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 June 30, 1998, OR
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( ) 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.
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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
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(Address of principal executive office) (Zip code)
(610) 692-1423
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(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 July
31, 1998 was 2,309,913.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three-Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Stockholder's Equity 5
Consolidated Statements of Cash Flows
Three-Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-23
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 24
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Dollars in thousands - except per share data) (Unaudited)
June 30, December 31,
1998 1997
------------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 21,441 $ 22,248
Federal funds sold 12,000 4,200
Total cash and cash equivalents 33,441 26,448
--------- ---------
Investment securities held-to-maturity (market value of $10,863 and $12,237
at June 30, 1998 and December 31,
1997, respectively) 10,709 12,082
Investment securities available-for-sale at market value 67,501 65,516
Loans 320,150 318,899
Less allowance for possible loan losses (5,912) (5,900)
--------- ---------
Net loans 314,238 312,999
Premises and equipment, net 7,347 6,659
Other assets 6,612 7,664
--------- ---------
TOTAL ASSETS $ 439,848 $ 431,368
========= =========
LIABILITIES
Deposits
Non-interest bearing $ 69,478 $ 63,287
Interest bearing 318,284 310,962
--------- ---------
Total deposits 387,762 374,249
Securities sold under repurchase agreements 1,728 7,625
Federal Home Loan Bank advances and other borrowings 5,104 7,379
Other liabilities 7,077 5,902
--------- ---------
Total liabilities 401,671 395,155
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 5,000,000 shares; Outstanding,
2,308,913 shares at June 30, 1998 and 2,399,833
shares December 31, 1997. 2,400 2,400
Additional paid-in capital 2,820 2,729
Retained earnings 34,291 32,803
Net unrealized gain (loss) on securities available-for-sale 144 (33)
Treasury stock, at cost: 91,210 shares at June 30, 1998 and
103,700 shares at December 31, 1997. (1,478) (1,686)
--------- ---------
Total stockholders' equity 38,177 36,213
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 439,848 $ 431,368
========= =========
Book Value Per Share $16.53 $15.77
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share data) Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $7,117 $6,680 $14,118 $12,833
Investment securities 1,138 1,331 2,308 2,806
Federal funds sold 83 61 152 85
Deposits in banks -- -- -- 12
----- ----- ------ ------
Total interest income 8,338 8,072 16,578 15,736
----- ----- ------ ------
INTEREST EXPENSE
Deposits 3,383 3,163 6,674 6,141
Securities sold under repurchase agreements 23 68 60 132
Federal Home Loan Bank advances and other borrowings 76 111 172 175
----- ----- ------ ------
Total interest expense 3,482 3,342 6,906 6,448
----- ----- ------ ------
Net interest income 4,856 4,730 9,672 9,288
Provision for loan losses 188 446 412 656
----- ----- ------ ------
Net interest income after provision
for possible loan losses 4,668 4,284 9,260 8,632
----- ----- ------ ------
NON-INTEREST INCOME
Financial management services 560 500 1,121 1,000
Service charges on deposit accounts 265 249 519 480
Other 327 157 588 326
----- ----- ------ ------
Total non-interest income 1,152 906 2,228 1,806
----- ----- ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,268 2,018 4,481 4,054
Net occupancy and equipment 808 702 1,610 1,473
FDIC deposit insurance 11 11 22 21
Bank shares tax 87 85 175 170
Other 809 851 1,667 1,572
----- ----- ------ ------
Total non-interest expense 3,983 3,667 7,955 7,290
----- ----- ------ ------
Income before income taxes 1,837 1,523 3,533 3,148
INCOME TAXES 561 394 1,078 919
----- ----- ------ ------
NET INCOME $1,276 $1,129 $ 2,455 $ 2229
===== ===== ====== =====
PER SHARE DATA
Basic net income per common share $0.55 $0.49 $1.07 $0.97
==== ==== ==== ====
Diluted net income per common share $0.54 $0.49 $1.05 $0.96
==== ==== ==== ====
Dividends declared $0.21 $0.19 $0.42 $0.38
==== ==== ==== ====
Weighted average shares outstanding 2,306,928 2,289,434 2,301,946 2,288,682
========= ========= ========= =========
</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>
Six Months Ended
June 30,
--------------------------
(Dollars in thousands) 1998 1997
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<S> <C> <C>
Balance at January 1, $36,213 $33,175
Net income to date 2,455 2,229
Cash dividends declared (967) (867)
Net unrealized gain (loss) on securities available-for-sale 177 (85)
Treasury stock transactions 207 65
Paid in capital from treasury stock transactions 92 9
------ ------
Balance at June 30, $38,177 $34,526
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
-------------------------------
(Dollars in thousands) 1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,455 $ 2,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 535 498
Provision for loan losses 412 656
Amortization of investment security premiums
and accretion of discounts 81 22
Amortization of deferred fees on loans 13 84
Investment securities losses, net 3 14
Increase in other assets 961 635
Increase in other liabilities 1,175 662
--------- ---------
Net cash provided by operating activities 5,635 4,800
--------- ---------
INVESTING ACTIVITIES
Decrease in interest bearing deposits in banks -- 1,000
Increase in loans (1,664) (42,099)
Proceeds from sales of investment securities available-for-sale 6,159 24,606
Proceeds from maturities of investment securities available-for-sale 12,687 6,521
Proceeds from maturities of investment securities held-to-maturity 1,394 2,909
Purchases of investment securities available-for-sale (20,668) (10,793)
Purchase of premises and equipment, net (1,223) (398)
--------- ---------
Net cash used in investing activities (3,315) (18,254)
--------- ---------
FINANCING ACTIVITIES
Increase (decrease) in securities sold under repurchase agreements (5,651) 442
Increase in deposits 13,513 11,443
Increase (decrease) in Federal Home Loan Bank advances and other borrowings (2,521) 6,433
Cash dividends (967) (867)
Treasury stock transactions 299 74
--------- ---------
Net cash provided by financing activities 4,673 17,525
--------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 6,993 4,071
Cash and cash equivalents at beginning of period 26,448 25,756
--------- ---------
Cash and cash equivalents at end of period $ 33,441 $ 29,827
========= =========
</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
fiscal year ended December 31, 1997.
2. The results of operations for the six-month period ended June 30,
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 per
share 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) net of taxes for the three- and six-month
periods ended June 30, 1998 was $100 thousand and $177 thousand,
compared to $431 thousand and $(85) thousand in the same period last
year.
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 statements.
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
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which amends FASB statements No. 52, 80, 105, 119
and 107. The statement requires that entities recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
statement is effective for fiscal quarters of fiscal years beginning
after June 15, 1999. Management is considering early adoption of the
statement, which is not expected to have a material impact on the
Corporation's financial statements.
8. Certain prior year amounts have been reclassified to conform to the
current year presentations.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EARNINGS AND DIVIDEND SUMMARY
Net income for the three-month period ended June 30, 1998 was $1.28
million, an increase of 13.0% from $1.13 million for the same period in 1997.
Net income for the six-month period ended June 30, 1998 was $2.46 million, an
increase of 10.1% from $2.23 million for the same period in 1997. Increases in
net income are the result of increases in net interest income and non-interest
income partially offset by increases in operating expenses. Net income also
benefited from a reduction in the provision for loan loss expense through the
six-month period. Cash dividends declared during the second quarter of 1998
increased to $0.21 per share, a 10.5% increase compared to $0.19 per share in
the second 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>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED RATIOS
---------------
Return on Average Assets 1.18% 1.10% 1.14% 1.10%
Return on Average Equity 13.57% 13.31% 13.22% 13.24%
Earning Retained 61.99% 61.20% 60.61% 61.10%
Dividend Payout Ratio 38.01% 38.80% 39.39% 38.90%
Book Value Per Share $16.53 $15.06 $16.53 $15.06
</TABLE>
The "Consolidated Average Balance Sheet" on pages 14 and 15 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- and six-month periods ended June 30, 1998, on
a tax equivalent basis, was $4.92 million and $9.78 million, compared to $4.81
million and $9.42 million for the same periods in 1997, respectively. Net yields
on interest-earning assets, on a tax equivalent basis, were 4.84% and 4.85% for
the three- and six-month periods ended June 30, 1998 compared to 4.98% for the
same periods in 1997, respectively. Average interest-earning assets increased
approximately $20.1 million to $406.1 million during the second quarter of 1998
from $386.1 million in the same period last year. The increase in average
earning assets was a direct result of loan demand, particularly in the Bank's
third party automobile loan and lease programs. Effective July 3, 1998 the
Corporation exited the third party automobile lending business due to less than
expected results. The Corporation will continue to service the existing
portfolio totaling $27.0 million but will not add any additional volume. While
the total amount of loans has increased, the loan growth rate has decreased
compared to the same period last year. The yield on interest-earning assets has
decreased, the cost or yield of the Bank's interest bearing liabilities has
increased, resulting in a decrease in the Bank's net yield. The increase in the
Bank's average funding costs is the direct result of an increase in the average
rate being paid on time deposits and other 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.
9
<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 Six Months
Yield On: Ended June 30, Ended June 30,
--------- ------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Earning Assets 8.27% 8.45% 8.28% 8.38%
Interest Bearing Liabilities 4.30% 4.24% 4.27% 4.18%
---- ---- ---- ----
Net Interest Spread 3.97% 4.21% 4.01% 4.20%
Contribution of Interest Free Funds 0.87% 0.77% 0.84% 0.78%
---- ---- ---- ----
Net Yield on Interest Earning Assets 4.84% 4.98% 4.85% 4.98%
==== ==== ==== ====
</TABLE>
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold for the three- and six-month
periods ended June 30, 1998, increased 36.1% and 78.8% to $83 thousand and $152
thousand, respectively, when compared to the same periods in 1997. The increase
in federal funds interest income for the three- and six-month periods ended June
30, 1998 is primarily the result of a $1.6 million and $2.4 million increase in
average balances.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
decreased 14.7% and 17.9% for the three- and six-month periods ended June 30,
1998 to $1.2 million and $2.3 million, respectively, when compared to the same
periods in 1997. The decreases for the three- and six-month periods is primarily
due to a decrease in average balances of 7.7% and 13.2% and 51 and 35 basis
point decreases in the yield earned on securities compared to the same periods
last year. Proceeds from net investment securities sales and maturities have
been used to fund loan growth over the last two quarters.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio increased 6.2% and 9.8% to $7.2 million and $14.2
million for the three- and six-month periods ended June 30, 1998, compared to
the same periods in 1997, respectively. The increases in interest income on
loans for the three- and six-month periods ended June 30, 1998 is attributable
to a $24.7 million and $33.8 million increase in average loans outstanding
respectively, offset by 17 and 16 basis point decreases in rates earned on loans
compared to the same period last year, respectively. The decrease in rates is a
direct result of increased competition for new and existing loan relationships
and volume increases in lower yielding third party automobile related loans and
leases. As previously mentioned, the third party automobile lending portfolio
has not met established objectives resulting in the Corporation's decision to
cease adding additional volume while continuing to service the existing
portfolio as of July 3, 1998. 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. A reduction in fees will result in a direct decrease in non-interest
income.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts increased 7.0% and 8.7% for the
three- and six-month periods ended June 30, 1998 to $3.4 million and $6.7
million, compared to the same periods in 1997. The increase for the three-month
period ended June 30, 1998 is the result of increases in average
interest-bearing deposits of $16.9 million, and a 5 basis point increase in the
rates paid on interest-bearing deposits. The increase for the six-month period
ended June 30, 1998 is the result of an increase in average interest-bearing
deposits of $19.6 million, partially offset by a 7 basis point decrease in rates
paid on interest-bearing deposits.
The Corporation's effective rate on interest-bearing deposits increased
from 4.2% in the second quarter 1997 to 4.3% in the second quarter 1998.
Competition for deposits from credit unions and mutual fund companies continues
to grow. The slow growth rates for interest bearing and non-interest bearing
deposits are expected to continue for future time periods. The Bank's new Frazer
branch site was opened for business on August 3, 1998. This and other new
branches are expected to expand the Bank's deposit base.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements
decreased 66.2% and 54.5% to $23 thousand and $60 thousand for the three- and
six-month periods ended June 30, 1998, respectively, compared to the same
periods in 1997. The decreases are primarily attributable to $6.0 million and
$4.7 million decreases in average securities sold under repurchase agreements
outstanding, partially offset by 69 and 24 basis point increase on rates paid,
compared to the three- and six-month periods ended June 30, 1997, respectively.
INTEREST EXPENSE ON FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Interest expense on borrowings decreased 31.5% and 2.3% for the three-
and six-month periods ended June 30, 1998, respectively. The need for borrowings
has decreased as a result of increased deposit growth and a decrease in the loan
growth rate. Borrowings consist of overnight Fed Funds purchased, Federal Home
Loan Bank ("FHLB") FlexLine, FHLB term advances and FHLB Open Repo and Repo Plus
advances.
PROVISION FOR POSSIBLE LOAN LOSSES
During the three- and six-month periods ended June 30, 1998, the
Corporation recorded a $188 thousand and a $412 thousand provision for possible
loan losses compared to $446 thousand and $656 thousand for the same periods in
1997. The decrease in the provision expense is a result of a decreased rate in
loan growth for the three- and six-month periods ended June 30, 1998, compared
to the same periods in 1997. The allowance for possible loan losses as a
percentage of total loans was 1.85% at June 30, 1998, December 31, 1997 and June
30, 1997, respectively. See the section titled "Allowance For Possible Loan
Losses" for additional discussion.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-INTEREST INCOME
Total non-interest income increased 27.2% and 23.4% to $1.2 million and
$2.2 million for the three- and six-month periods ended June 30, 1998,
respectively, compared to the same periods in 1997. The primary component of
non-interest income is Financial Management Services revenue, which increased
12.0% and 12.1% to $560 thousand and $1.1 million for both the three- and
six-month periods ended June 30, 1998, respectively, compared to the same
periods in 1997. Market value of Financial Management Services' assets grew
24.5% from $307.6 million at June 30, 1997 to $ 383.1 million at June 30, 1998.
The increase is a result of market appreciation and new account relationships.
Service charges on deposit accounts increased 6.4% and 8.1% to $265
thousand and $519 thousand for the three- and six-month period ended June 30,
1998, respectively, compared to the same periods in 1997. The increases relate
to more effective enforcement of service charge policies. Other non-interest
income increased 108.3% and 80.3% to $327 thousand and $588 thousand for the
three- and six-month periods ended June 30, 1998 compared to the same periods in
1997. The increases are attributed to income from service charges on Bank ATM
machines commencing during the second quarter 1998. Income from the sale of
residential mortgages to the secondary market during the first and second
quarters of 1998 also contributed to the increases.
NON-INTEREST EXPENSE
Total non-interest expense for the three- and six-month periods ended
June 30, 1998 increased 8.6% and 9.1% to $4.0 million and $8.0 million for the
same periods in 1997. The various components of non-interest expense changes are
discussed below.
Salaries and employee benefits increased 12.4% and 10.5% for the three-
and six-month periods ended June 30, 1998 to $2.3 million and $4.5 million
compared to the same periods in 1997, respectively. Annual employee raises,
promotions and a proportional increase in employee benefits are primarily
responsible for the increases. Average full time equivalent staff also increased
from 191 for the period ended June 30, 1997 to 197 for the period ended June 30,
1998.
Net occupancy, equipment, and data processing expense increased 15.1%
and 9.3% to $808 thousand and $1.61 million for the three- and six-month periods
ended June 30, 1998, compared to the same periods last year, respectively. The
increases are a 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 1998.
Total other non-interest expense decreased 4.9% to $809 thousand for the
three-month period ended June 30, 1998 compared to the same period in 1997.
Total other non-interest expense increased 6.0% to $1.67 million for the
six-month period ended June 30, 1998 compared to the same period in 1997. This
increase can be attributed to increases in the Bank's marketing and loan related
legal expenses as well as additional operating expenses associated with the
increases in staff and premises occurring during the first quarter 1998.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Construction on the Bank's new Frazer area branch has been completed. The
branch opened for business on August third of this year. Preliminary plans for
another branch in early 1999 continue to be 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.
13
<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 JUNE 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
---------------------------------- ---------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 6,035 $ 83 5.50% $ 4,389 $ 61 5.56%
Investment securities
Taxable 74,353 1,119 6.02% 79,753 1,301 6.53%
Tax-exempt (1) 1,490 27 7.29% 2,375 43 7.22%
------- ----- ------- -----
Total investment securities 75,843 1,146 6.04% 82,128 1,344 6.55%
------- ----- ------- -----
Loans (2)
Taxable 317,760 7,003 8.82% 289,905 6,528 8.99%
Tax-exempt (1) 6,489 166 10.20% 9,132 220 9.63%
------- ----- ------- -----
Total loans 324,249 7,169 8.84% 299,554 6,748 9.01%
------- ----- ------- -----
Total interest earning assets 406,127 8,398 8.27% 386,071 8,153 8.45%
Non-interest earning assets
Allowance for possible loan losses (5,970) (5,436)
Cash and due from banks 20,148 18,453
Other assets 13,652 13,241
------- --------
Total assets $433,957 $412,329
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $181,542 $1,605 3.54% $174,556 $ 1,362 3.12%
Certificates of deposits and other time 135,239 1,778 5.26% 125,283 1,801 5.75%
------- ----- ------- ------
Total interest bearing deposits 316,781 3,383 4.27% 299,839 3,163 4.22%
Securities sold under repurchase agreements 2,323 23 3.96% 8,313 68 3.27%
Federal Home Loan Bank advances and
other borrowings 4,853 76 6.26% 7,177 111 6.19%
------- ----- ------- -----
Total interest bearing liabilities 323,957 3,482 4.30% 315,329 3,342 4.24%
------- ----- ------- -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 65,211 57,180
Other liabilities 7,164 5,892
------- -------
Total liabilities 396,332 378,401
Stockholders' equity 37,625 33,928
------- -------
Total liabilities and stockholders' equity $433,957 $412,329
======= =======
Net interest income $4,916 $ 4,811
===== ======
Net yield on interest earning assets 4.84% 4.98%
==== ====
<FN>
(1) The indicated income and annual rate are presented on a taxable equivalent basis using the Federal marginal rate of 34%
adjusted for the 20% interest expense disallowance for 1998 and 1997.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
14
<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
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
---------------------------------- ----------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 5,531 $ 152 5.50% $ 3,124 $ 85 5.44%
Interest bearing deposits in banks -- -- -- 398 12 6.03%
Investment securities
Taxable 73,910 2,268 6.14% 84,410 2,745 6.50%
Tax-exempt (1) 1,484 57 7.73% 2,437 87 7.16%
------- ------ ------- ------
Total investment securities 75,394 2,325 6.17% 86,847 2,832 6.52%
Loans (2)
Taxable 315,293 13,882 8.81% 279,279 12,554 8.97%
Tax-exempt (1) 6,716 326 9.71% 8,418 383 9.10%
------- ------ ------- ------
Total loans 322,009 14,208 8.82% 288,212 12,937 8.98%
------- ------ ------- ------
Total Interest Earning Assets 402,934 16,685 8.28% 378,581 15,866 8.38%
Non-interest earning assets
Allowance for possible loan losses (5,946) (5,356)
Cash and due from banks 19,635 18,035
Other assets 13,666 13,474
------- -------
Total assets $430,289 $404,734
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $181,077 $ 2,838 3.13% $173,079 $ 2,687 3.10%
Certificates of deposits and other time 133,455 3,836 5.75% 121,802 3,454 5.67%
------- ------ ------- -------
Total interest bearing deposits 314,522 6,674 4.24% 294,881 6,141 4.17%
Securities sold under repurchase agreements 3,443 60 3.49% 8,113 132 3.25%
Federal Home Loan Bank advances and
other borrowings 5,469 172 6.29% 5,822 176 6.05%
------- ------ ------- ------
Total interest bearing liabilities 323,434 6,906 4.27% 308,816 6,449 4.18%
------- ------ ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 62,717 56,336
Other liabilities 6,984 5,905
------- -------
Total liabilities 393,235 371,057
Stockholders' equity 37,154 33,677
------- -------
Total liabilities and stockholders' equity $430,289 $404,734
======= =======
Net interest income $9,779 $ 9,417
===== ======
Net yield on interest earning assets 4.85% 4.98%
==== ====
<FN>
(1) The indicated income and annual rate are presented on a taxable equivalent basis using the Federal marginal rate of 34%
adjusted for the 20% interest expense disallowance for 1998 and 1997.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCOME TAXES
Income tax expense for the three- and six-month periods ended June 30,
1998 was $561 thousand and $1.1 million, compared to $394 thousand and $919
thousand in the same periods last year. This represents effective tax rates of
30.5% for both the three- and six-month periods ended June 30, 1998, compared
with 25.9% and 29.2% for the same periods in 1997, respectively. The primary
reason for the increases in effective tax rates is decreases in tax-exempt
instruments as a percentage of total average assets from 1.9% and 2.7% at June
30, 1998 and 1997, respectively. Tax credits which resulted from an investment
in a community development project were taken in the second quarter of 1997.
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:
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, 1998 December 31, 1997
--------------------------- ---------------------------
Average Effective Average Effective Dollar Percentage
DEPOSIT TYPE Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
NOW Accounts $ 54,818 2.16% $ 52,758 2.19% $ 2,060 3.90%
Money Market 28,474 3.13 28,433 3.15 41 0.14
Statement Savings 46,741 3.28 48,381 3.31 (1,640) (3.39)
Other Savings 2,450 2.69 2,996 2.74 (546) (18.22)
CD's Less than $100,000 112,379 5.76 108,022 5.80 4,357 4.03
------- ------- ------
Total Core Deposits 244,862 4.14 240,590 4.16 4,272 1.78
Demand Deposit Accounts 62,717 -- 57,659 -- 5,058 8.77
------- ------- ------
Total Core and Demand
Deposit Accounts 307,579 3.30 298,249 3.35 9,330 3.13
------- ------- ------
Tiered Savings 48,594 4.12 41,184 4.14 7,410 17.99
CD's Greater than $100,000 21,066 5.70 17,415 5.54 3,651 20.96
------- ------- ------
Total Deposits $377,239 3.54 $356,848 3.55 $20,391 5.71
======= ======= ======
</TABLE>
The Bank, as a member of the FHLB, maintains a line of credit secured
by the Bank's mortgage-related assets. As of June 30, 1998, this line of credit
was approximately $10.0 million. As of June 30, 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 $96.0 million. During the
second quarter of 1998, average FHLB advances were approximately $5.1 million
and consisted of term advances representing a combination of maturities. The
average interest rate on this advance was approximately 6.3%. 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
$104.1 million or 23.7% of total assets at June 30, 1998 compared with a
negative $121 million or 29.0% of total assets at June 30, 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST SENSITIVITY ANALYSIS
AS OF JUNE 30, 1998
<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 $ 12,000 $ -- $ -- $ -- $ 12,000
Investment securities 27,310 33,084 17,816 -- 78,210
Loans and leases 128,958 175,864 15,328 (5,912) 314,238
Cash and cash equivalents -- -- -- 21,441 21,441
Premises & equipment -- -- -- 7,347 7,347
Other assets -- -- -- 6,612 6,612
----------- ---------- ---------- ---------- ----------
Total assets $ 168,268 $ 208,948 $ 33,144 $ 29,488 $ 439,848
=========== ========== ========== ========== ==========
LIABILITIES AND CAPITAL
Non-interest bearing deposit $ -- $ -- $ -- $ 69,478 $ 69,478
Interest bearing deposits 268,655 48,380 1,249 -- 318,284
FHLB Term Advance 1,941 1,640 1,523 -- 5,104
Borrowed funds 1,728 -- -- -- 1,728
Other liabilities -- -- -- 7,077 7,077
Capital -- -- -- 38,177 38,177
---------- ---------- ---------- ---------- ----------
Total liabilities & capital $ 272,324 $ 50,020 $ 2,772 $ 114,732 $ 439,848
=========== ========== ========== ========== ==========
Net interest rate
sensitivity gap $ (104,056) $ 158,928 $ 30,372 $ (85,244) $ --
========== ========== ========== ========= ==========
Cumulative interest rate
sensitivity gap $ (104,056) $ 54,872 $ 85,244 $ -- $ --
========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap divided
by total assets (23.7%) 12.5% 19.4%
========== ===== =========
</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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June30,
------------------------- ------------------------
(Dollars in thousands) 1998 1997 1998 1997
---- ---- ----- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 5,940 $ 5,387 $ 5,900 $ 5,218
------- ------- ------- -------
Provision charged to operating expense 188 446 412 656
------- ------- ------- -------
Recoveries of loans previously charged-off 11 42 18 69
Loans charged-off (227) (222) (418) (290)
------- ------- ------- -------
Net loans charged-off (216) (180) (400) (221)
------- ------- ------- -------
Balance at end of period $ 5,912 $ 5,653 $ 5,912 $ 5,653
======= ======= ======= =======
Period-end loans outstanding $320,150 $306,375 $320,150 $306,375
Average loans outstanding $324,249 $299,554 $322,009 $288,212
Ratio of net charge-offs to average loans
outstanding 0.07% 0.06% 0.12% 0.08%
</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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
------------------------- ------------
(Dollars in thousands) 1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 413 $ 740 $ 466
Non-accrual loans 1,895 1,089 1,443
------ ------ -----
Total non-performing loans 2,308 1,829 1,909
Other real estate owned 712 851 1,651
------ ------ -----
Total non-performing assets $ 3,020 $ 2,680 $ 3,560
====== ====== ======
Non-performing loans as a percentage
of total loans (gross) 0.72% 0.60% 0.60%
Allowance for possible loan losses as a
percentage of non-performing loans 256.15% 309.08% 309.10%
Allowance for possible loan losses as a
percentage of total loans and other real
estate owned 0.94% 0.87% 1.11%
Allowance for possible loan losses as a
percentage of non-performing assets 195.76% 210.93% 165.70%
</TABLE>
The allowance for possible loan losses as a percentage of
non-performing loans ratio indicates that the allowance for possible loan losses
is sufficient to cover the principal of all non-performing loans at June 30,
1998. Other Real Estate Owned ("OREO") represents residential and commercial
real estate that has been written down to realizable value (net of estimated
disposal costs) based on professional appraisals. In July 1998, the Corporation
liquidated from OREO a commercial property for a net amount of $505 thousand.
This sale resulted in a loss of $15 thousand which will be reflected in the
third quarter.
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 1998 these loans grew
approximately $3 million to $27 million. These loans are unseasoned and have
increased non-performing loan numbers. As of June 30, 1998 approximately 7.53%
of this portfolio was past due. In addition, approximately $65 thousand in
repossessed vehicles is included in other assets. As previously mentioned, the
Corporation has decided to withdraw from third party automobile lending due to
less than expected results. The Corporation will continue to service the
existing portfolio but will not add any additional volume as of July 3, 1998. At
June 30, 1998 there were no concentrations of loans exceeding 10% of total loans
which are not otherwise disclosed.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LOAN IMPAIRMENT
In accordance with FASB 114, the Bank identifies certain loans 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) June 30, 1998 June 30, 1997 December 31, 1997
------------- ------------- -----------------
<S> <C> <C> <C>
Principal amount of impaired loans $1,351 $ 706 $ 1,121
Less valuation allowance 297 318 306
----- ---- ------
$1,054 $ 388 $ 815
===== ==== ======
</TABLE>
The activity in the valuation allowance for the three- and six-month periods
ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
---------------------- --------------------
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
----- ----- ----- -----
<S> <C> <C> <C> <C>
Valuation allowance at beginning of period $ 274 $ 306 $ 454 $ 419
Provision for loan impairment 25 75 25 75
Direct charge-offs (2) (84) (161) (176)
----- ------ ----- -----
Valuation allowance at end of period $ 297 $ 297 $ 318 $ 318
===== ===== ===== =====
</TABLE>
Total cash collected on impaired loans during the three- and six-month
periods ended June 30, 1998 was $11 thousand and $21 thousand, respectively, 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 three- and six-month periods ended June 30, 1998 was
$31 thousand and $59 thousand. There was no interest income recognized during
the three- and six-month periods ended June 30, 1998.
Total cash collected on impaired loans during the three- and six-month
periods ended June 30, 1997 was $6 thousand and $212 thousand, respectively, of
which $176 thousand was credited to the principal balance outstanding on such
loans. Interest that would have been accrued on impaired loans during the three-
and six-month periods ended June 30, 1997 was $15 thousand and $25 thousand,
respectively. Interest income recognized during the three- and six-month periods
ended June 30, 1997 was $0 and $36 thousand, respectively.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 has been completed and was opened for business on August 3,
1998.
In December 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, Pennsylvania for approximately $1.7 million. The Bank is
expected to take possession of the property in September 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 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 process has commenced and the final changeover is expected to take
place in the fourth quarter of this year.
Management continues 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 ("FRB") for bank holding companies. The Bank is also
subject to similar capital requirements adopted by the Office of the Comptroller
of the Currency. Under these requirements, the regulatory agencies have set
minimum thresholds for Tier I Capital, Total Capital, and Leverage ratios. At
June 30, 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 1991.
The Corporation's Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
June 30, December 31,
RISK-BASED ------------------------- ------------ "Well Capitalized"
CAPITAL RATIOS 1998 1997 1997 Requirements
- -------------- ---- ---- ---- ----------------
<S> <C> <C> <C>
Corporation
-----------
Leverage Ratio 8.76% 8.44% 8.57% 5.00%
Tier I Capital Ratio 11.48% 11.24% 11.22% 6.00%
Total Risk-Based Capital Ratio 12.74% 12.49% 12.48% 10.00%
Bank
----
Leverage Ratio 8.57% 8.38% 8.30% 5.00%
Tier I Capital Ratio 11.23% 11.16% 10.89% 6.00%
Total Risk-Based Capital Ratio 12.49% 12.42% 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 that,
if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
rate for the Corporation was 10.85% and 8.14% for the six months ended June 30,
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 June 30, 1998 and 1997, respectively.
FORWARD-LOOKING STATEMENTS
The Corporation has discussed its planned investments in new technology
and branch locations in this report. These, among others, i.e. anticipate
pressures on net yields, are forward-looking statements.
Risks and uncertainties could cause actual future results and
investments to differ materially from those contemplated in such forward-looking
statements. These risks and uncertainties include, but are not limited to, the
following: (a) loan growth and/or loan margins may be less than expected, due to
competitive pressures in the banking industry and/or changes in the interest
rate environment; (b) general economic conditions in the Corporation's market
area may be less favorable than expected, resulting in, among other things, a
deterioration in credit quality; (c) costs of the Corporation's planned training
initiatives, product development, branch expansion, new technology and operating
systems may exceed expectations; (d) volatility in the Corporation's market area
due to recent mergers may have unanticipated consequences, such as customer
turnover; and (e) changes in the regulatory environment, securities markets,
general business conditions and inflation may be adverse. These risks and
uncertainties are all difficult to predict and most are beyond the control of
the Corporation's Management.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as the date of this report. The
Corporation undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this report.
23
<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
of the Corporation, 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 1997 Annual Report for additional information.
24
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various actions and proceedings are presently pending to which
the Corporation is a party. These actions and proceedings
arise out of routine operations and, in Management's opinion,
will not, either individually or in the aggregate, have a
material adverse effect on the consolidated financial position
of the Corporation and its subsidiaries.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
(a) Exhibits
3(i). Articles of Incorporation. Copy of the Corporation's Articles of
Incorporation, as amended, is incorporated herein 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 herein by reference to Exhibit 3(ii) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
27. Financial Data Schedule.
(b) Reports on Form 8-K
None
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST WEST CHESTER CORPORATION
Charles E. Swope
/s/ Charles E. Swope
---------------------
President
DATE: August 14, 1998
J. Duncan Smith
/s/ J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
First West Chester Corporation FDS for period ending 6/30/98
</LEGEND>
<CIK> 0000744126
<NAME> First West Chester Corporation
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Apr-01-1998
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 21,441
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,501
<INVESTMENTS-CARRYING> 10,709
<INVESTMENTS-MARKET> 10,863
<LOANS> 320,150
<ALLOWANCE> 5,912
<TOTAL-ASSETS> 439,848
<DEPOSITS> 387,762
<SHORT-TERM> 3,669
<LIABILITIES-OTHER> 10,240
<LONG-TERM> 0
0
0
<COMMON> 2,400
<OTHER-SE> 35,777
<TOTAL-LIABILITIES-AND-EQUITY> 439,848
<INTEREST-LOAN> 14,118
<INTEREST-INVEST> 2,308
<INTEREST-OTHER> 152
<INTEREST-TOTAL> 16,578
<INTEREST-DEPOSIT> 6,674
<INTEREST-EXPENSE> 6,906
<INTEREST-INCOME-NET> 9,672
<LOAN-LOSSES> 412
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 7,955
<INCOME-PRETAX> 3,533
<INCOME-PRE-EXTRAORDINARY> 3,533
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,455
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 4.85
<LOANS-NON> 1,895
<LOANS-PAST> 413
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,900
<CHARGE-OFFS> 418
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 5,912
<ALLOWANCE-DOMESTIC> 5,912
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
