August 1, 1997
OFIS Filer Support
SEC Operations Center
6432 General Green Way
Alexandria, VA 22312
FIRST WEST CHESTER CORPORATION
Commission File Number 0-12870
------------------------------
Gentlemen:
Pursuant to the reporting requirements of the Securities and Exchange Act of
1934, we are filing herewith the above listed Registrant's Form 10-Q/A Amendment
#1 for the period ended March 31, 1997.
This form is being filed to reflect the reclassification of $600 thousand from
additional paid-in capital to capital stock in the March 31, 1997 Consolidated
Statement of Condition. This reclassification is the result of a "4-for-3" stock
split in the form of a 33 1/3% stock dividend declared on February 20, 1997 to
shareholders of record on March 21, 1997 and paid on April 21, 1997. The
presentation of shares issued and treasury shares held has also been modified.
Note: Weighted average shares outstanding and earnings per share already reflect
this stock split.
Very truly yours,
J. Duncan Smith, Treasurer
(Principal Accounting
and Financial Officer)
JDS/jd
Enclosures
cc: Patricia A. Gritzan, Esquire, Saul, Ewing, Remick and Saul,
Philadelphia, PA
James J. Welsh, CPA, Grant Thornton, Philadelphia, PA
<PAGE>
UNITED STATES
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997, OR
--------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File No. 0-12870.
FIRST WEST CHESTER CORPORATION
------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2288763
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
----------------------------------------------- -----
(Address of principal executive office) (Zip code)
(610) 692-1423
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
The number of shares outstanding of Common Stock of the Registrant as of May 1,
1997 was 2,287,921 (after the effect of a stock split in the form of a 33 1/3%
stock dividend paid on April 21, 1997).
<PAGE>
August 1, 1997
10-Q/A
REASON FOR AMENDMENT:
---------------------
To 10-Q Readers:
Pursuant to the reporting requirements of the Securities and Exchange Act of
1934, we are filing herewith the above listed Registrant's Form 10-Q/A Amendment
#1 for the period ended March 31, 1997.
This form is being filed to reflect the reclassification of $600 thousand from
additional paid-in capital to capital stock in the March 31, 1997 Consolidated
Statement of Condition. This reclassification is the result of a "4-for-3" stock
split in the form of a 33 1/3% stock dividend declared on February 20, 1997 to
shareholders of record on March 21, 1997 and paid on April 21, 1997. The
presentation of shares issued and treasury shares held has also been modified.
Note: Weighted average shares outstanding and earnings per share already reflect
this stock split.
Note: Attached is an amended Part I - Financial Information.
Very truly yours,
J. Duncan Smith, Treasurer
(Principal Accounting
and Financial Officer)
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
Unaudited
(Dollars in thousands) March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,398 $ 21,956
Federal funds sold 6,500 3,800
Total cash and cash equivalents 24,898 25,756
-------- --------
Interest-bearing deposits with banks - 1,000
Investment securities held-to-maturity (market value of $14,394 and
$16,749 at March 31, 1997 and December 31, 1996, respectively) 14,504 15,667
Investment securities available-for-sale, at fair value 70,167 82,008
Loans 290,100 264,582
Less: Allowance for possible loan losses (5,387) (5,218)
-------- --------
Net loans 284,713 259,364
Premises and equipment 6,831 6,752
Other assets 6,689 7,137
-------- --------
Total assets $ 407,802 $ 397,684
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 55,658 $ 63,591
Interest-bearing 299,271 287,675
-------- --------
Total deposits 354,929 351,266
Securities sold under repurchase agreements 7,453 7,943
Federal Home Loan Bank Advances 6,450 -
Other liabilities 5,640 5,300
-------- --------
Total liabilities 374,472 364,509
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 5,000,000 shares; Issued,
2,399,921 and 1,799,941 at March 31, 1997 and December 31, 1996,
respectively; 2,400 1,800
Additional paid-in capital 2,705 3,305
Retained earnings 30,804 30,133
Net unrealized loss on securities available-for-sale (758) (242)
Treasury stock, at cost: 112,000 shares and 84,000 shares at March 31, 1997
and December 31, 1996, respectively; (1,821) (1,821)
-------- --------
Total stockholders' equity 33,330 33,175
-------- --------
Total liabilities and stockholders' equity $ 407,802 $ 397,684
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
(Dollars in thousands - except per share) Three Months Ended
<CAPTION>
March 31,
---------
1997 1996
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 6,153 $ 5,556
Investment securities 1,475 1,438
Federal funds sold 24 221
Deposits in banks 12 3
--------- ---------
Total interest income 7,664 7,218
--------- ---------
INTEREST EXPENSE
Deposits 2,978 2,959
Securities sold under repurchase agreements 64 83
Federal Home Loan Bank advances 59 --
Other borrowings 5 --
--------- ---------
Total interest expense 3,106 3,042
--------- ---------
Net interest income 4,558 4,176
Provision for loan losses 210 276
--------- ---------
Net interest income after provision
for possible loan losses 4,348 3,900
--------- ---------
NON-INTEREST INCOME
Financial Management Services 500 453
Service charges on deposit accounts 231 201
Other 169 179
--------- ---------
Total non-interest income 900 833
--------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,036 1,902
Net occupancy and equipment 771 569
FDIC Bank insurance fund assessments 10 1
Bank shares tax 85 77
Other 721 710
--------- ---------
Total non-interest expense 3,623 3,259
--------- ---------
Income before income taxes 1,625 1,474
INCOME TAXES 525 474
--------- ---------
NET INCOME $ 1,100 $ 1,000
========= =========
PER SHARE DATA
Net income $ 0.48 $ 0.44
========= =========
Dividends declared $ 0.19 $ 0.17
========= =========
Weighted average shares outstanding 2,298,407 2,284,872
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
----------- ----------
<S> <C> <C>
Balance at January 1, $ 33,175 $ 30,692
Net income to date 1,100 1,000
Cash dividends declared (429) (394)
Net unrealized gain (loss) on securities available-for-sale (516) (379)
------- -------
Balance at March 31, $ 33,330 $ 30,919
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
------------------------------
(Dollars in thousands) 1997 1996
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,100 $ 1,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 246 160
Provision for loan losses 210 276
Amortization of investment security premiums
and accretion of discounts 10 66
Amortization of deferred fees on loans 29 9
Investment securities (gains) losses, net (5) -
(Decrease) increase in other assets 714 (483)
Increase in other liabilities 340 447
-------- --------
Net cash provided by operating activities 2,644 1,475
-------- --------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks 1,000 (1,000)
Increase in loans (25,588) (4,361)
Proceeds from sale of investment securities available-for-sale 15,191 -
Proceeds from sale of investment securities held-to-maturity - -
Proceeds from maturities of investment securities available-for-sale 4,088 3,824
Proceeds from maturities of investment securities held-to-maturity 1,186 3,231
Purchases of investment securities available-for-sale (8,247) (10,012)
Purchase of premises and equipment, net (326) (548)
-------- --------
Net cash used in investing activities (12,696) (8,866)
-------- --------
FINANCING ACTIVITIES
Increase in Federal Home Loan Bank advances 6,450 -
Increase (decrease) in deposits 3,663 (5,321)
Increase (decrease) in securities sold under repurchase agreements (490) 2,220
Cash dividends (429) (445)
-------- --------
Net cash provided by (used in) financing activities 9,194 (3,546)
-------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (858) (10,937)
Cash and cash equivalents at beginning of year 25,756 44,644
-------- --------
Cash and cash equivalents at end of period $ 24,898 $ 33,707
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of
operations for the interim period presented have been included. For
further information, refer to the consolidated financial statements
and footnotes thereto included in First West Chester Corporation and
Subsidiaries' (the "Corporation") Annual Report on Form 10-K for the
year ended December 31, 1996.
2. The results of operations for the three-month period ended March 31,
1997 are not necessarily indicative of the results to be expected for
the full year.
3. Per share data is based on the weighted average number of shares of
common stock outstanding during the period. All per share data in
this report has been restated to reflect the stock split in the form
of a 33 1/3% stock dividend, declared on February 20, 1997 to
shareholders of record on March 21, 1997 and paid on April 21, 1997.
4. The Financial Accounting Standards Board issued a new standard, SFAS
128, "Earnings per Share", which is effective for financial
statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and
fully diluted earnings per share and requires presentation of basic
and diluted earnings per share together with disclosure of how the
per share amounts were computed. Basic earnings per share excludes
dilution and is computed by dividing income available to common
shareholders by the weighted-average common shares outstanding for
the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. The adoption of this new standard is not
expected to have a material impact on the disclosure of earnings per
share in the financial statements.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
EARNINGS SUMMARY
Net income for the three months ended March 31, 1997 was $1.1 million,
an increase of $100 thousand or 10% from $1.0 million for the same period in
1996, primarily the result of an increase in interest and fee income on loans
and a lower provision for loan losses, partially offset by increased operating
expenses. Earnings per share for the three months ending March 31, 1997 were
$0.48 per share, a $0.04 or 9.1% increase over the same period in 1996. Cash
dividends declared during the first quarter of 1997 increased to $0.19 per
share, a 11.8% increase compared to $0.17 per share in the first quarter of
1996. Over the past ten years, the Corporation's practice has been to pay a
dividend of at least 35.0% of net income.
The "Consolidated Average Balance Sheet" on page 11 may assist the reader in
following this discussion.
<TABLE>
<CAPTION>
March December
------------------------------ --------
1997 1996 1996
---- ---- --------
<S> <C> <C> <C>
SELECTED RATIOS
Return on average assets 1.11% 1.05% 1.12%
Return on average equity 13.17% 12.99% 13.59%
Earnings retained 61.00% 60.60% 60.19%
Dividend payout ratio 39.00% 39.40% 39.81%
Book value per share $14.57 $13.54 $14.50
</TABLE>
NET INTEREST INCOME
Net interest income is the difference between interest income on earning
assets and interest expense on interest-bearing liabilities. Net interest income
for the three-month period ended March 31, 1997, on a tax equivalent basis, was
$4.6 million, compared to $4.2 million for the same period in 1996. Net yield on
interest earning assets, on a tax equivalent basis was 4.98% for the three-month
period ended March 31, 1997 compared to 4.75% for the same period in 1996.
Average interest earning assets increased approximately $14.6 million to $371.0
million during the twelve month period ending March 31, 1997 compared to $356.4
million during the same period last year. The increase in average earnings
assets was a direct result of strong commercial and consumer loan demand which
started during the fourth quarter of 1996. The increase in earning asset yields
was a result of changes in the earning asset mix. Although the net yield on
interest earning assets increased during the three month period ended March 31,
1997 over the same period in 1996, the Corporation anticipates continued
pressure on net yields on interest earning assets as competition for new loan
business remains very strong and incremental deposit growth is becoming more
expensive.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three-Months
Ended March 31,
-----------------------
YIELD ON 1997 1996
-------- ------ ------
Interest Earning Assets 8.33% 8.17%
Interest Bearing Liabilities 4.11% 4.18%
---- ----
Net Interest Spread 4.22% 3.99%
Contribution of Interest Free Funds 0.76% 0.76%
---- ----
Net Yield on Interest Earning Assets 4.98% 4.75%
==== ====
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold for the three-month period ended
March 31, 1997 decreased $197 thousand to $24 thousand when compared to the same
period in 1996. The decrease in 1997's first quarter federal funds sold interest
income is primarily the result of a $14.4 million decrease in average balances
and a 23-basis point (a basis point equals one hundredth of one percent)
decrease in rates compared to the same period in 1996. The decrease in average
balances is due to strong loan demand during the first quarter of 1997.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased $37 thousand or 2.6% for the three-month period ended March 31, 1997
to approximately $1.5 million compared to the same period in 1996. The increase
was a result of a 40-basis point increase in the yield earned on securities,
partially offset by a decrease in average balances of approximately $3.6
million. Proceeds from net investment securities' sales and maturities were used
to fund loan growth in 1996 and first quarter 1997.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio increased $599 thousand or 10.7% to $6.2 million
for the three-month period ended March 31, 1997, compared to $5.6 million for
the three-month period ended March 31, 1996. The increase in interest income for
the three-month period ended March 31, 1997 is attributable to a $32.0 million
or 13.1% increase in average loans outstanding, partially offset by a decrease
in the rates earned of 20-basis points. This is a direct result of the increased
competition for new and existing loan relationships which has been very strong
throughout 1996 and 1997. There has been a noticeable increase in pricing and
fee competition on large (over $500,000) loans (new and renewals) over the last
year. It is anticipated that this pricing pressure will continue to reduce
overall loan yields and net interest margins. Fee reductions will affect
non-interest income.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts increased $19 thousand or 0.6% for
the three-month period ended March 31, 1997 to approximately $3.0 million,
compared to the same period in 1996. The increase is primarily the result of an
increase in average interest-bearing deposits of $8.6 million compared to the
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
same period in 1996. The Corporation's effective rate on interest bearing
deposits decreased from 4.21% in the first quarter of 1996 to 4.11% in the first
quarter of 1997. Competition for deposits from non-banking institutions such as
mutual fund companies continues to grow. The slow growth rate in interest
bearing deposits of 3.1% and non-interest bearing deposits of 4.5% for the
quarter is expected to continue for the next twelve months. In order to attract
additional low cost funds, the Bank is considering opening new branches.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements
decreased $19 thousand to $64 thousand for the three-month period ended March
31, 1997 compared to the three-month period ended March 31, 1996. The decrease
is attributable to a $2.1 million decrease in average securities sold under
repurchase agreements outstanding, and a 6-basis point decrease in rates paid on
securities sold under repurchase agreements.
INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings was $64 thousand for the three-month
period ended March 31, 1997. The average balance of borrowings in the first
quarter of 1997 was $4.5 million. There were no borrowings outstanding during
the first quarter of 1996. The need for borrowings was the result of strong loan
demand outpacing the increases in deposits. Borrowings consists of overnight Fed
Funds purchased, FHLB Flex Line, and FHLB term advances.
PROVISION FOR POSSIBLE LOAN LOSSES
During the first quarter of 1997, the Corporation recorded a $210
thousand provision for possible loan losses compared to $276 thousand in 1996.
The allowance for possible loan losses as a percentage of total loans was 1.86%
as of March 31, 1997 compared to 1.89% as of March 31, 1996. See the section
titled "Allowance For Possible Loan Losses" for additional discussion.
NON-INTEREST INCOME
Total non-interest income increased $67 thousand or 8.0% to $900
thousand for the three months ended March 31, 1997, compared to $833 thousand
for the same period in 1996. The primary component of non-interest income is
Financial Management Services revenue, which increased $47 thousand or 10.4% to
$500 thousand for the three months ended March 31, 1997 compared with the same
period in 1996. Market value of Financial Management Services assets under
management grew $26.2 million or 10.1% from $258.3 million at March 31, 1996 to
$284.5 million at March 31, 1997. The increase in Financial Management Services
revenue and growth in assets under management is primarily the result of market
appreciation and new account relationships.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
------------------------------- -----------------------------
Daily Daily
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 1,846 $ 24 5.20% $ 16,271 $ 221 5.43%
Interest bearing deposits in banks 800 12 6.00% 187 3 6.42%
Investment securities
Taxable 89,120 1,443 6.48% 92,564 1,405 6.07%
Tax-exempt(1) 2,500 44 7.04% 2,637 45 6.83%
------- ----- ------- -----
Total investment securities 91,620 1,487 6.49% 95,201 1,450 6.09%
------- ----- ------- -----
Loans(2)
Taxable 268,537 6,027 8.98% 238,009 5,432 9.13%
Tax-exempt(1) 8,206 174 8.48% 6,728 170 10.11%
------- ----- ------- -----
Total loans 276,743 6,201 8.96% 244,737 5,602 9.16%
------- ----- ------- -----
Total interest earning assets 371,009 7,724 8.33% 356,396 7,276 8.17%
Non-interest earning assets
Allowance for possible loan losses (5,275) (4,607)
Cash and due from banks 17,611 16,155
Other assets 13,709 12,630
------- -------
Total assets $397,054 $380,574
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $171,588 $1,324 3.09% $163,710 $1,277 3.12%
Certificates of deposits and other time 118,281 1,654 5.59% 117,531 1,682 5.72%
------- ----- ------- -----
Total interest bearing deposits 289,869 2,978 4.11% 281,241 2,959 4.21%
Securities sold under repurchase agreements 7,911 64 3.24% 10,057 83 3.30%
Federal Home Loan Bank Advances 4,073 59 5.79% -- -- --
Other borrowings 378 5 5.29% -- -- --
------- ----- ------- -----
Total interest bearing liabilities 302,231 3,106 4.11% 291,298 3,042 4.18%
------- ----- ------- -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 55,483 53,119
Other liabilities 5,927 5,371
------- -------
Total liabilities 363,641 349,788
Stockholders' equity 33,413 30,786
------- -------
Total liabilities and stockholders' equity $397,054 $380,574
======= =======
Net interest income $4,618 $4,234
===== =====
Net yield on interest earning assets 4.98% 4.75%
==== ====
</TABLE>
(1) The indicated income and annual rate are presented on a taxable equivalent
basis using the effective tax rate of 32% adjusted for the 20% interest
expense disallowance for 1997 and 1996.
(2) Non-accruing loans are included in the average balance.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Service charges on deposit accounts increased $30 thousand or 14.9% to
$231 thousand for the three months ended March 31, 1997 from $201 thousand for
the same period in 1996. This increase relates to more effective enforcement of
policies. Other non-interest income decreased $10 thousand or 5.6% to $169
thousand for the three months ended March 31, 1997 compared to $179 thousand for
the same period in 1996.
NON-INTEREST EXPENSE
Total non-interest expense for the first quarter of 1997 was $3.6
million, an increase of $364 thousand or 11.2% from $3.3 million in the same
period in 1996. The various components of non-interest expense changes are
discussed below.
First quarter 1997 salaries and employee benefits increased $134
thousand or 7.0% to $2.0 million compared to $1.9 million in first quarter 1996.
Annual employee raises and a staff increase from 181 full-time equivalents
(FTE's) employees in the first quarter of 1996 to 193 FTE's in the first quarter
of 1997 are responsible for the increase. These staffing increases reflect
additions to the Corporation's sales and marketing staff. The Corporation also
experienced proportionate increases in employee benefits.
Net occupancy, equipment and data processing expense was $771 thousand
for the three-month period ended March 31, 1997, an increase of $202 thousand or
35.5% over the same period last year. The increase in the first quarter 1997 is
the direct result of increased costs associated with the opening of our new
mortgage center and the depreciation associated with the new teller online and
document imaging systems.
The FDIC's Bank Insurance Fund ("BIF") insurance assessment was $0 for
the three-month period ended March 31, 1997, a decrease from $1 thousand during
the same period last year. Effective January 1, 1997, in accordance with the
Deposit Insurance Act of 1996 an additional assessment by the Financing
Corporation ("FICO") will become applicable to all insured institutions. This
assessment is not tied to the FDIC risk classification. The BIF FICO assessment
will be 1.296 basis points per $100 in deposits for 1997. For the first quarter
of 1997, the Bank's assessments for BIF and BIF FICO were $0 and $10 thousand,
respectively.
Bank shares tax increased $8 thousand or 10.4% to $85 thousand for the
three months ended March 31, 1997 compared to $77 thousand for the three months
ended March 31, 1996. The Pennsylvania Bank Shares Tax is calculated on
quarter-end Bank stockholders' equity and paid annually.
Total other non-interest expense increased $11 thousand or 1.5% to $721
thousand for the three months ended March 31, 1997 compared to $710 thousand for
the same period in 1996. This increase is the result of additional operating
expenses associated with the increases in staff and premises.
INCOME TAXES
Income tax expense for the three-month period ended March 31, 1997 was
$525 thousand, compared to $474 thousand in the same period last year. This
represents an effective tax rate of 32.3% and 32.2% for both the first quarter
of 1997 and 1996, respectively. Average tax-exempt assets as a percentage of
total average assets were 2.7% and 2.5% at March 31, 1997 and 1996,
respectively.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Corporation's ability to meet deposit withdrawals either on demand or at
contractual maturity, to repay borrowings as they mature and to make new loans
and investments as opportunities arise. Liquidity is managed on a daily basis
enabling Senior Management to effectively monitor changes in liquidity and to
react accordingly to fluctuations in market conditions. The primary source of
liquidity for the Corporation is its available-for-sale portfolio of liquid
investment grade securities. Funding sources include NOW, money-market, savings
and smaller denomination certificates of deposit accounts. The Corporation
considers funds from such sources to comprise its "core" deposit base because of
the historical stability of such sources of funds. Additional funding comes from
the Corporation's non-interest bearing demand deposit accounts and credit
facilities. Other deposit sources include a three-tiered savings product and
certificates of deposit in excess of $100,000. Details of core deposits,
non-interest bearing demand deposit accounts and other deposit sources are
highlighted in the following table:
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1997 December 31, 1996 Average Balance
----------------------- ------------------- --------------------
Average Effective Average Effective Dollar Percentage
Deposit Type Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $ 51,729 2.20% $ 47,984 2.20% $ 3,745 7.80%
Money Market 29,098 3.11 28,974 3.09 124 0.43
Statement Savings 48,919 3.26 48,834 3.24 85 0.43
Other Savings 3,163 2.66 4,222 2.75 (1,059) -25.08
CD's Less than $100,000 104,244 5.66 102,566 5.76 1,678 1.64
------- ------- ------
Total Core Deposits 237,153 4.05 232,580 4.11 4,573 1.97
Non-Interest Bearing
Demand Deposit Accounts 55,483 - 55,018 - 465 0.85
-------- ------- ------
Total Core and Non-Interest
Bearing Deposits 292,636 - 287,598 - 5,038 1.75
------- ------- ------
Tiered Savings 38,679 4.07 38,514 4.11 165 0.43
CD's Greater than $100,000 14,037 5.16 12,677 5.36 1,360 10.73
-------- ------
Total Deposits $345,352 $338,789 - $ 6,563 1.94
======= ======= ======
</TABLE>
The Bank, as a member of the Federal Home Loan Bank (the "FHLB"),
maintains a line of credit secured by the Bank's mortgage-related assets. As of
March 31, 1997, this line of credit was approximately $8.0 million. The line of
credit at the FHLB at December 31, 1996 was approximately $8 million. The line
of credit available does not reflect the Bank's overall borrowing capacity at
the FHLB which is approximately $90.0 million. During the first quarter of 1997,
average advances under this line of credit
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
were approximately $2.2 million compared to no borrowing first quarter 1996. The
goal of interest rate sensitivity management is to avoid fluctuating net
interest margins, and to enhance consistent growth of net interest income
through periods of changing interest rates. Such sensitivity is measured as the
difference in the volume of assets and liabilities in the existing portfolio
that are subject to repricing in a future time period. The Corporation's net
interest rate sensitivity gap within one year is a negative $116.9 million or
28.7% of total assets at March 31, 1997 compared with a negative $109.5 million
or 27.5% of total assets at December 31, 1996. 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.
INTEREST SENSITIVITY ANALYSIS
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
One Over
(Dollars in thousands) Within through five Non-rate
one year five years years sensitive Total
-------- ---------- ----- --------- -----
<S> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 6,500 $ -- $ -- $ -- $ 6,500
Investment securities 18,256 39,357 27,058 -- 84,671
Interest bearing deposits in banks -- -- -- -- --
Loans and leases 128,899 143,741 17,460 (5,387) 284,713
Cash and cash equivalents -- -- -- 18,398 18,398
Premises and equipment -- -- -- 6,831 6,831
Other assets -- -- -- 6,689 6,689
-------- -------- ------- -------- -------
Total assets $ 153,655 $ 183,098 $ 44,518 $ 26,531 $ 407,802
======== ======== ======= ======== =======
LIABILITIES AND CAPITAL
Interest bearing deposits $ 259,162 $ 40,109 $ -- $ -- $ 299,271
Non-interest bearing deposits -- -- -- 55,658 55,658
Securities sold under repurchase
agreements 7,453 -- -- -- 7,453
FHLB Advances 3,950 -- 2,500 -- 6,450
Other liabilities -- -- -- 5,640 5,640
Capital -- -- -- 33,330 33,330
-------- -------- ------- -------- -------
Total liabilities & capital $ 270,565 $ 40,109 $ 2,500 $ 94,628 $ 407,802
======== ======== ======= ======== =======
Net interest rate
sensitivity gap $(116,910) $ 142,989 $ 42,018 $ (68,097) $ --
======== ======== ======= ======== =========
Cumulative interest rate
sensitivity gap $(116,910) $ 26,079 $ 68,097 $ -- $ --
======== ======== ======= ======== =========
Cumulative interest rate
sensitivity gap divided
by total assets (28.7%) 6.4% 16.7%
===== === ====
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is an amount that management
believes will be adequate to absorb possible loan losses on existing loans that
may become uncollectible based on evaluations of the collectibility of loans.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, adequacy of
collateral, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
----------------------------- ------------
1997 1996 1996
----------- ---------- ------------
<S> <C> <C> <C>
Balance at beginning of period $ 5,218 $ 4,506 $ 4,506
--------- --------- ---------
Provision charged to operating expense 210 276 1,079
--------- --------- ---------
Recoveries of loans previously charged-off 26 34 44
Loans charged-off (67) (149) (411)
--------- --------- ---------
Net loans charged-off (41) (115) (367)
--------- --------- ---------
Balance at end of period $ 5,387 $ 4,667 $ 5,218
========= ========= =========
Period-end loans outstanding $ 290,100 $ 246,824 $ 264,582
Average loans outstanding $ 276,743 $ 244,737 $ 249,697
Allowance for possible loan losses as a
percentage of period-end loans outstanding 1.86% 1.89% 1.97%
Ratio of net charge-offs to average loans
outstanding 0.06% 0.19% 0.15%
</TABLE>
Non-performing loans include loans on non-accrual status and loans past
due 90 days or more and still accruing. The Bank's policy to write down all
non-performing loans to net realizable value based on updated appraisals.
Non-performing loans are generally collateralized by real estate and are in the
process of collection. Management is not aware of any loans other than those
included in the following table that would be considered potential problem loans
and cause management to have doubts as to the borrower's ability to comply with
loan repayment terms. At March 31, 1997 there were no concentrations of loans
exceeding 10% of total loans which are not otherwise disclosed.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
--------------------------- --------------
1997 1996 1996
----- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 536 $ 261 $ 2,772
Non-accrual loans 997 808 713
------ ------ ------
Total non-performing loans 1,533 1,069 3,485
Other real estate owned 851 1,447 1,274
------ ------ ------
Total non-performing assets $ 2,384 $ 2,516 $ 4,759
====== ====== ======
Non-performing loans as a percentage
of total loans 0.53% 0.43% 1.32%
Allowance for possible loan losses as a
percentage of non-performing loans 351.40% 436.58% 149.7%
Non-performing assets as a percentage of
total loans and other real estate owned 0.82% 1.01% 1.79%
Allowance for possible loan losses as a
percentage of non-performing assets 225.96% 185.49% 109.6%
</TABLE>
The allowance for possible loan losses as a percentage of
non-performing loans indicates that the allowance for possible loan losses is
sufficient to cover the principal of all non-performing loans at March 1997.
Other real estate owned ("OREO") represents residential and commercial real
estate written down to realizable value (net of estimated disposal costs) based
on professional appraisals. Management intends to liquidate OREO in the most
expedient and cost-effective manner. This process could take up to twenty-four
months, although swifter disposition is anticipated.
LOAN IMPAIRMENT
In accordance with FAS 114, 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 in such loans and no income is recognized until all recorded
amounts of interest and principal are recovered in full. These loans are
included in the non-accrual loans total in the above analysis.
Loan impairment is measured by estimating the expected future cash
flows and discounting them at the respective effective interest rate or by
valuing the underlying collateral. The recorded investment in
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
these loans and the valuation for credit losses related to loan impairment are
as follows:
<TABLE>
(Dollars in thousands) March 31, 1997 March 31, 1996 December 31, 1996
-------------- -------------- -----------------
<S> <C> <C> <C>
Principal amount of impaired loans $ 725 $ 500 $ 443
Less valuation allowance 454 380 419
---- ---- ----
$ 271 $ 120 $ 24
==== ==== ====
</TABLE>
The activity in the valuation allowance for the quarters ending March 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Valuation allowance at beginning of period $ 419 $ 433
Provision for loan impairment 50 -
Direct charge-offs (15) (84)
Recoveries - 31
---- ----
Valuation allowance at end of period $ 454 $ 380
==== ====
</TABLE>
Total cash collected on impaired loans during the quarter ended March
31, 1997 was $206 thousand, $170 thousand of which was credited to the principal
balance outstanding on such loans and $36 thousand was recognized as interest
income. Interest that would have been accrued on impaired loans during the
quarter ended March 31, 1997 was $10 thousand. Interest income recognized during
the quarter ended March 31, 1997 was $36 thousand.
Total cash collected on impaired loans during the quarter ended March
31, 1996 was $5 thousand, all of which was credited to the principal balance
outstanding on such loans and none was recognized as interest income. Interest
that would have been accrued on impaired loans during the quarter ended March
31, 1996 was $12 thousand. No interest income was recognized during the quarter
ended March 31, 1996.
BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS
Renovations to the former Commonwealth Bank building, which was purchased in
1995, are now complete. Improvements to the property cost approximately $580
thousand. The building was occupied during the fourth quarter of 1996 and houses
our new Mortgage Center.
The Branch teller automation project is still in process. Depreciation
on the project started in 1996 at approximately $6 thousand per month.
Management is in the process of reviewing the adequacy of its mainframe
computer and software for possible replacement of some or all of its components.
The cost associated with such a project could be significant. An estimate of
costs has not yet been determined.
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by
the Federal Reserve Board for bank holding companies. The Bank is also subject
to similar capital requirements adopted by the Office of the Comptroller of the
Currency. Under these requirements, the regulatory agencies have set minimum
thresholds for Tier I Capital, Total Capital, and Leverage ratios. At March 31,
1997, both the Corporation's
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
and the Bank's capital exceeded all minimum regulatory requirements, and were
considered "well capitalized" as defined in the regulations issued pursuant to
the FDIC Improvement Act of 1992. The Corporation's Risk-Based Capital Ratios,
shown below, have been computed in accordance with regulatory accounting
policies.
<TABLE>
<CAPTION>
March 31, December 31,
RISK-BASED -------------------- ------------ "Well Capitalized"
CAPITAL RATIOS 1997 1996 1996 Requirements
- -------------- ---- ---- ---- ---------------
<S> <C> <C> <C> <C>
Leverage Ratio 8.57% 8.19% 8.58% 5.00%
Tier I Capital Ratio 11.57% 11.70% 12.05% 6.00%
Total Risk-Based Capital Ratio 12.82% 12.95% 13.31% 10.00%
</TABLE>
The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current recommendations by the regulatory authorities which,
if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
for the Corporation was 1.87% and 9.84% for the three months ended March 31,
1997 and 1996, respectively. The growth rate is computed by annualizing the
change in equity during the last period and dividing it by total stockholder's
equity at December 31, 1996 and 1995, respectively.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST WEST CHESTER CORPORATION
Charles E. Swope
----------------
DATE: August 1, 1997 Charles E. Swope
President
J. Duncan Smith
--------------
J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
19
