UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 692-3000
---------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates as of March 1, 1997, was approximately $44,585,000.
The number of shares outstanding of Common Stock of the Registrant as of March
1, 1997, was 1,715,941.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Annual Report to Shareholders for the year ended December 31,
1996, is incorporated by reference into Parts I and II hereof. The Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders is
incorporated by reference into Part III hereof.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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<S> <C> <C>
PART I: Item 1 - Business 1
Item 2 - Properties 13
Item 3 - Legal Proceedings 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
PART II: Item 5 - Market for the Corporation's Common Equity and Related
Stockholder Matters 14
Item 6 - Selected Financial Data 15
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 15
Item 8 - Financial Statements and Supplementary Data 15
Item 9 - Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III: Item 10 - Directors and Executive Officers of the Corporation 15
Item 11 - Executive Compensation 16
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 16
Item 13 - Certain Relationships and Related Transactions 16
PART IV: Item 14 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K 16
SIGNATURES 19
</TABLE>
<PAGE>
PART I
------
Item 1. Business.
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GENERAL
First West Chester Corporation (the "Corporation") is a Pennsylvania
business corporation and a bank holding company registered under the federal
Bank Holding Corporation Act of 1956, as amended (the "BHC Act"). As a bank
holding company, the Corporation's operations are confined to the ownership and
operation of banks and activities deemed by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") to be so closely related to
banking to be a proper incident thereto. The Corporation was incorporated on
March 9, 1984, for the purpose of becoming a registered bank holding company
pursuant to the BHC Act and acquiring The First National Bank of West Chester
(the "Bank"), thereby enabling the Bank to operate within a bank holding company
structure. On September 13, 1984, the Corporation acquired all of the issued and
outstanding shares of common stock of the Bank. The principal activities of the
Corporation are the owning and supervising of the Bank, which engages in a
general banking business in Chester County, Pennsylvania. The Corporation
directs the policies and coordinates the financial resources of the Bank. In
addition, the Corporation is the sole shareholder of 323 East Gay Street Corp.,
a Pennsylvania corporation ("EGSC"), which was formed in 1995 for the purpose of
holding the Bank's interest in and operating foreclosed real property until
liquidation of such property.
BUSINESS OF THE BANK
The Bank is engaged in the business of commercial and retail banking
and was organized under the banking laws of the United States in December 1863.
The Bank currently conducts its business through six banking offices located in
Chester County, Pennsylvania, including its main office. In addition, the Bank
operates four limited service ATM facilities. The Bank is a member of the
Federal Reserve System. At December 31, 1996, the Bank had total assets of
approximately $397 million, total loans of approximately $265 million, total
deposits of approximately $352 million and employed 190 full-time equivalent
persons.
The Bank is a full service commercial bank offering a broad range of
retail banking, commercial banking, trust and financial management services to
individuals and businesses. Retail services include checking accounts, savings
programs, money-market accounts, certificates of deposit, safe deposit
facilities, consumer loan programs, residential mortgages, overdraft checking,
automated tellers and extended banking hours. Commercial services include
revolving lines of credit, commercial mortgages, equipment leasing and letter of
credit services.
These retail and commercial banking activities are provided primarily
to consumers and small to mid-sized companies within the Bank's market area.
Lending services are focused on commercial, consumer and real estate lending to
local borrowers. The Bank attempts to establish a total borrowing relationship
with its customers which may typically include a commercial real estate loan, a
business line of credit for working capital needs, a mortgage loan for a
borrower's residence, a consumer loan or a revolving personal credit line.
The Bank's Financial Management Services Department (formerly, the
Trust Department) provides a broad range of personal trust services. It
administers and provides investment management services for estates, trusts,
agency accounts and employee benefit plans. At December 31, 1996, the Bank's
Financial Management Services Department administered or provided investment
management for 726 accounts, which possessed assets with an aggregate market
value of approximately $271 million. For the year ended December 31, 1996, gross
income from the Bank's Financial Management Services Department and related
activities amounted to approximately $1.9 million and accounted for 5.6% of the
total of interest income and other income of the Bank for such period.
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<PAGE>
COMPETITION
The Bank's service area consists primarily of greater Chester County,
including West Chester and Kennett Square, as well as the fringe of Delaware
County, Pennsylvania. The core of the Bank's service area is located within a
fifteen-mile radius of the Bank's main office in West Chester, Pennsylvania. The
Bank encounters vigorous competition for market share in the communities it
serves from community banks, thrift institutions and other non-bank financial
organizations. The Bank also competes with banking and financial branching
systems, some from out of state, which are substantially larger and have greater
financial resources than the Bank. There are branches of approximately 23
commercial banks, savings banks and credit unions, including the Bank, in the
general market area serviced by the Bank. The largest of these institutions had
assets of over $100 billion and the smallest had assets of less than $30
million. The Bank had total assets of approximately $397 million as of December
31, 1996.
The Bank competes for deposits with various other commercial banks,
savings banks, credit unions, brokerage firms and stock, bond and money market
funds. The Bank also faces competition from major retail-oriented firms that
offer financial services similar to traditional services available through
commercial banks without being subject to the same degree of regulation.
Mortgage banking firms, finance companies, insurance companies and leasing
companies also compete with the Bank for traditional lending services.
Management believes that the Bank is able to effectively compete with
its competitors because of its ability to provide responsive personalized
services and competitive rates. This ability is a direct result of management's
knowledge of the Bank's market area and customer base. Management believes the
needs of the small to mid-sized commercial business and retail customers are not
adequately met by larger financial institutions, therefore creating a marketing
opportunity for the Bank.
BUSINESS OF EGSC
EGSC was formed in 1995 to hold the Bank's partnership interest in WCP
Partnership. WCP Partnership was formed to facilitate the acquisition, necessary
repairs, required environmental remediation and other actions necessary to sell
real property located in West Chester, Pennsylvania (the "West Chester
Property") at fair market value. EGSC purchased a 62% interest in the mortgage
on the West Chester Property in 1995 from the Bank at book value and immediately
contributed the interest in the mortgage to WCP Partnership as capital. Another
financial institution contributed the remaining 38% interest in the mortgage to
WCP Partnership. WCP Partnership foreclosed on West Chester Property in 1995.
During 1996, the property was liquidated. The proceeds from the liquidation were
in excess of the transferred loan amount resulting in a gain which was included
in noninterest income.
SUPERVISION AND REGULATION
General
The Corporation is a bank holding company subject to supervision and
regulation by the Federal Reserve Board. In addition, the Bank is subject to
supervision and regulation by the Office of the Comptroller of the Currency
("OCC"), and the Federal Deposit Insurance Corporation ("FDIC"). Certain aspects
of the Bank's operation are also subject to state laws.
Government Regulation
The Corporation is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the BHC Act. Annual and other periodic reports also are
required to be filed with the Department. The Federal Reserve Board also makes
examinations of bank holding companies and their subsidiaries. The BHC Act
requires each bank holding company to obtain the prior approval of the Federal
Reserve Board before it may acquire substantially all of the assets of any bank,
or if it would acquire or
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<PAGE>
control more than 5% of the voting shares of such a bank. The Federal Reserve
Board will consider numerous factors, including its capital adequacy guidelines
before approving such acquisitions. For a description of certain applicable
guidelines, see "Capital," Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Adequacy,"
and Part II, Item 8, "Note H - Capital Requirements" in the consolidated
financial statements.
The BHC Act also restricts the types of businesses and operations in
which a bank holding company and its subsidiaries may engage. Generally,
permissible activities are limited to banking and activities found by the
Federal Reserve Board to be so closely related to banking as to be a proper
incident thereto. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
The operations of the Bank are subject to requirements and restrictions
under federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be made and
the types of services which may be offered and restrictions on the ability to
acquire deposits under certain circumstances. Various consumer laws and
regulations also affect the operations of the Bank. Approval of the OCC is
required for branching by the Bank and for bank mergers in which the continuing
bank is a national bank.
Dividend Restrictions
The Corporation is a legal entity separate and distinct from the Bank.
Virtually all of the revenue of the Corporation available for payment of
dividends on its Common Stock will result from amounts paid to the Corporation
from dividends received from the Bank. All such dividends are subject to
limitations imposed by federal and state laws and by regulations and policies
adopted by federal and state regulatory agencies.
The Bank as a national bank is required by federal law to obtain the
approval of the OCC for the payment of dividends if the total of all dividends
declared by the Board of Directors of the Bank in any calendar year will exceed
the total of Bank's net income for that year and the retained net income for the
preceding two years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. Under this formula, in 1997, the Bank,
without affirmative governmental approvals, could declare aggregate dividends in
1997 of approximately $3.1 million, plus an amount approximately equal to the
net income, if any, earned by the Bank for the period from January 1, 1997,
through the date of declaration of such dividend less dividends previously paid
in 1997, subject to the further limitations that a national bank can pay
dividends only to the extent that retained net profits (including the portion
transferred to surplus) exceed bad debts and provided that the Bank would not
become "undercapitalized" (as defined under federal law).
If, in the opinion of the applicable regulatory authority, a bank or
bank holding company under its jurisdiction is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition of
the bank or bank holding company, could include the payment of dividends), such
regulatory authority may require such bank or bank holding company to cease and
desist from such practice, or to limit dividends in the future. Finally, the
several regulatory authorities described herein, may from time to time,
establish guidelines, issue policy statements and adopt regulations with respect
to the maintenance of appropriate levels of capital by a bank or bank holding
company under their jurisdiction. Compliance with the standards set forth in
such policy statements, guidelines and regulations could limit the amount of
dividends which the Corporation and the Bank may pay.
Capital
The Corporation and the Bank are both subject to minimum capital
requirements and guidelines. The Federal Reserve Board measures capital adequacy
for bank holding companies on the basis of a risk-based capital framework and a
leverage ratio. The Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines currently provide for a
minimum leverage ratio of Tier I capital to adjusted total assets of 3% for bank
holding companies that meet certain criteria, including that they maintain the
highest regulatory rating.
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<PAGE>
All other bank holding companies are required to maintain a leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. The Federal
Reserve Board has not advised the Corporation of any specific minimum leverage
ratio under these guidelines which would be applicable to the Corporation.
Failure to satisfy regulators that a bank holding company will comply fully with
capital adequacy guidelines upon consummation of an acquisition may impede the
ability of a bank holding company to consummate such acquisition, particularly
if the acquisition involves payment of consideration other than common stock. In
many cases, the regulatory agencies will not approve acquisitions by bank
holding companies and banks unless their capital ratios are well above
regulatory minimums.
The Bank is subject to capital requirements which generally are similar
to those affecting the Corporation. The minimum ratio of total risk-based
capital to risk-adjusted assets (including certain off-balance sheet items, such
as standby letters of credit) is 8%. Capital may consist of equity and
qualifying perpetual preferred stock, less goodwill ("Tier I capital"), and
certain convertible debt securities, qualifying subordinated debt, other
preferred stock and a portion of the reserve for possible credit losses ("Tier
II capital").
A depository institution's capital classification depends upon its
capital levels in relation to various relevant capital measures, which include a
risk-based capital measure and a leverage ratio capital measure. A depository
institution is considered well capitalized if it significantly exceeds the
minimum level required by regulation for each relevant capital measure,
adequately capitalized if it meets each such measure, undercapitalized if it
fails to meet any such measure, significantly undercapitalized if it is
significantly below any such measure and critically undercapitalized if it fails
to meet any critical capital level set forth in the regulations. An institution
may be placed in a lower capitalization category if it receives an
unsatisfactory examination rating, is deemed to be in an unsafe or unsound
condition, or engages in unsafe or unsound practices. Under applicable
regulations, for an institution to be well capitalized it must have a total
risk-based capital ratio of at least 10%, a Tier I risk-based capital ratio of
at least 6% and a Tier I leverage ratio of at least 5% and not be subject to any
specific capital order or directive. As of December 31, 1996, 1995 and 1994, the
Corporation and the Bank had capital in excess of all regulatory minimums and
the Bank was "well capitalized." See Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition" and "-- Capital Adequacy" and Part II, Item 8, "Note H - Capital
Requirements" in the consolidated financial statements.
Deposit Insurance Assessments
The Bank is subject to deposit insurance assessments by the FDIC's Bank
Insurance Fund ("BIF"). The FDIC has developed a risk-based assessment system,
under which the assessment rate for an insured depository institution varies
according to its level of risk. An institution's risk category is based upon
whether the institution is well capitalized, adequately capitalized or
undercapitalized and the institution's "supervisory subgroups": Subgroup A, B or
C. Subgroup A institutions are financially sound institutions with a few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. Based on its capital
and supervisory subgroups, each BIF or SAIF member institution is assigned an
annual FDIC assessment rate per $100 of insured deposits varying between 0.00%
per annum (for well capitalized Subgroup A institutions) and 0.27% per annum
(for undercapitalized Subgroup C institutions). As of January 1, 1997, well
capitalized Subgroup A institutions will pay between 0.00% and 0.10% per annum.
In accordance with the Deposit Insurance Act of 1996 an additional
assessment by the Financing Corporation ("FICO") will become applicable to all
insured institutions as of January 1, 1997. This assessment is not tied to the
FDIC risk classification. The BIF FICO assessment will be 1.296 basis points for
1997. For the first quarter of 1997, the Bank's assessments for BIF and BIF FICO
are $0.00 and $10,163, respectively.
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<PAGE>
Other Matters
Federal and state law also contains a variety of other provisions that
affect the operations of the Corporation and the Bank including certain
reporting requirements, regulatory standards and guidelines for real estate
lending, "truth in savings" provisions, the requirement that a depository
institution give 90 days prior notice to customers and regulatory authorities
before closing any branch, certain restrictions on investments and activities of
state-chartered insured banks and their subsidiaries, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders, guidelines
governing regulatory examinations, and a prohibition on the acceptance or
renewal of brokered deposits by depository institutions that are not well
capitalized or are adequately capitalized and have not received a waiver from
the FDIC.
The Corporation's Common Stock is registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As a result, the
Corporation is subject to the regulations promulgated under the Exchange Act
regarding the filing of public reports, the solicitation of proxies, the
disclosure of beneficial ownership of certain securities, short swing profits
and the conduct of tender offers.
EFFECT OF GOVERNMENTAL POLICIES
The earnings of the Bank and, therefore, of the Corporation are
affected not only by domestic and foreign economic conditions, but also by the
monetary and fiscal policies of the United States and its agencies (particularly
the Federal Reserve Board), foreign governments and other official agencies. The
Federal Reserve Board can and does implement national monetary policy, such as
the curbing of inflation and combating of recession, by its open market
operations in United States government securities, control of the discount rate
applicable to borrowings from the Federal Reserve and the establishment of
reserve requirements against deposits and certain liabilities of depository
institutions. The actions of the Federal Reserve Board influence the level of
loans, investments and deposits and also affect interest rates charged on loans
or paid on deposits. The nature and impact of future changes in monetary and
fiscal policies are not predictable.
From time to time, various proposals are made in the United States
Congress and the Pennsylvania legislature and before various regulatory
authorities which would alter the powers of different types of banking
organizations, remove restrictions on such organizations and change the existing
regulatory framework for banks, bank holding companies and other financial
institutions. It is impossible to predict whether any of such proposals will be
adopted and the impact, if any, of such adoption on the business of the
Corporation.
ACCOUNTING CHANGES
Impairment of Long-Lived Assets
The Corporation adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-lived Assets to be Disposed of" on January 1,
1996. See Note A-7 in Notes to Consolidated Financial Statements included in the
Corporation's 1996 Annual Report to Shareholders, incorporated by reference.
Mortgage Servicing Rights
The Coporation adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights" on January 1, 1996. See Note A-6 in Notes to Consolidated Financial
Statements included in the Corporation's 1996 Annual Report to Shareholders,
incorporated by reference.
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<PAGE>
Stock Based Compensation Plans
The Corporation adopted SFAS No. 123, "Accounting for Stock Based
Compensation Plans" on September 1, 1996. See Note A-11 in Notes to Consolidated
Financial Statements included in the Corporation's 1996 Annual Report to
Shareholders, incorporated by reference.
Accounting for Transfer and Services of Financial Assets and Establishment of
Liability
The Corporation will adopt the Financial Accounting Standards Board
("FASB") No. 125, "Accounting for Transfer and Services of Financial Assets and
Establishment of Liability." as of January 1, 1997. See Note A-15 in Notes to
Consolidated Financial Statements included in the Corporation's 1996 Annual
Report to Shareholders, incorporated by reference.
STATISTICAL DISCLOSURES
The following tables set forth certain statistical disclosures
concerning the Corporation and the Bank. These tables should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Corporation's 1996 Annual Report to
Shareholders, incorporated herein by reference.
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<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
RATE VOLUME ANALYSIS
<TABLE>
<CAPTION>
Increase (decrease) in net interest income due to:
--------------------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in thousands) 1996 Compared to 1995 1995 Compared to 1994
--------------------------------- ------------------------------
INTEREST INCOME
- ---------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 153 $ (67) $ 86 $ 278 $ 210 $ 488
Investment securities
Taxable 777 130 907 (209) 540 331
Tax-exempt (73) -- (73) (18) (41) (59)
----- ----- ----- ----- ----- -----
Total investment securities 704 130 834 (227) 499 272
Loans
Taxable 556 (423) 133 1,342 1,981 3,323
Tax-exempt 10 44 54 (51) 42 (9)
----- ----- ----- ----- ----- -----
Total loans 566 (379) 187 1,291 2,023 3,314
----- ----- ----- ----- ----- -----
Total interest income 1,423 (316) 1,107 1,342 2,732 4,074
----- ----- ----- ----- ----- -----
INTEREST EXPENSE
Savings, NOW and money market
deposits 207 (407) (200) (431) 780 349
Certificates of deposits and other time 787 126 913 1,281 1,039 2,320
----- ----- ----- ----- ----- -----
Total interest bearing deposits 994 (281) 713 850 1,819 2,669
Securities sold under repurchase
agreements (85) 2 (83) 39 95 134
Other borrowings (59) -- (59) 27 15 42
----- ----- ----- ----- ----- -----
Total Interest expense 850 (279) 571 916 1,929 2,845
----- ----- ----- ----- ----- -----
Net Interest income $ 573 $ (37) $ 536 $ 426 $ 803 $1,229
===== ===== ===== ===== ===== =====
<FN>
NOTES:
(1) The indicated changes are presented on a tax equivalent basis.
(2) The changes in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(3) Non-accruing loans have been used in the daily average balances to
determine changes in interest due to volume. Loan fees included in the
interest income computation are not material.
(4) The related average balance sheets can be found on page 13 of the
Corporation's 1996 Annual Report to Shareholders.
</FN>
</TABLE>
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<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
LOAN PORTFOLIO BY TYPE AT DECEMBER 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ---------------- --------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $ 87,932 34% $ 86,686 36% $ 87,689 37% $ 88,632 40% $ 82,602 39%
Real estate - construction 11,447 4% 9,372 4% 4,607 2% 6,327 3% 3,724 2%
Real estate - other 109,179 41% 100,814 41% 101,589 42% 87,389 40% 85,555 40%
Consumer loans (1) 39,803 15% 33,836 14% 32,984 14% 27,414 12% 29,815 14%
Lease financing receivables 16,221 6% 11,879 5% 12,257 5% 11,671 5% 10,879 5%
------- ------- ------- -------- -------
Total gross loans 264,582 100% 242,587 100% 239,126 100% 221,433 100% 212,575 100%
Allowance for possible loan
losses (5,218) (4,506) (3,303) (2,839) (2,300)
------- ------- ------- --------- -------
Total loans $259,364 $238,081 $235,823 $218,594 $210,275
======= ======= ======= ======= =======
<FN>
NOTES:
(1) Consumer loans include open-end home equity lines of credit and credit card receivables.
(2) At December 31, 1996 there were no concentrations of loans exceeding 10% of total loans which is not otherwise
disclosed as a category of loans in the above table.
(3) The Corporation does not breakdown the allowance for possible loan
losses by area, industry or type of loan because the evaluation process
used to determine the adequacy of the reserve is based on the portfolio
as a whole. Management believes such an allocation would not be
meaningful. See pages 17-20 of the Corporation's 1996 Annual Report to
Shareholders for additional information.
</FN>
</TABLE>
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FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MATURITIES AND RATE SENSITIVITY OF LOANS DUE TO CHANGES IN
INTEREST RATES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Maturing
Maturing After 1 Year Maturing
Within And Within After
(Dollars in thousands) 1 Year 5 Years 5 Years Total
------ ------- ------- -----
<S> <C> <C> <C> <C>
Commercial loans $67,166 $5,924 $14,842 $87,932
Real Estate - construction 11,447 -- -- 11,447
------ ----- ------ ------
Total $78,613 $5,924 $14,842 $99,379
====== ===== ====== ======
Loans maturing after 1 year with:
- ---------------------------------
Fixed interest rates $5,924 $14,842
Variable interest rates -- --
----- ------
Total $5,924 $14,842
===== ======
<FN>
NOTES:
- ------
(1) Demand loans and overdrafts are reported maturing "Within 1 Year".
Construction real estate loans are reported maturing "Within 1 Year"
because of their short term maturity or index to the Bank's prime rate.
An immaterial amount of loans has no stated schedule of repayments.
(2) Determination of maturities included in the above loan maturity table
are based upon contract terms. In situations where a "rollover" is
appropriate, the Corporation's policy in this regard is to evaluate the
credit for collectability consistent with the normal loan evaluation
process. This policy is used primarily in evaluating ongoing customer's
use of their lines of credit with the Bank that are at floating
interest rates.
(3) This data excludes real estate-other loans, consumer loans and lease
financing receivables.
</FN>
</TABLE>
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FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INVESTMENT SECURITIES YIELD BY MATURITY AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Due over Due over
Due 1 year 5 years Due
Within Through Through Over
(Dollars in thousands) 1 year 5 years 10 years 10 years Total
------ ------- -------- -------- -----
Held-to-Maturity
- ----------------
<S> <C> <C> <C> <C>
U.S. Treasury -- 1,483 -- -- 1,483
U.S. Government agency -- -- -- -- --
Mortgage-backed securities -- 1,213 806 126 2,145
State and municipal 1,812 1,495 2,410 25 5,742
Corporate securities 1,001 4,121 -- -- 5,122
Asset-backed -- -- 1,000 175 1,175
----- ------ ------ ------ ------
2,813 8,312 4,216 326 15,667
----- ------ ------ ------ ------
Available-for-Sale
- ------------------
U.S. Treasury 5,498 3,998 -- -- 9,496
U.S. Government agency -- 10,993 3,486 -- 14,479
Mortgage-backed securities 237 6,551 10,386 30,245 47,419
State and municipal -- -- -- 254 254
Asset-backed -- -- -- 1,268 1,268
Mutual Funds -- -- -- 7,793 7,793
Other equity securities -- -- -- 1,666 1,666
----- ------ ------ ------ ------
5,735 21,542 13,872 41,226 82,375
----- ------ ------ ------ ------
Total Investment securities $8,548 $29,854 $18,088 $41,552 $98,042
===== ====== ====== ====== ======
Percent of portfolio 8.72% 30.45% 18.45% 42.38% 100.00%
==== ===== ===== ===== ======
Weighted average yield 5.73% 6.32% 6.57% 5.99% 6.17%
==== ==== ==== ==== ====
<FN>
NOTES:
- ------
(1) The yield on tax-exempt obligations has been computed on a tax
equivalent basis using the Federal marginal rate of 34% adjusted for
the 20% interest expense disallowance.
(2) Other equity securities having no stated maturity (including the
Federated ARMs Fund) have been included in "Due over 10 years."
(3) Mortgage-backed and Asset-backed securities are included in the above
table based on their contractual maturity.
(4) As of December 31, 1996, the Corporation held securities from one
issuer, The Federated ARMs Fund, in excess of 10% of stockholders'
equity. The Corporation's investment in the Federated ARMs Fund was
$7,793,000 with a market value of $7,535,000. This fund concentrates at
least 65% of its value in adjustable and floating rate mortgage
securities which are issued or guaranteed as to payment of principal
and interest by the U.S. Government or its agencies.
</FN>
</TABLE>
-10-
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INVESTMENT SECURITIES AT DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------- -------------------------
Book Market Book Market Book Market
(Dollars in thousands) Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
Held-to-Maturity
- ----------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,483 $ 1,482 $ 1,473 $ 1,485 $ 1,464 $ 1,365
U.S. Government agency -- -- 1,501 1,496 1,500 1,416
Mortgage-backed securities 2,145 2,130 2,685 2,689 3,223 3,039
State and municipal 5,742 5,834 4,759 4,862 5,603 5,525
Corporate securities 5,121 5,123 11,806 11,867 15,455 15,130
Asset-backed 1,176 1,180 824 814 2,122 2,053
Mutual funds -- -- -- -- -- --
Other equity securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
$15,667 $15,749 $23,048 $23,213 $29,367 $28,528
====== ====== ====== ====== ====== ======
Available-for-Sale
- ------------------
U.S. Treasury $ 9,529 $ 9,529 $13,091 $13,091 $12,761 $12,761
U.S. Government agency 14,503 14,503 12,176 12,176 -- --
Mortgage-backed securities 47,031 47,031 34,475 34,475 25,446 23,446
State and municipal 278 278 281 281 268 268
Corporate securities -- -- 1,079 1,079 3,081 3,081
Asset-backed 1,268 1,268 -- -- 107 107
Mutual Funds 7,735 7,735 7,733 7,733 7,764 7,764
Other equity securities 1,864 1,864 1,628 1,628 1,595 1,595
------ ------ ------ ------ ------ ------
$82,008 $82,008 $70,463 $70,463 $49,022 $49,022
====== ====== ====== ====== ====== ======
</TABLE>
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS,
$100,000 OR MORE, AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Due Within Over 3 Months Over 6 Months Due Over
(Dollars in thousands) 3 Months Through 6 Months Through 12 Months 12 Months Total
----------- ---------------- ----------------- --------- -----
<S> <C> <C> <C> <C> <C>
Certificates of Deposit
$100,000 or more $ 1,363 $ 3,115 $ 3,098 $ 4,403 $11,979
</TABLE>
-11-
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
EFFECT OF NONACCRUING LOANS ON INTEREST FOR
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income which would
have been recorded $ 42 $ 103 $432 $225 $ 61
Interest income that was
received from customer 1 172 -- -- --
----- ----- --- --- ----
$ 41 $ (69) $432 $225 $ 61
===== ===== === === ====
<FN>
NOTES:
(1) Generally the Bank places a loan in nonaccrual status when principal or
interest has been in default for a period of 90 days or more unless the
loan is both well secured and in the process of collection.
</FN>
</TABLE>
-12-
<PAGE>
Item 2. Properties.
- ------- -----------
The Bank owns seven properties which are not subject to any mortgages.
The Corporation owns one property which is not subject to any mortgage, and
which is located at 124 West Cypress Street, Kennett Square, Pennsylvania. In
addition, the Corporation leases the Westtown-Thornbury and the Exton Offices.
Management of the Corporation believes the Corporation's and the Bank's
facilities are suitable and adequate for their respective present needs. Set
forth below is a listing of each banking office presently operated by the Bank
and the Corporation, and other properties owned by the Bank and the Corporation
which may serve as future sites for branch offices.
<TABLE>
<CAPTION>
Current Date
Banking Acquired
Offices Address or Opened
- ------- ------- ---------
<S> <C> <C>
Main Office 9 North High Street December 1863
and Corporate West Chester, Pennsylvania
Headquarters
Walk-In Facility 17 East Market Street February 1978
West Chester, Pennsylvania
Westtown-Thornbury Route 202 and Route 926 May 1994
Westtown, Pennsylvania
Goshen 311 North Five Points Road September 1956
West Goshen, Pennsylvania
Kennett Square 126 West Cypress Street February 1987
Kennett Square, Pennsylvania
Exton Route 100 and Boot Road August 1995
West Chester, Pennsylvania
Other Date Acquired
Properties Address or Opened
- ---------- ------- ---------
Operations 202 Carter Drive July 1988
Center West Chester, Pennsylvania
Paoli Pike 1104 Paoli Pike July 1963
West Chester, Pennsylvania
Kennett Square 124 West Cypress Street July 1986
Kennett Square, Pennsylvania
Westtown 1039 Wilmington Pike February 1965
Westtown, Pennsylvania
Former Commonwealth High & Market Streets July 1995
Building West Chester, Pennsylvania
</TABLE>
-13-
<PAGE>
Item 3. Legal Proceedings.
- ------- ------------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Corporation, the
Bank or EGSC is a party or of which any of their respective property is the
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
None.
PART II
Item 5. Market for the Corporation's Common Equity and Related Stockholder
- ------- ------------------------------------------------------------------
Matters.
--------
The Corporation's Common Stock is publicly traded over the counter.
Trading is sporadic. Information regarding high and low bid quotations is
incorporated herein by reference from the Corporation's 1996 Annual Report to
Shareholders, attached as an exhibit hereto. As of March 1, 1997, there were
approximately 833 shareholders of record of the Corporation's Common Stock.
The Corporation instituted a dividend reinvestment and stock purchase
plan in 1990 ("DRIP"), the purpose of which is to provide the shareholders of
the Corporation with a convenient method of investing cash dividends and
optional cash payments in additional shares of the Corporation's Common Stock.
As of December 31, 1996, 430 shareholders of the Corporation, representing
approximately 68,000 shares of the Corporation's Common Stock, were participants
in the DRIP. The DRIP purchased approximately $297,000 worth of the
Corporation's Common Stock for the accounts of the participating shareholders
during the year ended December 31, 1996.
The Corporation instituted a stock bonus plan (the "Stock Bonus
Plan") during 1991, the purpose of which is to promote the interests of the
Corporation by encouraging and enabling its employees and the employees of the
Bank to acquire financial interests in the Corporation through the acquisition
of shares of the Corporation's Common Stock. Under the Stock Bonus Plan, the
Corporation may grant bonuses to its employees consisting of (i) shares of its
Common Stock, (ii) shares of Common Stock and cash, or (iii) cash, as determined
by the Board of Directors. Historically, the shares of Common Stock constituting
the stock bonuses under the Stock Bonus Plan have been purchased by the
Corporation on the open market through an independent agent specified by the
Corporation's Board of Directors. At the annual meeting of shareholders on March
18, 1997, the shareholders approved an amendment of the stock bonus plan to
permit the award of stock bonuses with newly issued shares or shares held in the
Corporation's treasury. Approximately $262,000 in cash bonuses were paid in 1997
under the Stock Bonus Plan for services rendered by the executive officers and
other employees of the Bank during 1996.
The Corporation instituted a stock option plan in 1995 (the "1995
Stock Option Plan"), the purpose of which is to provide additional incentive to
key employees and directors of the Corporation and the Bank to enter into or
remain in the service or employ of the Corporation or the Bank by providing them
with an opportunity to acquire or increase their proprietary interest in the
Corporation through receipt of options to acquire the Common Stock of the
Corporation. Under the 1995 Stock Option Plan, 146,250 shares of Common Stock of
the Corporation were reserved for issuance to key employees of the Corporation
and the Bank, and 41,250 shares of such Common Stock were reserved for issuance
to directors of the Corporation and the Bank. To date the Corporation has
awarded options to purchase 31,500 shares to key employees and 16,500 shares to
directors pursuant to the 1995 Stock Option Plan.
-14-
<PAGE>
The Corporation declared cash dividends per share on its Common Stock
during each quarter of the fiscal years ended December 31, 1996 and 1995, as set
forth in the following table (which have been adjusted for the stock split which
occurred in October, 1996):
Dividends
---------
Amount Per Share
----------------
1996 1995
---- ----
First Quarter........................................ $ 0.23 $ 0.20
Second Quarter....................................... 0.23 0.20
Third Quarter........................................ 0.25 0.23
Fourth Quarter....................................... 0.29 0.26
----- -----
Total.............................................. $ 1.00 $ 0.89
===== =====
The holders of the Corporation's Common stock are entitled to receive
such dividends as may be legally declared by the Corporation's Board of
Directors. The amount, time, and payment of future dividends, however, will
depend on the earnings and financial condition of the Corporation, government
policies, and other factors. See Part I, Item 1, "Supervision and Regulation"
for information concerning limitations on the payment of dividends by the Bank
and the Corporation and on the ability of the Corporation to otherwise obtain
funds from the Bank.
Item 6. Selected Financial Data.
- ------- ------------------------
Selected financial data concerning the Corporation and the Bank is
incorporated by reference from the Corporation's 1996 Annual Report to
Shareholders, attached as an exhibit hereto. See Part II, Item 5, for data
concerning the payment of cash dividends on Common Stock.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- ------------------------------------------------------------------------
of Operations.
--------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations is incorporated by reference from the Corporation's 1996
Annual Report to Shareholders, attached as an exhibit hereto.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
Consolidated financial statements of the Corporation and the Report
of Independent Certified Public Accountants thereon are incorporated by
reference from the Corporation's 1996 Annual Report to Shareholders, attached as
an exhibit hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
PART III
Item 10. Directors and Executive Officers of the Corporation.
- -------- ----------------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 21, 1997, for its
1997 Annual Meeting of Shareholders.
-15-
<PAGE>
Item 11. Executive Compensation.
- -------- -----------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 21, 1997, for its
1997 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 21, 1997, for its
1997 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 21, 1997, for its
1997 Annual Meeting of Shareholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- -----------------------------------------------------------------
(a) 1. Index to Consolidated Financial Statements:
------------------------------------------
Page of Annual
Report to Shareholders
Consolidated Balance Sheets Page 22
at December 31, 1996 and
1995
Consolidated Statements of Page 23
Income for the years ended
December 31, 1996, 1995
and 1994
Consolidated Statement of Page 24
Changes In Stockholders'
Equity for the years
ended December 31, 1996,
1995 and 1994
Consolidated Statements of Page 25
Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Pages 26 to 42
Financial Statements
Report of Independent Certified
Public Accountants Page 43
-16-
<PAGE>
The Consolidated Financial Statements listed in the above index,
together with the report thereon of Grant Thornton LLP dated January 24, 1997,
which are included in the Corporation's Annual Report to Shareholders for the
year ended December 31, 1996, are hereby incorporated by reference.
(a) 2. Financial Statement Schedules:
-----------------------------
Financial Statement Schedules are not required under the related
instructions of the Securities and Exchange Commission, are inapplicable or are
included in the Consolidated Financial Statements or notes thereto.
(a) 3. Exhibits:
--------
The following is a list of the exhibits filed with, or
incorporated by reference into, this Report (those exhibits marked with an
asterisk are filed herewith):
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 Decem ber 31, 1988.
10. Material contracts.
------------------
(a) Copy of Executive Deferred Compensation Plan, adopted by
the Bank on December 16, 1988, is incorporated by reference to Exhibit 10(a) to
the Corporation's Annual Report on Form 10-K for the year ended December 31,
1988.
(b) Copy of Employment Agreement among the Corporation, the
Bank and Charles E. Swope dated December 31, 1994, is incorporated by reference
to Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994.
(c) Copy of the Corporation's Dividend Reinvestment Plan is
incorporated by reference to Exhibit 10(d) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1990.
(d) Copy of the Corporation's Amended and Restated Stock Bonus
Plan, is incorporated by reference to the appendix to the Corporation's Proxy
Statement for the 1997 annual meeting of shareholders as filed with the SEC via
EDGAR.
-17-
<PAGE>
(e) Copy of the Bank's Supplemental Benefit Retirement Plan,
effective date January 1, 1994, is incorporated by reference to Exhibit 10(g) to
the Corporation's Annual Report on Form 10-K for the year ended December 31,
1994.
(f) Copy of the Corporation's and the Bank's Directors
Deferred Compensation Plan, effective December 30, 1994, is incorporated by
reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994.
(g) Copy of the Corporation's Amended and Restated 1995 Stock
Option Plan, is incorporated by reference to the appendix to the Corporation's
Proxy Statement for the 1997 annual meeting of shareholders as filed with the
SEC via EDGAR.
* 13. Annual report to security holders, Form 10-Q or quarterly report to
-------------------------------------------------------------------
security holders. The Corporation's Annual Report to Shareholders for the year
- -----------------
ended December 31, 1996. With the exception of the pages listed in the Index to
Consolidated Financial Statements and the items referred to in Items 1, 5, 6, 7
and 8 hereof, the Corporation's 1996 Annual Report to Shareholders is not deemed
to be filed as part of this Report.
21. Subsidiaries of the Corporation. The First National Bank of West
-------------------------------
Chester, a banking institution organized under the banking laws of the United
States in December 1863.
* 23. Consents of experts and counsel. Consent of Grant Thornton LLP,
-------------------------------
dated March 28, 1997.
* 27. Financial Data Schedule. A Financial Data Schedule is being
-------------------------
submitted with the Corporation's 1996 Annual Report on Form 10-K in the
electronic format prescribed by the EDGAR Filer Manual and sets forth the
financial information specified by Article 9 of Regulation S-X and Securities
Act Industry Guide 3 information and Exchange Act Industry Guide 3 listed in
Appendix C to Item 601 of Regulation S-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Corporation
during the quarter ended December 31, 1996.
-18-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST WEST CHESTER CORPORATION
/s/ Charles E. Swope
By:
----------------------
Charles E. Swope,
President
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Corporation and in the capacities indicated on March 28, 1997.
Signature Title
--------- -----
/s/ Charles E. Swope
______________________________ President, Chief Executive
Charles E. Swope Officer and Chairman of the
Board of Directors
/s/ J. Duncan Smith
______________________________ Treasurer (Principal
J. Duncan Smith Accounting and Financial Officer)
(Signatures continued on following page)
-19-
<PAGE>
(Signatures continued from previous page)
Signature Title
--------- -----
/s/ Richard M. Armstrong
_________________________________ Director
Richard M. Armstrong
/s/ John J. Ciccarone
_________________________________ Director
John J. Ciccarone
/s/ M. Robert Clarke
_________________________________ Director
M. Robert Clarke
/s/ Edward J. Cotter
_________________________________ Secretary and Director
Edward J. Cotter
/s/ Clifford E. DeBaptiste
_________________________________ Director
Clifford E. DeBaptiste
/s/ John A. Featherman, III
_________________________________ Director
John A. Featherman, III
/s/ J. Carol Hanson
_________________________________ Director
J. Carol Hanson
/s/ John S. Halsted
_________________________________ Director
John S. Halsted
/s/ Devere Kauffman
_________________________________ Director
Devere Kauffman
/s/ David L. Peirce
_________________________________ Director
David L. Peirce
/s/ John B. Waldron
_________________________________ Director
John B. Waldron
-20-
<PAGE>
Index to Exhibits
Exhibits
- --------
13 The Corporation's Annual Report to Shareholders for the year ended
December 31, 1996.
23 Consent of Grant Thornton LLP.
27 Financial Data Schedule.
-21-
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
FIVE-YEAR STATISTICAL SUMMARY
<TABLE>
(Dollars in thousands, except per share)
<CAPTION>
December 31
--------------------------------------------------------------
STATEMENTS OF CONDITION 1996 1995 1994 1993 1992
- ----------------------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Assets $397,684 $388,500 $348,099 $351,073 $315,543
Loans 264,582 242,587 239,126 221,433 212,575
Investment securities 97,675 93,511 78,389 92,829 66,817
Deposits 351,266 343,926 305,465 307,355 274,446
Stockholders' equity 33,175 30,692 28,299 27,767 25,546
Financial Management Services
assets, at market value 271,212 255,992 256,998 240,189 229,109
</TABLE>
<TABLE>
Year Ended December 31
--------------------------------------------------------------
<CAPTION>
STATEMENTS OF INCOME 1996 1995 1994 1993 1992
- -------------------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Interest income $ 29,627 $ 28,466 $ 24,374 $ 23,471 $ 24,293
Interest expense 12,135 11,564 8,719 9,405 10,985
------- ------- ------- ------- -------
Net interest income 17,492 16,902 15,655 14,066 13,308
Provision for possible loan losses 1,079 1,666 1,790 1,524 1,435
------- ------- ------- ------- -------
Net interest income after
provision for possible loan
losses 16,413 15,236 13,865 12,542 11,873
Noninterest income 3,562 3,497 3,514 2,929 2,709
Noninterest expense 13,632 12,768 12,216 11,329 10,075
------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of accounting
method change 6,343 5,965 5,163 4,142 4,507
Income taxes 2,038 1,865 1,556 1,201 1,253
------- ------- ------- ------- -------
Income before cumulative effect of
accounting method change 4,305 4,100 3,607 2,941 3,254
Cumulative effect of accounting
method change - - - 489 -
Net income $ 4,305 $ 4,100 $ 3,607 $ 3,430 $ 3,254
======= ======= ======= ======= =======
PER SHARE (1)
Income before cumulative effect of
accounting method change $ 2.51 $ 2.34 $ 2.01 $ 1.64 $ 1.81
Cumulative effect of accounting
method change - - - 0.27 -
------- ------- ------- ------- -------
Net income $ 2.51 $ 2.34 $ 2.01 $ 1.91 $ 1.81
======= ======= ======= ======= =======
Cash dividends declared $ 1.00 $ 0.89 $ 0.77 $ 0.69 $ 0.64
Book value 19.33 17.92 15.72 15.43 14.25
Weighted average shares outstanding 1,718,025 1,752,413 1,799,784 1,799,352 1,796,268
<FN>
(1) Adjusted for 1995 3-for-2 stock split. See Note A11 - Earnings per Share and Stockholders' Equity - in the
accompanying financial statements for additional information.
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is intended to further your understanding of the
consolidated financial condition and results of operations of First West Chester
Corporation (the "Corporation") and its wholly-owned subsidiaries, The First
National Bank of West Chester (the "Bank") and 323 East Gay Street Corp
("EGSC"). It should be read in conjunction with the consolidated financial
statements included in this report.
EARNINGS AND DIVIDEND SUMMARY
1996 was another profitable year for the Corporation as net income
increased $205,000 or 5.0% to $4,305,000 from $4,100,000 in 1995. The
improvement was primarily the result of an industry-wide reduction in Federal
Deposit Insurance Corporation ("FDIC") insurance premiums, a gain from the sale
of property owned by EGSC, and a lower provision for loan losses, partially
offset by tighter net interest margins and increased operating expenses. Net
income for 1995 increased $493,000 or 13.7% from $3,607,000 in 1994, primarily
the result of improved net interest margins offset by increased operating
expenses. On a per share basis, 1996 earnings were $2.51, an increase of 7.3%
over 1995 earnings of $2.34. On a per share basis, 1995 earnings were 16.4%
higher than 1994 earnings of $2.01. Cash dividends per share in 1996 were $1.00,
a 12.4% increase over the 1995 dividend of $0.89. Cash dividends per share in
1995 were 15.6% higher than the 1994 dividend of $0.77. Over the past ten years,
the Corporation's practice has been to pay a dividend of at least 35.0% of net
income. Performance ratios for 1996 were down slightly from 1995, reflecting a
reduction in net income growth, while remaining favorable compared with 1994
numbers.
PERFORMANCE RATIOS 1996 1995 1994
- ------------------ -------- -------- ------
Return on Average Assets 1.12% 1.14% 1.05%
Return on Average Equity 13.59% 13.68% 12.83%
Earnings Retained 60.19% 62.05% 61.74%
Dividend Payout Ratio 39.81% 37.95% 38.26%
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, on a tax equivalent basis, increased 3.1% or $536,000, from
$17,155,000 in 1995 to $17,691,000 in 1996, compared to a 7.7% increase of
$1,229,000 from 1994 to 1995. The net yield on interest-earning assets, on a tax
equivalent basis, was 4.92% for the year ended 1996 compared to 5.06% in 1995,
and 4.96% in 1994. The decrease in net yield on interest-earning assets from
1995 to 1996 was attributable to reduced loan demand during the first three
quarters of 1996. The increase in net yield on interest-earning assets from 1994
to 1995 reflected a faster increase in earning asset yields during 1995 than
corresponding funding costs. The Corporation anticipates continued pressure on
the net yield on interest-earning assets as competition for new loan business
remains very strong and incremental deposit growth remains rate sensitive.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
YIELD ON 1996 1995 1994
- -------- ------- ------- ------
Interest-Earning Assets 8.29% 8.46% 7.67%
Interest-Bearing Liabilities 4.13 4.18 3.33
---- ---- ----
Net Interest Spread 4.16 4.28 4.34
Contribution of Interest-Free Funds 0.76 0.78 0.62
---- ---- ----
Net Yield on Interest-Earning Assets 4.92% 5.06% 4.96%
==== ==== ====
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST INCOME ON FEDERAL FUNDS SOLD AND INVESTMENT SECURITIES
Interest income on federal funds increased $86,000, from $648,000 in
1995 to $734,000 in 1996. The 13.3% increase in 1996 was attributed to a $2.6
million increase in average balances, partially offset by a 49 basis point (a
basis point equals one hundredth of one percent) decrease in rates compared to
the same period in 1995. The 1996 increase in average federal fund balances of
$2.6 million was the result of reduced loan demand during the first three
quarters of 1996. The 305.0% increase in 1995 was attributed to a $ 7.0 million
increase in average balances and a 191 basis point increase in rates compared to
the same period in 1994.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased $834,000, from $5,203,000 in 1995 to $6,037,000 in 1996, compared to a
$272,000 increase from 1994 to 1995. The 16.0% increase in investment interest
income from 1995 to 1996 was the result of a 13 basis point increase in the
yield on investment securities, and an $11.7 million increase in average
balances. The 5.5% increase in investment interest income from 1994 to 1995 was
the result of a 58 basis point increase in yield investment securities,
partially offset by a $4.1 million decrease in average balances. Changes in
investment portfolio balances are related to loan demand and deposit growth
levels.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio increased $187,000, from $22,868,000 in 1995 to
$23,055,000 in 1996. The 0.8% increase in interest income during 1996 was
attributable to a $6.0 million increase in average loans outstanding, offset by
a 16 basis point decrease in rates earned. Loan interest income, on a tax
equivalent basis, increased $3,314,000, from $19,554,000 in 1994 to $22,868,000
in 1995. The 16.9% increase in interest income during 1995 was attributable to a
$15.2 million increase in average loans outstanding and an 83 basis point
increase in rates earned. Competition for new and existing loan relationships
has been very strong the last three years, especially 1996. Price and fee
competition on loans over $500,000 has been especially strong. The Corporation
expects that this pricing pressure will continue, therefore reducing overall
loan yields and the net interest yield on interest earnings assets.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposits was $11,815,000 for 1996 compared to
$11,102,000 and $8,433,000 in 1995 and 1994, respectively. The 6.4% increase in
interest expense on deposits from 1995 to 1996 was the result of a $20.2 million
increase in average interest-bearing deposits, partially offset by a 5 basis
point decrease in rates paid. The 31.6% increase in interest expense for
deposits from 1994 to 1995 was the result of an 85 basis point increase in rates
paid on interest-bearing deposits and a $12.9 million increase in average
balances during 1995.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET AND TAX EQUIVALENT INCOME/EXPENSES
AND RATES FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ------------------------ ------------------------
(Dollars in thousands) Daily Daily Daily
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 13,603 $ 734 5.40% $ 11,001 $ 648 5.89% $ 4,024 $ 160 3.98%
Investment securities
Taxable 93,809 5,863 6.25 81,098 4,956 6.11 84,927 4,625 5.45
Tax-exempt (1) 2,519 174 6.91 3,576 247 6.91 3,801 306 8.05
------- ------ ------- ------ ------- ------
Total investment securities 96,328 6,037 6.27 84,674 5,203 6.14 88,728 4,931 5.56
------- ------ ------- ------ ------- ------
Loans (2)
Taxable 242,862 22,320 9.19 236,923 22,187 9.36 221,185 18,864 8.53
Tax-exempt (1) 6,835 735 10.75 6,734 681 10.11 7,271 690 9.49
------- ------ ------- ------ ------- ------
Total loans 249,697 23,055 9.23 243,657 22,868 9.39 228,456 19,554 8.56
------- ------ ------- ------ ------- ------
Total interest-earning assets 359,628 29,826 8.29 339,332 28,719 8.46 321,208 24,645 7.67
------ ------ ------
Noninterest-earning assets
Allowance for possible loan losses (4,848) (3,796) (3,164)
Cash and due from banks 17,153 16,037 17,654
Other assets 13,814 11,827 9,176
------- ------- -------
Total assets $385,747 $363,400 $344,874
======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Savings, NOW, and money market
deposits $168,528 5,231 3.10 $162,332 5,431 3.35 $177,414 5,082 2.86
Certificates of deposit and
other time 115,243 6,584 5.71 101,197 5,671 5.60 73,238 3,351 4.58
------- ------ ------- ------ ------- ------
Total interest-bearing deposits 283,771 11,815 4.16 263,529 11,102 4.21 250,652 8,433 3.36
Securities sold under repurchase
agreements 9,713 320 3.29 12,313 403 3.27 10,762 269 2.50
Other borrowings -- -- 949 59 6.22 367 17 4.63
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities 293,484 12,135 4.13 276,791 11,564 4.18 261,781 8,719 3.33
------ ------ ------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 55,018 52,177 50,872
Other liabilities 5,574 4,471 4,116
------- ------- -------
Total liabilities 354,076 333,439 316,769
Stockholders' equity 31,671 29,961 28,105
------- ------- -------
Total liabilities and stockholders'
equity $385,747 $363,400 $344,874
======= ======= =======
Net interest income $17,691 $17,155 $15,926
====== ====== ======
Net yield on interest-earning assets 4.92% 5.06% 4.96%
===== ===== ====
(1) The indicated income and annual rate are presented on a tax equivalent
basis using the federal marginal rate of 34%, adjusted for the 20%
interest expense disallowance for 1996, 1995, and 1994.
(2) Nonaccruing loans are included in the average balance.
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
While total average interest-bearing deposits have grown 7.7% and 5.1%
in 1996 and 1995, respectively, the components have not grown proportionately.
During 1996, average savings, NOW, and money market deposits increased $6.2
million or 3.8%, while average certificates of deposit and other time deposits
increased $14.0 million or 13.9%. During 1995, average savings, NOW and money
market deposits declined $15.1 million or 8.5%, while average certificates of
deposit and other time deposits increased $28.0 million or 38.2%. The
Corporation's effective rate on interest-bearing deposits changed from 3.89%,
4.20%, 4.26%, and 4.34% in the first, second, third, and fourth quarters of
1995, respectively, to 4.18%, 4.12%, 4.10%, and 4.15% in the first, second,
third, and fourth quarters of 1996, respectively.
PROVISION FOR POSSIBLE LOAN LOSSES
During 1996, the Corporation recorded a provision for possible loan
losses of $1,079,000, compared to $1,666,000 and $1,790,000 in 1995 and 1994,
respectively. Net charge-offs in 1996 were $367,000, down from $463,000 and
$1,326,000 in 1995 and 1994, respectively. Net charge-offs as a percentage of
average loans outstanding were 0.15%, 0.19%, and 0.58% for 1996, 1995, and 1994,
respectively. The 1996 decrease in provision for loan losses related to the
total allowance level of over $5.2 million (1.97% of loans) and the decline in
non-accrual loans from 1994 levels. See "Asset Quality and the Allowance For
Possible Loan Losses" for additional information.
NONINTEREST INCOME
Total noninterest income increased $65,000 or 1.9%, from $3,497,000 in
1995 to $3,562,000 in 1996, compared to a decrease of $17,000 or 0.5% from 1994
to 1995. The primary component of noninterest income was Financial Management
Services (formerly known as the Trust Department) revenue, which increased
$25,000 or 1.4%, from $1,836,000 in 1995 to $1,861,000 in 1996, compared to an
increase of $72,000 or 4.1% from 1994 to 1995. Market value of Financial
Management Services assets under management increased $15.2 million or 5.9%,
from $256.0 million at the end of 1995 to $271.2 million at the end of 1996, and
declined $1.0 million or 0.4% from 1994 to 1995. The 1996 increase in market
value of assets under management was attributable to new business development
and market value appreciation. The 1995 decline in market value of assets under
management was primarily the result of the distribution of two defined benefit
pension plans totaling $27.1 million, partially offset by increases in new
business and market value appreciation.
Service charges on deposit accounts decreased $44,000 or 4.9% in 1996,
while average deposits went up 7.3%. This decrease relates to 1996 changes in
the Bank's service charge structure. In 1995, service charges on deposit
accounts increased 0.7%, while average deposits grew 4.7%, a result of increases
in the earnings credit paid to commercial checking customers. Other noninterest
income included a gain of $135,000 relating to the sale of a property by EGSC in
1996 and a $190,000 and $273,000 gain relating to the termination of the
Corporation's defined benefit pension plans in 1995 and 1994, respectively.
Other noninterest income, excluding the above gains, was $710,000, $567,000, and
$585,000 in 1996, 1995, and 1994, respectively. See Note M - Employee Benefit
Plans - for additional information on pension plan changes.
NONINTEREST EXPENSE
Total noninterest expense increased $864,000 or 6.8%, from $12,768,000
in 1995 to $13,632,000 in 1996, compared to an increase of $552,000 or 4.5% from
1994 to 1995. The growth in noninterest expense reflects the increased costs
incurred to service the Corporation's expanding customer base. The components of
noninterest expense changes are discussed below.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Salary and employee benefits increased $662,000 or 9.4%, from
$7,073,000 in 1995 to $7,735,000 in 1996. The increase in 1996 was a result of
an overall 4.0% salary increase and a 4.4% increase in staff, partially offset
by decreases in pension costs. Salary and employee benefits increased $592,000
or 9.1% from 1994 to 1995, primarily the result of an overall 4.0% salary
increase, a 7.7% increase in staff and bonus payment increases, partially offset
by decreases in life insurance premiums and pension costs. The Corporation's
full-time equivalents were 190, 182, and 169 at the end of 1996, 1995, and 1994,
respectively.
Occupancy, equipment and data processing expense increased $283,000 or
12.0%, from $2,364,000 in 1995 to $2,647,000 in 1996. Occupancy, equipment and
data processing expense increased $108,000 or 4.8% from 1994 to 1995. The
increases in 1996 from 1995 were primarily a result of building renovations and
costs related to the teller on-line system and check imaging projects. The
increases in 1995 from 1994 were primarily the result of increased personal
computer costs and MAC system transaction volume, partially offset by decreased
costs associated with maintenance on equipment.
During 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. The 1995 rate paid was
$2.30 per $1,000 in deposits for the first six months and $.040 per $1,000 in
deposits for the balance of the year. FDIC insurance was $2,000, $349,000, and
$678,000 in 1996, 1995, and 1994, respectively. This represents a decrease of
$347,000 or 99.4% from 1995 to 1996 and a decrease of $329,000 or 48.5% from
1994 to 1995. FDIC insurance is calculated based on quarter-end deposits and
paid quarterly. Effective January 1, 1997, the BIF insurance premiums have been
set at $0.13 per $1,000 in deposits for the best rated banks. This rate is
effective through June 30, 1997.
Bank shares tax was 0.97%, 0.99%, and 0.81% of average stockholders'
equity for 1996, 1995, and 1994, respectively. The Pennsylvania Bank Shares Tax
is based primarily on Bank stockholders' equity and paid annually.
INCOME TAXES
Income tax expense was $2,038,000 in 1996 compared to $1,865,000 in
1995 and $1,556,000 in 1994. This represented an effective tax rate of 32.1%,
31.3%, and 30.1%, respectively. The primary reason for the increase in the
effective tax rates each year was a decrease in tax-exempt assets as a
percentage of total assets. Average tax-exempt assets as a percentage of total
average assets was 2.4%, 2.8%, and 3.2% in 1996, 1995, and 1994, 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 monitored as a regular part
of Bank operations, enabling management 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 as its "core" deposit base because of the historical stability of such
sources of funds. Additional liquidity comes from the Corporation's
noninterest-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, noninterest-bearing demand deposit accounts and other
deposit sources are highlighted in the following table:
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands)
1996 1995 1994
----------------------- ------------------------ ---------------------
Average Effective Average Effective Average Effective
DEPOSIT TYPE Balance Yield Balance Yield Balance Yield
------------ ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
NOW $ 47,984 2.20% $ 42,974 2.32% $ 41,985 2.30%
Money Market 28,974 3.09 29,610 3.23 32,962 2.68
Statement Savings 48,834 3.24 46,347 3.64 51,468 3.06
Other Savings 4,222 2.75 4,657 2.73 5,571 2.60
CDS Less than $100,000 102,566 5.76 89,866 5.67 64,551 4.57
------- -------- --------
Total Core Deposits 232,580 4.11 213,454 4.15 196,537 3.31
Noninterest-Bearing
Demand Deposits 55,018 - 52,177 - 50,872 -
-------- -------- --------
Subtotal 287,598 - 265,631 - 247,409 -
Tiered Savings 38,514 4.11 38,744 4.29 45,427 3.33
CDS Greater than $100,000 12,677 5.36 11,331 5.11 8,688 4.66
-------- -------- ---------
Total Deposits $338,789 - $315,706 - $301,524 -
======= ======= =======
</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. This line of
credit was approximately $8 million as of December 31, 1996. The line of credit
at the FHLB at December 31, 1995 was approximately $34 million. The reduction in
the line of credit available was the result of a system wide policy change by
the FHLB. However, the Bank's overall borrowing capacity at the FHLB remains
over $90 million.
The goal of interest rate sensitivity management is to avoid
fluctuating net interest margins and 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 ($109.5)
million or 27.5% of total assets at December 31, 1996, compared with ($45.6)
million or 11.7% of total assets at the end of 1995. The Corporation's gap
position is one factor used to evaluate interest rate risk and the stability of
net interest margins. Other factors include computer simulations of what might
happen to net interest income under various interest rate forecasts and
scenarios. Management monitors interest rate risk as a regular part of bank
operations with the intention of maintaining a stable net interest margin.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 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 $ 4,800 $ - $ - $ - $ 4,800
Investment securities 19,782 45,820 32,073 - 97,675
Loans and leases 124,332 124,524 15,726 (5,218) 259,364
Cash and cash equivalents - - - 21,956 21,956
Other assets - - - 13,889 13,889
-------- --------- ------- ------- --------
Total assets $ 148,914 $ 170,344 $ 47,799 $ 30,627 $ 397,684
======== ======= ======= ======= ========
LIABILITIES AND CAPITAL
Noninterest-bearing deposits $ - $ - $ - $ 63,591 $ 63,591
Interest bearing deposits 250,518 37,157 - - 287,675
Borrowed funds 7,943 - - - 7,943
Other liabilities - - - 5,300 5,300
Capital - - - 33,175 33,175
-------- --------- ------- ------- --------
Total liabilities and capital $ 258,461 $ 37,157 $ - $102,066 $ 397,684
======== ========= ======= ======= ========
Net interest rate sensitivity gap $(109,547) $ 133,187 $ 47,799 $(71,439) $ -
======== ======= ======= ======= ========
Cumulative interest rate
sensitivity gap $(109,547) $ 23,640 $ 71,439 $ - $ -
======== ======= ======= ======= ========
Cumulative interest rate
sensitivity gap divided
by total assets (27.5)% 5.9% 18.0% - -
</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 collectible 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. The allowance for possible loan losses as
a percentage of year-end loans outstanding increased from 1.86% at December 31,
1995, to 1.97% at December 31, 1996.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
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>
December 31
----------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,506 $ 3,303 $ 2,839 $ 2,300 $ 1,850
--------- --------- --------- --------- ---------
Provision charged to operating expense 1,079 1,666 1,790 1,524 1,435
--------- --------- --------- --------- ---------
Recoveries of loans previously charged off
Commercial loans 36 4 19 69 212
Real estate - mortgages - 46 9 2 77
Consumer loans 8 29 10 21 19
--------- --------- --------- --------- ---------
Total recoveries 44 79 38 92 308
--------- --------- --------- --------- ---------
Loan charge-offs
Commercial loans (118) (348) (253) (28) (922)
Real estate - mortgages (218) (25) (1,042) (975) (192)
Consumer loans (62) (108) (69) (71) (179)
Lease financing receivables (13) (61) - (3) -
--------- --------- --------- --------- ---------
Total charge-offs (411) (542) (1,364) (1,077) (1,293)
--------- --------- --------- --------- ---------
Net loan charge-offs (367) (463) (1,326) (985) (985)
--------- --------- --------- --------- ---------
Balance at end of year $ 5,218 $ 4,506 $ 3,303 $ 2,839 $ 2,300
========= ========= ========= ========= =========
Year-end loans outstanding $ 264,582 $ 242,587 $ 239,126 $ 221,433 $ 212,575
Average loans outstanding $ 249,697 $ 243,657 $ 228,456 $ 217,086 $ 212,394
Allowance for possible loan losses as
a percentage of year-end loans
outstanding 1.97% 1.86% 1.38% 1.28% 1.08%
Ratio of net charge-offs to average
loans outstanding 0.15% 0.19% 0.58% 0.45% 0.46%
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nonperforming 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
nonperforming loans to net realizable value based on updated appraisals.
Nonperforming loans are generally collateralized by real estate and are in the
process of collection. The increase in loans past due 90 days and still accruing
at December 31, 1996, was primarily related to three different loan customers.
In all instances, the Bank has adequate collateral as to principal and interest
and is in the process of collection. One loan in the amount of $1.2 million is
expected to be brought current and assumed by a new borrower during the first
quarter of 1997.
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. At December 31, 1996, there were no concentrations of loans
exceeding 10% of total loans which are not otherwise disclosed.
NONPERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Past due over 90 days and still accruing $ 2,772 $ 419 $ 323 $ 1,074 $ 2,111
Nonaccrual loans 713 726 2,997 2,804 1,200
-------- --------- -------- -------- --------
Total nonperforming loans 3,485 1,145 3,320 3,878 3,311
Other real estate owned 1,274 1,447 1,565 - 90
-------- --------- -------- -------- --------
Total nonperforming assets $ 4,759 $ 2,592 $ 4,885 $ 3,878 $ 3,401
======== ======== ======== ======== ========
Nonperforming loans as a
percentage of total loans 1.32% 0.47% 1.39% 1.75% 1.56%
Allowance for possible loan losses
as a percentage of nonperforming
loans 149.7% 393.5% 99.5% 73.2% 69.5%
Nonperforming assets as a percentage
of total loans and other real estate
owned 1.79% 1.06% 2.03% 1.75% 1.60%
Allowance for possible loan losses as
a percentage of nonperforming
assets 109.6% 173.8% 67.6% 73.2% 67.6%
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Although the allowance for possible loan losses as a percentage of
nonperforming loans decreased to 149.7% at December 31, 1996, from 393.5% at
December 31, 1995, this ratio still indicates that the allowance for possible
loan losses is sufficient to cover the principal of all nonperforming loans at
December 31, 1996. 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 24 months, although swifter disposition is anticipated.
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 December
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. See Note H - Capital
Requirements - for additional information.
<TABLE>
<CAPTION>
December 31
RISK-BASED -------------------------------------- "Well Capitalized"
CAPITAL RATIOS 1996 1995 1994 Requirements
- -------------- ------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Leverage Ratio 8.58% 8.19% 8.53% 5.00%
Tier I Capital Ratio 12.05% 11.51% 11.09% 6.00%
Total Risk-Based Capital Ratio 13.31% 12.77% 12.32% 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 effect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
rate for the Corporation was 8.09%, 2.68%, and 1.92% for the years ended
December 31, 1996, 1995, and 1994, respectively.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DESCRIPTION OF CAPITAL STOCK AND MARKET INFORMATION
The authorized capital stock of the Corporation consists of 5,000,000
shares of common stock, par value $1.00 per share, of which 1,715,941 shares and
1,712,941 shares were outstanding at the end of 1996 and 1995, respectively. The
Corporation's common stock is publicly traded over the counter. Trading is
sporadic. The following table, which shows the range of high and low month-end
bid prices for the stock, is based upon transactions reported by the
Philadelphia brokerage firm of F. J. Morrissey & Co., Inc.
Bid Prices (1)
1996 1995
---- ----
Quarter Ended High Low High Low
First $31.25 $29.00 $21.33 $21.33
Second $30.00 $29.25 $21.33 $21.17
Third $30.00 $29.25 $23.66 $21.33
Fourth $30.50 $30.25 $28.00 $25.00
(1) Adjusted for 1995 3-for-2 stock split. See Note A11 - Earnings per Share
and Stockholders' Equity - in the accompanying financialstatements for
additional information.
Other statistical disclosures required by bank holding companies can be
found in the Corporation's 10-K, to be filed with the Securities and Exchange
Commission on March 30, 1997. Copies of the 10-K can be obtained from the
Corporation's Shareholder Relations Representative, P.O. Box 523, West Chester,
PA 19381-0523, at 610-344- 2686.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 21,956 $ 19,944
Federal funds sold 3,800 24,700
---------- --------
Total cash and cash equivalents 25,756 44,644
---------- --------
Interest-bearing deposits with banks 1,000 --
Investment securities held-to-maturity (market value of
$15,749 and $23,213 in 1996 and 1995, respectively) 15,667 23,048
Investment securities available-for-sale, at fair value 82,008 70,463
Loans 264,582 242,587
Less: Allowance for possible loan losses (5,218) (4,506)
---------- --------
Net loans 259,364 238,081
Premises and equipment 6,752 5,521
Other assets 7,137 6,743
---------- --------
Total assets $ 397,684 $ 388,500
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 63,591 $ 63,393
Interest-bearing (including certificates of deposit over $100 of
$11,978 and $11,479 - 1996 and 1995, respectively) 287,675 280,533
-------- --------
Total deposits 351,266 343,926
Securities sold under repurchase agreements 7,943 8,858
Other liabilities 5,300 5,024
-------- --------
Total liabilities 364,509 357,808
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 5,000,000 shares; outstanding,
1996 - 1,715,941 and 1995 - 1,712,941; excluding
shares in treasury, 1996 - 84,000 and 1995 - 87,000 1,800 1,800
Additional paid-in capital 3,305 3,301
Retained earnings 30,133 27,542
Net unrealized loss on securities available-for-sale (242) (65)
Treasury stock, at cost (1,821) (1,886)
-------- --------
Total stockholders' equity 33,175 30,692
-------- --------
Total liabilities and stockholders' equity $ 397,684 $ 388,500
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands, except per share) December 31
-------------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 22,856 $ 22,682 $ 19,366
Investment securities 5,990 5,136 4,848
Federal funds sold 734 648 160
Deposits in banks 47 -- --
Total interest income 29,627 28,466 24,374
-------- -------- --------
INTEREST EXPENSE
Deposits 11,815 11,102 8,433
Securities sold under repurchase agreements 320 462 286
-------- -------- --------
Total interest expense 12,135 11,564 8,719
-------- -------- --------
Net interest income 17,492 16,902 15,655
PROVISION FOR POSSIBLE LOAN LOSSES 1,079 1,666 1,790
-------- -------- --------
Net interest income after provision for possible loan losses 16,413 15,236 13,865
-------- -------- --------
NONINTEREST INCOME
Financial Management Services 1,861 1,836 1,764
Service charges on deposit accounts 851 895 889
Investment securities gains, net 5 9 3
Other 845 757 858
-------- -------- --------
Total noninterest income 3,562 3,497 3,514
-------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 7,735 7,073 6,481
Occupancy, equipment, and data processing 2,647 2,364 2,256
FDIC insurance 2 349 678
Bank shares tax 308 297 228
Other operating 2,940 2,685 2,573
-------- -------- --------
Total noninterest expense 13,632 12,768 12,216
-------- -------- --------
Income before income taxes 6,343 5,965 5,163
INCOME TAXES 2,038 1,865 1,556
-------- -------- --------
NET INCOME $ 4,305 $ 4,100 $ 3,607
======== ======== ========
PER SHARE
Net income $ 2.51 $ 2.34 $ 2.01
======== ======== ========
Cash dividends declared $ 1.00 $ 0.89 $ 0.77
======== ======== ========
Weighted average shares outstanding 1,718,025 1,752,413 1,799,784
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained Treasury
(Dollars in thousands) Shares Par Value Capital Earnings Other Stock
----------- ----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 1,199,821 $ 1,200 $ 3,900 $ 22,771 $ (99) $ (5)
Change in accounting for
investments on January 1, 1994 - - - - 236 -
Net income - - - 3,607 - -
Cash dividends declared - - - (1,380) - -
Net unrealized loss on
securities available-for-sale - - - - (1,936) -
Treasury stock transactions 179 - - - - 5
--------- ------ ------- -------- ------- ------
Balance at December 31, 1994 1,200,000 1,200 3,900 24,998 (1,799) -
Net income - - - 4,100 - -
Cash dividends declared - - - (1,556) - -
Net unrealized gain on equity
securities available-for-sale - - - - 1,734 -
3-for-2 stock split 599,941 600 (600) - - -
Treasury stock transactions ( 87,000) - 1 - - (1,886)
--------- ------ ------- -------- ------- ------
Balance at December 31, 1995 1,712,941 1,800 3,301 27,542 (65) (1,886)
Net income - - - 4,305 - -
Cash dividends declared - - - (1,714) - -
Net unrealized loss on equity
securities available-for-sale - - - - (177) -
Treasury stock transactions 3,000 - 4 - - 65
--------- ------ ------- -------- ------- -------
Balance at December 31, 1996 1,715,941 $ 1,800 $ 3,305 $ 30,133 $ (242) $ (1,821)
========= ====== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
---------------------------------------
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,305 $ 4,100 $ 3,607
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 786 614 618
Provision for loan losses 1,079 1,666 1,790
Amortization of investment security
premiums and accretion of discounts 141 217 392
Amortization of deferred fees on loans (57) (5) 46
Provision for deferred income taxes (331) (394) (165)
Investment securities (gains) losses, net (5) (9) (3)
(Decrease) increase in other assets 29 (163) (3,414)
Increase (decrease) in other liabilities 222 1,127 (1,283)
-------- -------- --------
Net cash provided by operating activities 6,169 7,153 1,588
-------- -------- --------
INVESTING ACTIVITIES
Increase in interest-bearing deposits with banks (1,000) -- --
Increase in loans (22,309) (3,919) (19,064)
Proceeds from sales of investment securities available-for-sale 4,172 301 1,875
Proceeds from maturities of investment securities available-for-sale 17,826 13,367 19,529
Proceeds from maturities of investment securities held-to-maturity 11,477 7,244 8,042
Purchase of investment securities available-for-sale (33,919) (32,615) (17,098)
Purchase of investment securities held-to-maturity (4,120) (999) --
Purchase of premises and equipment, net (2,017) (1,309) (830)
-------- -------- --------
Net cash used in investing activities (29,890) (17,930) (7,546)
-------- -------- ---------
FINANCING ACTIVITIES
Increase (decrease) in deposits 7,340 38,461 (1,890)
(Decrease) in securities sold under repurchase agreements (915) (1,641) (119)
Cash dividends (1,661) (1,495) (1,321)
Treasury stock transactions 69 (1,885) 5
-------- -------- --------
Net cash provided by (used in) financing activities 4,833 33,440 (3,325)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (18,888) 22,663 (9,283)
Cash and cash equivalents at beginning of year 44,644 21,981 31,264
-------- -------- --------
Cash and cash equivalents at end of year $ 25,756 $ 44,644 $ 21,981
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First West Chester Corporation (the "Corporation"), through its wholly-owned
subsidiary, The First National Bank of West Chester (the "Bank"), has been
serving the residents and businesses of Chester County, Pennsylvania, since
1863. The Bank is a locally managed community bank providing loan, deposit,
and trust services from its five branch locations. The Bank encounters
vigorous competition for market share in the communities it serves from bank
holding companies, other community banks, thrift institutions, and other
non-bank financial organizations such as mutual fund companies, insurance
companies, and brokerage companies.
The Corporation and the Bank are subject to regulations of certain state and
federal agencies. These regulatory agencies periodically examine the
Corporation and the Bank for adherence to laws and regulations. As a
consequence, the cost of doing business may be affected.
1. Basis of Financial Statement Presentation
-----------------------------------------
The accounting policies followed by the Corporation and its wholly-owned
subsidiaries, the Bank and 323 East Gay Street Corp ("EGSC"), conform to
generally accepted accounting principles and predominant practices within
the banking industry. The accompanying financial statements include the
accounts of the Corporation, the Bank, and EGSC. All significant
intercompany transactions have been eliminated.
2. Financial Instruments
---------------------
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair
Value of Financial Instruments," which requires all entities to disclose the
estimated fair value of their assets and liabilities considered to be
financial instruments. Financial instruments requiring disclosure consist
primarily of investment securities, loans, and deposits.
3. Investment Securities
---------------------
The Corporation adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," on January 1, 1994. This new standard requires
investments in securities to be classified in one of three categories:
held-to-maturity, trading, or available-for-sale. Debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are reported at amortized cost. As the
Corporation does not engage in security trading, the balance of its debt
securities and any equity securities are classified as available-for-sale.
Net unrealized gains and losses for such securities, net of tax effect, are
required to be recognized as a separate component of stockholders' equity
and excluded from the determination of net income.
4. Loans and Allowance for Loan Losses
-----------------------------------
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. Interest on loans is accrued and
credited to operations based upon the principal amount outstanding.
Accrual of interest is discontinued on a loan when management believes that
the borrower's financial condition is such that collection of interest and
principal is doubtful. Upon such discontinuance, all unpaid accrued interest
is reversed. The determination of the allowance for loan losses is based
upon the character of the loan portfolio,
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
current economic conditions, loss experience, and other relevant factors
which, in management's judgment, deserve recognition in estimating possible
losses.
On January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by
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, its observable market price or the fair value of the
collateral if the loan is collateral dependent. If it is probable that a
creditor will foreclose on a property, the creditor must measure impairment
based on the fair value of the collateral. SFAS No. 118 allows creditors to
use existing methods for recognizing interest income on impaired loans.
5. Loan Fees and Related Costs
---------------------------
Certain origination and commitment fees and related direct loan origination
costs are deferred and amortized over the contractual life of the related
loans, resulting in an adjustment of the related loan's yield.
6. Mortgage Servicing Rights
-------------------------
On January 1, 1996, the Corporation adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65," which
requires that the Corporation recognize as a separate asset rights to
service mortgage loans for others, however those servicing rights are
acquired. In circumstances where mortgage loans are originated, separate
asset rights to service mortgage loans are only recorded when the
Corporation intends to sell such loans. The adoption of this new statement
did not have a material impact on the Corporation's financial position or
results of operations.
7. Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Assets are depreciated over their estimated useful lives, principally by the
straight-line method.
On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." This statement provides guidance on when assets should be reviewed for
impairment, how to determine whether an asset or group of assets is
impaired, how to measure an impairment loss, and the accounting for long
lived-lived assets that a company plans to dispose of. The adoption of this
new statement did not have a material impact on the Corporation's
consolidated financial position or results of operations.
8. Contributions
-------------
On January 1, 1995, the Corporation adopted SFAS No. 116, "Accounting for
Contributions Received and Contributions Made." SFAS No. 116 specifies that
contributions made by the Corporation be recognized as expenses in the
period made and as decreases of assets or increases of liabilities depending
on the form of the benefits given. In accordance with SFAS No. 116, the
Corporation accrued contribution expenses of $137,000 relating to long-term
commitments to local not-for-profit organizations during 1995. Financial
statements prior to 1995 were not restated. Prior to 1995, the Corporation
accounted for contributions made on a cash basis.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
9. Income Taxes
------------
The Corporation accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the liability method specified by SFAS
No. 109, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities.
10. Employee Benefit Plans
----------------------
The Corporation has certain employee benefit plans covering eligible
employees. The Bank accrues such costs as earned.
11. Stock Based Compensation Plan
-----------------------------
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation, 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.
Alternately, the standard permits entities to continue accounting for
employee stock options and similar instruments under "Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 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's stock option plan is accounted for
under APB Opinion No. 25.
12. Financial Management Services Assets and Income
-----------------------------------------------
Assets held by the Corporation in fiduciary or agency capacities for its
customers are not included in the accompanying consolidated balance sheets
since such items are not assets of the Corporation. Operating income and
expenses of Financial Management Services are included under their
respective captions in the accompanying consolidated statements of income
and are recorded on the accrual basis.
13. Earnings per Share and Stockholders' Equity
-------------------------------------------
Earnings per share are calculated using the weighted average shares
outstanding during the year. On September 18, 1995, the Board of Directors
declared a 3-for-2 stock split, payable October 16, 1995, in the form of a
50% stock dividend to stockholders of record on October 3, 1995. Par value
remained at $1.00 per share. The stock split resulted in the issuance of
599,941 additional shares of common stock from authorized but unissued
shares. The issuance of authorized but unissued shares resulted in the
transfer of $600,000 from additional paid-in capital to common stock,
representing the par value of the shares issued. Accordingly, earnings per
share, cash dividends per share, and weighted average shares of common stock
outstanding have been restated to reflect the stock split.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
14. Cash Flow Information
---------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods. Cash paid during the years
ended December 31, 1996, 1995, and 1994 for interest was $11,718,000,
$10,901,000, and $10,268,000, respectively. Cash paid during the years ended
December 31, 1996, 1995, and 1994 for income taxes was $2,100,000,
$2,144,000, and $1,891,000, respectively.
15. Accounting for Transfers and Servicing of Financial Assets and
----------------------------------------------------------------------
Extinguishments of Liabilities
------------------------------
The Financial Accounting Standards Board (FASB) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as amended by SFAS No. 127, which provides accounting guidance
on transfers of financial assets, servicing of financial assets, and
extinguishments of liabilities occurring after December 31, 1996. Adoption
of this new statement is not expected to have a material impact on the
Company's consolidated financial position or results of operations.
16. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE B - INVESTMENT SECURITIES
On January 1, 1994, the Corporation changed its method of accounting for
certain debt and equity securities and recorded an unrealized holding gain,
net of taxes, of $236,000 as a separate component of stockholders' equity.
At December 31, 1996 and 1995, unrealized holding losses on securities
available-for-sale, net of taxes, were $242,000 and $65,000, respectively.
The amortized cost, gross unrealized gains and losses, and fair market value
of the Corporation's available-for-sale and held-to-maturity securities are
summarized as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
---------------- ------------------
(Dollars in thousands) Gross Gross Fair Gross Gross Fair
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,483 $ 1 $ (2) $ 1,482 $ 9,496 $ 34 $ (1) $ 9,529
U.S. Government agency - - - - 14,479 53 (29) 14,503
Mortgage-backed securities 2,145 5 (20) 2,130 47,419 173 (561) 47,031
State and municipal 5,742 103 (11) 5,834 254 24 - 278
Corporate securities 5,121 11 (9) 5,123 1,268 - - 1,268
Asset-backed securities 1,176 5 (1) 1,180 - - - -
Mutual funds - - - - 7,793 - (258) 7,535
Other equity securities - - - - 1,666 198 - 1,864
------- ----- --- ------ ------- ----- ----- -------
$15,667 $ 125 $(43) $15,749 $ 82,375 $ 482 $ (849) $ 82,008
====== ===== === ====== ======= ===== ====== =======
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE B - INVESTMENT SECURITIES - continued
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
---------------- ------------------
(Dollars in thousands) Gross Gross Fair Gross Gross Fair
1995 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
---- Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ------ --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,473 $ 12 $ - $ 1,485 $13,020 $ 89 $ (18) $13,091
U.S. Government agency 1,501 4 (9) 1,496 12,011 165 - 12,176
Mortgage-backed securities 2,685 26 (22) 2,689 34,659 141 (325) 34,475
State and municipal 4,759 108 (5) 4,862 254 27 - 281
Corporate securities 11,806 62 (1) 11,867 1,079 - - 1,079
Asset-backed securities 824 2 (12) 814 - - - -
Mutual funds - - - - 8,000 - (267) 7,733
Other equity securities - - - - 1,540 224 (136) 1,628
------ ---- ----- ------- ------ ---- ----- ------
$23,048 $ 214 $ (49) $ 23,213 $70,563 $ 646 $ (746) $70,463
====== ==== ===== ======= ====== ==== ===== ======
</TABLE>
The amortized cost and estimated fair value of debt securities classified as
available-for-sale and held-to-maturity at December 31, 1996, by contractual
maturity, are shown in the following table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
---------------- ------------------
Estimated Estimated
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,813 $ 2,818 $ 5,498 $ 5,509
Due after one year through five years 7,098 7,132 14,991 15,033
Due after five years through ten years 2,411 2,463 3,486 3,491
Due after ten years 25 27 254 278
-------- --------- --------- ---------
12,347 12,440 24,229 24,311
Mortgage-backed securities 2,145 2,130 47,419 47,030
Asset-backed securities 1,175 1,179 1,268 1,268
-------- --------- --------- ---------
$ 15,667 $ 15,749 $ 72,916 $ 72,609
======== ========= ========= =========
</TABLE>
Proceeds on sales of securities classified as available-for-sale were
$4,172,000 and $301,000 during 1996 and 1995, respectively. Gains of
$31,000, $17,000, and $94,000, and losses of $26,000, $8,000, and $91,000
were realized on sales of securities in 1996, 1995, and 1994, respectively.
The Corporation uses the specific identification method to determine the
cost of the securities sold. The principal amount of investment securities
pledged to secure public deposits and for other purposes required or
permitted by law was $25,402,000 and $28,170,000 at December 31, 1996 and
1995, respectively. There were no securities held from a single issuer that
represented more than 10% of stockholders' equity.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE C - LOANS
Major classifications of loans are as follows:
(Dollars in thousands) 1996 1995
---------- -----------
Commercial loans $ 87,932 $ 86,686
Real estate - construction 11,447 9,372
Real estate - other 109,179 100,814
Consumer loans 39,803 33,836
Lease financing receivables 16,221 11,879
--------- ---------
264,582 242,587
Less: Allowance for loan losses (5,218) (4,506)
--------- ---------
$ 259,364 $ 238,081
========= ========
Loan balances on which the accrual of interest has been discontinued
amounted to approximately $713,000 and $726,000 at December 31, 1996 and
1995, respectively. Interest on these nonaccrual loans would have been
approximately $62,000 and $51,000 in 1996 and 1995, respectively. Loan
balances past due 90 days or more which are not on a nonaccrual status, but
which management expects will eventually be paid in full, amounted to
$2,772,000 and $419,000 at December 31, 1996 and 1995, respectively. Changes
in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 4,506 $ 3,303 $ 2,839
Provision charged to operating expenses 1,079 1,666 1,790
Recoveries of charged-off loans 44 79 38
Loans charged-off (411) (542) (1,364)
--------- ----------- ---------
Balance at end of year $ 5,218 $ 4,506 $ 3,303
========== ========== =========
</TABLE>
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 impaired loans
and no income is recognized until all recorded amounts of interest and
principal are recovered in full. Retail loans and residential mortgages have
been excluded from these calculations.
The balance of impaired loans was $443,000, $590,000, and $2,819,000 at
December 31, 1996, December 31, 1995, and January 1, 1995, respectively. The
associated allowance for loan losses for impaired loans was $419,000,
$433,000, and $380,000 at December 31, 1996, December 31, 1995, and January
1, 1995, respectively.
During 1996, activity in the allowance for impaired loan losses included a
provision of $110,000, write-offs of $159,000, and recoveries of $34,000.
Interest income of $1,000 was recorded in 1996, while contractual interest
in the same period amounted to $42,000. Cash collected on impaired loans in
1996 was $172,000, of which $171,000 was applied to principal and $1,000 was
applied to interest.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE C - LOANS - continued
During 1995, activity in the allowance for impaired loan losses included a
provision of $380,000, write-offs of $369,000, and recoveries of $42,000.
Interest income of $172,000 was recorded in 1995, while contractual interest
in the same period amounted to $103,000. Cash collected on impaired loans in
1995 was $1,448,000, of which $1,276,000 was applied to principal and
$172,000 was applied to interest.
During the year ended December 31, 1995, two impaired loans totaling
$699,000 were transferred to OREO, and one impaired loan for approximately
$500,000 was transferred to EGSC as an equity investment. The $500,000
impaired loan that was transferred to EGSC in 1995 was liquidated in 1996.
The proceeds from the liquidation were in excess of $600,000, resulting in a
gain of $135,000 which was included in other noninterest income in 1996.
In the normal course of business, the Bank has made loans to certain
officers, directors, and their related interests. All loan transactions
entered into between the Bank and such related parties were made on the same
terms and conditions as transactions with all other parties. In management's
opinion, such loans are consistent with sound banking practices and are
within applicable regulatory lending limitations. The balance of these loans
at December 31, 1996 and 1995, was approximately $8,625,000 and $8,069,000,
respectively. In 1996, new loans and payments amounted to approximately
$2,337,000 and $1,781,000, respectively.
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
(Dollars in thousands) 1996 1995
---------- ----------
Premises $ 7,990 $ 7,111
Equipment 5,532 4,394
--------- ---------
13,522 11,505
Less Accumulated depreciation (6,770) (5,984)
--------- ---------
$ 6,752 $ 5,521
========= =========
NOTE E - SHORT-TERM BORROWINGS AND CREDIT FACILITY
Securities sold under agreements to repurchase are generally overnight
transactions. These borrowings had interest rates of 3.3%, 3.3% and 3.0% and
balances of $7,943,000, $8,858,000 and $10,499,000 at December 31, 1996,
1995 and 1994, respectively. Daily average balances and weighted average
interest rates for the years ended December 31, 1996, 1995 and 1994 were
$9,713,000, $12,313,000 and $10,762,000 and 3.3%, 3.3% and 2.5%,
respectively. Maximum amounts outstanding at any month-end were
approximately $11,715,000, $16,037,000 and $13,348,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
As of December 31, 1996, the Bank had a line of credit with the FHLB of
approximately $8 million. The line of credit 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 over $80 million. Advances
under this line of credit are payable on demand, bear interest at the
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE E - SHORT-TERM BORROWINGS AND CREDIT FACILITY - continued
federal fund's rate plus 25 basis points. The Bank had no borrowings under
this line of credit during 1996 and 1994. Daily average balance and weighted
average interest rate for the year ended December 31, 1995 was $949,000 and
6.2%, respectively. Maximum amounts outstanding at any month-end in 1995
were $10,000,000. There were no amounts outstanding at December 31, 1996 and
1995. FHLB advances are collateralized by a pledge of the Bank's entire
portfolio of unencumbered investment securities, certain mortgage loans and
a lien on the Bank's FHLB stock.
NOTE F - OTHER NONINTEREST EXPENSE
The components of other noninterest expense are detailed as follows:
(Dollars in thousands) 1996 1995 1994
--------- --------- --------
Purchased services $ 664 $ 647 $ 707
Telephone, postage, and supplies 633 516 515
Marketing and corporate communications 340 359 459
Loan and deposit supplies 406 200 353
Director costs 260 281 235
Other 637 682 304
------- ------ ------
$ 2,940 $ 2,685 $ 2,573
====== ====== ======
NOTE G - INCOME TAXES
The components of income taxes are detailed as follows:
(Dollars in thousands) 1996 1995 1994
---------- ---------- ---------
Current $ 2,369 $ 2,259 $ 1,721
Deferred (331) (394) (165)
-------- -------- -------
$ 2,038 $ 1,865 $ 1,556
======== ======== =======
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from
Tax-exempt loan and investment income (3.3) (3.1) (4.8)
Other, net 1.4 0.4 0.9
----- ----- -----
Applicable income tax 32.1% 31.3% 30.1%
==== ==== ====
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE G - INCOME TAXES - continued
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
---------- -------- -----------
<S> <C> <C> <C>
Allowance for possible loan losses $ 1,489 $ 1,243 $ 871
Unrealized loss on securities available-for-sale 125 34 926
Deferred loan fees 249 231 179
Accrued pension and deferred compensation 305 262 359
Depreciation accumulated 29 - -
Other 91 82 50
------- ------- ------
2,288 1,852 2,385
Valuation allowance - - -
------- ------- ------
Total deferred tax asset 2,288 1,852 2,385
------- ------- ------
Bond accretion (89) (75) (72)
Accumulated depreciation - - (38)
------- ------- ------
Total deferred tax liabilities (89) (75) (110)
------- ------- -------
Net deferred tax asset $ 2,199 $ 1,777 $ 2,275
======= ======= =======
</TABLE>
The Corporation's main operating subsidiary, The First National Bank of West
Chester, is not subject to Pennsylvania corporate income taxes, but is taxed
based on the value of its capital stock. Pennsylvania Bank Shares Tax
accrued by the Bank amounted to $308,000, $297,000, and $228,000 in 1996,
1995, and 1994, respectively.
NOTE H - CAPITAL REQUIREMENTS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and classification
are also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of Total and
Tier I capital to risk-weighted assets, and Tier I capital to average
quarterly assets. Management believes that the Corporation and the Bank meet
all capital adequacy requirements to which it is subject, as of December 31,
1996.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE H - CAPITAL REQUIREMENTS - continued
As of December 31, 1996, the most recent notification from the federal
banking agencies categorized the Corporation and the Bank as well
capitalized under the regulatory framework for corrective action. To be
categorized as adequately capitalized the Corporation and the Bank must
maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
the notification that management believes have changed the institution's
category.
The Corporation's actual capital amounts and ratios are presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Provisions
---------------------- ------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 36,839 13.31% $ 22,145 less than or = 8.00% $ 27,681 less than or = 10.00%
Tier I Capital
(to Risk Weighted Assets) $ 33,357 12.05% $ 11,073 less than or = 4.0% $ 16,609 less than or = 6.00%
Tier I Capital
(to Average Assets) $ 33,357 8.58% $ 15,544 less than or = 4.00% $ 19,430 less than or = 5.00%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) $ 33,911 12.77% $ 21,247 less than or = 8.00% $ 26,558 less than or = 10.00%
Tier I Capital
(to Risk Weighted Assets) $ 30,578 11.51% $ 10,623 less than or = 4.00% $ 15,935 less than or = 6.00%
Tier I Capital
(to Average Assets) $ 30,578 8.19% $ 14,936 less than or = 4.00% $ 18,670 less than or = 5.00%
1996 1995
---- ----
Risk Weighted Assets $276,814 $265,584
Average Assets (Current Quarter) $388,603 $373,405
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of an entity's assets and
liabilities considered to be financial instruments. For the Corporation, as
for most financial institutions, the majority of its assets and liabilities
are considered financial instruments as defined in SFAS No. 107. However,
many such instruments lack an available trading market, as characterized by
a willing buyer and seller engaging in an exchange transaction. Also, it is
the Corporation's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, the Corporation had to use significant estimations and present
value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimated fair value of cash
and cash equivalents, deposits with no stated maturities, short-term
borrowings and commitments to extend credit, and outstanding letters of
credit has been estimated to equal the carrying amount. Quoted market prices
were used to determine the estimated fair value of investment securities
held-to-maturity and available-for-sale. Fair values of net loans and
deposits with stated maturities were calculated using estimated discounted
cash flows based on the year-end offering rate for instruments with similar
characteristics and maturities.
The estimated fair values and carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ---------------------------
Estimated Estimated
(Dollars in thousands) Fair Carrying Fair Carrying
Value Amount Value Amount
----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 25,756 $ 25,756 $ 44,644 $ 44,644
Investment securities held-to-maturity 16,749 15,667 23,213 23,048
Investment securities available-for-sale 82,008 82,008 70,463 70,463
Interest-bearing deposits with banks 1,000 1,000 - -
Net loans 263,703 259,364 242,772 238,081
Financial Liabilities
Deposits with no stated maturities 236,585 236,585 229,039 229,039
Deposits with stated maturities 115,310 115,260 115,582 114,887
Short-term borrowings 7,943 7,943 8,858 8,858
Off-Balance-Sheet Investments
Commitments for extended credit
and outstanding letters of credit 102,651 102,651 78,287 78,287
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk to meet the financing needs of its customers and reduce its own
exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they
become payable. Those instruments involve, to varying degrees, elements of
credit and interest rate risks in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Corporation uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Corporation does not require collateral or other
security to support financial instruments with credit risk. The contract
amounts are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $97,954 $ 73,087
Standby letters of credit and financial guarantees written 4,697 5,200
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and
similar transactions. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Corporation holds residential or commercial real estate,
accounts receivable, inventory and equipment as collateral supporting those
commitments for which collateral is deemed necessary. The extent of
collateral held for those commitments at December 31, 1996, varies up to
100%; the average amount collateralized is 80%.
All of the Corporation's loans, commitments, and commercial and standby
letters of credit have been granted to customers in the Corporation's
primary market area, Chester County, Pennsylvania. Investments in state and
municipal securities also involve governmental entities within the
Corporation's market area. The concentrations of credit by type of loan are
set forth in Note C - Loans. Although the Corporation has a
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the economic sector. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers.
NOTE K - ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Corporation instituted the 1995 Stock Option Plan on September 18, 1995,
which was subsequently ratified at the March 19, 1996, annual meeting of
shareholders. This plan allows the Corporation to grant up to 187,500 fixed
stock options to key employees and directors. The options have a term of ten
years and become exercisable six months after grant. The exercise price of
each option equals the average between the high and low bid price of the
Corporation's stock on the date of grant.
The Corporation has elected to account for its stock option plan under
Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation cost for the plan been determined based
on the fair value of the options at the grant dates consistent with the
method of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Corporation's net income and earnings per share would have been:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C> <C>
Net income (in thousands) As reported $ 4,305 $ 4,100 $ 3,607
Pro forma $ 4,005 $ 4,100 $ 3,607
Earnings per share As reported 2.51 $ 2.34 $ 2.01
Pro forma $ 2.34 $ 2.34 $ 2.01
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996: dividend yield of 3.8%; expected
volatility of 0.47; risk-free interest rate of 6.13%; and an expected life
of 5 years.
There were no options outstanding at the beginning of 1996. During 1996,
48,000 options were granted at a weighted average exercise price of $26.25
and 3,000 options were exercised at a price of $23.08. The 48,000 options
granted in 1996 included 24,750 options at an exercise price of $23.08 that
were granted in 1995 subject to shareholder approval. This approval was
obtained at the March 1996 shareholders meeting.
At December 31, 1996, there were 45,000 options outstanding with a weighted
average option price of $26.46, an exercise price range of $23.08 to $29.63,
and a weighted average contractual life of 9.25 years. At December 31, 1996
there were 21,750 options exercisable at an average exercise price of
$23.08. The weighted average fair value of options granted during the year
was $9.46.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE L - REGULATORY MATTERS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank based upon deposit levels and other factors. The average amount
of those reserve balances for the years ended December 31, 1996 and 1995,
was approximately $2,756,000 and $2,141,000, respectively.
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Corporation in
the form of cash dividends, loans or advances. The Bank, without the prior
approval of regulators, can declare dividends to the Corporation totaling
approximately $3,135,000 plus additional amounts equal to the net earnings
of the Bank for the period from January 1, 1997, through the date of
declaration, less dividends previously paid in 1997.
NOTE M - EMPLOYEE BENEFIT PLANS
1. Defined Contribution Plans
--------------------------
The Bank has a qualified deferred salary savings 401(k) plan (the "401(k)
Plan") under which the Corporation contributes $0.75 ($0.50 prior to 1995)
for each $1.00 that an employee contributes, up to the first 5% of the
employee's salary. The Corporation's expenses were $136,000, $123,000, and
$100,000 in 1996, 1995, and 1994, respectively. The Corporation also has a
qualified defined contribution pension plan (the "QDCP Plan") which was
implemented on January 1, 1995. Under the QDCP Plan, the Corporation will
make annual contributions into the 401(k) Plan on behalf of each eligible
participant in an amount equal to 3% of salary up to $30,000 in salary plus
6% in excess of $30,000. Contribution expense in 1996 and 1995 under the
QDCP Plan was $220,000 and $200,000, respectively. The Corporation may make
additional discretionary employer contributions subject to approval of the
Board of Directors.
2. Defined Benefit Plans
---------------------
In October 1994, the Board of Directors approved the termination of the
Corporation's qualified defined benefit retirement plan (the "QDB Plan") and
the non-qualified supplemental defined benefit pension plan for executive
officers (the "NQDB Plan") effective December 31, 1994. Distributions of
participants' vested benefits in the QDB Plan took place in the fourth
quarter of 1995. Accrued benefits from the terminated NQDB Plan were rolled
over into a non-qualified defined contribution pension plan for executive
officers (the "NQDCP Plan") effective December 31, 1994. Beginning in 1995,
the Corporation makes annual contributions to the NQDCP Plan equal to 3% of
the participant's salary up to $160,000 plus 9% in excess of $160,000.
Contribution expense in 1996 and 1995 under the NQDCP Plan was $38,000 and
$35,000, respectively. The Corporation may make additional discretionary
employer contributions subject to approval of the Board of Directors.
Contributions to the QDB Plan, which are limited by federal income tax
regulations, amounted to $327,000 in 1994. Contributions to the NQDB Plan
were $60,000 in 1994. Net periodic pension cost for both plans was $364,000
in 1994.
The termination of the QDB Plan was accounted for at December 31, 1994, as a
curtailment under SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
Accordingly, a curtailment gain of approximately $311,000 was recognized in
the income statement
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE M - EMPLOYEE BENEFIT PLANS - continued
in 1994. A settlement gain of approximately $190,000 was recorded in 1995
upon distribution of QDB Plan assets to participants. The termination of the
NQDB Plan resulted in a loss of approximately $38,000 in 1994.
NOTE N - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY
Condensed financial information for First West Chester Corporation (parent
corporation only) follows:
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
(Dollars in thousands) December 31
------------------------
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 460 $ 467
Investment in subsidiaries, at equity 32,589 29,935
Other assets 516 867
--------- ---------
Total assets $ 33,565 $ 31,269
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 17 $ 454
Stockholders' equity 33,548 30,815
-------- --------
Total liabilities and stockholders' equity $ 33,565 $ 31,269
======== ========
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
(Dollars in thousands) Year ended December 31
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries $ 1,814 $ 3,609 $ 1,380
Dividends from investment securities 12 21 24
Investment securities gains, net - 17 94
Other income 23 30 107
------ ------ ------
Total income 1,849 3,677 1,605
------ ------ ------
EXPENSES
Other expenses 196 145 128
------ ------ ------
Total expenses 196 145 128
------ ------ ------
Income before equity in undistributed
income of subsidiaries 1,653 3,532 1,477
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES 2,652 568 2,130
------ ------ ------
NET INCOME $ 4,305 $ 4,100 $ 3,607
====== ====== ======
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE N - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - continued
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
(Dollars in thousands) 1996 1995 1994
--------- --------- ---------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 4,305 $ 4,100 $ 3,607
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary (2,652) (568) (2,130)
Investment securities (gains), net - (17) (94)
Decrease (increase) in other assets 423 (432) 5
(Decrease) increase in other liabilities (491) (5) 13
-------- -------- --------
Net cash provided by operating activities 1,585 3,078 1,401
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from sales and maturities of investment securities - 57 219
-------- -------- --------
Net cash provided by investing activities - 57 219
-------- -------- --------
FINANCING ACTIVITIES
Dividends paid (1,661) (1,495) (1,321)
Effect of treasury stock transactions 69 (1,885) 5
-------- -------- --------
Net cash used in financing activities (1,592) (3,380) (1,316)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (7) (245) 304
Cash and cash equivalents at beginning of year 467 712 408
-------- -------- --------
Cash and cash equivalents at end of year $ 460 $ 467 $ 712
======== ======== ========
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the unaudited quarterly results of operations is as follows:
<TABLE>
<CAPTION>
1996
----
(Dollars in thousands, except per share) December 31 September 30 June 30 March 31
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 7,609 $ 7,444 $ 7,356 $ 7,218
Interest expense 3,029 3,029 3,035 3,042
Net interest income 4,580 4,415 4,321 4,176
Provision for loan losses 278 249 276 276
Investment securities gains (losses), net 9 (4) - -
Income before income taxes 1,686 1,555 1,628 1,474
Net income 1,152 1,057 1,096 1,000
Per share
Net income $ 0.68 $ 0.61 $ 0.64 $ 0.58
Dividends declared 0.29 0.25 0.23 0.23
1995
----
Interest income $ 7,287 $ 7,211 $ 7,217 $ 6,751
Interest expense 3,075 3,036 2,884 2,569
Net interest income 4,212 4,175 4,333 4,182
Provision for loan losses 482 400 435 349
Investment securities gains, net 9 - - -
Income before income taxes 1,478 1,583 1,510 1,394
Net income 1,012 1,085 1,027 976
Per share
Net income $ 0.59 $ 0.63 $ 0.58 $ 0.54
Dividends declared 0.26 0.23 0.20 0.20
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
First West Chester Corporation
We have audited the accompanying consolidated balance sheets of First
West Chester Corporation and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
West Chester Corporation and Subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 24, 1997
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 24, 1997 accompanying the
consolidated financial statements included in the 1996 Annual Report to
Shareholders which is incorporated by reference in the Annual Report of First
West Chester Corporation and Subsidiary on Form 10-K for the year ended December
31, 1996. We hereby consent to the incorporation by reference of said report in
the Registration Statement of First West Chester Corporation and Subsidiary on
Form S-8 (File No. 33-26325, effective January 4, 1989; File No. 33-46575,
effective March 23,1992; File No. 33-09241, effective July 31, 1996; and File
No. 33-15733, effective November 7, 1996).
GRANT THORNTON LLP
/s/ GRANT THORNTON LLP
- ----------------------
Philadelphia, Pennsylvania
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This is Exhibit 27 of First West Chester Corporation's Form 10-K for the year
ended December 31, 1996.
</LEGEND>
<CIK> 0000744126
<NAME> FIRST WEST CHESTER CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,956
<INT-BEARING-DEPOSITS> 1,000
<FED-FUNDS-SOLD> 3,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,008
<INVESTMENTS-CARRYING> 15,667
<INVESTMENTS-MARKET> 15,749
<LOANS> 264,582
<ALLOWANCE> 5,218
<TOTAL-ASSETS> 397,684
<DEPOSITS> 351,266
<SHORT-TERM> 7,943
<LIABILITIES-OTHER> 5,300
<LONG-TERM> 0
0
0
<COMMON> 1,800
<OTHER-SE> 31,375
<TOTAL-LIABILITIES-AND-EQUITY> 397,684
<INTEREST-LOAN> 22,856
<INTEREST-INVEST> 5,990
<INTEREST-OTHER> 781
<INTEREST-TOTAL> 29,627
<INTEREST-DEPOSIT> 11,815
<INTEREST-EXPENSE> 12,135
<INTEREST-INCOME-NET> 17,492
<LOAN-LOSSES> 1,079
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 13,632
<INCOME-PRETAX> 6,343
<INCOME-PRE-EXTRAORDINARY> 6,343
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,305
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.51
<YIELD-ACTUAL> 4.92
<LOANS-NON> 713
<LOANS-PAST> 2,772
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,506
<CHARGE-OFFS> 411
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 5,218
<ALLOWANCE-DOMESTIC> 5,218
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
