UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
-----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (610) 692-3000
-------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates as of March 1, 1999, was approximately $73,687,000.
The number of shares outstanding of Common Stock of the Registrant as of March
1, 1999, was 4,605,282.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Annual Report to Shareholders for the year ended December 31,
1998, is incorporated by reference into Parts I and II hereof. The Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders is
incorporated by reference into Part III hereof.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE
----
PART I: Item 1 - Business 1
Item 2 - Properties 13
Item 3 - Legal Proceedings 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
PART II: Item 5 - Market for the Corporation's Common Equity and
Related Stockholder Matters 14
Item 6 - Selected Financial Data 14
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 15
Item 7A - Quantitative and Qualitative Disclosures About
Market Risk
Item 8 - Financial Statements and Supplementary Data 15
Item 9 - Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III: Item 10 - Directors and Executive Officers of the Corporation 15
Item 11 - Executive Compensation 15
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 15
Item 13 - Certain Relationships and Related Transactions 15
PART IV: Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K
16
SIGNATURES 19
</TABLE>
<PAGE>
PART I
Item 1. Business.
- ------- ---------
GENERAL
First West Chester Corporation (the "Corporation") is a Pennsylvania
business corporation and a bank holding company registered under the Federal
Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a bank holding
company, the Corporation's operations are confined to the ownership and
operation of banks and activities deemed by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") to be so closely related to
banking to be a proper incident thereto. The Corporation was incorporated on
March 9, 1984, for the purpose of becoming a registered bank holding company
pursuant to the BHC Act and acquiring The First National Bank of West Chester
(the "Bank"), thereby enabling the Bank to operate within a bank holding company
structure. On September 13, 1984, the Corporation acquired all of the issued and
outstanding shares of common stock of the Bank. The principal activities of the
Corporation are the owning and supervising of the Bank, which engages in a
general banking business in Chester County, Pennsylvania. The Corporation
directs the policies and coordinates the financial resources of the Bank. In
addition, the Corporation is the sole shareholder of 323 East Gay Street Corp.,
a Pennsylvania corporation ("EGSC"), which was formed in 1996 for the purpose of
holding the Bank's interest in and operating foreclosed real property until
liquidation of such property.
BUSINESS OF THE BANK
The Bank is engaged in the business of commercial and retail banking
and was organized under the banking laws of the United States in December 1863.
The Bank currently conducts its business through seven banking offices located
in Chester County, Pennsylvania, including its main office. In addition, the
Bank operates four limited service ATM facilities. The Bank is a member of the
Federal Reserve System. At December 31, 1998, the Bank had total assets of
approximately $471 million, total loans of approximately $320 million, total
deposits of approximately $418 million and employed 206 full-time equivalent
persons.
The Bank is a full service commercial bank offering a broad range of
retail banking, commercial banking, trust and financial management services to
individuals and businesses. Retail services include checking accounts, savings
programs, money-market accounts, certificates of deposit, safe deposit
facilities, consumer loan programs, residential mortgages, overdraft checking,
automated tellers and extended banking hours. Commercial services include
revolving lines of credit, commercial mortgages, equipment leasing and letter of
credit services.
These retail and commercial banking activities are provided primarily
to consumers and small to mid-sized companies within the Bank's market area.
Lending services are focused on commercial, consumer and real estate lending to
local borrowers. The Bank attempts to establish a total borrowing relationship
with its customers which may typically include a commercial real estate loan, a
business line of credit for working capital needs, a mortgage loan for a
borrower's residence, a consumer loan or a revolving personal credit line.
The Bank's Financial Management Services Department (formerly, the
Trust Department) provides a broad range of personal trust services. It
administers and provides investment management services for estates, trusts,
agency accounts and employee benefit plans. At December 31, 1998, the Bank's
Financial Management Services Department administered or provided investment
management for 827 accounts, which possessed assets with an aggregate market
value of approximately $405 million. For the year ended December 31, 1998, gross
income from the Bank's Financial Management Services Department and related
activities amounted to approximately $2.3 million and accounted for 5.9% of the
total of interest income and other income of the Bank for such period.
<PAGE>
COMPETITION
The Bank's service area consists primarily of greater Chester County,
including West Chester and Kennett Square, as well as the fringe of Delaware
County, Pennsylvania. The core of the Bank's service area is located within a
fifteen-mile radius of the Bank's main office in West Chester, Pennsylvania. The
Bank encounters vigorous competition for market share in the communities it
serves from community banks, thrift institutions and other non-bank financial
organizations. The Bank also competes with banking and financial branching
systems, some from out of state, which are substantially larger and have greater
financial resources than the Bank. There are branches of many commercial banks,
savings banks and credit unions, including the Bank, in the general market area
serviced by the Bank. The largest of these institutions had assets of over $100
billion and the smallest had assets of less than $30 million. The Bank had total
assets of approximately $471 million as of December 31, 1998.
The Bank competes for deposits with various other commercial banks,
savings banks, credit unions, brokerage firms and stock, bond and money market
funds. The Bank also faces competition from major retail-oriented firms that
offer financial services similar to traditional services available through
commercial banks without being subject to the same degree of regulation.
Mortgage banking firms, finance companies, insurance companies and leasing
companies also compete with the Bank for traditional lending services.
Management believes that the Bank is able to effectively compete with
its competitors because of its ability to provide responsive personalized
services and competitive rates. This ability is a direct result of management's
knowledge of the Bank's market area and customer base. Management believes the
needs of the small to mid-sized commercial business and retail customers are not
adequately met by larger financial institutions, therefore creating a marketing
opportunity for the Bank.
BUSINESS OF EGSC
EGSC was formed in 1996 to hold the Bank's partnership interest in WCP
Partnership. WCP Partnership was formed to facilitate the acquisition, necessary
repairs, required environmental remediation and other actions necessary to sell
real property located in West Chester, Pennsylvania (the "West Chester
Property") at fair market value. EGSC purchased a 62% interest in the mortgage
on the West Chester Property in 1996 from the Bank at book value and immediately
contributed the interest in the mortgage to WCP Partnership as capital. Another
financial institution contributed the remaining 38% interest in the mortgage to
WCP Partnership. WCP Partnership foreclosed on the West Chester Property in
1996. During 1997, the property was liquidated. The proceeds from the
liquidation were in excess of the transferred loan amount resulting in a gain
which was included in noninterest income. As of December 31, 1998, the WCP
Partnership was dissolved.
SUPERVISION AND REGULATION
General
The Corporation is a bank holding company subject to supervision and
regulation by the Federal Reserve Board. In addition, the Bank is subject to
supervision and regulation by the Office of the Comptroller of the Currency (the
"OCC"), and the Federal Deposit Insurance Corporation (the "FDIC"). Certain
aspects of the Bank's operation are also subject to state laws. The following is
not intended to be an exhaustive description of the statutes and regulations
applicable to the Corporation and the Bank.
<PAGE>
Government Regulation
The Corporation is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the BHC Act. Annual and other periodic reports also are
required to be filed with the Federal Reserve Board. The Federal Reserve Board
also makes examinations of bank holding companies and their subsidiaries. The
BHC Act requires each bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire substantially all of the assets of
any bank, or if it would acquire or control more than 5% of the voting shares of
such a bank. The Federal Reserve Board considers numerous factors, including its
capital adequacy guidelines, before approving such acquisitions. For a
description of certain applicable guidelines, see this Item "Capital," Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Capital Adequacy," and Part II, Item 8, "Note I -- Capital
Requirements" in the consolidated financial statements.
The BHC Act also restricts the types of businesses and operations in
which a bank holding company and its subsidiaries may engage. Generally,
permissible activities are limited to banking and activities found by the
Federal Reserve Board to be so closely related to banking as to be a proper
incident thereto. Further, a bank holding company and its subsidiaries are
generally prohibited from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services.
The operations of the Bank are subject to requirements and restrictions
under federal and state law, including requirements to maintain reserves against
deposits, restrictions on the types and amounts of loans that may be made and
the types of services which may be offered, and restrictions on the ability to
acquire deposits under certain circumstances. Various consumer laws and
regulations also affect the operations of the Bank. Approval of the OCC is
required for branching by the Bank and for bank mergers in which the continuing
bank is a national bank.
The Community Reinvestment Act
The Community Reinvestment Act of 1977, as amended (the "CRA"), and the
regulations promulgated to implement the CRA are designed to create a system for
bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. The CRA regulations were completely
revised in 1995 to establish performance-based standards for use in examining a
depository institution's compliance with the CRA (the "revised CRA
regulations"). The revised CRA regulations establish new tests for evaluating
both small and large depository institutions' investment in the community. For
the purposes of the revised CRA regulations, the Bank is deemed to be a large
retail institution, based upon financial information as of December 31, 1998.
The Bank has opted to be examined under a three-part test evaluating the Bank's
lending service and investment performance. The Bank received a "satisfactory"
rating in 1998.
Dividend Restrictions
The Corporation is a legal entity separate and distinct from the Bank.
Virtually all of the revenue of the Corporation available for payment of
dividends on its common stock, with a par value of $1.00 (the "Common Stock")
will result from amounts paid to the Corporation from dividends received from
the Bank. All such dividends are subject to limitations imposed by federal and
state laws and by regulations and policies adopted by federal and state
regulatory agencies.
The Bank as a national bank is required by federal law to obtain the
approval of the OCC for the payment of dividends if the total of all dividends
declared by the Board of Directors of the Bank in any calendar year will exceed
the total of Bank's net income for that year and the retained net income for the
preceding two years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. Under this formula, in 1998, the Bank,
without affirmative governmental approvals, could declare aggregate dividends in
<PAGE>
1998 of approximately $5.9 million, plus an amount approximately equal to the
net income, if any, earned by the Bank for the period from January 1, 1998,
through the date of declaration of such dividend less dividends previously paid
in 1998, subject to the further limitations that a national bank can pay
dividends only to the extent that retained net profits (including the portion
transferred to surplus) exceed bad debts and provided that the Bank would not
become "undercapitalized" (as these terms are defined under federal law).
If, in the opinion of the applicable regulatory authority, a bank or
bank holding company under its jurisdiction is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition of
the bank or bank holding company, could include the payment of dividends), such
regulatory authority may require such bank or bank holding company to cease and
desist from such practice, or to limit dividends in the future. Finally, the
several regulatory authorities described herein, may from time to time,
establish guidelines, issue policy statements and adopt regulations with respect
to the maintenance of appropriate levels of capital by a bank or bank holding
company under their jurisdiction. Compliance with the standards set forth in
such policy statements, guidelines and regulations could limit the amount of
dividends which the Corporation and the Bank may pay.
Capital
The Corporation and the Bank are both subject to minimum capital
requirements and guidelines. The Federal Reserve Board measures capital adequacy
for bank holding companies on the basis of a risk-based capital framework and a
leverage ratio. The Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines currently provide for a
minimum leverage ratio of Tier I capital to adjusted total assets of 3% for bank
holding companies that meet certain criteria, including that they maintain the
highest regulatory rating. All other bank holding companies are required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points. The Federal Reserve Board has not advised the Corporation of
any specific minimum leverage ratio under these guidelines which would be
applicable to the Corporation. Failure to satisfy regulators that a bank holding
company will comply fully with capital adequacy guidelines upon consummation of
an acquisition may impede the ability of a bank holding company to consummate
such acquisition, particularly if the acquisition involves payment of
consideration other than common stock. In many cases, the regulatory agencies
will not approve acquisitions by bank holding companies and banks unless their
capital ratios are well above regulatory minimums.
The Bank is subject to capital requirements which generally are similar
to those affecting the Corporation. The minimum ratio of total risk-based
capital to risk-adjusted assets (including certain off-balance sheet items, such
as standby letters of credit) is 8%. Capital may consist of equity and
qualifying perpetual preferred stock, less goodwill ("Tier I capital"), and
certain convertible debt securities, qualifying subordinated debt, other
preferred stock and a portion of the reserve for possible credit losses ("Tier
II capital").
A depository institution's capital classification depends upon its
capital levels in relation to various relevant capital measures, which include a
risk-based capital measure and a leverage ratio capital measure. A depository
institution is considered well capitalized if it significantly exceeds the
minimum level required by regulation for each relevant capital measure,
adequately capitalized if it meets each such measure, undercapitalized if it
fails to meet any such measure, significantly undercapitalized if it is
significantly below any such measure and critically undercapitalized if it fails
to meet any critical capital level set forth in the regulations. An institution
may be placed in a lower capitalization category if it receives an
unsatisfactory examination rating, is deemed to be in an unsafe or unsound
condition, or engages in unsafe or unsound practices. Under applicable
regulations, for an institution to be well capitalized it must have a total
risk-based capital ratio of at least 10%, a Tier I risk-based capital ratio of
at least 6% and a Tier I leverage ratio of at least 5% and not be subject to any
specific capital order or directive. As of December 31, 1998, 1997 and 1996, the
Corporation and the Bank had capital in excess of all regulatory minimums and
the Bank was "well capitalized." See Part II, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Financial
Condition" and "--Capital Adequacy" and Part II, Item 8, "Note I -- Capital
Requirements" in the consolidated financial statements.
<PAGE>
Deposit Insurance Assessments
The Bank is subject to deposit insurance assessments by the FDIC's Bank
Insurance Fund ("BIF"). The FDIC has developed a risk-based assessment system,
under which the assessment rate for an insured depository institution varies
according to its level of risk. An institution's risk category is based upon
whether the institution is well capitalized, adequately capitalized or
undercapitalized and the institution's "supervisory subgroups": Subgroup A, B or
C. Subgroup A institutions are financially sound institutions with a few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. Based on its capital
and supervisory subgroups, each BIF member institution is assigned an annual
FDIC assessment rate per $100 of insured deposits varying between 0.00% per
annum (for well capitalized Subgroup A institutions) and 0.27% per annum (for
undercapitalized Subgroup C institutions). As of January 1, 1999, well
capitalized Subgroup A institutions will pay between 0.00% and 0.10% per annum.
In accordance with the Deposit Insurance Act of 1997 an additional
assessment by the Financing Corporation ("FICO") became applicable to all
insured institutions as of January 1, 1998. This assessment is not tied to the
FDIC risk classification. The BIF FICO assessment will be 1.220 basis points for
1999. For the first quarter of 1999, the Bank's assessments for BIF and BIF FICO
are $0.00 and $11,918, respectively.
Other Matters
Federal and state law also contains a variety of other provisions that
affect the operations of the Corporation and the Bank including certain
reporting requirements, regulatory standards and guidelines for real estate
lending, "truth in savings" provisions, the requirement that a depository
institution give 90 days prior notice to customers and regulatory authorities
before closing any branch, certain restrictions on investments and activities of
nationally-chartered insured banks and their subsidiaries, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders, guidelines
governing regulatory examinations, and a prohibition on the acceptance or
renewal of brokered deposits by depository institutions that are not well
capitalized or are adequately capitalized and have not received a waiver from
the FDIC.
The Corporation's Common Stock is registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As a result, the
Corporation is subject to the regulations promulgated under the Exchange Act
regarding the filing of public reports, the solicitation of proxies, the
disclosure of beneficial ownership of certain securities, short swing profits
and the conduct of tender offers.
EFFECT OF GOVERNMENTAL POLICIES
The earnings of the Bank and, therefore, of the Corporation are
affected not only by domestic and foreign economic conditions, but also by the
monetary and fiscal policies of the United States and its agencies (particularly
the Federal Reserve Board), foreign governments and other official agencies. The
Federal Reserve Board can and does implement national monetary policy, such as
the curbing of inflation and combating of recession, by its open market
operations in United States government securities, control of the discount rate
applicable to borrowings from the Federal Reserve and the establishment of
reserve requirements against deposits and certain liabilities of depository
institutions. The actions of the Federal Reserve Board influence the level of
loans, investments and deposits and also affect interest rates charged on loans
or paid on deposits. The nature and impact of future changes in monetary and
fiscal policies are not predictable.
From time to time, various proposals are made in the United States
Congress and the Pennsylvania legislature and before various regulatory
authorities which would alter the powers of different types of banking
organizations, remove restrictions on such organizations and change the existing
regulatory framework for banks, bank holding companies and other financial
<PAGE>
institutions. It is impossible to predict whether any of such proposals will be
adopted and the impact, if any, of such adoption on the business of the
Corporation.
ACCOUNTING STANDARDS
Impairment of Long-Lived Assets
The Corporation adopted the Financial Accounting Standards Board
Statement ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" on January 1, 1996. See Note A-6 in
Notes to Consolidated Financial Statements included in the Corporation's 1998
Annual Report to Shareholders, incorporated herein by reference.
Stock Based Compensation Plans
The Corporation adopted SFAS No. 123, "Accounting for Stock Based
Compensation" on January 1, 1996. See Note A-10 in Notes to Consolidated
Financial Statements included in the Corporation's 1998 Annual Report to
Shareholders, incorporated herein by reference.
Accounting for Transfer and Services of Financial Assets and Extinquishments of
The Corporation adopted SFAS No. 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities" as amended by
SFAS No. 127, as of January 1, 1998. See Note A-14 in Notes to Consolidated
Financial Statements included in the Corporation's 1998 Annual Report to
Shareholders, incorporated herein by reference.
Earnings Per Share
The Corporation adopted SFAS No. 128, "Earnings per Share" as of
January 1, 1998. See Note A-12 in Notes to Consolidated Financial Statements
included in the Corporation's 1998 Annual Report to Shareholders, incorporated
herein by reference.
Reporting Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income"
effective as of January 1, 1998. See Note A-15 in Notes to Consolidated
Financial Statements included in the Corporation's 1998 Annual Report to
Shareholders, incorporated herein by reference.
Disclosures about Segments of an Enterprise and Related Information
The Corporation adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" as of January 1, 1998. See Note A-16 in
Notes to Consolidated Financial Statements included in the Corporations 1998
Annual Report to Shareholders, incorporated by herein by reference.
Disclosures about Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, "Disclosures about Derivative Instruments
and Hedging Activities" was issued effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. See Note A-17 in Notes to Consolidated
Financial Statements included in the Corporation's 1998 Annual Report to
Shareholders, incorporated herein by reference.
STATISTICAL DISCLOSURES
The following tables set forth certain statistical disclosures
concerning the Corporation and the Bank. These tables should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Corporation's 1998 Annual Report to
Shareholders, incorporated herein by reference.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
RATE VOLUME ANALYSIS (1)
<TABLE>
<CAPTION>
Increase (decrease) in net interest income due to:
--------------------------------------------------
Volume (2) Rate (2) Total Volume (2) Rate (2) Total
------ ---- ----- ------ ---- -----
(Dollars in thousands) 1998 Compared to 1997 1997 Compared to 1996
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Federal funds sold $ 138 $ (10) $ 128 $ (435) $ 9 $ (426)
Interest Bearing Deposits in Banks (12) - (12) (35) - (35)
------- ------ ------ ------ ------ -----
Investment securities
Taxable 244 (410) (166) (946) 187 (759)
Tax-exempt(3) (42) 4 (38) (29) 5 (24)
------- ------ ------ ------ ------ -----
Total investment securities 202 (406) (204) (975) 192 (783)
Loans
Taxable 2,035 (198) 1,837 4,430 (738) 3,692
Tax-exempt(3) (205) 32 (174) 210 (169) 41
------- ------ ------ ------ ------ -----
Total loans(4) 1,830 (167) 1,663 4,640 (907) 3,733
------- ------ ------ ------ ------ -----
Total interest income 2,158 (582) 1,575 3,195 (706) 2,489
------- ------ ------ ------ ------ -----
INTEREST EXPENSE
Savings, NOW and money market
deposits 323 (46) 277 162 43 205
Certificates of deposits and other time 714 18 732 582 68 650
------- ------ ------ ------ ------ -----
Total interest bearing deposits 1,037 (28) 1,009 744 111 855
Securities sold under repurchase
agreements (181) 16 (165) (37) (2) (39)
Other borrowings (76) 15 (61) -- 401 401
------- ------ ------ ------ ------ -----
Total Interest expense 780 3 783 707 510 1,217
------- ------ ------ ------ ------ -----
Net Interest income $ 1,378 $ (585) $ 792 $ 2,488 $(1,216) $1,272
======= ====== ====== ====== ====== =====
<FN>
NOTES:
- -----
(1) The related average balance sheets can be found on page 25 of the
Corporation's 1998 Annual Report to Shareholders.
(2) The changes in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(3) The indicated changes are presented on a tax equivalent basis.
(4) Non-accruing loans have been used in the daily average balances to
determine changes in interest due to volume. Loan fees included in the
interest income computation are not material.
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
LOAN PORTFOLIO BY TYPE AT DECEMBER 31,
<TABLE>
<CAPTION>
(Dollars in thousand) 1998 1997 1996 1995 1994
-------------- --------------- --------------- ------------- ---------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $ 85,110 27% $ 93,914 30% $ 87,932 34% $ 86,686 36% $ 87,689 37%
Real estate - construction 13,439 4% 17,256 5% 11,447 4% 9,372 4% 4,607 2%
Real estate - other 133,191 42% 117,953 37% 109,179 41% 100,814 41% 101,589 42%
Consumer loans (1) 62,481 19% 66,753 21% 39,803 15% 33,836 14% 32,984 14%
Lease financing receivables 26,174 8% 23,023 7% 16,221 6% 11,879 5% 12,257 5%
-------- -------- ------- -------- --------
Total gross loans $ 320,395 100% $ 318,899 100% $264,582 100% $242,587 100% $ 239,126 100%
Allowance for possible loan
losses(2) $ (5,877) $ (5,900) $ (5,218) $ (4,506) $ (3,303)
-------- ------- ------ -------- -------
Total loans(2) $ 314,518 $ 312,999 $259,364 $238,081 $ 235,823
======== ======== ======= ======= =======
<FN>
NOTES:
- -----
(1) Consumer loans include open-end home equity lines of credit and credit card
receivables.
(2) The Corporation does not breakdown the allowance for possible loan losses
by area, industry or type of loan because the evaluation process used to
determine the adequacy of the reserve is based on the portfolio as a whole.
Management believes such an allocation would not be meaningful. See pages
29-30 of the Corporation's 1998 Annual Report to Shareholders for
additional information.
(3) At December 31, 1998 there were no concentrations of loans exceeding 10% of
total loans which is not otherwise disclosed as a category of loans in the
above table.
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MATURITIES AND RATE SENSITIVITY OF LOANS DUE TO CHANGES IN
INTEREST RATES AT DECEMBER 31, 1998 (1) (2)
<TABLE>
<CAPTION>
Maturing
Maturing After 1 Year Maturing
Within And Within After
(Dollars in thousands) 1 Year (3) 5 Years 5 Years Total
-------- ------------ ------- ----------
<S> <C> <C> <C> <C>
Commercial loans $64,963 $5,563 $14,584 $85,110
Real Estate - construction 13,439 -- -- 13,439
------ ----- ------ ------
Total $78,402 $5,563 $14,584 $98,549
====== ===== ====== ======
Loans maturing after 1 year with:
Fixed interest rates $5,563 $14,584
Variable interest rates -- --
----- ------
Total $5,563 $14,584
===== ======
<FN>
NOTES:
- -----
(1) Determination of maturities included in the loan maturity table are based
upon contract terms. In situations where a "rollover" is appropriate, the
Corporation's policy in this regard is to evaluate the credit for
collectability consistent with the normal loan evaluation process. This
policy is used primarily in evaluating ongoing customer's use of their
lines of credit with the Bank that are at floating interest rates.
(2) This data excludes real estate-other loans, consumer loans and lease
financing receivables.
(3) Demand loans and overdrafts are reported maturing "Within 1 Year".
Construction real estate loans are reported maturing "Within 1 Year"
because of their short term maturity or index to the Bank's prime rate. An
immaterial amount of loans has no stated schedule of repayments.
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INVESTMENT SECURITIES YIELD BY MATURITY AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
Due over Due over
Due 1 year 5 years Due
Within Through Through Over
(Dollars in thousands) 1 year 5 years 10 years 10 years Total
------ ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Held-to-Maturity
U.S. Treasury -- -- -- -- --
U.S. Government agency -- -- -- -- --
Mortgage-backed securities (1) 442 359 -- 58 859
State and municipal (2) 340 907 1,660 -- 2,907
Corporate securities 1,000 2,110 -- -- 3,110
Asset-backed (1) 530 -- -- -- 530
------ ------ ------ ------- --------
2,312 3,376 1,660 58 7,406
------ ------ ------ ------- --------
Available-for-Sale
U.S. Treasury 4,996 -- -- -- 4,996
U.S. Government agency -- -- -- -- --
Mortgage-backed securities (1) -- 10,737 11,409 55,259 77,405
State and municipal (2) -- -- -- 500 500
Corporate securities 1,000 -- 4,578 694 6,272
Asset-backed (1) -- -- 1,585 7,052 8,637
Mutual Funds -- -- -- 1,091 1,091
Other equity securities (3) -- -- -- 3,037 3,037
------ ------ ------ ------- --------
5,996 10,737 17,572 67,633 101,938
------ ------ ------ ------- --------
Total Investment securities $ 8,308 $14,113 $19,232 $ 67,691 $109,344
====== ====== ====== ======= =======
Percent of portfolio 7.60% 12.91% 17.59% 61.91% 100.00%
==== ===== ===== ===== ======
Weighted average yield 5.82% 5.90% 6.50% 5.71% 5.89%
==== ==== ==== ==== ====
<FN>
NOTES:
- -----
(1) Mortgage-backed and Asset-backed securities are included in the above table
based on their contractual maturity.
(2) The yield on tax-exempt obligations has been computed on a tax equivalent
basis using the Federal marginal rate of 34% adjusted for the 20% interest
expense disallowance.
(3) Other equity securities having no stated maturity have been included in
"Due over 10 years".
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INVESTMENT SECURITIES AT DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ---------------------- ----------------------
(Dollars in thousands) Book Market Book Market Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
U.S. Treasury $ -- $ -- $ 1,493 $ 1,494 $ 1,483 $ 1,482
U.S. Government agency -- -- -- -- -- --
Mortgage-backed securities 859 860 1,519 1,520 2,145 2,130
State and municipal 2,907 3,069 3,955 4,081 5,742 5,834
Corporate securities 3,110 3,144 4,115 4,129 5,121 5,123
Asset-backed 530 533 1,000 1,013 1,176 1,180
Mutual funds -- -- -- -- -- --
Other equity securities -- -- -- -- -- --
-------- -------- ------- -------- ------- ------
$ 7,406 $ 7,606 $ 12,082 $ 12,237 $ 15,667 $15,749
======== ======== ======= ======= ======= ======
Available-for-Sale
U.S. Treasury $ 5,019 $ 5,019 $ 6,528 $ 6,528 $ 9,529 $ 9,529
U.S. Government agency -- -- 7,392 7,392 14,503 14,503
Mortgage-backed securities 77,516 77,516 47,688 47,688 47,031 47,031
State and municipal 497 497 -- -- 278 278
Corporate securities 6,262 6,262 1,000 1,000 -- --
Asset-backed 8,760 8,760 -- -- 1,268 1,268
Mutual Funds 1,039 1,039 1,042 1,042 7,535 7,535
Other equity securities 3,287 3,287 1,866 1,866 1,864 1,864
--------- --------- ------- ------- ------- -------
$ 102,380 $ 102,380 $ 65,516 $ 65,516 $ 82,008 $82,008
======== ======== ======= ======= ======= ======
</TABLE>
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS,
$100,000 OR MORE, AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
Due Within Over 3 Months Over 6 Months Due Over
(Dollars in thousands) 3 Months Through 6 Months Through 12 Months 12 Months Total
----------- ---------------- ----------------- --------- -----
<S> <C> <C> <C> <C> <C>
Certificates of Deposit
$100,000 or more $ 7,778 $ 6,193 $ 3,697 $ 10,153 $27,821
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
EFFECT OF NONACCRUING LOANS ON INTEREST FOR
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income which would
have been recorded (1) $ 129 $ 64 $ 42 $ 103 $ 432
Interest income that was
received from customer 25 37 1 172 --
----- ----- ------ ----- ----
$ 104 $ 27 $ 41 $ (69) $ 432
==== ===== ===== ===== ====
<FN>
NOTES:
- ------
(1) Generally the Bank places a loan in nonaccrual status when principal or
interest has been in default for a period of 90 days or more unless the
loan is both well secured and in the process of collection.
</FN>
</TABLE>
<PAGE>
Item 2. Properties.
- ------- -----------
The Bank owns eight properties which are not subject to any mortgages.
The Corporation owns one property which is not subject to any mortgage, and
which is located at 124 West Cypress Street, Kennett Square, Pennsylvania. In
addition, the Corporation leases the Westtown-Thornbury, Exton and Frazer
Offices. Management of the Corporation believes the Corporation's and the Bank's
facilities are suitable and adequate for their respective present needs. Set
forth below is a listing of each banking office presently operated by the Bank
and the Corporation, and other properties owned by the Bank and the Corporation
which may serve as future sites for branch offices.
<TABLE>
<CAPTION>
Current Date
Banking Acquired
Offices / Use Address or Opened
- ------------- ------- ---------
<S> <C> <C>
Main Office / Branch 9 North High Street December 1863
and Corporate West Chester, Pennsylvania
Headquarters
Walk-In Facility / Branch 17 East Market Street February 1978
West Chester, Pennsylvania
Westtown-Thornbury / Route 202 and Route 926 May 1994
Branch Westtown, Pennsylvania
Goshen / Branch 311 North Five Points Road September 1956
West Goshen, Pennsylvania
Kennett Square / Branch 126 West Cypress Street February 1987
Kennett Square, Pennsylvania
Exton / Branch Route 100 and Boot Road August 1995
West Chester, Pennsylvania
Frazer / Branch 309 Lancaster Avenue August 1998
Frazer, Pennsylvania
Former Commonwealth High & Market Streets July 1995
Building / Mortgage Center West Chester, Pennsylvania
Other Date Acquired
Properties / Use Address or Opened
- ---------------- ------- ---------
Operations 202 Carter Drive July 1988
Center / Operations West Chester, Pennsylvania
Matlack Street / 887 South Matlack Street September 1998
Operations West Chester, Pennsylvania
Paoli Pike / Parking 1104 Paoli Pike July 1963
West Chester, Pennsylvania
Kennett Square / Parking 124 West Cypress Street July 1986
Kennett Square, Pennsylvania
Westtown / Operations 1039 Wilmington Pike February 1965
Westtown, Pennsylvania
</TABLE>
<PAGE>
Item 3. Legal Proceedings.
- ------- ------------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Corporation, the
Bank or EGSC is a party or of which any of their respective property is the
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
None.
PART II
-------
Item 5. Market for the Corporation's Common Equity and Related Stockholder
- ------- ------------------------------------------------------------------
Matters.
-------
The Corporation's Common Stock is publicly traded over the counter.
Trading is sporadic. Information regarding high and low bid quotations is
incorporated herein by reference from the Corporation's 1998 Annual Report to
Shareholders, attached as an exhibit hereto. As of March 1, 1998, there were
approximately 920 shareholders of record of the Corporation's Common Stock.
The Corporation declared cash dividends per share on its Common Stock
during each quarter of the fiscal years ended December 31, 1998 and 1997, as set
forth in the following table (which have been adjusted for the stock splits
which occurred on April 1, 1997 and November 24, 1998):
Dividends
---------
Amount Per Share
----------------
1998 1997
---- ----
First Quarter............................................. $ 0.11 $ 0.10
Second Quarter............................................ 0.11 0.10
Third Quarter............................................. 0.11 0.10
Fourth Quarter............................................ 0.14 0.12
----- -----
Total................................................... $ 0.47 $ 0.42
===== =====
The holders of the Corporation's Common Stock are entitled to receive
such dividends as may be legally declared by the Corporation's Board of
Directors. The amount, time, and payment of future dividends, however, will
depend on the earnings and financial condition of the Corporation, government
policies, and other factors. See Part I, Item 1, "Supervision and Regulation"
for information concerning limitations on the payment of dividends by the Bank
and the Corporation and on the ability of the Corporation to otherwise obtain
funds from the Bank.
Item 6. Selected Financial Data.
- ------- ------------------------
Selected financial data concerning the Corporation and the Bank is
incorporated herein by reference from the Corporation's 1998 Annual Report to
Shareholders, attached as an exhibit hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- ------------ ---------------------------------------------------------
of Operations.
-------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations is incorporated herein by reference from the Corporation's 1998
Annual Report to Shareholders, attached as an exhibit hereto.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Quantitative and Qualitative Disclosures About Market Risk are
incorporated herein by reference from the Corporation's 1998 Annual Report to
Shareholders, attached as an exhibit hereto.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
Consolidated financial statements of the Corporation and the Report of
Independent Certified Public Accountants thereon are incorporated herein by
reference from the Corporation's 1998 Annual Report to Shareholders, attached as
an exhibit hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- -------------------------------------------------------------------
Financial Disclosure.
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Corporation.
- -------- ----------------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 19, 1998, for its
1999 Annual Meeting of Shareholders.
Item 11. Executive Compensation.
- -------- ----------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 19, 1998, for its
1999 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 19, 1998, for its
1999 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
- -------- ----------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 19, 1998, for its
1999 Annual Meeting of Shareholders.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- -----------------------------------------------------------------
1. Index to Consolidated Financial Statements
------------------------------------------
<TABLE>
<CAPTION>
Page of Annual
Report to Shareholders
----------------------
<S> <C>
Consolidated Balance Sheets Page 35
at December 31, 1998 and
1997
Consolidated Statements of Page 36
Income and Comprehensive
Income for the years ended
December 31, 1998, 1997
and 1996
Consolidated Statement of Page 37
Changes in Stockholders'
Equity for the years
ended December 31, 1998,
1997 and 1996
Consolidated Statements of Page 38
Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Pages 39 to 57
Financial Statements
Report of Independent Certified Page 59
Public Accountants
</TABLE>
The Consolidated Financial Statements listed in the above index,
together with the report thereon of Grant Thornton LLP dated January 22, 1999,
which are included in the Corporation's Annual Report to Shareholders for the
year ended December 31, 1998, are hereby incorporated herein by reference.
2. Financial Statement Schedules
-----------------------------
Financial Statement Schedules are not required under the related
instructions of the Securities and Exchange Commission, are inapplicable or are
included in the Consolidated Financial Statements or notes thereto.
3. Exhibits
--------
The following is a list of the exhibits filed with, or incorporated by
reference into, this Report (those exhibits marked with an asterisk are filed
herewith):
* 3(i). Articles of Incorporation. Copy of the Articles of Incorporation
-------------------------
of the Corporation, as amended.
3(ii). By-Laws of the Corporation. By-Laws of the Corporation, filed as
--------------------------
Exhibit 3 (ii) to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997 is incorporated by reference.
<PAGE>
10. Material contracts.
------------------
(a) Copy of Employment Agreement among the Corporation, the
Bank and Charles E. Swope dated January 1, 1998, filed as Exhibit 10 (a) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 is
incorporated by reference.
(b) Copy of the Corporation's Dividend Reinvestment and Stock
Purchase Plan, filed as an exhibit to the Corporation's registration statement
on Form S-3 filed August 8, 1997 (File no. 333-33175) is incorporated herein by
reference.
(c) Copy of the Corporation's Amended and Restated Stock Bonus
Plan, filed as an exhibit to the Corporation's registration statement on Form
S-8 filed August 12, 1997 (File no. 333-33411) is incorporated herein by
reference.
(d) Copy of the Bank's Amended and Restated Supplemental
Benefit Retirement Plan, effective date January 1, 1995, is incorporated herein
by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994.
(e) Copy of the Corporation's and the Bank's Directors
Deferred Compensation Plan, effective December 30, 1995, is incorporated herein
by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995.
(f) Copy of the Corporation's Amended and Restated 1995 Stock
Option Plan, filed as an exhibit to the Corporation's Proxy statement for the
1999 Annual Meeting of Shareholders is incorporated herein by reference.
* 13 Annual Report to Security Holders, Form 10-Q or Quarterly
Report to Security Holders. The Corporation's Annual Report to Shareholders for
the year ended December 31, 1998. With the exception of the pages listed in the
Index to Consolidated Financial Statements and the items referred to in Items 1,
5, 6, 7 and 8 hereof, the Corporation's 1998 Annual Report to Shareholders is
not deemed to be filed as part of this Report.
* 21. Subsidiaries of the Corporation. The First National Bank of
West Chester, a banking institution organized under the banking laws of the
United States in December 1863. 323 East Gay Street Corporation incorporated in
1996 in the State of Pennsylvania.
* 23. Consents of experts and counsel. Consent of Grant Thornton
LLP, dated March 25, 1999.
* 27. Financial Data Schedules. A Financial Data Schedule is being
submitted with the Corporation's 1998 Annual Report on Form 10-K in the
electronic format prescribed by the EDGAR Filer Manual and sets forth the
financial information specified by Article 9 of Regulation S-X and Securities
Act Industry Guide 3 information and Exchange Act Industry Guide 3 listed in
Appendix C to Item 601 of Regulation S-K. 1996 and 1995 Restated Financial Data
Schedules as per FASB 128.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Corporation during the quarter ended December 31, 1998.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST WEST CHESTER CORPORATION
/s/ Charles E. Swope
By:_______________________
Charles E. Swope,
President
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Corporation and in the capacities indicated on March 26, 1999.
Signature Title
--------- -----
/s/ Charles E. Swope President, Chief Executive
______________________________ Officer and Chairman of the
Charles E. Swope Board of Directors
/s/ J. Duncan Smith Treasurer (Principal Accounting
______________________________ and Financial Officer)
J. Duncan Smith
(Signatures continued on following page)
<PAGE>
(Signatures continued from previous page)
Signature Title
--------- -----
/s/ John J. Ciccarone Director
- --------------------------------
John J. Ciccarone
/s/ M. Robert Clarke Director
- ---------------------------------
M. Robert Clarke
/s/ Edward J. Cotter Secretary and Director
- ---------------------------------
Edward J. Cotter
/s/ Clifford E. DeBaptiste Director
- ---------------------------------
Clifford E. DeBaptiste
/s/ John A. Featherman, III Director
- ---------------------------------
John A. Featherman, III
/s/ J. Carol Hanson Director
- ---------------------------------
J. Carol Hanson
/s/ John S. Halsted Director
- ---------------------------------
John S. Halsted
/s/ David L. Peirce Director
- ---------------------------------
David L. Peirce
/s/ John B. Waldron Director
- ---------------------------------
John B. Waldron
<PAGE>
Index to Exhibits
-----------------
The following is a list of the exhibits filed with, or incorporated by
reference into, this Report (those exhibits marked with an asterisk are filed
herewith):
* 3(i). Articles of Incorporation. Copy of the Articles of Incorporation
-------------------------
of the Corporation, as amended.
3(ii). By-Laws of the Corporation. By-Laws of the Corporation, filed as
--------------------------
Exhibit 3 (ii) to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997 is incorporated by reference.
10. Material contracts.
------------------
(a) Copy of Employment Agreement among the Corporation, the
Bank and Charles E. Swope dated January 1, 1998, filed as Exhibit 10 (a) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 is
incorporated by reference.
(b) Copy of the Corporation's Dividend Reinvestment and Stock
Purchase Plan, filed as an exhibit to the Corporation's registration statement
on Form S-3 filed August 8, 1997 (File no. 333-33175) is incorporated herein by
reference.
(c) Copy of the Corporation's Amended and Restated Stock Bonus
Plan, filed as an exhibit to the Corporation's registration statement on Form
S-8 filed August 12, 1997 (File no. 333-33411) is incorporated herein by
reference.
(d) Copy of the Bank's Amended and Restated Supplemental
Benefit Retirement Plan, effective date January 1, 1995, is incorporated herein
by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994.
(e) Copy of the Corporation's and the Bank's Directors
Deferred Compensation Plan, effective December 30, 1995, is incorporated herein
by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995.
(f) Copy of the Corporation's Amended and Restated 1995 Stock
Option Plan, filed as an exhibit to the Corporation's Proxy statement for the
1999 Annual Meeting of Shareholders is incorporated herein by reference.
* 13 Annual Report to Security Holders, Form 10-Q or Quarterly
Report to Security Holders. The Corporation's Annual Report to Shareholders for
the year ended December 31, 1998. With the exception of the pages listed in the
Index to Consolidated Financial Statements and the items referred to in Items 1,
5, 6, 7 and 8 hereof, the Corporation's 1998 Annual Report to Shareholders is
not deemed to be filed as part of this Report.
* 21. Subsidiaries of the Corporation. The First National Bank of
West Chester, a banking institution organized under the banking laws of the
United States in December 1863. 323 East Gay Street Corporation incorporated in
1996 in the State of Pennsylvania.
* 23. Consents of experts and counsel. Consent of Grant Thornton
LLP, dated March 25, 1999.
* 27. Financial Data Schedules. A Financial Data Schedule is being
submitted with the Corporation's 1998 Annual Report on Form 10-K in the
electronic format prescribed by the EDGAR Filer Manual and sets forth the
financial information specified by Article 9 of Regulation S-X and Securities
Act Industry Guide 3 information and Exchange Act Industry Guide 3 listed in
Appendix C to Item 601 of Regulation S-K. 1996 and 1995 Restated Financial Data
Schedules as per FASB 128.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Corporation during the quarter ended December 31, 1998.
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
ARTICLES OF INCORPORATION *
OF
FIRST WEST CHESTER CORPORATION
In compliance with the requirements of the Business Corporation
Law, approved the fifth day of May, A.D., 1933, as amended, the undersigned,
desiring to be incorporated as a business corporation, does hereby certify:
Article 1
---------
The name of the Corporation is: First West Chester Corporation
Article 2
---------
The location and post office address of the initial registered
office of the Corporation in the Commonwealth of Pennsylvania is: Nine North
High Street, West Chester, Pennsylvania 19380.
Article 3
---------
The Corporation is incorporated under the Business Corporation
law of the Commonwealth of Pennsylvania for the following purposes: To engage in
and do any lawful act concerning all lawful business for which corporations may
be incorporated under the Business Corporation Law of Pennsylvania and to do all
things and exercise all powers, rights and privileges which a business
corporation may now or hereafter be organized or authorized to do or to exercise
under the laws of the Commonwealth of Pennsylvania.
Article 4
---------
The term for which the Corporation is to exist is perpetual.
Article 5
---------
The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is (10,000,000) shares of common stock
with a par value of $20.00 per share.
* Restated to include the amendment there to approved by stockholders on
March 16, 1999.
<PAGE>
Article 6
---------
A. The provisions of this Article 6 shall apply to any of the
following transactions (hereinafter referred to as "Business Combinations"):
(1) any merger or consolidation of the Corporation or any
subsidiary of the Corporation with or into any other
corporation, person or other entity which is the owner or
beneficial owner, directly or indirectly, of 20% or more of the
outstanding voting securities of the Corporation; or
(2) any sale or lease or exchange or other disposition (in
one transaction or a series of related transactions) of all or
substantially all of the assets of the Corporation to any other
corporation, person or other entity which is the beneficial
owner, directly or indirectly, of 20% or more of the outstanding
voting securities of the Corporation; or
(3) any sale or lease or exchange or other disposition (in
one transaction or a series of related transactions) to the
Corporation or any subsidiary of the Corporation of any agents
having an aggregate fair market value equal to or greater than
ten (10%) percent of the Corporation's consolidated
stockholders' equity as of the date thereof in exchange for
voting securities (or securities convertible into or
exchangeable for voting securities, or options, warrants or
rights to purchase voting securities or securities convertible
into or exchangeable for voting securities) of the Corporation
or any subsidiary of the Corporation by any other corporation,
person or other entity which is the beneficial owner, directly
or indirectly, of 20% or more of the outstanding voting
securities of the Corporation; or
(4) any reclassification of securities, recapitalization or
other transactions designed to decrease the numbers of hollers
of the Corporation's voting securities remaining after any other
corporation, person or other entity has acquired 20% or more of
the outstanding voting securities of the Corporation. A
corporation, person or other entity (other than the Corporation
or any subsidiary of the Corporation) which is the beneficial
owner, directly or indirectly, of 20% or more of the
Corporation's outstanding voting securities (taken together as a
single class) is herein referred to as the "Acquiring Entity".
B. Notwithstanding the fact that by law or by agreement with a
national securities exchange or otherwise, no vote, or a lesser vote, of
shareholders may be specified or required, the affirmative vote of the holders
of at least seventy-five (75%) percent of outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors (taken
together as a single class) shall be required to approve any Business
Combination or any plan or proposal for the liquidation or dissolution of the
Corporation which would require or permit a distribution of any surplus
remaining after payment of all debts and liabilities o the Corporation to the
shareholders in accordance with their respective rights and preferences.
C. Notwithstanding the foregoing, if three-fourths (3/4) of the
entire Board of Directors (or if there is a person or persons serving on the
Board other than Continuing Directors (as hereinafter defined); in which event
this requirement shall be for three-fourths (3/4) of the Continuing Directors )
recommends in favor of acceptance of Business Combination or a plan of
liquidation or dissolution described in paragraph B of this Article 6, the Board
may waive the provisions above requiring a greater percentage of shareholder
vote and the same may be effected upon the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (taken together as a single
class). If any provision herein requiring a 75% shareholder approval is finally
judicially determined invalid, then a Business Combination or plan of
liquidation or dissolution must be approved by the affirmative vote of the
holders of not less than two-thirds (2/3) of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
(taken together as a single class). A "Continuing Director" shall mean a person
who was a member of the Board of Directors of the Corporation elected prior to
the date as of which any Acquiring Entity acquired in excess of twenty (20%)
percent of the Corporation's outstanding voting securities (taken together as a
single class), or a person designated (before his initial election as a
director) as a Continuing Director by a majority of the then Continuing
Directors.
Article 7
---------
Any amendment, alteration, change or repeal of these Articles of
Incorporation or the By-Laws of the Corporation shall require the affirmative
vote of the holders of at least seventy-five (75%) percent of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (taken as a single class); provided, however, that this
Article 7 shall not apply to, and such seventy-five (75%) percent vote shall not
be required for, and the affirmative vote or a majority of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (taken together as a single class) shall be required for,
any amendment, alteration, change or repeal recommended to the stockholders by
three-fourths (3/4) of the entire Board of Directors (or if there is a person or
persons serving on the Board other than Continuing Directors, by three-fourths
(3/4) of the Continuing Directors). If any of the foregoing provisions are
finally judicially determined to be invalid, then these Articles of
Incorporation and the By-Laws of the Corporation may only be amended, altered,
changed or repealed by the affirmative vote of the holders of not less than
two-thirds (2/3) of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (taken together as a
single class).
Article 8
---------
The management, control and government of the Corporation shall
be vested in a Board of Directors consisting of not less than five (5) nor more
than twenty-five (25) members in number, as fixed from time to time by the Board
of Directors of the Corporation. The Directors of the Corporation shall be
divided into three classes: Class I, Class II and Class III. Each class shall be
as nearly equal in number as possible. If the number of Class I, Class II or
Class III Directors is fixed for any term of office, it shall not be increased
during that term, except by a majority vote of Directors, the term of office of
each class shall be three years; provided, however, that the term of office of
the initial Class I Directors shall expire at the annual election of Directors
by the shareholders of the Corporation in 1985; the term of office of the
initial Class II Directors shall expire at the annual election of Directors by
the shareholders of the Corporation in 1986; the term of office of the initial
Class III Directors shall expire at the annual election of Directors by the
shareholders of the Corporation in 1987, so that, after the expiration of each
such initial term, the terms of office of one class of Directors shall expire
each year when their respective successors have been duly elected by the
shareholders and qualified. At each annual election of the Directors by the
shareholders of the Corporation held during and after 1984, the Directors chosen
to succeed those whose terms then expire shall be identified as being of the
same class as the Directors they succeed. A Director must be a shareholder of
the Corporation. If a vacancy occurs on the Board of Directors of the
Corporation after the first annual election of Directors for the class in which
such Director sits, a majority of the remaining Directors shall have the
exclusive power to fill the vacancy by electing a Director to hold office for
the unexpired term in respect of which the vacancy occurred.
Article 9
---------
The shareholders of this Corporation shall not be permitted to
cumulate their votes for the election of directors.
Article 10
----------
The Corporation shall indemnify its officers, directors,
employees and agents of the Corporation and its subsidiaries to the extent set
forth in the By-Laws of the COrporation.
Article 11
----------
The name and post office address of the incorporators and the
number and class of shares subscribed by him is:
Number of and
Name Address Class of Shares
- ---- ------- ---------------
David B. Harwi 3800 Centre Square West 1
Philadelphia, PA 19102 Common
IN TESTIMONY WHEREOF, the incorporator has signed and sealed
these Articles of Incorporation this 7th day of March 1984.
/s/ DAVID B. HARWI(SEAL)
------------------------
David B. Harwi
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
FIVE-YEAR STATISTICAL SUMMARY
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
December 31
-----------
STATEMENTS OF CONDITION
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets $ 470,693 $ 431,368 $ 397,684 $388,500 $348,099
Loans 320,395 318,899 264,582 242,587 239,126
Investment securities 109,786 77,598 97,675 93,511 78,389
Deposits 418,398 374,249 351,266 343,926 305,465
Stockholders' equity 39,723 36,213 33,175 30,692 28,299
Financial Management Services
assets, at market value 405,217 348,069 271,212 255,992 256,998
Year Ended December 31
----------------------
STATEMENTS OF INCOME 1998 1997 1996 1995 1994
- -------------------- ---- ---- ---- ---- ----
Interest income $ 33,753 $ 32,114 $ 29,627 $ 28,466 $ 24,374
Interest expense 14,135 13,351 12,135 11,564 8,719
Net interest income 19,618 18,763 17,492 16,902 15,655
Provision for possible loan losses 911 1,135 1,079 1,666 1,790
Net interest income after
provision for possible loan
losses 18,707 17,628 16,413 15,236 13,865
Non-interest income 4,687 3,787 3,562 3,497 3,514
Non-interest expense 16,278 14,911 13,632 12,768 12,216
Income before income taxes 7,116 6,504 6,343 5,965 5,163
Income taxes 2,100 1,889 2,038 1,865 1,556
Net income $ 5,016 $ 4,615 $ 4,305 $ 4,100 $ 3,607
PER SHARE DATA (1)
Net income per share (Basic) $ 1.09 $ 1.00 $ 0.94 $ 0.88 $ 0.75
Net income per share (Diluted) $ 1.07 $ 1.00 $ 0.94 $ 0.88 $ 0.75
Cash dividends declared $ 0.47 $ 0.43 $ 0.38 $ 0.34 $ 0.29
Book value $ 8.61 $ 7.89 $ 7.25 $ 6.72 $ 5.90
Basic weighted average shares
outstanding 4,609,874 4,580,814 4,569,712 4,673,100 4,799,424
Diluted weighted average shares
outstanding 4,676,031 4,619,620 4,584,668 4,673,342 4,799,424
<FN>
(1) Adjusted for 1998 2-for-1 stock split and 1997 4-for-3 stock split. See Note
A12 - Earnings per Share and Stockholders' Equity - in the accompanying
financial statements for additional information.
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is intended to further your understanding of the
consolidated financial condition and results of operations of First West Chester
Corporation (the "Corporation") and its wholly-owned subsidiaries, The First
National Bank of West Chester (the "Bank") and 323 East Gay Street Corp
("EGSC"). It should be read in conjunction with the consolidated financial
statements included in this report.
In addition to historical information, this discussion and analysis
contains statements relating to future results of the Corporation that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements can often be
identified by the use of forward-looking terminology such as "believes,"
"expects," "intends," "may," "will," "should" "or anticipates" or similar
terminology. These statements involve risks and uncertainties and are based on
various assumptions. Investors and prospective investors are cautioned that such
statements are only projections. The risks and uncertainties noted below, among
others, could cause the Corporation's actual future results to differ materially
from those described in forward looking statements made in this report or
presented elsewhere by Management from time to time.
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 causing increased loan losses; (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 of competing
financial institutions may have unanticipated consequences, such as customer
turnover; (e) changes in the regulatory environment, securities markets, general
business conditions and inflation may be adverse; (f) impact of changes in
interest rates on customer behavior; (g) unforeseen difficulties in implementing
the Corporation's Year 2000 compliance plan or contingency plans; (h) failure of
suppliers and customers to be Year 2000 compliant; (i) estimated changes in net
interest income; (j) anticipated pressure on net yields; and (k) branch
locations. These risks and uncertainties are all difficult to predict and most
are beyond the control of the Corporation's Management.
Although the Corporation believes that its expectations are based on
reasonable assumptions, readers are cautioned that such statements are only
projections. The Corporation undertakes no obligation to publicly release any
revisions to the forward-looking statements to reflect events or circumstances
after the date of this report.
EARNINGS AND DIVIDEND SUMMARY
In 1998, net income increased $401 thousand or 8.7% to $5.0 million
from $4.6 million in 1997. The improvement was primarily the result of increases
in net interest income and non-interest income, partially offset by increased
operating expenses. Net income for 1997 increased $310 thousand or 7.2% from
$4.3 million in 1996. The 1997 increase was primarily the result of an increase
in net interest income and a reduction in the effective tax rate, partially
offset by a higher provision for loan losses and increased operating expenses.
On a per share basis, 1998 earnings were $1.09, an increase of 9.0% over 1997
earnings of $1.00. On a per share basis, 1997 earnings were 6.4% higher than
1996 earnings of $0.94. Cash dividends per share in 1998 were $0.47, a 9.3%
increase over the 1997 dividend of $0.43. Cash dividends per share in 1997 were
13.3% higher than the 1996 dividend of $0.38. In the past, the Corporation's
practice has been to pay a dividend of at least 35.0% of net income. The
following performance ratios for 1998 remained stable compared to 1997 and 1996
ratios.
The "Consolidated Average Balance Sheet" on page may assist the reader in the
following discussion.
<PAGE>
PERFORMANCE RATIOS 1998 1997 1996
- ------------------ ---- ---- ----
Return on Average Assets 1.14% 1.12% 1.12%
Return on Average Equity 13.13% 13.36% 13.59%
Earnings Retained 57.26% 57.88% 60.19%
Dividend Payout Ratio 42.74% 42.12% 39.81%
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, on a tax equivalent basis, increased 4.2% or $792 thousand,
from $19.1 million in 1997 to $19.9 million in 1998, compared to a 7.3% increase
of $1.3 million from 1996 to 1997. The increases in net interest income can be
attributed to an increase in average interest earning assets of 6.8% or $26.1
million from 1997 to 1998 and 7.2% or $25.8 million from 1996 to 1997, partially
offset by a decrease in the net yield on interest-earning assets. The increases
in average interest-earning assets are primarily the result of increased loan
and investment activity during the period. While the average balance of total
loans increased for the year ended 1998, the loan growth rate has decreased
compared to the same period last year. The decrease in loan growth rate can be
attributed to the Corporation's decision to exit the third party automobile
lending business due to less than expected results. The decision took effect on
July 10, 1998. The Corporation will continue to service the existing portfolio
totaling approximately $24.0 million, but has ceased adding any additional
volume. Average net yields on interest-earning assets, on a tax equivalent
basis, were 4.82% for 1998, and 4.94% for 1997 and 1996. The decrease in the
Corporation's average net yield on interest-earning assets in 1998 was primarily
the result of a decrease in the average yield earned on its interest-earning
assets and an increase in the cost or average yield paid on interest bearing
liabilities. The decrease in the average net yield earned on interest-earning
assets can be attributed to decreases in loan demand, which resulted in more
assets being reinvested in lower yielding investments as opposed to higher
yielding loans. The Corporation's ability to maintain the average net yield on
interest-earning assets from 1996 to 1997 was the result of increased loan
demand which allowed the Corporation to shift more assets into higher yielding
loans, resulting in increases in earned asset yields. The Corporation
anticipates continued pressure on the net yield on interest-earning assets as
competition for new loan business remains very strong and the cost of
incremental deposit growth and other funding sources becomes more expensive.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
YIELD ON 1998 1997 1996
- -------- ---- ---- ----
Interest-Earning Assets 8.24% 8.39% 8.30%
Interest-Bearing Liabilities 4.28 4.25 4.13
Net Interest Spread 3.96 4.14 4.17
Contribution of Interest-Free Funds 0.86 0.80 0.77
Net Yield on Interest-Earning Assets 4.82% 4.94% 4.94%
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds increased 41.6%, from $308 thousand in
1997 to $436 thousand in 1998. The increase in 1998 is primarily the result of a
$2.5 million increase in the average federal funds sold, partially offset by a
12 basis point (a basis point equals one hundredth of one percent) decrease in
rates compared to 1997. The 1997 decrease in average federal funds sold of $8.1
million was the result of increased loan demand for that period.
<PAGE>
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities,
decreased 3.9%, from $5.3 million in 1997 to $5.1 million in 1998, compared to
an $800 thousand decrease from 1996 to 1997. The decrease in investment interest
income from 1997 to 1998 was the direct result of a 49 basis point decrease in
the yield on investment securities, partially offset by a $3.2 million increase
in average investment securities. The 13.0% decrease in investment interest
income from 1996 to 1997 was the result of a decrease in average investment
securities of $15.5 million, partially offset by a 23 basis point increase in
the yield on investment securities.
INTEREST INCOME ON LOANS
Interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio increased 6.2%, from $26.8 million in 1997 to $28.5
million in 1998. The increase in interest income during 1998 was attributable to
a $20.6 million increase in average loans outstanding, partially offset by a 5
basis point decrease in rates. The decrease in the average rates earned on the
Corporation's loan portfolio are a direct result of the declining rate
environment during the year as well as increased competition for new and
existing loan relationships and volume increases in lower yielding lease and
third party automobile related loans (occurring primarily during the first and
second quarters of 1998). As noted earlier, the third party automobile lending
portfolio failed to meet expected results prompting the Corporation's July 10,
1998 decision to cease adding additional volume while continuing to service the
existing portfolio. Loan interest income, on a tax equivalent basis, increased
$3.7 million, from $23.1 million in 1996 to $26.8 million in 1997. The 16.2%
increase in loan interest income during 1997 was attributable to a $50.0 million
increase in average loans outstanding, approximately 36.0% of which were third
party automobile loans and leases. The 1997 loan volume increase was partially
offset by a 30 basis point decrease in rates earned. Competition for new and
existing loan relationships has been very strong the last four years. Price and
fee competition on loans over $500,000 (new and renewals) has been especially
strong. It is anticipated that this pricing pressure will continue to put
pressure on overall loan yields and net interest margins. A reduction in fees
will also result in a direct decrease in non-interest income.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposits increased 8.0% from $12.7 million in 1997
to $13.7 million in 1998. The increase in interest expense on deposits from 1997
to 1998 was the result of increases in average interest-bearing deposit balances
of $22.7 million and a 2 basis point increase in the rates paid. The 7.2%
increase in interest expense for deposits from 1996 to 1997 was the result of a
$15.4 million increase in average interest-bearing deposits and a 7 basis point
decrease in rates paid.
While total average interest-bearing deposits have grown 7.6% and 5.4%
in 1998 and 1997, respectively, the components have not grown proportionately.
During 1998, average savings, NOW, and money market deposits increased $10.3
million or 5.9%, while average certificates of deposit and other time deposits
increased $12.4 million or 9.9%. During 1997, average savings, NOW, and money
market deposits increased $5.2 million or 3.1%, while average certificates of
deposit and other time deposits increased $10.2 million or 8.8%. The
Corporation's effective rate on interest-bearing deposits changed from 4.11%,
4.22%, 4.31%, and 4.30% in the first, second, third, and fourth quarters of
1997, respectively, to 4.21%, 4.27%, 4.29%, and 4.22% in the first, second,
third, and fourth quarters of 1998, respectively. The overall increase in rates
being paid on interest bearing liabilities is the direct result of increased
competition. Competition for deposits from other banks and non-banking
institutions such as credit unions and mutual fund companies continues to grow.
In an effort to expand its deposit base, the Corporation opened a new branch
site in the Frazer area on August 3, 1998. Future branch sites are expected.
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES
During 1998, the Corporation recorded a provision for possible loan
losses of $911 thousand, compared to $1.14 million and $1.08 million in 1997 and
1996, respectively. The decrease in the provision expense can be attributed to
the decreased rate in loan growth for 1998 and an overall decrease in total non
performing assets, offset by an increase in charge-offs. Net charge-offs in 1998
were $934 thousand, compared to $453 thousand and $367 thousand in 1997 and
1996, respectively. Net charge-offs as a percentage of average loans outstanding
were 0.29%, 0.15%, and 0.15% for 1998, 1997, and 1996, respectively. The
increase in charge-offs is primarily attributed to our third party automobile
loan program. This program accounted for 66% of total charge-offs in 1998. The
allowance for possible loan loss was $5.88 million or 1.83% of loans outstanding
at December 31, 1998.
See "Asset Quality and the Allowance For Possible Loan Losses" for additional
information.
NON-INTEREST INCOME
Total non-interest income increased $900 thousand or 23.8%, from $3.8
million in 1997 to $4.7 million in 1998, compared to an increase of $225
thousand or 6.3% from 1996 to 1997. The primary component of non-interest income
is Financial Management Services revenue, which increased $266 thousand or
13.3%, from $2.0 million in 1997 to $2.3 million in 1998, compared to an
increase of $139 thousand or 7.5% from 1996 to 1997. The market value of
Financial Management Services assets under management increased $57.1 million or
16.4%, from $348.1 million at the end of 1997 to $405.2 million at the end of
1998, and increased $76.9 million or 28.3% from 1996 to 1997. The 1998 and 1997
increases in market value of assets under management are attributable to new
business development in the areas of trust, investment and pension management
and market value appreciation.
Service charges on deposit accounts increased $50 thousand or 5.1% from
$987 thousand in 1997 to $1.0 million in 1998 compared to an increase of $136
thousand or 16.0% from 1996 to 1997. This increase, as in 1997, relates to more
effective enforcement of service charge policies, increases in volume of
deposits, and fee based products and services offered and sold.
Other non-interest income increased 59% to $1.3 million in 1998 from
$815 thousand in 1997. The increase can be attributed to income from service
charges for non-customer ATM transactions, which commenced during the second
quarter of 1998. Income from the sale of residential mortgages to the secondary
market during the first and second quarters of 1998 also contributed to the
increase. In 1997, other non-interest income decreased 3.6% from $845 thousand
to $815 thousand. This decrease was a result of a gain of $135 thousand included
in non-interest income relating to the sale of a property by EGSC during 1996.
NON-INTEREST EXPENSE
Total non-interest expense increased $1.4 million or 9.2%, from $14.9
million in 1997 to $16.3 million in 1998, compared to an increase of $1.3
million or 9.4% from 1996 to 1997. The growth in non-interest expense reflects
the increased costs incurred to service the Corporation's expanding customer
base. The components of non-interest expense changes are discussed below.
Salary and employee benefits increased $685 thousand or 8.2%, from $8.4
million in 1997 to $9.1 million in 1998. The increase in 1998 was a result of an
average 4.0% salary increase for annual raises and a 3.1% increase in staff. As
the Corporation expands and the cost of providing benefits increases, especially
health insurance, it is anticipated that this component of non-interest expense
will continue to increase. Salary and employee benefits increased $626 thousand
or 8.1% from 1996 to 1997, primarily as a result of an average 4.0% salary
increase and 2.1% increase in staff, partially offset by decreases in pension
costs. The Corporation's full-time equivalents were 200, 194, and 190 at the end
of 1998, 1997, and 1996, respectively.
<PAGE>
Net occupancy, equipment and data processing expense increased $334
thousand or 11.3%, from $3.0 million in 1997 to $3.3 million in 1998. The
increase is a direct result in the increased number of personal computers and
related equipment costs, which were a necessary part of the Corporation's core
system conversion. The conversion occurred during the fourth quarter of 1998.
The increase can also be attributed to the addition of the new Frazer area
branch in the second quarter. Occupancy, equipment and data processing expense
increased $317 thousand or 12.0% from 1996 to 1997. The increase in 1997 from
1996 was primarily a result of building renovations on the mortgage center and
Financial Management Services building. See section titled "Building
Improvements and Technology Projects" for additional information.
Other non-interest expense increased $348 thousand or 9.7% from $3.6
million in 1997 to $4.0 million in 1998. This increase is the result of
increases in the Corporation's expanded marketing efforts to attract new
borrowers and depositors as well as promotion of the new branch site. Additional
operating expenses associated with the increases in staff and premises also
contributed to the increase. Other non-interest expense increased $336 or 10.3%
from 1996 to 1997. This increase is the result of a $100 thousand expense
incurred to comply with a reconciliation agreement with the United States
Department of Labor's Office of Federal Contract Compliance Program.
Additional components of non-interest expense are the FDIC's Bank
Insurance Fund ("BIF") assessments and Pennsylvania Bank Shares Tax. The BIF
insurance assessment was $0 for 1998 and 1997, compared to $2 thousand in 1996.
Effective January 1, 1997, in accordance with the Deposit Insurance Act of 1996
an additional assessment by the Financing Corporation ("FICO") became applicable
to all insured institutions. This assessment is not tied to the FDIC risk
classification. The BIF FICO assessment is 1.296 basis points per $100 in
deposits for 1997. The Bank's assessment for the BIF FICO in 1997 was $43
thousand. Bank Shares Tax was 0.68%, 0.84%, and 0.97% of average stockholders'
equity for 1998, 1997, and 1996, respectively. The Pennsylvania Bank Shares Tax
is based primarily on Bank Stockholders equity and paid annually. See Note G -
Other Non-interest Expense and Note H - Income Taxes, in the accompanying
financial statements for additional information on Bank Shares Tax.
Preliminary plans for the opening of additional branch sites and office
space continue to be pursued. The Corporation believes that the costs associated
with achieving these objectives will have a direct impact on all the above
components of non-interest expense. It is anticipated that increased costs and
expenses will be offset over time by increases in net interest and fee income
generated by business in new marketing areas.
INCOME TAXES
Income tax expense was $2.1 million in 1998 compared to $1.9 million in
1997 and $2.0 million in 1996, representing an effective tax rate of 29.5%,
29.0%, and 32.1%, respectively. Tax rates in 1998 and 1997 were affected by tax
credits resulting from investments in a community development projects that were
accounted for in the third quarter of 1998 and the second quarter of 1997. The
primary reason for the increase in the effective tax rates from 1997 to 1998 was
a decrease in tax exempt assets as a percentage of total average assets and a
smaller amount of tax credits. Average tax-exempt assets as a percentage of
total average assets were 1.8%, 2.6% and 2.4% in 1998, 1997 and 1996,
respectively.
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEET AND TAX EQUIVALENT INCOME/EXPENSES
AND RATES FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- ----------------------- ------------------------
(Dollars in thousands) Daily Daily Daily
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- ------------- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 8,022 $ 436 5.44% $ 5,544 $ 308 5.56% $ 13,603 $ 734 5.40%
Interest bearing deposits in Banks -- -- -- 197 12 6.09 798 47 5.89
Investment securities
Taxable 82,434 4,938 5.99 78,672 5,104 6.49 93,809 5,863 6.25
Tax-exempt (1) 1,548 119 7.69 2,114 157 7.43 2,519 182 7.23
Total investment securities 83,982 5,057 6.02 80,786 5,261 6.51 96,328 6,045 6.28
Loans (2)
Taxable 313,893 27,849 8.87 291,114 26,012 8.94 242,862 22,320 9.19
Tax-exempt (1) 6,473 649 10.03 8,623 823 9.54 6,835 781 11.43
Total loans 320,366 28,498 8.90 299,737 26,835 8.95 249,697 23,101 9.25
Total interest-earning assets 412,370 33,991 8.24 386,264 32,416 8.39 360,426 29,927 8.30
Non-interest-earning assets
Allowance for possible loan losses (5,900) (5,607) (4,848)
Cash and due from banks 20,121 18,853 17,153
Other assets 14,772 13,218 13,016
Total assets $441,363 $412,728 $385,747
LIABILITIES AND STOCKHOLDERS'
EQUITY
Savings, NOW, and money market
deposits $184,081 $ 5,713 3.10% $173,753$ 5,436 3.13% $168,528 $ 5,231 3.10%
Certificates of deposit and other time 137,825 7,966 5.78 125,436 7,234 5.77 115,243 6,584 5.71
Total interest-bearing deposits 321,906 13,679 4.25 299,189 12,670 4.23 283,771 11,815 4.16
Securities sold under repurchase
agreements 3,019 116 3.84 8,560 281 3.28 9,713 320 3.29
Other borrowings 5,269 340 6.45 6,508 401 6.16 -- --
Total interest-bearing liabilities 330,194 14,135 4.28 314,257 13,352 4.25 293,484 12,135 4.13
Non-interest-bearing liabilities
Non-interest-bearing demand deposits 64,705 57,659 55,018
Other liabilities 8,268 6,264 5,574
Total liabilities 403,167 378,180 354,076
Stockholders' equity 38,196 34,548 31,671
Total liabilities and stockholders'
equity $441,363 $412,728 $385,747
Net interest income $ 19,856 $19,064 $17,792
Net yield on interest-earning assets 4.82% 4.94% 4.94%
<FN>
(1) The indicated income and annual rate are presented on a tax equivalent basis
using the federal marginal rate of 34%, adjusted for the 20% interest
expense disallowance for 1998, 1997, and 1996.
(2) Nonaccruing loans are included in the average balance.
</FN>
</TABLE>
<PAGE>
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 also include NOW, money market,
savings, and small denomination certificates (less than $100,000) of deposit
accounts. The Corporation considers funds from such sources as its "core"
deposit base because of the historical stability of such sources of funds.
Additional liquidity comes from the Corporation's non-interest-bearing demand
deposit accounts, a three-tiered savings product and certificates of deposit in
excess of $100,000. Details of core deposits, non-interest-bearing demand
deposit accounts and other deposit sources are highlighted in the following
table:
Deposit Analysis
<TABLE>
<CAPTION>
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Average Effective Average Effective Average Effective
DEPOSIT TYPE Balance Yield Balance Yield Balance Yield
------------ ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
NOW $ 55,203 2.04% $ 52,758 2.19% $ 47,984 2.20%
Money Market 27,596 3.09 28,433 3.15 28,974 3.09
Statement Savings 47,046 3.28 48,381 3.31 48,834 3.24
Other Savings 2,382 2.73 2,996 2.74 4,222 2.75
CD's Less than $100,000 114,372 5.81 108,022 5.80 102,566 5.76
Total Core Deposits 246,599 4.15 240,590 4.16 232,580 4.11
Non-interest-Bearing
Demand Deposits 64,705 -- 57,659 -- 55,018 --
Subtotal 311,304 -- 298,249 -- 287,598 --
Tiered Savings 51,854 4.09 41,184 4.14 38,514 4.11
CD's Greater than $100,000 23,453 5.63 17,415 5.54 12,677 5.36
Total Deposits $386,611 -- $356,848 -- $338,789 --
</TABLE>
The Bank as a member of the Federal Home Loan Bank ("FHLB") maintains a
credit line secured by the Bank's mortgage related assets. Additionally, the
FHLB offers several other credit related products which are available to the
Bank. The Corporation utilizes borrowings from the FHLB and collateralized
repurchase agreements in managing its interest rate risk and as a tool to
augment deposits in funding asset growth. The Corporation may utilize these
funding sources to better match its longer term repricing assets (i.e., between
one and five years). See Note F - Short Term Borrowings and Credit Facility in
the accompanying financial statements for more detailed information on these
funding sources.
<PAGE>
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 "gap position" within one year
is ($151,780) million or 32.2% of total assets at December 31, 1998, compared
with ($114.4) million or 26.5% of total assets at the end of 1997.
Interest Rate Sensitivity GAP as of December 31, 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 $ 5,675 $ - $ - $ - $ 5,675
Investment securities 42,473 49,285 $ 18,028 - 109,786
Loans and leases 89,696 167,791 62,908 (5,877) 314,518
Cash and cash equivalents - - - 25,006 25,006
Premises & equipment - - - 9,579 9,579
Other assets 2,385 - - 3,744 6,129
Total assets $ 140,229 $ 217,076 $ 80,936 $ 32,452 $ 470,693
LIABILITIES AND CAPITAL
Non-interest-bearing deposits$ - $ - $ - $ 72,556 $ 72,556
Interest bearing deposits 288,259 55,969 1,614 - 345,842
Borrowed funds 3,589 1,735 2,498 - 7,822
Other liabilities - - - 4,750 4,750
Capital 161 - - 39,562 39,723
Total liabilities and capital $ 292,009 $ 57,704 $ 4,112 $ 116,868 $ 470,693
Net interest rate sensitivity gap $(151,780) $ 159,372 $ 76,824 $ (84,416) $ -
Cumulative interest rate
sensitivity gap $(151,780) $ 7,592 $ 84,416 $ - $ -
Cumulative interest rate
sensitivity gap divided
by total assets (32.2)% 1.6% 17.9% - -
</TABLE>
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. The Corporation's Asset Liability
Management Policy requires quarterly calculation of the effects of changes in
interest rates on net interest income. These calculations are prepared quarterly
using computer based asset liability software. The table below summarizes
estimated changes in net interest income over a twelve-month period, under
alternative interest rate scenarios. The change in interest rates was based on
an immediate and proportional shift in the December 31, 1998 Wall Street Journal
prime rate of 7.75%.
<PAGE>
<TABLE>
<CAPTION>
Change in Net Dollar Percent Management
Interest Rates Interest Income Change Change Limits
-------------- --------------- ------ ------ ------
<S> <C> <C> <C> <C>
+300 Basis Points $21,776 $-462 -2.08% 12.00%
+200 Basis Points 21,878 -360 -1.62 10.00
+100 Basis Points 21,980 -258 -1.16 5.00
FLAT RATE 22,238 0 0 0.00
-100 Basis Points 22,342 104 0.47 5.00
-200 Basis Points 22,444 206 0.93 10.00
-300 Basis Points 22,547 309 1.39 12.00
</TABLE>
Management believes that the assumptions utilized in evaluating the
vulnerability of the Corporation's net interest income to changes in interest
rates approximate actual experience; however, the interest rate sensitivity of
the Corporation's assets and liabilities as well as the estimated effect of
changes in interest rates on net interest income could vary substantially if
different assumptions are used or actual experience differs from the experience
on which the assumptions were based. For example, certain assets, such as
adjustable rate loans, have features which restrict changes in interest rates on
a short term basis or over the life of the assets.
In the event the Corporation should experience a mismatch in its
desired gap position or an excessive decline in its net interest income
subsequent to an immediate and sustained change in interest rates, it has a
number of options which it could utilize to remedy such a mismatch. The
Corporation could restructure its investment portfolio through sale or purchase
of securities with more favorable repricing attributes. It could also promote
loan products with appropriate maturities or repricing attributes. The
Corporation could also solicit deposits or search for borrowings with more
desirable maturities. However, market circumstances might make execution of
these strategies cost prohibitive or unattainable.
The nature of the Corporation's current operation is such that it is
not subject to foreign currency exchange or commodity price risk. Additionally,
neither the Corporation nor the Bank own trading assets. At December 31, 1998,
the Corporation did not have any hedging transactions in place such as interest
rate swaps, caps or floors.
ASSET QUALITY AND 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.
<PAGE>
Analysis of Changes in the Allowance for Possible Loan Losses
and comparison of loans outstanding
<TABLE>
<CAPTION>
December 31
-----------
(Dollars in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,900 $ 5,218 $ 4,506 $ 3,303 $ 2,839
Provision charged to operating expense 911 1,135 1,079 1,666 1,790
Recoveries of loans previously charged off
Commercial loans 48 67 36 4 19
Real estate - mortgages 145 - - 46 9
Consumer loans 52 16 8 29 10
Total recoveries 245 83 44 79 38
Loan charge-offs
Commercial loans (247) (237) (118) (348) (253)
Real estate - mortgages (45) (117) (218) (25) (1,042)
Consumer loans (887) (182) (62) (108) (69)
Lease financing receivables - - (13) (61) -
Total charge-offs (1,179) (536) (411) (542) (1,364)
Net loan charge-offs (934) (453) (367) (463) (1,326)
Balance at end of year $ 5,877 $ 5,900 $ 5,218 $ 4,506 $ 3,303
Year-end loans outstanding $320,395 $318,899 $264,582 $242,587 $239,126
Average loans outstanding $320,366 $299,737 $249,697 $243,657 $228,456
Allowance for possible loan losses as
a percentage of year-end loans
outstanding 1.83% 1.85% 1.97% 1.86% 1.38%
Ratio of net charge-offs to average
loans outstanding 0.29% 0.15% 0.15% 0.19% 0.58%
</TABLE>
Nonperforming loans include loans on non-accrual status and loans past
due 90 days or more and still accruing. The Bank's policy is to write down all
nonperforming loans to net realizable value based on updated appraisals of
collateral. Nonperforming loans are generally collateralized by real estate and
are in the process of collection. Management believes that loans that are past
due over 90 days and still accruing are adequately collateralized as to
principal and interest. Such loans are in the process of collection.
The allowance for possible loan losses as a percentage of
non-performing loans ratio indicates that the allowance for possible loan losses
<PAGE>
is sufficient to cover the principal of all non-performing loans. Other Real
Estate Owned ("OREO") represents residential and commercial real estate that has
been written down to realizable value (net of estimated disposal costs) based on
professional appraisals. In July 1998, the Corporation liquidated from OREO, a
commercial property for a net amount of $505 thousand resulting in a $15
thousand loss. Management intends to liquidate OREO in the most expedient and
cost-effective manner.
This process could take up to 24 months, although swifter disposition is
anticipated.
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. The Corporation decided to withdraw from
third party automobile lending on July 10, 1998 due to less than expected
results. The Corporation will continue to service the existing portfolio but has
not added any additional volume. This portfolio totaled approximately $24
million as of December 31, 1998. These loans are unseasoned and have increased
non-performing loan numbers. As of December 31, 1998 approximately 9.92% of this
portfolio was past due 30 or more days. In addition, approximately $57 thousand
in repossessed vehicles are included in other assets. These assets have been
charged down and recorded at their estimated realizable value. At December 31,
1998 there were no concentrations of loans exceeding 10% of total loans which
are not otherwise disclosed.
<PAGE>
NonPerforming Loans And Assets
<TABLE>
<CAPTION>
December 31
-----------
(Dollars in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Past due over 90 days and still accruing $ 546 $ 466 $ 2,772 $ 419 $ 323
Nonaccrual loans 1,316 1,443 713 726 2,997
Total nonperforming loans 1,862 1,909 3,485 1,145 3,320
Other real estate owned 192 1,651 1,274 1,447 1,565
Total nonperforming assets $ 2,054 $ 3,560 $ 4,759 $ 2,592 $ 4,885
Nonperforming loans as a
percentage of total loans 0.58% 0.60% 1.32% 0.47% 1.39%
Allowance for possible loan losses
as a percentage of nonperforming
loans 315.6% 309.1% 149.7% 393.5% 99.5%
Nonperforming assets as a percentage
of total loans and other real estate
owned 0.6% 1.1% 1.8% 1.1% 2.0%
Allowance for possible loan losses as
a percentage of nonperforming
assets 286.1% 165.7% 109.6% 173.8% 67.6%
</TABLE>
<PAGE>
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 ("OCC"). Under these requirements, the regulatory agencies have set
minimum thresholds for Tier I Capital, Total Capital, and Leverage ratios. At
December 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 1994.
The Corporation's and Banks Risk-Based Capital Ratios, shown below, have been
computed in accordance with regulatory accounting policies. See Note I - Capital
Requirements in the accompanying financial statements for additional
information.
<TABLE>
<CAPTION>
Risk-Based December 31 "Well Capitalized"
Capital Ratios 1998 1997 1996 Requirements
- -------------- ---- ---- ---- -----------------
Corporation
<S> <C> <C> <C> <C>
Leverage Ratio 8.59% 8.57% 8.58% 5.00%
Tier I Capital Ratio 11.67% 11.22% 12.05% 6.00%
Total Risk-Based Capital Ratio 12.95% 12.48% 13.31% 10.00%
Bank
Leverage Ratio 8.36% 8.30% 8.30% 5.00%
Tier I Capital Ratio 11.35% 10.89% 11.66% 6.00%
Total Risk-Based Capital Ratio 12.62% 12.14% 12.92% 10.00%
</TABLE>
The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current recommendations by the regulatory authorities which,
if they were to be implemented, would have a material effect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
rate for the Corporation was 9.69%, 9.16%, and 8.09% for the years ended
December 31, 1998, 1997, and 1996, respectively.
BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS
During 1998, the Corporation completed construction of a 2,750 square
foot branch office in the Frazer area. The branch opened for business on August
3, 1998. In December 1997, the Corporation entered into an agreement to purchase
a 25,000 square foot office building adjacent to the Corporation's existing
Operation Center in West Chester, Pennsylvania for approximately $1.7 million.
The Corporation took possession of the property in September 1998 and expects to
occupy the building sometime during 1999. During 1998, the Corporation entered
into an agreement to purchase additional land to accommodate future expansion.
See Note P - Commitments and Contingencies in the accompanying financial
statements for additional information.
During 1998, the Corporation completed a conversion of its Core
Processing system to the Jack Henry and Associates, Inc. ("JHA") Silverlake
system. JHA is a major provider of community bank core processing systems.
Conversion costs incurred through December 31, 1998 were approximately $1.1
million. Additionally, the Corporation completed similar processing conversions
in the areas of Financial Management Services, Credit Card Lending and Payroll.
<PAGE>
YEAR 2000 ISSUES
State of Readiness
- ------------------
The Corporation has adopted a Year 2000 ("Y2K") policy to address the
inability of certain information systems and automated equipment to properly
recognize and process dates containing the Y2K and beyond, (the "Y2K Issue"). If
not corrected, these systems and automated equipment could produce inaccurate or
unpredictable results commencing on January 1, 2000. The Corporation, similar to
most financial services providers, is particularly vulnerable to the potential
impact of the Y2K Issue due to the nature of financial information. Potential
impacts to the Corporation may arise from software, computer hardware, and other
equipment failure both within the Corporation's direct control and outside of
the Corporation's ownership yet with which the Corporation electronically or
operationally interfaces. The Corporation has no internally generated software
coding to correct. Substantially all of the software utilized by the Corporation
is purchased or licensed from external providers.
In order to address the Y2K Issue, the Corporation has developed and
implemented a five phase compliance plan. The compliance plan is divided into
the following major components: (1) Awareness; (2) Assessment; (3) Renovation;
(4) Validation and Testing; and (5) Implementation. The Corporation has
completed the first three phases of the plan for all of its mission-critical
systems and is currently working on the final two phases. The Corporation
anticipates that the validation, testing and implementation phases of
mission-critical systems will be substantially completed by March 31, 1999.
JHA has tested the unmodified version of its Silverlake system and the
Federal Financial Institutions Examination Council ("FFIEC") has reviewed JHA
test procedures and has provided the Corporation with a copy of the results. The
Corporation will conduct an independent test on the Silverlake system and
related hardware during the week of March 7, 1999.
The Corporation's Financial Management Services Department outsources
its core processing to Sunguard Trust System Inc.'s ("STS") Charlotte. STS is a
provider of data processing services to the financial services industry. STS has
informed the Corporation that, based upon tests, which it has conducted and is
currently conducting, it believes its systems are Y2K compliant. The Corporation
will rely on testing conducted by STS and will also rely on Proxy Tests
conducted by certain STS customers. The Corporation anticipates testing to be
completed by March 31, 1999.
The Costs to Address the Corporation's Year 2000 Issues
- -------------------------------------------------------
The Corporation has incurred direct Y2K project cost of $21,000 as of
December 31, 1998. The Corporation anticipates that its total Y2K project cost
will not exceed $150,000. This estimated project cost is based upon currently
available information and includes expenses for the review and testing by third
parties, including government entities. However, there can be no guarantee that
the hardware, software, and systems of such third parties will be free of
unfavorable Y2K issues and therefore not present a material adverse impact upon
the Corporation. The aforementioned Y2K project cost estimate also may change as
the Corporation progresses in its Y2K program and obtains additional information
associated with, and conducts further testing concerning, third parties. At this
time, no significant projects have been delayed as a result of the Corporation's
Y2K effort.
<PAGE>
Risk Assessment
- ---------------
In assessing the Corporation's Y2K exposure the Corporation is
identifying those suppliers and customers whose possible lack of Y2K
preparedness might expose the Corporation to financial loss. Financial loss
includes but is not limited to the following: (1) monies paid to suppliers for
which no performance is rendered; (2) inability of suppliers to furnish
necessary items potentially resulting in costly business interruptions; and (3)
inability of loan customers to repay amounts due.
The Corporation has initiated formal communications with all of its
significant vendors and large loan customers (over $250,000) to determine its
vulnerability as a result of the failure of those third parties to remediate
their own Y2K Issues. For significant vendors, the Corporation will review their
Y2K capabilities by March 31, 1999 or make plans to switch to new vendors with
systems that are Y2K compliant. For large loan customers, the Corporation will
take appropriate action based upon each customer's response to the Corporation's
Y2K communication.
The Corporation's Contingency Plan
- ----------------------------------
The Corporation has developed labor intensive contingency plans, which
are designed to render the Corporation operational for a period of seven to
fourteen days should a Y2K problem surface. These contingency plans consist of
various manual tasks, which include but are not limited to the following: 1.
Maintenance of loan data on Microsoft Excel spreadsheets or paper ledgers; 2.
Maintenance of core deposit account information on Microsoft Excel spreadsheets
or paper ledgers; 3. Manual sorting of deposit tickets and checks by account
number; and 4. Maintenance of FMS account information on Microsoft Excel
spreadsheets or manual ledgers;
At this time the Corporation cannot estimate the cost, if any, that
might be required to implement such contingency plans.
Other
- -----
Financial institution regulators have intensively focused upon Y2K
exposures, issuing guidance concerning the responsibilities of senior management
and directors in addressing the Y2K Issue. Y2K testing and certification is
being addressed as a key safety and soundness issue in conjunction with
regulatory exams. In May 1997, the FFIEC issued an interagency statement to the
chief executive officers of all federally supervised financial institutions
regarding Y2K project management awareness. The FFIEC has highly prioritized Y2K
compliance in order to avoid major disruptions to the operations of financial
institutions and the country's financial systems when the new century begins.
The FFIEC statement provides guidance to financial institutions, providers of
data services, and all examining personnel of the federal banking agencies
regarding the Y2K Issue.
The federal banking agencies, including the OCC have been conducting
Y2K compliance examinations. The failure to implement an adequate Y2K program
can be identified as an unsafe and unsound banking practice. The Corporation and
the Bank are subject to regulation and supervision by the OCC which regularly
conducts reviews of the safety and soundness of the Corporation's operations,
including the Corporation's progress in becoming Y2K compliant. The OCC has
established an examination procedure which contains three categories of ratings:
"Satisfactory", "Needs Improvement", and "Unsatisfactory". Institutions that
receive a Y2K rating of Unsatisfactory may be subject to formal enforcement
action, supervisory agreements, cease and desist orders, civil money penalties,
or the appointment of a conservator. In addition, federal banking agencies will
be taking into account Y2K compliance programs when reviewing applications and
<PAGE>
may deny an application based on Y2K related issues. Failure by the Corporation
to adequately prepare for Y2K issues could negatively impact the Corporation's
banking operations, including the imposition of restrictions upon its operations
by the OCC.
Despite the Corporation's activities in regards to the Y2K Issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Corporation's business, financial condition, results of
operations, and business prospects.
DESCRIPTION OF CAPITAL STOCK AND MARKET INFORMATION
The authorized capital stock of the Corporation consists of 5,000,000
shares of common stock, par value $1.00 per share, of which 4,799,666 shares and
2,399,833 shares were outstanding at the end of 1998 and 1997, respectively.
The Corporation's common stock is publicly traded over the counter.
Trading is sporadic. The following table, which shows the range of high and low
month-end bid prices for the stock, is based upon transactions reported by the
Philadelphia brokerage firm of Janney Montgomery Scott, Inc, one of the
Corporation's market makers.
<TABLE>
Bid Prices (1)
<CAPTION>
1998 1997
Quarter Ended High Low High Low
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $20.25 $16.75 $13.50 $11.25
Second $20.25 $20.25 $15.00 $12.94
Third $20.00 $17.00 $15.50 $15.00
Fourth $19.00 $18.00 $16.50 $15.25
<FN>
(1) Adjusted for 1998 2-for-1 stock split and 1997 4-for-3 stock split. See Note A12 - Earnings per Share and Stockholders Equity
- in the accompanying financial statements for additional information.
</FN>
</TABLE>
Other information regarding the Corporation can be found in the
Corporation's Form 10-K, to be filed with the Securities and Exchange Commission
on March 31, 1999. Copies of the form 10-K can be obtained from the
Corporation's Shareholder Relations Officer, P.O. Box 523, West Chester, PA
19381-0523, at 610-344-2686.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
----------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,006 $ 22,248
Federal funds sold 5,675 4,200
Total cash and cash equivalents 30,681 26,448
Investment securities held-to-maturity (market value of
$7,606 and $12,237 in 1998 and 1997, respectively) 7,406 12,082
Investment securities available-for-sale, at fair value 102,380 65,516
Loans 320,395 318,899
Less allowance for possible loan losses (5,877) (5,900)
Net loans 314,518 312,999
Premises and equipment, net 9,579 6,659
Other assets 6,129 7,664
Total assets $ 470,693 $ 431,368
LIABILITIES
Deposits
Non-interest-bearing $ 72,556 $ 63,287
Interest-bearing (including certificates of deposit over $100 of
$28,984 and $11,978 - 1998 and 1997, respectively) 345,842 310,962
Total deposits 418,398 374,249
Securities sold under repurchase agreements 2,795 7,625
Federal Home Loan Bank advances and other borrowings 5,027 7,380
Other liabilities 4,750 5,901
Total liabilities 430,970 395,155
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 5,000,000 shares;
Outstanding, 1998 - 4,799,666 and 1997 - 2,399,833. 4,800 2,400
Additional paid-in capital 542 2,729
Retained earnings 35,675 32,803
Accumulated Other Comprehensive Income 292 (33)
Treasury stock, at cost: 1998 - 183,640 and 1997 - 103,700. (1,586) (1,686)
Total stockholders' equity 39,723 36,213
Total liabilities and stockholders' equity $ 470,693 $ 431,368
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Dollars in thousands, except per share) December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 28,296 $ 26,580 $22,856
Investment securities 5,021 5,214 5,990
Federal funds sold 436 308 734
Deposits in banks - 12 47
Total interest income 33,753 32,114 29,627
INTEREST EXPENSE
Deposits 13,679 12,670 11,815
Securities sold under repurchase agreements 116 280 320
Other borrowings 340 401 -
Total interest expense 14,135 13,351 12,135
Net interest income 19,618 18,763 17,492
PROVISION FOR POSSIBLE LOAN LOSSES 911 1,135 1,079
Net interest income after provision for possible loan losses 18,707 17,628 16,413
NON-INTEREST INCOME
Financial Management Services 2,266 2,000 1,861
Service charges on deposit accounts 1,037 987 851
Investment securities gains (losses), net 87 (15) 5
Other 1,297 815 845
Total non-interest income 4,687 3,787 3,562
NON-INTEREST EXPENSE
Salaries and employee benefits 9,046 8,361 7,735
Occupancy, equipment, and data processing 3,298 2,964 2,647
Other 3,934 3,586 3,250
Total non-interest expense 16,278 14,911 13,632
Income before income taxes 7,116 6,504 6,343
INCOME TAXES 2,100 1,889 2,038
NET INCOME $ 5,016 $ 4,615 $ 4,305
Other comprehensive Income
Unrealized gains on securities
Unrealized gains (losses) arising in period 523 265 (232)
Reclassification adjustment: gain (loss) included in net income (87) 15 (5)
Net unrealized gains (losses) 436 280 (237)
Other comprehensive income (loss) before taxes 436 280 (237)
Income tax (expense) benefit on other comprehensive income (loss) (111) (71 60
Other comprehensive income 325 209 (177)
Comprehensive income $ 5,341 $ 4,824 $ 4,128
PER SHARE
Basic Earnings Per Common Share (1) $ 1.09 $ 1.00 $ 0.94
Diluted Earnings Per Common Share (1) $ 1.07 $ 1.00 $ 0.94
Dividends declared $ 0.47 $ 0.43 $ 0.38
Basic weighted average shares outstanding 4,609,874 4,580,814 4,569,712
Diluted weighted average shares outstanding 4,676,031 4,619,620 4,584,668
<FN>
(1) Please refer to Note M - Earnings Per Share for information on this calculation.
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive Treasury
(Dollars in thousands) Shares Par Value Capital Earnings Income Stock
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 1,799,941 1,800 3,301 27,542 (65) (1,886)
Net income - - - 4,305 - -
Cash dividends declared - - - (1,714) - -
Other Comprehensive Income
Net unrealized loss on investment
securities available-for-sale - - - - (177) -
Treasury stock transactions - - 4 - - 65
Balance at December 31, 1996 1,799,941 $ 1,800 $ 3,305 $30,133 $ (242) $ (1,821)
Net income - - - 4,615 - -
Cash dividends declared - - - (1,945) - -
Other Comprehensive Income
Net unrealized gain on investment
securities available-for-sale - - - - 209 -
4 for 3 stock split 599,892 600 (600) - - -
Treasury stock transactions - - 24 - - 135
Balance at December 31, 1997 2,399,833 $ 2,400 $ 2,729 $32,803 $ (33) $ (1,686)
Net income - - - 5,016 - -
Cash dividends declared - - - (2,144) - -
Other Comprehensive Income
Net unrealized gain on investment
securities available-for-sale - - - - 325
2 for 1 stock split 2,399,833 2,400 (2,400) - - -
Treasury stock transactions - - 213 - - 100
Balance at December 31, 1998 4,799,666 $ 4,800 $ 542 $35,675 $ 292 $ (1,586)
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,016 $ 4,615 $ 4,305
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 1,279 860 786
Provision for loan losses 911 1,135 1,079
Amortization of investment security
premiums and accretion of discounts, net 275 52 141
Amortization of deferred fees, net on loans (92) 53 (57)
Provision for deferred income taxes (155) (235) (331)
Investment securities (gains) losses, net (87) 15 (5)
Decrease (increase) in other assets 1,858 (399) 29
(Decrease) increase in other liabilities (1,151) 601 222
Net cash provided by operating activities 7,854 6,697 6,169
INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits with banks -- 1,000 (1,000)
Net increase in loans (2,338) (54,823) (22,309)
Proceeds from sales of investment securities available-for-sale 22,061 30,646 4,172
Proceeds from maturities of investment securities available-for-sale 29,790 13,588 17,826
Proceeds from maturities of investment securities held-to-maturity 4,719 3,635 11,477
Purchase of investment securities available-for-sale (88,789) (27,543) (33,919)
Purchase of investment securities held-to-maturity -- -- (4,120)
Purchase of premises and equipment, net (4,199) (767) (2,017)
Net cash used in investing activities (38,756) (34,264) (29,890)
FINANCING ACTIVITIES
Increase (decrease) in securities sold under repurchase agreements (4,830) 7,380 --
Increase in deposits 44,149 22,983 7,340
Decrease in Federal Home Loan Bank advances and other borrowings (2,353) (318) (915)
Cash dividends (2,144) (1,945) (1,661)
Treasury stock transactions 313 159 69
Net cash provided by financing activities 35,135 28,259 4,833
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 4,233 692 (18,888)
Cash and cash equivalents at beginning of year 26,448 25,756 44,644
Cash and cash equivalents at end of year $ 30,681 $ 26,448 $ 25,756
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First West Chester Corporation (the "Corporation"), through its wholly-owned
subsidiary, The First National Bank of West Chester (the "Bank"), has been
serving the residents and businesses of Chester County, Pennsylvania, since
1863. The Bank is a locally managed community bank providing loan, deposit,
and trust services from its seven branch locations. The Bank encounters
vigorous competition for market share in the communities it serves from bank
holding companies, other community banks, thrift institutions, credit unions
and other non-bank financial organizations such as mutual fund companies,
insurance companies, and brokerage companies.
The Corporation and the Bank are subject to regulations of certain state and
federal agencies. These regulatory agencies periodically examine the
Corporation and the Bank for adherence to laws and regulations. As a
consequence, the cost of doing business may be affected.
1. Basis of Financial Statement Presentation
The accounting policies followed by the Corporation and its wholly-owned
subsidiaries, the Bank and 323 East Gay Street Corp ("EGSC"), conform to
generally accepted accounting principles and predominant practices within
the banking industry. The accompanying consolidated financial statements
include the accounts of the Corporation, the Bank, and EGSC. All significant
intercompany transactions have been eliminated.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the balance sheets, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The principal estimate that is susceptible to significant change in the near
term relates to the allowance for loan and lease losses. The evaluation of
the adequacy of the allowance for loan losses include an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
conditions, the capability of specific borrowers to pay specific loan
obligations, as well as current loan collateral values. However, actual
losses on specific loans, which also are encompassed in the analysis, may
vary from estimated losses.
2. Financial Instruments
The Corporation follows Statement of Financial Accounting Standards ("SFAS")
No. 107, "Disclosures about Fair Value of Financial Instruments," which
requires all entities to disclose the estimated fair value of their assets
and liabilities considered to be financial instruments. Financial
instruments requiring disclosure consist primarily of investment securities,
loans, and deposits.
3. Investment Securities
The Corporation follows SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires investments in securities to be
classified in one of three categories: held-to-maturity, trading, or
available-for-sale. Debt securities that the Corporation has the positive
intent and ability to hold to maturity are classified as held-to-maturity
and are reported at amortized cost. As the Corporation does not engage in
security trading, the balance of its debt securities and any equity
securities are classified as available-for-sale. Net unrealized gains and
losses for such securities, net of tax effect, are required to be recognized
as a separate component of stockholders' equity and excluded from the
determination of net income.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
4. Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
discount and an allowance for loan losses. Interest on loans is accrued and
credited to operations based upon the principal amount outstanding.
Accrual of interest is discontinued on a loan when management believes that
the borrower's financial condition is such that collection of interest and
principal is doubtful. Upon such discontinuance, all unpaid accrued interest
is reversed. The determination of the allowance for loan losses is based
upon the character of the loan portfolio, current economic conditions, loss
experience, and other relevant factors which, in management's judgment,
deserve recognition in estimating possible losses.
The Corporation accounts for impairment in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." SFAS No. 114 requires loan impairment to be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, its observable market price or the fair value of
the collateral if the loan is collateral dependent. If it is probable that a
creditor will foreclose on a property, the creditor must measure impairment
based on the fair value of the collateral. SFAS No. 118 allows creditors to
use existing methods for recognizing interest income on impaired loans.
5. Loan Fees and Related Costs
Certain origination and commitment fees and related direct loan origination
costs are deferred and amortized over the contractual life of the related
loans, resulting in an adjustment of the related loan's yield.
6. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Assets are depreciated over their estimated useful lives, principally by the
straight-line method.
On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." This statement provides guidance on when assets should be reviewed for
impairment, how to determine whether an asset or group of assets is
impaired, how to measure an impairment loss, and the accounting for long
lived-lived assets that a company plans to dispose of. The adoption of this
new statement did not have a material impact on the Corporation's
consolidated financial position or results of operations.
7. Contributions
The Corporation accounts for contributions in accordance with SFAS No. 116,
"Accounting for Contributions Received and Contributions Made." SFAS No. 116
specifies that contributions made by the Corporation be recognized as
expenses in the period made and as decreases of assets or increases of
liabilities depending on the form of the benefits given. In accordance with
SFAS No. 116, the Corporation incurred contribution expenses relating to
long-term commitments to local not-for-profit organizations of $63,000,
$83,000 and $137,000 during 1998, 1997 and 1996, respectively.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
8. Income Taxes
The Corporation accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes. Under the liability method specified by SFAS
No. 109, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense and benefits are the
result of changes in deferred tax assets and liabilities.
9. Employee Benefit Plans
The Corporation has certain employee benefit plans covering eligible
employees. The Bank accrues such costs as earned.
10. Stock Based Compensation Plan
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for
valuing stock-based compensation, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternately, the standard permits entities to continue accounting for
employee stock options and similar instruments under Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net income and earnings per
share, as if the fair-value based method of accounting defined in SFAS No.
123 had been applied. The Corporation's stock option plan is accounted for
under APB Opinion No. 25.
11. Financial Management Services Assets and Income
Assets held by the Corporation in fiduciary or agency capacities for its
customers are not included in the accompanying consolidated balance sheets
since such items are not assets of the Corporation. Operating income and
expenses of Financial Management Services are included under their
respective captions in the accompanying consolidated statements of income
and are recorded on the accrual basis.
12. Earnings per Share and Stockholders' Equity
Earnings per share are calculated using the weighted average shares
outstanding during the year. On September 22, 1998, the Board of Directors
declared a stock split, in the form of a 100% stock dividend to stockholders
of record on October 23, 1998, payable November 24, 1998. Par value remained
at $1.00 per share. The stock split resulted in the issuance of 2,399,833
additional shares of common stock from authorized but unissued shares. The
issuance of authorized but unissued shares resulted in the transfer of
$2,399,833 from additional paid-in capital to common stock, representing the
par value of the shares issued. Accordingly, earnings per share, cash
dividends per share, and weighted average shares of common stock outstanding
have been restated to reflect the stock split.
On December 15, 1997, the Corporation adopted SFAS No. 128, "Earnings per
Share". The new standard eliminates primary and fully diluted earnings per
share and requires presentation of basic and diluted earnings per share
together with disclosure of how the per share amounts were computed. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average common
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of
the entity.
13. Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods. Cash paid during the years
ended December 31, 1998, 1997, and 1996 for interest was $15,900,000,
$12,600,000, and $11,718,000, respectively. Cash paid during the years ended
December 31, 1998, 1997, and 1996 for income taxes was $2,053,000,
$2,045,000, and $2,100,000, respectively.
14. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets, and extinguishments of liabilities occurring
after December 31, 1996. Adoption of this new statement has not had a
material impact on the Corporation's consolidated financial position or
results of operations.
15. Reporting Comprehensive Income
The Corporation has adopted the provisions of FASB issued SFAS No. 130,
Reporting of Comprehensive Income, which establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of financial statements. This statement also
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
16. Disclosure about Segments of an Enterprise and Related Information
On January 1, 1998, the Corporation adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 redefines
how operating segments are determined and requires disclosure of certain
financial and descriptive information about a Company's operating segments.
Management has concluded that under current conditions, the corporation will
report one business segment.
17. Disclosure about Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities was issued. SFAS No. 133 establishes standards for
derivative instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The statement is not expected to have an effect on the
Corporation's financial statements.
18. Advertising Costs
The Bank expenses advertising costs as incurred.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
19. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair market value
of the Corporation's available-for-sale and held-to-maturity securities at
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
---------------- ------------------
(Dollars in thousands) Gross Gross Fair Gross Gross Fair
1998 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ - $ - $ - $ - $ 4,996 $ 23 $ - $ 5,019
U.S. Government agency - - - - - - - -
Mortgage-backed securities 859 1 - 860 77,405 144 (33) 77,516
State and municipal 2,907 162 - 3,069 500 - (3) 497
Corporate securities 3,110 34 - 3,144 6,272 - (10) 6,262
Asset-backed securities 530 3 - 533 8,637 123 - 8,760
Mutual funds - - - - 1,091 - (52) 1,039
Other equity securities - - - - 3,037 250 - 3,287
$ 7,406 $ 200 $ - $ 7,606 $101,938 $ 540 $ (98) $102,380
Held-to-Maturity Available-for-Sale
---------------- ------------------
(Dollars in thousands) Gross Gross Fair Gross Gross Fair
1997 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
U.S. Treasury $ 1,493 $ 1 $ - $ 1,494 $ 6,512 $ 18 $ (2) $ 6,528
U.S. Government agency - - - - 7,356 36 - 7,392
Mortgage-backed securities 1,519 8 (7) 1,520 47,742 213 (267) 47,688
State and municipal 3,955 126 - 4,081 - - - -
Corporate securities 4,115 14 - 4,129 1,000 - - 1,000
Asset-backed securities 1,000 13 - 1,013 - - - -
Mutual funds - - - - 1,091 - (49) 1,042
Other equity securities - - - - 1,866 - - 1,866
$12,082 $ 162 $ (7) $12,237 $ 65,567 $ 267 $ (318) $ 65,516
</TABLE>
The amortized cost and estimated fair value of debt securities classified as
available-for-sale and held-to-maturity at December 31, 1998, by contractual
maturity, are shown in the following table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<PAGE>
NOTE B - INVESTMENT SECURITIES - continued
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
---------------- ------------------
Estimated Estimated
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 1,340 $ 1,344 $ 5,996 $ 6,029
Due after one year through five years 3,016 3,105 - -
Due after five years through ten years 1,660 1,763 4,578 4,562
Due after ten years - - 1,194 1,188
6,016 6,212 11,768 11,779
Mortgage-backed securities 859 861 77,405 77,516
Asset-backed securities 531 533 8,637 8,759
Other equity securities - - 4,128 4,326
$ 7,406 $ 7,606 $101,938 $102,380
</TABLE>
Proceeds from the sale of investment securities available for sale during
1998 were $22.1 million. Gains of $155,000, $330,000, and $31,000, and
losses of $68,000, $345,000, and $26,000 were realized on sales of
securities in 1998, 1997, and 1996, respectively. The Corporation uses the
specific identification method to determine the cost of the securities sold.
The principal amount of investment securities pledged to secure public
deposits and for other purposes required or permitted by law was $30,493,000
and $29,140,000 at December 31, 1998 and 1997, respectively. There were no
securities held from a single issuer that represented more than 10% of
stockholders' equity.
NOTE C - LOANS
Major classifications of loans are as follows:
(Dollars in thousands) 1998 1997
--------- ----------
Commercial loans $ 85,110 $ 84,514
Real estate - construction 13,439 17,256
Real estate - other 133,191 127,353
Consumer loans 62,481 66,753
Lease financing receivable 26,174 23,023
320,295 318,899
Less: Allowance for loan losses (5,877) (5,900)
$ 314,518 $ 312,999
Loan balances on which the accrual of interest has been discontinued
amounted to approximately $1,316,000 and $1,443,000 at December 31, 1998 and
1997, respectively. Interest on these nonaccrual loans would have been
approximately $176,000 and $115,000 in 1998 and 1997, respectively. Loan
balances past due 90 days or more which are not on a nonaccrual status, but
which management expects will eventually be paid in full, amounted to
$546,000 and $466,000 at December 31, 1998 and 1997, respectively. Changes
in the allowance for loan losses are summarized as follows:
<PAGE>
NOTE C - LOANS - continued
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 5,900 $ 5,218 $ 4,506
Provision charged to operating expenses 911 1,135 1,079
Recoveries of charged-off loans 245 83 44
Loans charged-off (1,179) (536) (411)
Balance at end of year $ 5,877 $ 5,900 $ 5,218
</TABLE>
The Bank identifies a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the
loan agreement. The accrual of interest is discontinued on impaired loans
and no income is recognized until all recorded amounts of interest and
principal are recovered in full. Retail loans and residential mortgages have
been excluded from these calculations. See Note A4 - Loans and Allowance for
Loan Losses for more information.
The balance of impaired loans was $919,000, $1,121,000, and $443,000 at
December 31, 1998, 1997, and 1996, respectively. The associated allowance
for loan losses for impaired loans was $286,000, $306,000, and $419,000 at
December 31, 1998, 1997, and 1996, respectively.
During 1998, activity in the allowance for impaired loan losses included a
provision of $150,000, write offs of $170,000 and recoveries of $0. Interest
income of $25,000 was recorded in 1998, while contractual interest in the
same period amounted to $129,000. Cash collected on impaired loans in 1998
was $836,000 of which $811,000 was applied to principal and $25,000 was
applied to interest.
During 1997, activity in the allowance for impaired loan losses included a
provision of $182,000, write-offs of $295,000, and recoveries of $0.
Interest income of $37,000 was recorded in 1997, while contractual interest
in the same period amounted to $64,000. Cash collected on impaired loans in
1997 was $278,000, of which $241,000 was applied to principal and $37,000
was applied to interest.
In the normal course of business, the Bank makes loans to certain officers,
directors, and their related interests. All loan transactions entered into
between the Bank and such related parties were made on the same terms and
conditions as transactions with all other parties. In management's opinion,
such loans are consistent with sound banking practices and are within
applicable regulatory lending limitations. The balance of these loans at
December 31, 1998 and 1997, was approximately $6,025,000 and $7,234,000,
respectively. In 1998, new loans and payments amounted to approximately
$1,429,000 and $1,870,000, respectively. Loans totaling $768,000 were no
longer considered loans to officers and directors due to personnel changes
that occurred during 1998.
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
(Dollars in thousands) 1998 1997
------ -----
Premises $ 10,813 $ 8,307
Equipment 7,675 5,982
------ ------
18,488 14,289
Less Accumulated depreciation (8,909) (7,630)
$ 9,579 $ 6,659
====== ======
<PAGE>
NOTE E - DEPOSITS
At December 31, 1998, the scheduled maturities of certificates of deposit
are as follows:
(Dollars in thousands)
1999 $ 93,199
2000 42,408
2001 7,390
2002 2,673
2003 and thereafter 5,113
$ 150,783
NOTE F - SHORT-TERM BORROWINGS AND CREDIT FACILITY
Securities sold under agreements to repurchase are generally overnight
transactions. These borrowings had interest rates of approximately 3.8%,
3.3% and 3.3% and balances of $2,795,000, $7,625,000 and $7,943,000 at
December 31, 1998, 1997 and 1996, respectively. Daily average balances and
weighted average interest rates for the years ended December 31, 1998, 1997
and 1996 were $3,019,000, $8,560,000 and $9,713,000 and 3.8%, 3.3% and 3.3%,
respectively. Maximum amounts outstanding at any month-end were
approximately $5,364,000, $11,450,000 and $11,715,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Bank, as a member of the Federal Home Loan Bank ("FHLB"), maintains a
$10 million flex-line of credit secured by the Bank's mortgage related
assets. During 1998, 1997 and 1996, the Bank had no borrowings under this
line of credit. As of December 31, 1998, the FHLB discontinued the flexline
product and replaced it with a similar credit facility, the Open Repo Plus.
This product is similar to the flexline but is expected to streamline the
borrowing process. In addition to this, the Bank has additional borrowing
capacity at the FHLB of approximately $110 million. FHLB advances as of
December 31, 1998 consisted of $5.0 million in term advances, which
represent a combination of maturities ranging from 6 months to 10 years. The
weighted average interest rate on these advances for the year ended December
31, 1998 was 6.45%. FHLB advances are collateralized by a pledge of the
Bank's entire portfolio of unencumbered investment securities, certain
mortgage loans and a lien on the Bank's FHLB stock.
NOTE G - OTHER NON-INTEREST EXPENSE
The components of other non-interest expense are detailed as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Purchased services $ 826 $ 833 $ 664
Telephone, postage, and supplies 669 583 633
Marketing and corporate communications 652 406 340
Loan and deposit supplies 476 436 406
Director costs 262 276 260
Bank shares tax 259 290 308
FDIC Insurance 45 43 2
Other 745 719 637
$ 3,934 $3,586 $ 3,250
</TABLE>
<PAGE>
NOTE H - INCOME TAXES
The components of income taxes are detailed as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $ 2,255 $ 2,124 $ 2,369
Deferred (155) (235) (331)
$ 2,100 $ 1,889 $ 2,038
</TABLE>
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from
Tax-exempt loan and investment income (2.0) (3.0) (3.3)
Tax credits (0.9) (3.0) --
Other, net (1.6) 1.0 1.4
Applicable income tax 29.5% 29.0% 32.1%
</TABLE>
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Allowance for possible loan losses $ 1,715 $ 1,699 $ 1,489
Unrealized gain (loss) on securities available-for-sale (150) 18 125
Deferred loan fees 158 210 249
Accrued pension and deferred compensation 421 367 305
Depreciation 181 53 29
Other 21 28 91
2,346 2,375 2,288
Valuation allowance - - -
Total deferred tax asset 2,346 2,375 2,288
Bond accretion (32) (48) (89)
Total deferred tax liabilities (32) (48) (89)
Net deferred tax asset $ 2,314 $ 2,327 $ 2,199
</TABLE>
The Corporation's main operating subsidiary, The First National Bank of West
Chester, is not subject to Pennsylvania corporate income taxes, but is taxed
based on the value of its capital stock. Pennsylvania Bank Shares Tax
expense incurred by the Bank amounted to $259,000, $290,000, and $308,000 in
1998, 1997, and 1996, respectively. Shares tax expense reflects tax credits
of approximately $86,000 and $51,000 resulting from an investment in a local
community development project for the years 1998 and 1997, respectively.
<PAGE>
NOTE I - CAPITAL REQUIREMENTS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of Total and
Tier I capital to risk-weighted assets, and Tier I capital to average
quarterly assets. Management believes that the Corporation and the Bank meet
all capital adequacy requirements to which it is subject, as of December 31,
1998.
As of December 31, 1998, the most recent notification from the federal
banking agencies categorized the Corporation and the Bank as well
capitalized under the regulatory framework for corrective action. To be
categorized as adequately capitalized the Corporation and the Bank must
maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
the notification that management believes have changed the institution's
category.
The Corporation's actual capital amounts and ratios are presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Provisions
---------------------- ------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets)
Corporation $43,742 12.95% $ 27,027 greater than or = 8.00% $33,784 greater than or = 10.00%
Bank $42,638 12.62% $ 27,024 $33,780
Tier I Capital (to Risk Weighted Assets)
Corporation $39,431 11.67% $ 13,513 greater than or = 4.00% $20,270 greater than or = 6.00%
Bank $38,327 11.35% $ 13,512 $20,268
Tier I Capital (to Average Assets)
Corporation $39,431 8.59% $ 18,369 greater than or = 4.00% $22,961 greater than or = 5.00%
Bank $38,327 8.36% $ 18,344 $22,930
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
Corporation $40,253 12.48% $ 25,811 greater than or = 8.00% $32,264 greater than or = 10.00%
Bank $39,060 12.14% $ 25,731 $32,164
</TABLE>
<PAGE>
NOTE I - CAPITAL REQUIREMENTS- continued
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Tier I Capital (to Risk Weighted Assets)
Corporation $36,197 11.22% $ 12,906 greater than or = 4.00% $19,359 greater than or = 6.00%
Bank $35,016 10.89% $ 12,865 $19,298
Tier I Capital (to Average Assets)
Corporation $36,197 8.57% $ 16,891 greater than or = 4.00% $21,114 greater than or = 5.00%
Bank $35,016 8.30% $ 16,885 $21,106
Corporation 1998 1997
----------- ---- ----
Risk Weighted Assets 337,836 322,642
Average Assets (Current Quarter) 459,218 422,284
Bank 1998 1997
---- ---- ----
Risk Weighted Assets 337,796 321,635
Average Assets (Current Quarter) 458,592 422,129
</TABLE>
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of an entity's assets and
liabilities considered to be financial instruments. For the Corporation, as
for most financial institutions, the majority of its assets and liabilities
are considered financial instruments as defined in SFAS No. 107. However,
many such instruments lack an available trading market, as characterized by
a willing buyer and seller engaging in an exchange transaction. Also, it is
the Corporation's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, the Corporation had to use significant estimations and present
value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimated fair value of cash
and cash equivalents, deposits with no stated maturities, short-term
borrowings and commitments to extend credit, and outstanding letters of
credit has been estimated to equal the carrying amount. Quoted market prices
were used to determine the estimated fair value of investment securities
held-to-maturity and available-for-sale. Fair values of net loans and
deposits with stated maturities were calculated using estimated discounted
cash flows based on the year-end offering rate for instruments with similar
characteristics and maturities.
The estimated fair values and carrying amounts are summarized as follows:
<PAGE>
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
<TABLE>
1998 1997
---- ----
<S> <C> <C> <C> <C> <C> <C>
Estimated Estimated
(Dollars in thousands) Fair Carrying Fair Carrying
Value Amount Value Amount
----- ------ ----- ------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 30,681 $ 30,681 $ 26,448 $ 26,448
Investment securities held-to-maturity 7,606 7,406 12,237 12,082
Investment securities available-for-sale 102,380 101,938 65,516 65,567
Net loans 313,921 314,518 314,508 312,999
Financial Liabilities
Deposits with no stated maturities 267,615 267,615 244,328 244,328
Deposits with stated maturities 152,005 150,783 130,239 129,921
Short-term borrowings 2,795 2,795 7,625 7,625
Off-Balance-Sheet Investments
Commitments for extended credit
and outstanding letters of credit 103,132 103,132 95,212 95,212
</TABLE>
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk to meet the financing needs of its customers and reduce its own
exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they
become payable. Those instruments involve, to varying degrees, elements of
credit and interest rate risks in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Corporation uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Corporation does not require collateral or other
security to support financial instruments with credit risk. The contract
amounts are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
---------------------- ---- ----
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $95,500 $90,029
Standby letters of credit and financial guarantees written 7,632 5,183
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
<PAGE>
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - continued
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and
similar transactions. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Corporation holds residential or commercial real estate,
accounts receivable, inventory and equipment as collateral supporting those
commitments for which collateral is deemed necessary. The extent of
collateral held for those commitments at December 31, 1998, varies up to
100%; the average amount collateralized is 80%.
Substantially all of the Corporation's loans, commitments, and commercial
and standby letters of credit have been granted to customers in the
Corporation's primary market area, Chester County, Pennsylvania. Investments
in state and municipal securities also involve governmental entities within
the Corporation's market area. The concentrations of credit by type of loan
are set forth in Note C - Loans. Although the Corporation has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the economic sector. The distribution of
commitments to extend credit approximates the distribution of loans
outstanding.
Commercial and standby letters of credit were granted primarily to
commercial borrowers.
NOTE L - ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Corporation instituted the 1995 Stock Option Plan on September 18, 1995,
which was subsequently ratified at the March 19, 1996, annual meeting of
shareholders. This plan allows the Corporation to grant up to 807,500 fixed
stock options to key employees and directors. The options have a term of ten
years and become exercisable six months after grant. The exercise price of
each option equals the average between the high and low bid price of the
Corporation's stock on the date of grant.
The Corporation has elected to account for its stock option plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the plan been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Corporation's net income and
earnings per share would have been:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income (in thousands) As reported $ 5,016 $ 4,615 $ 4,305
Pro forma $ 4,048 $ 4,036 $ 4,125
Earnings per share (Basic) As reported $ 1.09 $ 1.00 $ 0.94
Pro forma $ 0.88 $ 0.87 $ 0.90
Earnings per share (Diluted) As reported $ 1.07 $ 1.00 $ 0.94
Pro forma $ 0.86 $ 0.87 $ 0.90
</TABLE>
<PAGE>
NOTE L - ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS - continued
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yield of 2.20%, 2.82% and 3.80%; expected volatility of 0.48, 0.48 and 0.47;
risk-free interest rate of 4.39%, 5.99% and 6.13%; and an expected life of 4
1/2 years, 5 years and 5 years.
Information about stock options outstanding at December 31, 1998, is
summarized as follows:
Weighted-Average
Outstanding Exercise Price
----------- --------------
Balance 1/1/96 66,000 $ 8.66
Granted 62,000 11.11
Exercised (8,000) 8.86
Cancelled -- --
Balance 1/1/97 120,000 9.93
Granted 125,000 15.51
Exercised (16,600) 9.55
Cancelled -- --
Balance 1/1/98 228,400 13.01
Granted 233,000 18.76
Exercised (33,400) 12.16
Cancelled (36,000) 20.25
Balance, 12/31/98 392,000 $15.84
The weighted average fair value of options granted during 1998, 1997 and
1996 was $7.11, $6.10 and $3.53, respectively.
Options Outstanding
-------------------
<TABLE>
<CAPTION>
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise-Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 8.66 - $15.50 190,000 8.11 years $13.09 170,800 $12.82
$15.81 - $17.81 141,000 9.68 years $17.65 2,000 $15.81
$20.00 - $21.13 61,000 9.83 years $20.20 11,000 $21.13
392,000 183,800
</TABLE>
NOTE M - EARNINGS PER SHARE (EPS)
During 1997, the Bank adopted the provisions of SFAS No. 128, "Earnings Per
Share". SFAS No.128 eliminates primary and fully diluted earnings per share
and requires presentation of basic and diluted earnings per share.
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<PAGE>
NOTE M - EARNINGS PER SHARE (EPS) - continued
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
------------------------------------
1998: Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS:
Net income available to common stockholders $5,016,039 4,609,874 $1.09
Effect of Dilutive Securities
Add options to purchase common stock -- 66,157
Diluted EPS: $5,016,039 4,676,031 $1.07
</TABLE>
1,000 options to purchase shares of common stock with an exercise price of
$21.19 per share were not included in the computation of 1998 diluted EPS
because the options' exercise price was greater than the average market
price of the common shares.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------
1997: Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS:
Net income available to common stockholders $4,615,000 4,580,814 $1.00
Effect of Dilutive Securities
Add options to purchase common stock -- 38,806
Diluted EPS: $4,615,000 4,619,620 $1.00
</TABLE>
125,000 options to purchase shares of common stock with a range of exercise
prices from $15.50 to $15.81 per share were not included in the computation
of 1997 diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
------------- ------
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
------------------------------------
1996: Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders $4,305,000 4,569,712 $0.94
Effect of Dilutive Securities
Add options to purchase common stock -- 14,956
Diluted EPS: $4,305,000 4,584,668 $0.94
</TABLE>
NOTE N - REGULATORY MATTERS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank based upon deposit levels and other factors. The average amount
of those reserve balances for the years ended December 31, 1998 and 1997,
was approximately $4,739,000 and $3,754,000, respectively.
<PAGE>
NOTE N - REGULATORY MATTERS - continued
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Corporation in
the form of cash dividends, loans or advances. The Bank, without the prior
approval of regulators, can declare dividends to the Corporation totaling
approximately $5,855,000 plus additional amounts equal to the net earnings
of the Bank for the period from January 1, 1999, through the date of
declaration, less dividends previously paid in 1999.
NOTE O - EMPLOYEE BENEFIT PLANS - DEFINED CONTRIBUTION PLANS
1. Qualified
The Corporation has a qualified deferred salary savings 401(k) plan (the
"401(k) Plan") under which the Corporation contributes $0.75 for each $1.00
that an employee contributes, up to the first 5% of the employee's salary.
The Corporation's expenses were $181,000, $152,000, and $136,000 in 1998,
1997, and 1996, respectively. The Corporation also has a qualified defined
contribution pension plan (the "QDCP Plan"). Under the QDCP Plan, the
Corporation makes annual contributions into the 401(k) Plan on behalf of
each eligible participant in an amount equal to 3% of salary up to $30,000
in salary plus 6% in excess of $30,000 up to $160,000. Contribution expense
in 1998, 1997 and 1996 under the QDCP Plan was $199,000, $138,000 and
$220,000, respectively. The Corporation may make additional discretionary
employer contributions subject to approval of the Board of Directors.
2. Non-Qualified
The Corporation makes annual contributions to a non-qualified defined
contribution Plan ("the NQDCP Plan ") equal to 3% of the participant's
salary up to $160,000 plus 9% in excess of $160,000. Contribution expense
for 1998, 1997 and 1996 under the NQDCP Plan was $43,000, $39,000 and
$38,000, respectively. The Corporation may make additional discretionary
employer contributions subject to approval of the Board of Directors.
NOTE P - COMMITMENTS AND CONTINGENCIES
In September 1998, the Corporation entered into an agreement to purchase
approximately five acres of land in Chester County, Pennsylvania for
approximately $1.4 million. The Corporation is scheduled to take possession
of the land in September 1999.
The Corporation has an employment agreement with the Corporation's Chief
Executive Officer ("CEO") that provides for severance payments upon
termination of employment under certain circumstances or a change of control
as defined. The Corporation's potential minimum obligation would be equal to
1.0 times the CEO's salary for a period totaling 10 years.
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY
Condensed financial information for First West Chester Corporation (parent
corporation only) follows:
<PAGE>
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - continued
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
-----------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 260 $ 67
Investment securities available for sale, at market value 741 --
Investment in subsidiaries, at equity 38,363 35,152
Inter company loan 105 932
Other assets 23 120
Total assets $ 39,492 $ 36,271
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 30 $ 25
Stockholders' equity 39,462 36,246
Total liabilities and stockholders' equity $ 39,492 $ 36,271
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended December 31
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries $ 1,948 $ 2,022 $ 1,814
Dividends from investment securities 1 1 12
Investment securities gains, net 23 182 -
Other income 35 16 23
Total income 2,007 2,221 1,849
EXPENSES
Other expenses 203 169 196
Total expenses 203 169 196
Income before equity in undistributed
income of subsidiaries 1,804 2,052 1,653
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES 3,212 2,563 2,652
NET INCOME $ 5,016 $ 4,615 $ 4,305
</TABLE>
<PAGE>
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - continued
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
----------------------
(Dollars in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,016 $ 4,615 $ 4,305
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary (3,212) (2,563) (2,652)
Investment securities (gains), net (23) (182) -
Decrease (increase) in other assets 114 (61) 423
(Decrease) increase in other liabilities 5 8 (491)
Net cash provided by operating activities 1,900 1,817 1,585
INVESTING ACTIVITIES
Proceeds from sales and maturities of investment securities - 510 -
Purchases of investment securities available for sale (672) - -
Net cash (used in) provided by investing activities (672) 510 -
FINANCING ACTIVITIES
Inter company loan 796 (933) -
Dividends paid (2,144) (1,945) (1,661)
Effect of treasury stock transactions 313 159 69
Net cash used in financing activities (1,035) (2,719) (1,592)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 193 (393) (7)
Cash and cash equivalents at beginning of year 67 460 467
Cash and cash equivalents at end of year $ 260 $ 67 $ 460
</TABLE>
<PAGE>
NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the unaudited quarterly results of operations is as follows:
<TABLE>
<CAPTION>
1998
----
(Dollars in thousands, except per share) December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Interest income $ 8,725 $ 8,472 $ 8,338 $ 8,240
Interest expense 3,640 3,588 3,482 3,424
Net interest income 5,085 4,884 4,856 4,816
Provision for loan losses 298 201 188 224
Investment securities gains (losses), net 85 5 - 3
Income before income taxes 1,855 1,727 1,837 1,695
Net income 1,308 1,252 1,276 1,179
Per share
Net income (Basic) $ 0.28 $ 0.28 $ 0.27 $ 0.26
Net income (Diluted) 0.28 0.26 0.27 0.26
Dividends declared 0.14 0.11 0.11 0.11
</TABLE>
<TABLE>
<CAPTION>
1997
----
(Dollars in thousands, except per share) December 31 September 30 June 30 March 31
----------- ------------ ------- --------
<S> <C> <C> <C> <C>
Interest income $ 8,150 $ 8,227 $ 8,072 $ 7,664
Interest expense 3,452 3,451 3,342 3,106
Net interest income 4,698 4,776 4,730 4,558
Provision for loan losses 189 290 446 210
Investment securities gains (losses), net - - (20) 5
Income before income taxes 1,623 1,734 1,523 1,625
Net income 1,172 1,214 1,129 1,100
Per share
Net income (Basic) $ 0.26 $ 0.26 $ 0.24 $ 0.24
Net Income (Diluted) 0.26 0.26 0.24 0.24
Dividends declared 0.12 0.11 0.10 0.10
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
First West Chester Corporation
We have audited the accompanying consolidated balance sheets of First
West Chester Corporation and Subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income and comprehensive income, changes
in stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
West Chester Corporation and Subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 22, 1999
SUBSIDIARIES OF THE CORPORATION
The First National Bank of West Chester
9 North High Street
P.O. Box 523
West Chester, PA 19381-0523
323 East Gay Street Corporation
323 East Gay Street
West Chester, PA 19381-0523
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 22, 1999 accompanying the
consolidated financial statements included in the 1998 Annual Report to
Shareholders which is incorporated by reference in the Annual Report of First
West Chester Corporation and subsidiaries on Form 10-K for the year ended
December31, 1998. We hereby consent to the incorporation by reference of said
reports in the Registration Statement of First West Chester Corporation on Forms
S-8 and S-3(File No. 33-09241, effective July 31, 1996, File No. 33-15733,
effective November 7, 1996, File No. 333-33175, effective August 8, 1997, File
No. 33-33411, effective August 12, 1997, File No. 333-69315, effective December
21, 1998).
Philadelphia, Pennsylvania
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
First West Chester Corpoartion's Financial Data Schedule
</LEGEND>
<CIK> 0000744126
<NAME> First West Chester Corporation
<MULTIPLIER> 1000
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 25,006
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,675
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 102,380
<INVESTMENTS-CARRYING> 7,406
<INVESTMENTS-MARKET> 7,606
<LOANS> 320,395
<ALLOWANCE> 5,877
<TOTAL-ASSETS> 470,693
<DEPOSITS> 418,398
<SHORT-TERM> 3,589
<LIABILITIES-OTHER> 8,983
<LONG-TERM> 0
0
0
<COMMON> 4,800
<OTHER-SE> 34,926
<TOTAL-LIABILITIES-AND-EQUITY> 470,693
<INTEREST-LOAN> 28,296
<INTEREST-INVEST> 5,021
<INTEREST-OTHER> 436
<INTEREST-TOTAL> 33,753
<INTEREST-DEPOSIT> 13,679
<INTEREST-EXPENSE> 14,135
<INTEREST-INCOME-NET> 19,618
<LOAN-LOSSES> 911
<SECURITIES-GAINS> 87
<EXPENSE-OTHER> 16,278
<INCOME-PRETAX> 7,116
<INCOME-PRE-EXTRAORDINARY> 7,116
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,016
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 4.82
<LOANS-NON> 1,316
<LOANS-PAST> 546
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,900
<CHARGE-OFFS> 1,179
<RECOVERIES> 245
<ALLOWANCE-CLOSE> 5,877
<ALLOWANCE-DOMESTIC> 5,877
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
