FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998, 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,
1998 was 2,304,913.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three-Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Stockholder's Equity 5
Consolidated Statements of Cash Flows
Three-Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-19
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 20
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 2 - Changes in Securities 21
Item 3 - Defaults upon Senior Securities 21
Item 4 - Submission of Matters to a Vote of Security Holders 21-22
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
Unaudited
(Dollars in thousands) March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 21,760 $ 22,248
Federal funds sold 7,700 4,200
Total cash and cash equivalents 29,460 26,448
--------- ---------
Investment securities held-to-maturity (market value of $11,156 and
$12,237 at March 31, 1998 and December 31, 1997, respectively) 11,015 12,082
Investment securities available-for-sale, at market value 62,815 65,516
Loans 321,034 318,899
Less: Allowance for possible loan losses (5,940) (5,900)
--------- ---------
Net loans 315,094 312,999
Premises and equipment 6,926 6,659
Other assets 6,335 7,664
--------- ---------
Total assets $ 431,645 $ 431,368
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 66,904 $ 63,287
Interest-bearing 313,941 310,962
--------- ---------
Total deposits 380,845 374,249
Securities sold under repurchase agreements 4,727 7,625
Federal Home Loan Bank Advances 3,392 7,379
Other liabilities 5,609 5,902
--------- ---------
Total liabilities 394,573 395,155
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 5,000,000 shares;
outstanding, 2,399,833 at March 31, 1998 and December 31, 1997. 2,400 2,400
Additional paid-in capital 2,746 2,729
Retained earnings 33,500 32,803
Net unrealized gain (loss) on securities available-for-sale 44 (33)
Treasury stock, at cost: 99,520 shares and 103,700 shares
at March 31, 1998 and December 31, 1997, respectively. (1,618) (1,686)
--------- ---------
Total stockholders' equity 37,072 36,213
--------- ---------
Total liabilities and stockholders' equity $ 431,645 $ 431,368
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share) Three Months Ended
March 31,
---------
1998 1997
--------- -------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 7,001 $ 6,153
Investment securities 1,170 1,475
Federal funds sold 69 24
Deposits in banks -- 12
-------- --------
Total interest income 8,240 7,664
-------- --------
INTEREST EXPENSE
Deposits 3,290 2,978
Securities sold under repurchase agreements 37 64
Other borrowings 97 64
-------- --------
Total interest expense 3,424 3,106
-------- --------
Net interest income 4,816 4,558
Provision for loan losses 224 210
-------- --------
Net interest income after provision for possible loan losses 4,592 4,348
-------- --------
NON-INTEREST INCOME
Financial Management Services 561 500
Service charges on deposit accounts 253 231
Investment securities gains (losses), net (3) 5
Other 265 164
-------- --------
Total non-interest income 1,076 900
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,213 2,036
Net occupancy and equipment 802 771
FDIC Bank insurance fund assessments 11 10
Bank shares tax 87 85
Other 860 721
-------- --------
Total non-interest expense 3,973 3,623
-------- --------
Income before income taxes 1,695 1,625
INCOME TAXES 516 525
-------- --------
NET INCOME $ 1,179 $ 1,100
======== ========
PER SHARE DATA
Basic net income per common share $ 0.51 $ 0.48
======== ========
Diluted net income per common share $ 0.50 $ 0.48
======== ========
Dividends declared $ 0.21 $ 0.19
======== ========
Weighted average shares outstanding 2,296,908 2,287,921
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
----------- ----------
<S> <C> <C>
Balance at January 1, $ 36,213 $ 33,175
Net income to date 1,179 1,100
Cash dividends declared (482) (429)
Net unrealized gain (loss) on securities available-for-sale 77 (516)
Paid-in capital from treasury stock transactions 17 --
Treasury stock transactions 68 --
------- -------
Balance at March 31, $ 37,072 $ 33,330
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
(Dollars in thousands) 1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,179 $ 1,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 265 246
Provision for loan losses 224 210
Amortization of investment security premiums
and accretion of discounts 34 10
Amortization of deferred fees on loans 9 29
Investment securities (gains) losses, net 3 (5)
Decrease in other assets 1,289 714
Increase (decrease) in other liabilities (293) 340
------- -------
Net cash provided by operating activities 2,710 2,644
------- -------
INVESTING ACTIVITIES
Decrease in interest bearing deposits in banks -- 1,000
Increase in loans (2,327) (25,588)
Proceeds from sale of investment securities available-for-sale 8,408 15,191
Proceeds from maturities of investment securities available-for-sale 5,082 4,088
Proceeds from maturities of investment securities held-to-maturity 1,077 1,186
Purchases of investment securities available-for-sale (10,720) (8,247)
Purchase of premises and equipment, net (532) (326)
------- -------
Net cash provided by (used) in investing activities 988 (12,696)
------- -------
FINANCING ACTIVITIES
Increase (decrease) in Federal Home Loan Bank advances (3,987) 6,450
Increase in deposits 6,596 3,663
Decrease in securities sold under repurchase agreements (2,898) (490)
Cash dividends (482) (429)
Treasury stock transactions 85 --
------- -------
Net cash provided by (used in) financing activities (686) 9,194
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,012 (858)
Cash and cash equivalents at beginning of year 26,448 25,756
------- -------
Cash and cash equivalents at end of period $ 29,460 $ 24,898
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of Management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of
operations for the interim period presented have been included. For
further information, refer to the consolidated financial statements
and footnotes thereto included in First West Chester Corporation and
Subsidiarie's (the "Corporation") Annual Report on Form 10-K for the
year ended December 31, 1997.
2. The results of operations for the three-month period ended March 31,
1998 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. Diluted net income
includes the effect of options granted. All per share data in this
report has been restated to reflect the new standards imposed by the
Financial Accounting Standards Board Statement ("SFAS") No. 128,
"Earnings Per Share" which became effective for financial statements
issued after December 15, 1997.
4. The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income"
which became effective January 1, 1998. This new standard requires
entities presenting a complete set of financial statements to include
details of comprehensive income. Comprehensive income consists of net
income or loss for the current period and income, expenses, gains and
losses that bypass the income statement and are reported directly in a
separate component of equity. Other comprehensive income/(loss) for
the periods ending March 31, 1998 and 1997 is $77 thousand and ($516)
thousand, respectively.
5. The Financial Accounting Standards Board ("FASB") issued SFAS No. 132,
"Employers Disclosures About Pensions and Other Postretirement
Benefits" which amends FASB statements No. 87, 88 and 106. The
statement revises employers' disclosures about pension and other
postretirement benefit plans and does not change the measurement of
recognition of these plans. It standardizes the disclosure
requirements and requires additional information on benefit
obligations and the fair value of plan assets that will facilitate
financial analysis, and eliminate certain disclosures that are no
longer useful. The statement is effective for fiscal years beginning
after December 15, 1997. Adoption of the new standard is not expected
to have a material impact on the Corporation's financial statement.
6. The American Institute of Certified Public Accountants ("AICPA")
issued Statement of Option ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP was
issued to provide authoritative guidance on the subject of accounting
for the costs associated with the purchase or development of computer
software. The statement is effective for fiscal years beginning after
December 15, 1998. This statement is not expected to have a material
impact on the Corporation's financial statements.
7. Certain prior year amounts have been reclassified to conform to the
current year presentations.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EARNINGS AND DIVIDEND SUMMARY
Net income for the three months ended March 31, 1998 was $1.18 million,
an increase of $79 thousand or 7.2% from $1.10 million for the same period in
1997. Increases in net income are primarily the result of increases in net
interest and non-interest income, partially offset by increases in operating
expenses. Basic earnings per share for the three months ending March 31, 1998
were $0.51 per share, a $0.03 or 6.3% increase over the same period in 1997.
Cash dividends declared during the first quarter of 1998 increased to $0.21 per
share, a 10.5% increase compared to $0.19 per share in the first quarter of
1997. Over the past ten years, the Corporation's practice has been to pay a
dividend of at least 35.0% of net income.
<TABLE>
<CAPTION>
March December
---------------------- --------
1998 1997 1997
---- ---- --------
<S> <C> <C> <C>
SELECTED RATIOS
Return on average assets 1.11% 1.11% 1.12%
Return on average equity 12.87% 13.17% 13.36%
Earnings retained 59.12% 61.00% 57.88%
Dividend payout ratio 40.88% 39.00% 42.12%
Book value per share $16.12 $14.57 $15.77
</TABLE>
The "Consolidated Average Balance Sheet" on page 12 may assist the reader in
following this discussion.
NET INTEREST INCOME
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income for the three-month period ended March 31, 1998, on a tax
equivalent basis, was $4.9 million, compared to $4.6 million for the same period
in 1997. Net yield on interest-earning assets, on a tax equivalent basis was
4.88% for the three-month period ended March 31, 1998 compared to 4.99% for the
same period in 1997. Average interest-earning assets increased approximately
$28.7 million or 7.7% to $400.0 million during the twelve month period ending
March 31, 1998 compared to $371.0 million during the same period last year. The
increase in average earning assets was a direct result of strong commercial and
consumer loan demand particularly in the Bank's third party automobile loan and
lease programs. While the yield on interest-earning assets has remained stable,
the cost or yield of the Bank's interest bearing liabilities has increased
resulting in a decrease in the Bank's net yield on interest-earning assets. The
increase in the Bank's average funding costs is the direct result of an increase
in the average rate being paid on deposits, especially time deposits and high
rates being paid for borrowings. 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)
<TABLE>
<CAPTION>
Three-Months
Ended March 31,
----------------------
YIELD ON 1998 1997
- -------- ------ -----
<S> <C> <C>
Interest-Earning Assets 8.31% 8.34%
Interest Bearing Liabilities 4.24% 4.11%
---- ----
Net Interest Spread 4.07% 4.23%
Contribution of Interest-Free Funds 0.81% 0.76%
---- ----
Net Yield on Interest-Earning Assets 4.88% 4.99%
==== ====
</TABLE>
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold for the three-month period ended
March 31, 1998 increased 172.0% to $69 thousand when compared to the same period
in 1997. The increase in 1998's first quarter federal funds sold interest income
is primarily the result of a $3.2 million increase in average balances and a
30-basis point (a basis point equals one hundredth of one percent) increase in
rates compared to the same period in 1997.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
decreased 20.8% for the three-month period ended March 31, 1998 to approximately
$1.2 million compared to the same period in 1997. The decrease was primarily the
result of a 18.2% decrease in average balances and a 21-basis point decrease in
the yield earned. Proceeds from net investment securities, sales and maturities
have been used to fund continued loan growth over the last 12 to 18 months.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio increased 13.8% to $7.0 million for the three-month
period ended March 31, 1998, compared to $6.2 million for the same time period
in 1997. The increase in interest income for the three-month period ended March
31, 1998 can be attributed to a 15.5% increase in average loans outstanding,
partially offset by a decrease in the rates earned of 15-basis points. This is a
direct result of the increased competition for new and existing loan
relationships and volume increases in lower yielding automobile related loans
and leases. Pricing and fee competition on large (over $500,000) loans (new and
renewals) remains strong. 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 10.5% for the
three-month period ended March 31, 1998 to approximately $3.3 million, compared
to the same period in 1997. The increase is primarily the result of an increase
in average interest-bearing deposits of $22.4 million and a 10-basis point
increase in the rates paid on interest bearing deposits, compared to the same
period in 1997.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Corporation's effective rate on interest-bearing deposits increased
from 4.11% in the first quarter of 1997 to 4.21% for the first quarter of 1998.
Competition for deposits from non-banking institutions such as credit union
mutual fund companies continues to grow. The slow growth rates for
interest-bearing and non-interest bearing deposits is expected to continue for
future time periods. Construction is underway for the Bank's new Frazer area
branch. This and other future branch sites are expected to expand the Bank's
deposit base and attract additional low cost funds.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements
decreased 42.2% to $37 thousand for the three-month period ended March 31, 1998
compared to the same time period in 1997. The decrease is attributable to a $3.3
million decrease in average securities sold under repurchase agreements
outstanding, and a 1-basis point decrease in rates paid on securities sold under
repurchase agreements.
INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings increased 51.6% to $97 thousand for the
three-month period ended March 31, 1998 compared to the same time period in
1997. The need for borrowings continues as a result of strong loan demand, which
is outpacing the increases in deposits. Borrowings consists of overnight Fed
Funds purchased, Federal Home Loan Bank ("FHLB") Flex Line, FHLB Term Advances,
FHLB Open Repo and Open Repo Plus Advances.
PROVISION FOR POSSIBLE LOAN LOSSES
During the first quarter of 1998, the Corporation recorded a $224
thousand provision for possible loan losses compared to $210 thousand for the
same period in 1997. The allowance for possible loan losses as a percentage of
total loans was 1.85% as of March 31, 1998 compared to 1.86% as of March 31,
1997. See the section titled "Allowance For Possible Loan Losses" for additional
discussion.
NON-INTEREST INCOME
Total non-interest income increased 19.6% to $1.1 million for the three
months ended March 31, 1998, compared to the same period in 1997. The primary
component of non-interest income is Financial Management Services revenue, which
increased $61 thousand or 12.2% to $561 thousand for the three-months ended
March 31, 1998 compared with the same period in 1997. Market value of Financial
Management Services assets under Management grew $100.7 million or 35.4% from
$284.5 million at March 31, 1997 to $385.2 million at March 31, 1998. The
increase in Financial Management Services revenue and growth in assets under
Management is primarily the result of market appreciation and new account
relationships acquired through strong marketing efforts.
Service charges on deposit accounts increased 9.5% to $253 thousand for
the three-months ended March 31, 1998 compared to $231 thousand for the same
period in 1997. This increase relates to more effective enforcement of policies.
Other non-interest income increased 61.6% to $265 thousand for the three-months
ended March 31, 1998 compared to $164 thousand for the same period in 1997. The
increase is directly related to income from the sale of residential mortgages to
the secondary market during the first quarter of 1998.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-INTEREST EXPENSE
Total non-interest expense for the first quarter of 1998 increased 9.7%
to $3.97 million compared to the same period in 1997. The various components of
non-interest expense changes are discussed below.
First quarter 1998 salaries and employee benefits increased 8.7% to
$2.2 million for the three-month period ended March 31, 1998 compared to the
same period in 1997. Annual employee raises, promotions and a proportional
increase in employee benefits are primarily responsible for the increase.
Net occupancy, equipment and data processing expense increased 4.0% to
$802 thousand for the three-month period ended March 31, 1998 compared to the
same period last year. The increase in the first quarter 1998 is the direct
result of increased personal computer and related equipment costs which are a
necessary part of the Corporation's Core System conversion. The conversion is
scheduled to occur during the fourth quarter of this year.
Total non-interest expense increased 19.3% to $860 thousand for the
three months ended March 31, 1998 compared to the same period in 1997. This
increase can be attributed to an increase in the Bank's marketing and loan
related legal expenses as well as additional operating expenses associated with
the increases in staff and premises.
Construction on the Bank's new Frazer area branch is underway and is
expected to be completed in June of this year. Preliminary plans for another
branch in early 1999 are being pursued. The Corporation believes that the costs
associated with the opening of new branch sites will have a direct impact on all
the components of non-interest expense. It is anticipated that the increases in
costs will be offset over time by an increase in net interest and fee income
generated by business in the new marketing areas.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
------------------------------- --------------------------------
Daily Daily
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
-------- -------- ------ ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 5,022 $ 69 5.50% $ 1,846 $ 24 5.20%
Interest bearing deposits in banks -- -- -- 800 12 6.00%
Investment securities
Taxable 73,460 1,150 6.26% 89,120 1,443 6.48%
Tax-exempt(1) 1,479 29 7.76% 2,500 46 7.33%
------- ----- ------- -----
Total investment securities 74,939 1,179 6.29% 91,620 1,489 6.50%
------- ----- ------- -----
Loans(2)
Taxable 312,797 6,879 8.80% 268,537 6,027 8.98%
Tax-exempt(1) 6,947 177 10.21% 8,206 184 8.96%
------- ----- ------- -----
Total loans 319,744 7,056 8.83% 276,743 6,211 8.98%
------- ----- ------- -----
Total interest-earning assets 399,705 8,304 8.31% 371,009 7,736 8.34%
Non-interest earning assets
Allowance for possible loan losses (5,920) (5,275)
Cash and due from banks 19,115 17,611
Other assets 13,678 13,709
-------- --------
Total assets $426,578 $397,054
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $180,607 $1,409 3.12% $171,588 $1,324 3.09%
Certificates of deposits and other time 131,631 1,881 5.72% 118,281 1,654 5.59%
------- ----- ------- -----
Total interest bearing deposits 312,238 3,290 4.21% 289,869 2,978 4.11%
Securities sold under repurchase agreements 4,575 37 3.23% 7,911 64 3.24%
Federal Home Loan Bank advances 6,093 97 6.37% 4,451 64 5.75%
------- ----- ------- -----
Total interest bearing liabilities 322,906 3,424 4.24% 302,231 3,106 4.11%
------- ----- ------- -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 60,195 55,483
Other liabilities 6,834 5,927
------- -------
Total liabilities 389,935 363,641
Stockholders' equity 36,643 33,413
------- -------
Total liabilities and stockholders' equity $426,578 $397,054
======= =======
Net interest income $4,880 $4,630
===== =====
Net yield on interest earning assets 4.88% 4.99%
==== ====
(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 1998 and 1997.
(2) Non-accruing loans are included in the average balance.
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCOME TAXES
Income tax expense for the three-month period ended March 31, 1998 was
$516 thousand, compared to $525 thousand in the same period last year. This
represents an effective tax rate of 30.4% and 32.3% for both the first quarter
of 1998 and 1997, respectively. The reduction in the effective tax rate for the
first quarter of 1998 is primarily the result of tax credits stemming from a
1997 investment the Bank made in a community development project. These credits
will be realized over a ten year period starting with this tax year. Average
tax-exempt assets as a percentage of total average assets were 2.0% and 2.7% at
March 31, 1998 and 1997, respectively.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The objective of liquidity Management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity Management addresses the
Corporation's ability to meet deposit withdrawals either on demand or at
contractual maturity, to repay borrowings as they mature and to make new loans
and investments as opportunities arise. Liquidity is managed on a daily basis
enabling Senior Management to effectively monitor changes in liquidity and to
react accordingly to fluctuations in market conditions. The primary source of
liquidity for the Corporation is its available-for-sale portfolio of liquid
investment grade securities. Funding sources include NOW, money-market, savings
and smaller denomination certificates of deposit accounts. The Corporation
considers funds from such sources to comprise its "core" deposit base because of
the historical stability of such sources of funds. Additional liquidity 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:
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
DEPOSIT ANALYSIS
(Dollars in thousands) March 31, 1998 December 31, 1997 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 $ 55,467 2.19% $ 52,758 2.19% $ 2,709 5.13%
Money Market 28,336 3.11 28,433 3.15 (97) -0.34
Statement Savings 47,086 3.26 48,381 3.31 (1,295) -2.68
Other Savings 2,406 2.66 2,996 2.74 (590) -19.69
CD's Less than $100,000 111,960 5.66 108,022 5.80 3,938 3.65
------- ------- ------
Total Core Deposits 245,255 4.09 240,590 4.16 4,665 1.94
Non-Interest Bearing
Demand Deposit Accounts 60,195 - 57,659 - 2,536 4.40
------- ------- ------
Total Core and Non-Interest
Bearing Deposits 305,450 3.28 298,249 3.35 7,201 2.41
------- ------- ------
Tiered Savings 47,313 4.09 41,184 4.14 6,129 14.88
CD's Greater than $100,000 19,670 5.88 17,415 5.54 2,255 12.95
------- ------- -----
Total Deposits $372,433 3.52 $356,848 3.55 $15,585 4.37
======= ======= ======
</TABLE>
The Bank, as a member of the FHLB, maintains a line of credit secured
by the Bank's mortgage-related assets. As of March 31, 1998, this line of credit
was approximately $10.0 million. As of March 31, 1998 the amount outstanding
under this line of credit was $0. In addition to the line of credit, the Bank
has additional borrowing capacity of approximately $98.0 million. During the
first quarter of 1998, average FHLB advances were approximately $6.1 million and
consisted of term advances representing a combination of maturities. The average
interest rate on this advance was approximately 6.4%. FHLB advances are
collateralized by a pledge on the Bank's entire portfolio of unencumbered
investment securities, certain mortgage loans and a lien on the Bank's FHLB
stock.
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
$119.3 million or 27.6% of total assets at March 31, 1998 compared with a
negative $116.9 million or 28.7% of total assets at December 31, 1997. 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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST SENSITIVITY ANALYSIS
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
One Over
(Dollars in thousands) Within through five Non-rate
one year five years years sensitive Total
-------- ---------- ----- --------- -----
ASSETS
<S> <C> <C> <C> <C> <C>
Federal funds sold $ 7,700 $ -- $ -- $ -- $ 7,700
Investment securities 9,787 27,843 36,200 -- 73,830
Interest bearing deposits in banks -- -- -- -- --
Loans and leases 131,917 170,461 18,656 (5,940) 315,094
Cash and cash equivalents -- -- -- 21,760 21,760
Premises and equipment -- -- -- 6,926 6,926
Other assets -- -- -- 6,335 6,335
-------- -------- ------- -------- ---------
Total assets $ 149,404 $ 198,304 $ 54,856 $ 29,081 $ 431,645
======== ======== ======= ======== =========
LIABILITIES AND CAPITAL
Interest bearing deposits $ 263,746 $ 49,089 $ 1,107 $ -- $ 313,942
Non-interest bearing deposits -- -- -- 66,904 66,904
Borrowed funds 4,727 -- -- -- 4,727
FHLB Advances 192 1,302 1,897 -- 3,391
Other liabilities -- -- -- 5,609 5,609
Capital -- -- -- 37,072 37,072
-------- -------- -------- -------- ---------
Total liabilities & capital $ 268,665 $ 50,391 $ 3,004 $ 109,585 $ 431,645
======== ======== ======= ======== =========
Net interest rate
sensitivity gap $(119,261) $ 147,913 $ 51,852 $ (80,504) $ --
======== ======== ======= ======== =========
Cumulative interest rate
sensitivity gap $(119,261) $ 28,652 $ 80,504 $ -- $ --
======== ======== ======= ======== =========
Cumulative interest rate
sensitivity gap divided
by total assets (27.6%) 6.6% 18.7%
======= ======== =======
</TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is an amount that Management
believes will be adequate to absorb possible loan losses on existing loans that
may become uncollectible based on evaluations of the collectibility of loans.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, adequacy of
collateral, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
-------------------------- ------------
1998 1997 1997
---------- ---------- -----------
<S> <C> <C> <C>
Balance at beginning of period $ 5,900 $ 5,218 $ 5,218
--------- --------- ----------
Provision charged to operating expense 224 210 1,135
--------- --------- ----------
Recoveries of loans previously charged-off 7 26 83
Loans charged-off (191) (67) (536)
--------- --------- ----------
Net loans charged-off (184) (41) (453)
--------- --------- ----------
Balance at end of period $ 5,940 $ 5,387 $ 5,900
========= ========= ==========
Period-end loans outstanding $ 321,034 $ 290,100 $ 318,899
Average loans outstanding $ 319,744 $ 276,743 $ 299,737
Allowance for possible loan losses as a
percentage of period-end loans outstanding 1.85% 1.86% 1.85%
Ratio of net charge-offs to average loans
Outstanding (annualized) 0.23% 0.06% 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 is to write down all
non-performing loans to net realizable value based on updated appraisals.
Non-performing loans are generally collateralized by real estate and are in the
process of collection. Management is not aware of any loans other than those
included in the following table that would be considered potential problem loans
and cause Management to have doubts as to the borrower's ability to comply with
loan repayment terms.
16
<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,
--------------------------- --------------
1998 1997 1997
----- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 389 $ 536 $ 466
Non-accrual loans 1,763 997 1,443
----- ------ ------
Total non-performing loans 2,152 1,533 1,909
Other real estate owned 1,600 851 1,651
----- ------ ------
Total non-performing assets $ 3,752 $2,384 $ 3,560
====== ===== ======
Non-performing loans as a percentage
of total loans 0.67% 0.53% 0.60%
Allowance for possible loan losses as a
percentage of non-performing loans 276.07% 351.40% 309.10%
Non-performing assets as a percentage of
total loans and other real estate owned 1.16% 0.82% 1.11%
Allowance for possible loan losses as a
percentage of non-performing assets 158.32% 225.96% 165.70%
</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 31, 1998.
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.
Management is not aware of any loans other than those included in these
tables and mentioned in this paragraph 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. During 1997, the Bank increased third party
automobile loans $23 million to $24 million. During the first quarter of 1998
these loans grew $2 million to $26 million. These loans are unseasoned and may
potentially increase nonperforming loan numbers. As of March 31, 1998
approximately 5.67% of this portfolio was past due. In addition, approximately
$148 thousand in repossessed vehicles is included in other assets. Management is
closely monitoring these loans and has tightened credit standards and
significantly reduced planned growth in this new product. At March 31, 1998
there were no concentrations of loans exceeding 10% of total loans which are not
otherwise disclosed.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOAN IMPAIRMENT
In accordance with SFAS 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 these loans and
the valuation for credit losses related to loan impairment are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1998 March 31, 1997 December 31, 1997
-------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Principal amount of impaired loans $1,377 $ 725 $1,121
Less valuation allowance 274 454 306
----- ---- -----
$1,103 $ 271 $ 815
===== ==== =====
</TABLE>
The activity in the valuation allowance for the quarters ending March 31, are as
follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Valuation allowance at beginning of period $ 306 $ 419
Provision for loan impairment 50 50
Direct charge-offs (82) (15)
Recoveries - -
---- ----
Valuation allowance at end of period $ 274 $ 454
==== ====
</TABLE>
Total cash collected on impaired loans during the quarter ended March
31, 1998 was $10 thousand, all of which was credited to the principal balance
outstanding on such loans and $0 was recognized as interest income. Interest
that would have been accrued on impaired loans during the quarter ended March
31, 1998 was $28 thousand. There was no interest income recognized during the
quarter ended March 31, 1998.
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.
BUILDING IMPROVEMENTS, TECHNOLOGY PROJECTS AND YEAR 2000 ISSUES
In the third quarter of 1997, the Bank entered into a contract for the
purpose of constructing a 2,750 square foot branch office in the Frazer area.
The Frazer branch office is expected to open in June of this year.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In December of 1997, the Bank entered into an agreement to purchase a
25,000 square foot office building adjacent to the Bank's existing Operation
Center in West Chester for approximately $1.7 million. The Bank is expected to
take possession of the property in the fourth quarter of 1998.
During 1997, Management completed an in depth review of its core
processing system and concluded that a new core system was needed for
competitive, functional and Year 2000 reasons. After extensive research, the
Corporation selected Jack Henry and Associates ("Jack Henry") to provide the new
core processing system. Jack Henry and Associates is a major provider of
Community Bank Core Processing Systems. Specifically, the Corporation has
contracted to purchase Jack Henry's Silverlake System, related hardware,
installation and training services. First year contract costs are estimated to
be $1.2 million. The conversion is expected to take place in the fourth quarter
of this year.
Management is addressing Year 2000 issues on several levels. Jack
Henry's Silverlake software is Year 2000 compliant, which addresses a major
component of the Corporation's Year 2000 Compliance Action Plan (the "Plan").
The Plan requires a review of the remainder of the Corporation's systems for
compliance or replacement. The Plan also calls for communication with
significant customers, critical vendors and service providers.
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,
1998, both the Corporation's and the Bank's capital exceeded all minimum
regulatory requirements, and were considered "well capitalized" as defined in
the regulations issued pursuant to the FDIC Improvement Act of 1992. The
Corporation's Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.
<TABLE>
<CAPTION>
RISK-BASED March 31, December 31, "Well Capitalized"
CAPITAL RATIOS 1998 1997 1997 Requirements
- -------------- ---- ---- ------------ ----------------
Corporation
-----------
<S> <C> <C> <C> <C>
Leverage Ratio 8.68% 8.57% 8.57% 5.00%
Tier I Capital Ratio 11.33% 11.57% 11.22% 6.00%
Total Risk-Based Capital Ratio 12.59% 12.82% 12.48% 10.00%
Bank
----
Leverage Ratio 8.42% 8.42% 8.30% 5.00%
Tier I Capital Ratio 11.01% 11.36% 10.89% 6.00%
Total Risk-Based Capital Ratio 12.27% 12.62% 12.14% 10.00%
</TABLE>
The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current recommendations by the regulatory authorities which,
if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
for the Corporation was 9.98% and 1.87% for the three months ended March 31,
1998 and 1997, 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 March 31, 1998 and 1997, respectively.
19
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's assessment of
its sensitivity to market risk since its presentation in the 1997 Annual Report,
filed as an exhibit to its Form 10-K for the fiscal year ended December 31, 1997
with the SEC via EDGAR. Please refer to the "Management's Discussion and
Analysis" section on pages 22-23 of the Corporation's Annual Report for more
information.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Various actions and proceedings are presently pending to which
the Corporation is a party. These actions and proceedings
arise out of routine operations and, in Management's opinion,
will not, either individually or in the aggregate, have a
material adverse effect on the consolidated financial position
of the Corporation and its subsidiaries.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Corporation was held
on March 17, 1998 (the "Meeting"). Notice of the Meeting was
mailed to shareholders of record on or about February 3, 1998,
together with proxy solicitation materials prepared in
accordance with Section 14(a) of the Securities Exchange Act
of 1934, as amended, and the regulations promulgated
thereunder.
The matters submitted to a vote of shareholders at the meeting
were the following:
1. The election of four Class II directors,
with each director to serve until the 2001
Annual Meeting of Shareholders and until the
election and qualification of his respective
successor;
2. The approval of certain amendments to the
Corporation's 1995 Stock Option Plan; and
3. The ratification of the appointment of Grant
Thornton, LLP as the Corporation's
independent public accountants for the year
ending December 31, 1998.
There was no solicitation in opposition to the nominees of the
Board of Directors for election to the Board of Directors and
all such nominees were elected. The number of votes cast for
or withheld as well as the number of abstentions and broker
non-votes for each of the nominees for election to the Board
of Directors were as follows:
21
<PAGE>
PART II - OTHER INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Abstentions and
Nominee For Withheld Broker Non-Votes
------- --- -------- -----------------
<S> <C> <C> <C> <C>
M. Robert Clarke 1,774,904 268,792 0
Edward J. Cotter 1,772,098 270,819 0
David L. Peirce 1,773,113 269,804 0
Charles E. Swope 1,772,059 270,858 0
</TABLE>
The names of the other directors whose terms of office as
directors continued after the Meeting are as follows: John J.
Ciccarone, Clifford E. DeBaptiste, John A. Featherman, John S.
Halsted, J. Carol Hanson, Devere Kauffman and John B. Waldron.
The proposal to approve certain amendments to the
Corporation's 1995 Stock Option Plan was ratified. The number
of votes cast for or against as well as the number of
abstentions and broker non-votes for the proposal were as
follows:
<TABLE>
<CAPTION>
For Against Abstentions Broker non-votes
--- ------- ----------- ----------------
<S> <C> <C> <C>
1,936,867 32,243 73,807 0
</TABLE>
The proposal to ratify the appointment of Grant Thornton, LLP
as the Corporation's independent public accountants for the
year ending December 31, 1998 was ratified. The number of
votes cast for or against as well as the number of abstentions
and broker non-votes for the ratification were as follows:
<TABLE>
For Against Abstentions Broker non-votes
--- ------- ----------- ----------------
<S> <C> <C> <C>
1,987,610 2,629 52,678 0
</TABLE>
There was no other business that came before the Meeting or
matters incident to the conduct of the Meeting.
Item 5. Other Information
-----------------
None
22
<PAGE>
PART II - OTHER INFORMATION - CONTINUED
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
(a) Exhibits
--------
3(i). Certificate of Incorporation. Copy of the Corporation's
Certificate of Incorporation, as amended, is incorporated herin by reference to
Exhibit 3(i) to the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997.
3(ii). Bylaws of the Corporation, as amended. Copy of the Corporation's
Bylaws, as amended, is incorporated herin by reference to Exhibit 3(ii) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
10. Material contracts.
------------------
(a) Copy of the Corporation's Amended and Restated 1995 Stock
Option Plan, is incorporated herin by reference to the appendix to the
Corporation's Proxy Statement for the 1998 Annual Meeting of Shareholders as
filed with the SEC via EDGAR (File No. 000-12870).
27. Financial Data Schedule.
-----------------------
(b) Reports on Form 8-K
-------------------
None
23
<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: May 15, 1998 Charles E. Swope
President
J. Duncan Smith
J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This is FWCC Financial Data Schedule for period ended 03/31/98.
</LEGEND>
<CIK> 0000744126
<NAME> First West Chester Coporation
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 21,760
<INT-BEARING-DEPOSITS> 313,941
<FED-FUNDS-SOLD> 7,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,815
<INVESTMENTS-CARRYING> 11,015
<INVESTMENTS-MARKET> 11,156
<LOANS> 321,034
<ALLOWANCE> 5,940
<TOTAL-ASSETS> 431,645
<DEPOSITS> 380,845
<SHORT-TERM> 4,919
<LIABILITIES-OTHER> 8,809
<LONG-TERM> 0
0
0
<COMMON> 2,400
<OTHER-SE> 34,672
<TOTAL-LIABILITIES-AND-EQUITY> 431,645
<INTEREST-LOAN> 7,001
<INTEREST-INVEST> 1,170
<INTEREST-OTHER> 69
<INTEREST-TOTAL> 8,240
<INTEREST-DEPOSIT> 3,290
<INTEREST-EXPENSE> 3,424
<INTEREST-INCOME-NET> 4,816
<LOAN-LOSSES> 224
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,973
<INCOME-PRETAX> 1,695
<INCOME-PRE-EXTRAORDINARY> 1,695
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,179
<EPS-PRIMARY> .51
<EPS-DILUTED> .50
<YIELD-ACTUAL> 4.88
<LOANS-NON> 1,763
<LOANS-PAST> 389
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,900
<CHARGE-OFFS> 190
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 5941
<ALLOWANCE-DOMESTIC> 5941
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
