in thousands) January 1 September 30
---------- ------------
Principal amount of impaired loans $ 590 $ 422
Less valuation allowance (433) (406)
------- -------
$ 157 $ 16
======== ========
On January 1, 1996, a valuation for credit losses related to impaired
loans was established. The activity in this allowance account for the
three- and nine-month periods ended September 30, 1996 and 1995 is as
follows:
7
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
4. (Continued) September 30, 1996 September 30, 1995
---------------------- -----------------------
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
<S> <C> <C> <C> <C>
Valuation allowance at beginning of period $ 406 $ 433 $ 303 $ 380
Provision for loan impairment 10 110 50 280
Direct charge-offs -- (159) (20) (369)
Recoveries 2 34 -- 42
------- ------- ------- -------
Valuation allowance at end of period $ 418 $ 418 $ 333 $ 333
======= ======= ======= =======
</TABLE>
Total cash collected on impaired loans during the three- and
nine-month periods ended September 30, 1996 was $32 thousand and $41
thousand, respectively, of which $31 thousand and $40 thousand was
credited to the principal balance outstanding on such loans and $1
thousand and $1 thousand was recognized as interest income,
respectively. Interest that would have been accrued on impaired loans
during the three- and nine-month periods ended September 30, 1996 was
$10 thousand and $32 thousand, respectively. Interest income
recognized during the three- and nine-month periods ended September
30, 1996 was $0 thousand and $1 thousand, respectively.
Total cash collected on impaired loans during the three- and
nine-month periods ended September 30, 1995 was $17 thousand and
$1,432 thousand, of which $17 thousand and $1,260 thousand was
credited to the principal balance outstanding on such loans and $0
and $172 thousand was recognized as interest income, respectively.
Interest that would have been accrued on impaired loans during the
three- and nine-month periods ended September 30, 1995 was $18
thousand and $76 thousand, respectively. Interest income recognized
during the three- and nine-month periods ended September 30, 1995 was
$0 and $172 thousand, respectively.
During the nine months ended September 30, 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 1995 was liquidated in May 1996. The
proceeds from the liquidation were in excess of $600 thousand
resulting in a gain of $135 thousand included in other non-interest
income.
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 will continue to use APB Opinion 25 while
complying with the disclosure requirements of SFAS No. 123.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
EARNINGS SUMMARY AND HIGHLIGHTS
Net income for the three month period ended September 30, 1996 was
$1,057 thousand, a decrease of $28 thousand or 2.6% from $1,085 thousand in the
three month period ended September 30, 1995. Net income for the nine-month
period ended September 30, 1996 was $3,153 thousand, an increase of $65 thousand
or 2.1% from $3,088 thousand in the nine-month period ended September 30, 1995.
Changes in net income are primarily the result of an industry wide reduction in
Federal Deposit Insurance Corporation ("FDIC') insurance premiums, gain from the
sale of property owned by the Corporation's subsidiary, 323 East Gay Street
Corp, and a lower provision for loan losses, partially offset by tighter net
interest margins and increased operating expenses. Earnings per share for the
three month period ended September 30, 1996 was $0.61 per share, a decrease of
$0.02 per share compared to the same period in 1995. Earnings per share for the
nine month period ended September 30, 1996 was $1.84 per share, an increase of
$0.09 per share compared to the same period in 1995.
Performance ratios for the three- and nine-month periods ended
September 30, 1996 declined slightly compared to the same period in 1995 as
shown below. Cash dividends declared during the third quarter of 1996 increased
to $0.25 per share, an 8.7% increase compared to $0.23 per share in the third
quarter of 1995. On a year-to-date basis, cash dividends increased to $0.71 per
share, a 12.7% increase compared to $0.63 per share in the same period 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>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS
------------------
Return on Average Assets 1.09% 1.17% 1.09% 1.14%
Return on Average Equity 13.30% 14.67% 13.43% 14.06%
Earnings Retained 59.51% 64.24% 61.43% 64.12%
Dividend Payout Ratio 40.49% 35.78% 38.57% 35.88%
Book Value Per Share $18.79 $17.43 $18.79 $17.43
</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- and nine-month periods ended September 30, 1996,
on a tax equivalent basis, was $4,471 thousand and $13,082 thousand, compared to
$4,233 thousand and $12,869 thousand for the same periods in 1995, respectively.
Net yields on interest earning assets, on a tax equivalent basis, were 4.95% and
4.85% for the three- and nine-month periods ended September 30, 1996 compared to
4.89% and 5.11% for the same periods in 1995, respectively. Average interest
earning assets increased approximately $23.6 million to $359.5 million during
the first nine months of 1996 compared to $335.9 million in the same period last
year. The increase in average earnings assets is a direct result of overall
deposit growth over the past 24 months. 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
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
--------------------------------- ---------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 15,065 $ 202 5.36% $ 13,925 $ 206 5.92%
Interest bearing deposits in banks 1,000 15 6.00% -- -- --
Investment securities
Taxable 93,852 1,492 6.36% 85,395 1,323 6.20%
Tax-exempt (1) 2,480 43 6.94% 3,484 59 6.77%
------- ------ ------- -----
Total investment securities 96,332 1,535 6.37% 88,879 1,382 6.22%
------- ------ ------- -----
Loans (2)
Taxable 243,219 5,585 9.19% 236,770 5,523 9.33%
Tax-exempt (1) 6,016 163 10.84% 6,531 158 9.68%
------- ------ ------- -----
Total loans 249,235 5,748 9.23% 243,301 5,681 9.34%
------- ------ ------- -----
Total interest earning assets 361,632 7,500 8.30% 346,105 7,269 8.40%
Non-interest earning assets
Allowance for possible loan losses (4,917) (3,857)
Cash and due from banks 18,486 16,697
Other assets 13,387 11,998
------- -------
Total assets $388,588 $370,943
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $171,950 $ 1,325 3.08% $162,774 $1,364 3.35%
Certificates of deposits and other time 113,040 1,615 5.71% 107,879 1,553 5.76%
------- ------ ------- -----
Total interest bearing deposits 284,990 2,940 4.13% 270,653 2,917 4.31%
Securities sold under repurchase agreements 10,706 89 3.33% 14,435 119 3.30%
------- ------ ------- -----
Total interest bearing liabilities 295,696 3,029 4.10% 285,088 3,036 4.26%
------ -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 55,433 51,106
Other liabilities 6,164 5,467
------- -------
Total liabilities 357,293 341,661
Stockholders' equity 31,295 29,282
------- -------
Total liabilities and stockholders' equity $388,588 $370,943
======= =======
Net interest income $ 4,471 $ 4,233
======= =======
Net yield on interest earning assets 4.95% 4.89%
==== ====
<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>
10
<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
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
---------------------------------- -----------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 15,429 $ 623 5.38% $ 8,725 $ 388 5.93%
Interest bearing deposits in banks 730 32 5.84% -- -- --
Investment securities
Taxable 93,481 4,352 6.21% 78,622 3,592 6.09%
Tax-exempt (1) 2,529 130 6.85% 3,690 192 6.94%
------- ------ ------- ------
Total investment securities 96,010 4,482 6.22% 82,312 3,784 6.13%
Loans (2)
Taxable 240,696 16,549 9.17% 238,137 16,711 9.36%
Tax-exempt (1) 6,653 499 10.00% 6,676 478 9.55%
------- ------ ------- ------
Total loans 247,349 17,048 9.19% 244,813 17,189 9.36%
------- ------ ------- ------
Total Interest Earning Assets 359,518 22,185 8.23% 335,850 21,361 8.48%
Non-interest earning assets
Allowance for possible loan losses (4,757) (3,654)
Cash and due from banks 17,115 16,122
Other assets 12,912 12,026
------- -------
Total assets $384,788 $360,344
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $167,905 $ 3,894 3.09% $162,669 $ 4,073 3.34%
Certificates of deposits and other time 115,924 4,961 5.71% 97,920 4,047 5.51%
------- ------ ------- ------
Total interest bearing deposits 283,829 8,855 4.16% 260,589 8,120 4.15%
Securities sold under repurchase agreements 10,092 248 3.28% 12,846 313 3.25%
Other borrowings -- -- -- 1,269 59 6.20%
------- ------ ------- ------
Total interest bearing liabilities 293,921 9,103 4.13% 274,704 8,492 4.12%
------ ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 54,270 51,349
Other liabilities 5,302 5,009
------- -------
Total liabilities 353,493 331,062
Stockholders' equity 31,295 29,282
------- -------
Total liabilities and stockholders' equity $384,788 $360,344
======= =======
Net interest income $13,082 $ 12,869
====== =======
Net yield on interest earning assets 4.85% 5.11%
===== ====
<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>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
Three-Months Nine-Months
Yield On: Ended September 30, Ended September 30,
--------- ------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Earning Assets 8.30% 8.40% 8.23% 8.48%
Interest Bearing Liabilities 4.10% 4.26% 4.13% 4.12%
---- ---- ---- ----
Net Interest Spread 4.20% 4.14% 4.10% 4.36%
Contribution of Interest Free Funds 0.75% 0.75% 0.75% 0.75%
---- ---- ---- ----
Net Yield on Interest Earning Assets 4.95% 4.89% 4.85% 5.11%
==== ==== ==== ====
</TABLE>
INTEREST INCOME ON FEDERAL FUNDS
Interest income on federal funds sold for the three month period ended
September 30, 1996 decreased $4 thousand when compared to the same period in
1995. The decrease in federal funds sold interest income for the three month
period ended September 30, 1996 is due to a 56 basis point decrease in rates,
partially offset by a $1.1 million increase in average balances compared to the
same period in 1995.
Interest income on federal funds sold for the nine month period ended
September 30, 1996 increased $235 thousand when compared to the same period in
1995. The increase in federal funds sold interest income for the nine month
period ended September 30, 1996 is due to a $6.7 million increase in average
balances, partially offset by a 55 basis point decrease in rates compared to the
same period in 1995.
INTEREST INCOME ON DEPOSITS IN BANKS
Interest income on deposits in banks for the three- and-nine-month
periods ended September 30, 1996 was $15 thousand and $32 thousand,
respectively, when compared to the same periods in 1995. There were no deposits
in banks in the three- and nine-month periods ended September 30, 1995 compared
to $1.0 million and $0.7 million in average deposits in banks outstanding during
the three- and nine-month period ended September 30, 1996.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased $153 thousand and $698 thousand for the three- and nine-month periods
ended September 30, 1996 to $1,535 thousand and $4,482 thousand, respectively,
when compared to the same periods in 1995. The increase for the three- and
nine-month period is due to an increase in average balances of $7.5 million and
$13.7 million and 15 basis point and 9 basis point increases in the yield earned
on securities when compared to the same periods last year, respectively. The
increases in average balances in investment securities is a result of overall
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 increased $67 thousand to $5,748 thousand for the
three-month period ended September 30, 1996, compared to the same period in
1995. The increase in interest income on loans for the three-month period ended
September 30, 1996 is
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
attributable to $5.9 million increase in average balances, partially off set by
an 11-basis point decrease in rates.
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio decreased $141 thousand to $17,048 thousand for the
nine-month period ended September 30, 1996, compared to the same period in 1995.
The decrease in interest income on loans for the nine-month period ended
September 30, 1996 is attributable to a 17-basis point decrease in rates,
partially offset by a $2.5 million increase in average balances.
The decrease in the loan portfolio yield is a result of decreases in
lending rates due to the increased competition on existing loans and new loans.
The Bank has seen a noticeable increase in pricing and fee competition on large
(more than $500,000) loans (new and renewal) during the past twelve months. The
Bank expects that pricing pressure will continue and reduce the overall loan
yields and net interest yield on interest earning assets.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts increased $23 thousand and $735
thousand for the three- and nine-month periods ended September 30, 1996 to
$2,940 thousand and $8,855 thousand, compared to the same periods in 1995. The
increase for the three month period ended September 30, 1996 is the result of
increases in average interest-bearing deposits of $14.3 million, partially
offset by a 18 basis point decrease in the rates paid on interest-bearing
deposits. The increase for the nine month period ended September 30, 1996 is the
result of a 1 basis point increase in rates paid on interest-bearing deposits
and increases in average interest-bearing deposits of $23.2 million.
The Corporation's effective rate on interest-bearing deposits decreased
from 4.31% in the third quarter 1995 to 4.13% in the third quarter 1996. Steps
are being taken to continue to control interest expense without causing deposit
run-off. Competition for deposits from non-banking institutions such as credit
unions and mutual fund companies continues to grow.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements
decreased $30 thousand and $65 thousand to $89 thousand and $248 thousand for
the three- and nine-month periods ended September 30, 1996 compared to $119
thousand and $313 thousand for the three- and nine-month periods ended September
30, 1995, respectively. The decreases are primarily attributable to $3.7 million
and $2.8 million decreases in average securities sold under repurchase
agreements outstanding compared to the three- and nine-month periods ended
September 30, 1995, respectively. Average balances decreased due to a new cash
sweep product recently introduced by the Bank. The Bank sweeps excess customer
demand deposit account balances overnight outside the Bank through a program
with Federated Investors. Cash sweep balances amounted to approximately $4.9
million as of September 30, 1996. This product provides fee-based income to the
Bank while earning our customers a higher yield than our current repurchase
agreement product.
INTEREST EXPENSE ON OTHER BORROWINGS
There were no other borrowings in the nine months ended September 30,
1996 compared to $1.3 million average other borrowings outstanding during the
nine month period ended September 30, 1995. Short term funding requirements in
1996 have been met through deposits increases, management of federal funds and
investment maturities.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR POSSIBLE LOAN LOSSES
During the three- and nine-month periods ended September 30, 1996, the
Corporation recorded a $249 thousand and a $801 thousand provision for possible
loan losses compared to $400 thousand and $1,184 thousand for the same periods
in 1995. The allowance for possible loan losses as a percentage of total loans
was 2.00% as of September 30, 1996 compared to 1.86% as of December 31, 1995 and
1.69% as of September 30, 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 $55 thousand and $166 thousand to
$889 thousand and $2,648 thousand for the three- and nine-month periods ended
September 30, 1996, compared to $834 thousand and $2,482 thousand for the same
periods in 1995. The primary component of non-interest income is Financial
Management Services revenue, which decreased $6 thousand and $19 thousand to
$453 thousand and $1,358 thousand for the three- and nine-month periods ended
September 30, 1996 from $459 thousand and $1,377 thousand for the three- and
nine-month periods ended September 30, 1995. Market value of Financial
Management Services' assets declined $13.9 million to $262.0 million at
September 30, 1996 from $275.9 million at September 30, 1995. The decline in
Financial Management Services' assets and revenues is primarily the result of
the loss of three account relationships partially offset by business development
efforts.
Service charges on deposit accounts decreased $18 thousand and $51
thousand to $207 thousand and $627 thousand for the three- and nine-month period
ended September 30, 1996 from $225 thousand and $678 thousand for the same
periods in 1995. The decreases relate to increases in the earnings credits
offered to business customers, partially offset by an internal review of
unprofitable accounts and changes in service charges.
Other non-interest income increased $79 thousand and $236 thousand to
$229 thousand and $663 thousand for the three- and nine-month periods ended
September 30, 1996 compared to $150 thousand and $427 thousand for the same
periods in 1995. These increases relate to a $135 thousand net gain from the
sale of property owned by the Corporation's subsidiary, 323 East Gay Street
Corp, increases in revenue from the sale of residential mortgage loans, and
rental income received from other real estate owned property, partially offset
by decreases in credit card income.
NON-INTEREST EXPENSE
Total non-interest expense for the three- and nine-month periods ended
September 30, 1996 was $3,500 thousand and $10,101 thousand, increases of $474
thousand and $603 thousand from $3,026 thousand and $9,498 thousand for the same
periods in 1995. The various components of non-interest expense changes are
discussed below.
Salaries and employee benefits increased $161 thousand and $487
thousand for the three- and nine-month periods ended September 30, 1996 to
$1,942 thousand and $5,793 compared to $1,781 thousand and $5,306 thousand for
the same periods in 1995. Annual employee raises and a staff increase from 176
full-time equivalents (FTE's) employees in the second quarter of 1995 to 187
FTE's in the second quarter of 1996 are responsible for the
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 $714 thousand
and $1,936 thousand for the three- and nine-month periods ended September 30,
1996, increases of $129 thousand and $195 thousand over the same periods last
year. The increase in the first nine months of 1996 is primarily a result of
increased costs associated with building improvements and new technology
projects, such as the teller on-line system and the check imaging system. See
the section titled "Building Improvements and Technology Projects" for
additional discussion.
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. FDIC
insurance for the best rated banks, was calculated based on quarter-end deposits
at a rate of $0.23 per year per $1,000 in deposits from January 1, 1995 to May
31, 1995 and $0.04 per year per $1,000 in deposits from September 1, 1995 to
December 31, 1995. It is anticipated that the premium for 1997 will be above the
statutory minimum.
Bank shares tax was $77 thousand and $231 thousand for the three- and
nine-month period ended September 30, 1996, increases of $2 thousand and $9
thousand over the same periods last year. The Pennsylvania Bank Shares Tax is
calculated on quarter-end Bank stockholders' equity and paid annually.
Other non-interest expense increased $162 thousand, or 26.8%, to $766
thousand for the three- month period ended September 30, 1996 compared to $604
thousand for the same period in 1995. This increase is primarily the result of
increases in marketing costs, supplies, and fraud losses, partially offset by
recoveries of loan related legal fees.
Other non-interest expense increased $228 thousand, or 11.9%, to $2,139
thousand for the nine-month period ended September 30, 1996 compared to $1,911
thousand for the same period in 1995. The increase in non-interest expenses is
due to increases in supplies, fraud losses and additional writedowns on other
real estate owned, partially offset by a Pennsylvania sales tax refund and
recoveries of loan related legal fees. The increase is also 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 contribute when the
promises became unconditional. This had an impact of $117 thousand on other
non-interest expenses during the first nine months of 1995.
INCOME TAXES
Income tax expense for the three- and nine-month periods ended
September 30, 1996 was $498 thousand and $1,504 thousand, compared to $498
thousand and $1,399 thousand in the same periods last year. This represents
effective tax rates of 32.03% and 32.30% for the three- and nine-month periods
ended September 30, 1996, compared with 31.46% and 31.18% for the same periods
in 1995, respectively. The primary reason for the increases in effective tax
rates is decreases in tax-exempt instruments as a percentage of total assets.
Average tax-exempt assets as a percentage of total average assets were 2.39% and
2.88% at September 30, 1996 and 1995, respectively.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 liquidity 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:
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 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 $ 47,236 2.20% $ 42,974 2.32% $ 4,262 9.92%
Money Market 28,775 3.07 29,610 3.23 (835) (2.82)
Statement Savings 48,995 3.21 46,347 3.64 2,648 5.71
Other Savings 4,407 2.75 4,657 2.73 (250) (5.37)
CD's Less than $100,000 103,356 5.75 89,866 5.67 13,490 15.01
------- ------- ------
Total Core Deposits 232,769 4.11 213,454 4.15 19,315 9.05
Non-Interest Bearing
Demand Deposit Accounts 54,270 -- 52,177 -- 2,093 4.01
------- ------- ------
Total Core and Non-Interest
Bearing Deposits 287,039 -- 265,631 -- 21,408 8.06
Tiered Savings 38,492 4.09 38,744 4.29 (252) (0.65)
CD's Greater than $100,000 12,568 5.36 11,331 5.11 1,237 10.92
------- ------- ------
Total Deposits $338,099 -- $315,706 -- $22,393 7.09
======= ======= ======
</TABLE>
The Bank, as a member of the Federal Home Loan Bank ("FHLB"), maintains
a line of credit secured by the Bank's mortgage related assets. As of September
30, 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 $90.0 million or 23.3% of total assets at September 30,
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1996, compared with negative $60.9 million and negative 16.6% at September 30,
1995, respectively. Management is aware of this negative gap position and is
taking steps to maintain net interest margins at acceptable levels.
INTEREST SENSITIVITY ANALYSIS
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
(Dollars in thousands)
One Over
Within through five Non-rate
one year five years years sensitive Total
-------- ---------- ----- --------- -----
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 7,800 $ -- $ -- $ -- $ 7,800
Investment securities 31,187 45,841 22,702 -- 99,730
Interest bearing deposits in banks 1,000 -- -- -- 1,000
Loans and leases 121,928 114,765 14,499 (5,025) 246,167
Cash and cash equivalents -- -- -- 17,578 17,578
Other assets -- -- -- 13,443 13,443
-- -- -- ------ ------
Total assets $ 161,915 $ 160,606 $ 37,201 $ 25,996 $ 385,718
======= ======= ====== ====== =======
LIABILITIES AND CAPITAL
Non-interest bearing deposit $ -- $ -- $ -- $ 57,500 $ 57,500
Interest bearing deposits 242,552 37,980 -- -- 280,532
Borrowed funds 9,394 -- -- -- 9,394
Other liabilities -- -- -- 6,077 6,077
Capital -- -- -- 32,215 32,215
-- ---------- ----------- ------------ -----------
Total liabilities & capital $ 251,946 $ 37,980 $ -- $ 95,792 $ 385,718
============ ============= ============ ============= ============
Net interest rate
sensitivity rate $ (90,031) $ 122,626 $ 37,201 $ (69,796) $ --
============ ============= ============ ============= ============
Cumulative interest rate
sensitivity gap $ (90,031) $ 32,595 $ 69,796 $ -- $ --
============ ============= ============ ============== ============
Cumulative interest rate
sensitivity gap divided (23.3%) 8.5% 18.1%
=========== ============ ===========
by total assets
</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.
17
<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>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
(Dollars in thousands) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 4,831 $ 3,712 $ 4,506 $ 3,303
------- ------ ------ ------
Provision charged to operating expense 249 400 801 1,184
------- ------ ------ ------
Recoveries of loans previously charged-off 3 21 41 74
Loans charged-off (58) (78) (323) (506)
------- ------ ------ ------
Net loans charged-off (55) (57) (282) (432)
------- ------ ------ ------
Balance at end of period $ 5,025 $ 4,055 $ 5,025 $ 4,055
======= ====== ====== ======
Period-end loans outstanding $251,192 $240,579 $251,192 $240,579
Average loans outstanding $249,235 $243,301 $247,349 $244,813
Allowance for possible loan losses as a
percentage of period-end loans outstanding 2.00% 1.69% 2.00% 1.69%
Ratio of net charge-offs to average loans
outstanding (annualized) 0.09% 0.09% 0.15% 0.24%
</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 is 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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- ------------
(Dollars in thousands) 1996 1995 1995
----- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 705 $ 200 $ 419
Non-accrual loans 688 925 726
----- ----- -----
Total non-performing loans 1,393 1,125 1,145
Other real estate owned 1,368 1,278 1,447
----- ----- -----
Total non-performing assets $2,761 $2,403 $2,592
===== ===== =====
Non-performing loans as a percentage
of total loans 0.55% 0.47% 0.47%
Allowance for possible loan losses as a
percentage of non-performing loans 360.73% 360.44% 393.54%
Non-performing assets as a percentage of
total loans and other real estate owned 1.09% 0.99% 1.06%
Allowance for possible loan losses as a
percentage of non-performing assets 182.00% 168.75% 173.84%
</TABLE>
The allowance for possible loan losses as a percentage of
non-performing loans ratio 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 that has
been 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
The following changes/promotions in executive management have occurred over the
past twelve months:
o 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 retired on
June 30, 1996.
o Effective March 29, 1996, Peter J. D'Angelo assumed Mr.
Cloud's duties as Cashier of the Bank and the Corporation.
Effective September 20, 1996, Mr. D'Angelo was promoted to
Senior Vice President.
o Effective December 15, 1995, J. Duncan Smith was promoted to
Senior Vice President and Comptroller of the Bank. Mr. Smith
also serves as Treasurer of the Corporation.
o Effective September 20, 1996, David W. Glarner was promoted to
Senior Vice President. Mr. Glarner is head of the Bank's
Mortgage Department.
19
<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
thousand. 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 fourth quarter.
Improvements to the property will cost an estimated $525 thousand.
The Corporation has two technology projects in process: Branch teller
automation ("BTA") and customer check imaging ("CCI"). The BTA project, with an
approximate cost of $450 thousand, which was scheduled for completion in the
first half of 1996, has been delayed and is not expected to be fully operational
until the first quarter of 1997. The CCI project, with an initial cost of
approximately $550 thousand, was fully operational at the end of the third
quarter.
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by
the Federal Reserve Board ("FRB") 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
September 30, 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 1991.
The Corporation's Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.
<TABLE>
<CAPTION>
RISK-BASED September 30, December 31, "Well Capitalized"
------------------------ ------------ Requirements
CAPITAL RATIOS 1996 1995 1995 ------------------
- -------------- ---- ---- ----
<S> <C> <C> <C> <C>
Leverage Ratio 8.39% 8.31% 8.47% 5.00%
Tier I Capital Ratio 12.20% 11.46% 11.51% 6.00%
Total Risk-Based Capital Ratio 13.46% 12.71% 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 that,
if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
rate for the Corporation was 6.62% for the nine months ended September 30, 1996.
20
<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, have 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
-------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
The following is a list of exhibits incorporated by
reference into this report:
(3)(a) Articles of Incorporation.
-------------------------
(i.) Copy of the Corporation's Articles 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 the Articles 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.
(iii.) Copy of the Corporation's
Certificate of Amendment to the Articles of
Incorporation filed with 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.
21
<PAGE>
PART II - OTHER INFORMATION
(CONTINUED)
Item 6. Exhibits and Reports on Form 8-K (Continued)
--------------------------------------------
(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.
(b) Reports on Form 8-K
-------------------
No report was filed during the nine months ended September 30,
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
President
DATE: November 14, 1996
J. Duncan Smith
/s/ 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.
</LEGEND>
<CIK> 0000744126
<NAME> FIRST WEST CHESTER CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,578
<INT-BEARING-DEPOSITS> 1,000
<FED-FUNDS-SOLD> 7,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,930
<INVESTMENTS-CARRYING> 15,800
<INVESTMENTS-MARKET> 16,816
<LOANS> 251,192
<ALLOWANCE> 5,025
<TOTAL-ASSETS> 385,718
<DEPOSITS> 338,032
<SHORT-TERM> 9,394
<LIABILITIES-OTHER> 6,077
<LONG-TERM> 0
0
0
<COMMON> 1,800
<OTHER-SE> 30,415
<TOTAL-LIABILITIES-AND-EQUITY> 385,718
<INTEREST-LOAN> 16,912
<INTEREST-INVEST> 4,447
<INTEREST-OTHER> 655
<INTEREST-TOTAL> 22,014
<INTEREST-DEPOSIT> 8,855
<INTEREST-EXPENSE> 9,103
<INTEREST-INCOME-NET> 12,911
<LOAN-LOSSES> 801
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,101
<INCOME-PRETAX> 4,657
<INCOME-PRE-EXTRAORDINARY> 4,657
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,153
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
<YIELD-ACTUAL> 4.85
<LOANS-NON> 688
<LOANS-PAST> 705
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,506
<CHARGE-OFFS> 323
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 5,025
<ALLOWANCE-DOMESTIC> 5,025
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
