UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999, OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File No. 0-12870.
FIRST WEST CHESTER CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2288763
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
(Address of principal executive office) (Zip code)
(610) 692-1423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of Common Stock of the Registrant as of
November 1, 1999 was 4,589,526.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three- and Nine-Months Ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholder's Equity 5
Consolidated Statements of Cash Flows
Nine-Months Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-25
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 27
Item 2 - Changes in Securities 27
Item 3 - Defaults upon Senior Securities 27
Item 4 - Submission of Matters to a Vote of Security Holders 27
Item 5 - Other Information 27
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 28
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Dollars in thousands - except per share data)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,141 $ 25,006
Federal funds sold -- 5,675
--------- ---------
Total cash and cash equivalents 20,141 30,681
--------- ---------
Investment securities held-to-maturity (market value of $4,792 and $7,606 at
September 30, 1999 and December 31,
1998, respectively) 4,777 7,406
Investment securities available-for-sale at market value 113,959 102,380
Loans 334,084 320,395
Less allowance for loan losses (6,037) (5,877)
--------- ---------
Net loans 328,047 314,518
Premises and equipment, net 10,630 9,579
Other assets 6,685 6,129
--------- ---------
TOTAL ASSETS $ 484,239 $ 470,693
========= =========
LIABILITIES
Deposits
Non-interest bearing $ 72,860 $ 72,556
Interest bearing 355,412 345,842
--------- ---------
Total deposits 428,272 418,398
Securities sold under repurchase agreements 3,516 2,795
Federal Home Loan Bank advances and other borrowings 8,367 5,027
Other liabilities 5,718 4,750
--------- ---------
Total liabilities 445,873 430,970
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares; 4,800 4,800
Outstanding, 4,799,666 shares at September 30, 1999 and December 31,
1998.
Additional paid-in capital 602 542
Retained earnings 37,836 35,675
Accumulated other Comprehensive Income (Loss) (1,966) 292
Treasury stock, at cost: 250,009 shares at September 30, 1999 and
183,640 shares at December 31, 1998. (2,906) (1,586)
--------- ---------
Total stockholders' equity 38,366 39,723
--------- ---------
Total liabilities and stockholders' equity $ 484,239 $ 470,693
========= =========
Book Value Per Share $ 8.43 $ 8.61
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 6,979 $ 7,041 $20,423 $21,136
Investment securities 1,912 1,265 5,388 3,573
Federal funds sold 14 166 109 319
Deposits in banks 3 -- 3 --
------ ------ ------ ------
Total interest income 8,908 8,472 25,923 25,028
------ ------ ------ ------
INTEREST EXPENSE
Deposits 3,495 3,477 10,350 10,151
Securities sold under repurchase agreements 28 25 80 86
Federal Home Loan Bank advances and other borrowings 119 86 295 258
------ ------ ------ ------
Total interest expense 3,642 3,588 10,725 10,495
------ ------ ------ ------
Net interest income 5,266 4,884 15,198 14,533
Provision for loan losses 184 201 493 613
------ ------ ------ ------
Net interest income after provision
for possible loan losses 5,082 4,683 14,705 13,920
------ ------ ------ ------
NON-INTEREST INCOME
Financial Management Services 650 573 1,907 1,693
Service charges on deposit accounts 246 270 748 788
Investment securities gains, net -- -- 202 --
Other 316 334 946 946
------ ------ ------ ------
Total non-interest income 1,212 1,177 3,803 3,427
------ ------ ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,457 2,250 7,172 6,731
Net occupancy, equipment and data processing 915 838 2,846 2,448
FDIC deposit insurance 12 31 35 34
Bank shares tax 117 (3) 334 172
Other 848 1,017 2,609 2,702
------ ------ ------ ------
Total non-interest expense 4,349 4,133 12,996 12,087
------ ------ ------ ------
Income before income taxes and cumulative effect
of change in accounting for income taxes 1,945 1,727 5,512 5,260
INCOME TAXES 594 475 1,681 1,552
------ ------ ------ ------
NET INCOME $ 1,351 $ 1,252 $ 3,831 $ 3,708
====== ====== ====== ======
PER SHARE DATA (*)
Basic earnings per common share $ 0.300 $ 0.280 $ 0.840 $ 0.810
====== ====== ====== ======
Diluted earnings per common share $ 0.290 $ 0.260 $ 0.830 $ 0.790
====== ====== ====== ======
Dividends declared $ 0.125 $ 0.115 $ 0.365 $ 0.330
====== ====== ====== ======
Basic weighted average shares outstanding 4,563,431 4,619,450 4,580,140 4,609,135
========= ========= ========= =========
Diluted weighted average shares outstanding 4,586,577 4,675,068 4,625,196 4,673,635
========= ========= ========= =========
(*) Please refer to the footnote entitled "Earnings Per Share" for information on this calculation
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
------- ------
<S> <C> <C>
Balance at January 1, $39,723 $36,213
Net income to date 3,831 3,708
Cash dividends declared (1,671) (1,498)
Net unrealized gain (loss) on securities available-for-sale (2,257) 1,051
Treasury stock transactions 60 225
Paid in capital from treasury stock transactions (1,320) 94
------- --------
Balance at September 30, $38,366 $39,793
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
(Dollars in thousands) 1999 1998
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,831 $ 3,708
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,094 889
Provision for loan losses 493 613
Amortization of investment security premiums
and accretion of discounts 287 150
Amortization of deferred fees on loans 53 47
Investment securities gains, net (202) (2)
(Increase) decrease in other assets (556) 1,210
Increase in other liabilities 968 2,194
-------- --------
Net cash provided by operating activities 5,968 8,809
-------- --------
INVESTING ACTIVITIES
(Increase) decrease in loans (14,074) 560
Proceeds from sales of investment securities available-for-sale 13,338 12,640
Proceeds from maturities of investment securities available-for-sale 22,692 19,794
Proceeds from maturities of investment securities held-to-maturity 2,874 3,859
Purchases of investment securities available-for-sale (51,674) (48,465)
Purchase of premises and equipment, net (668) (3,609)
-------- --------
Net cash used in investing activities (27,512) (15,221)
-------- --------
FINANCING ACTIVITIES
Increase (decrease) in securities sold under repurchase agreements 721 (2,525)
Increase in deposits 9,874 15,262
(Decrease) increase in Federal Home Loan Bank advances and other borrowings 3,340 (2,559)
Cash dividends (1,671) (1,498)
Treasury stock transactions (1,260) 318
-------- --------
Net cash provided by financing activities 11,004 8,998
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (10,540) 2,586
Cash and cash equivalents at beginning of period 30,681 26,448
-------- --------
Cash and cash equivalents at end of period $ 20,141 $ 29,034
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of Management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of
operations for the interim period presented have been included. For
further information, refer to the consolidated financial statements
and footnotes thereto included in First West Chester Corporation and
Subsidiaries' (the "Corporation") Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
2. The results of operations for the three and nine-month period ended
September 30, 1999 are not necessarily indicative of the results to
be expected for the full year.
3. Earnings per share is based on the weighted average number of shares
of common stock outstanding during the period. Diluted net income per
share includes the effect of options granted.
4. 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
year-end comprehensive income be reported in a financial statement
that is displayed with the same prominence as others financial
statements. Other comprehensive income/(loss) net of taxes for the
three- and nine-month periods ended September 30, 1999 was $(2,072)
thousand and $(2,257) thousand, compared to $874 thousand and $1,051
thousand in the same period last year.
5. 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.
6. The American Institute of Certified Public Accountants ("AICPA")
issued Statement of Option ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP
was issued to provide authoritative guidance on the subject of
accounting for the costs associated with the purchase or development
of computer software. The statement is effective for fiscal years
beginning after December 15, 1998. This statement is not expected to
have a material impact on the Corporation's financial statements.
7. In 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137 which defined the adoption of FASB statement 133. The
statement is effective for quarters of fiscal years beginning after
June 15, 2000. The statement is not expected to have a material
impact on the Corporation's financial statements.
8. Certain prior year amounts have been reclassified to conform to the
current year presentations.
7
<PAGE>
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) competive pressure on net yields; and (k) the impact of a
change in demographics on 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 SUMMARY AND HIGHLIGHTS
Net income for the three-month period ended September 30, 1999 was
$1.35 million, an increase of 7.9% from $1.25 million for the same period in
1998. Net income for the nine-month period ended September 30, 1999 was $3.83
million, an increase of 3.3% from $3.71 million for the same period in 1998. The
increases in net income are the direct result of increases in net interest
income, gains on the sale of certain investment securities, and increases in
non-interest income partially offset by increases in operating expenses. In
addition, net income benefited from a reduction in the provision for loan loss
expense in both the three-month and the nine-month periods. Cash dividends
declared during the third quarter of 1999 increased to $0.125 per share, a 8.7%
increase compared to the third quarter of 1998. Over the past ten years, the
Corporation's practice has been to pay a dividend of at least 35.0% of net
income.
The "Consolidated Average Balance Sheet" on pages 14 and 15 may assist the
reader in the following discussion.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS
Return on Average Assets 1.11% 1.13% 1.06% 1.14%
Return on Average Equity 13.90% 13.06% 13.07% 13.07%
Earnings Retained 57.81% 57.59% 56.38% 59.60%
Dividend Payout Ratio 42.19% 42.41% 43.62% 40.40%
</TABLE>
NET INTEREST INCOME
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income for the three- and nine-month periods ended September 30,
1999, on a tax equivalent basis, was $5.3 million and $15.2 million, compared to
$4.9 million and $14.5 million for the same periods in 1998, respectively. The
increase in net interest income for the three- and nine-month periods can
primarily be attributed to the growth of interest earning assets, partially
offset by a decrease in the average net yield on interest-earning assets.
Average interest earning assets increased approximately $36.7 million or 8.9% to
$450.8 million during the third quarter of 1999 from $414.0 million in the same
period last year. The increase in average interest earning assets was primarily
the result of increased investment activity and, to a lesser extent, an increase
in average loans outstanding. Net yields on interest-earning assets, on a tax
equivalent basis, were 4.76% and 4.56% for the three- and nine-month periods
ended September 30, 1999 compared to 4.77% and 4.82% for the same periods in
1998, respectively.
The decrease in the average net yield on interest-earning assets for
the three-and nine-month periods ended September 30, 1999 was primarily the
result of a decrease in the average yield earned on interest earning assets,
partially offset by a decrease in the average yield paid on interest bearing
liabilities. The decrease in the average net yield earned on interest earning
assets can be attributed to lower average interest rates on loans. However,
while loan demand was light during the first half of the year, the Corporation
experienced some modest growth during the third quarter of 1999. The Corporation
anticipates continued pressure on the net yield on interest-earning assets as
competition for new loan business remains strong and the cost of incremental
deposit growth and other funding sources becomes more expensive.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
Three Months Nine Months
Yield On: Ended September 30, Ended September 30,
--------- ------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Earning Assets 7.99% 8.24% 7.76% 8.27%
Interest Bearing Liabilities 3.97% 4.33% 3.98% 4.29%
---- ---- ---- ----
Net Interest Spread 4.02% 3.91% 3.78% 3.98%
Contribution of Interest Free Funds 0.74% 0.86% 0.78% 0.84%
---- ---- ---- ----
Net Yield on Interest Earning Assets 4.76% 4.77% 4.56% 4.82%
==== ==== ==== ====
</TABLE>
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold for the three- and nine-month
periods ended September 30, 1999, decreased 91.6% and 65.8% to $14 thousand and
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$109 thousand, respectively, when compared to the same periods in 1998. The
decrease in interest income on federal funds is the direct result of reduced
balances and reduced interest rates as shown on the Average Balance Sheets an
page 14 and 15.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased 50.0% and 48.3% for the three and nine-month periods ended September
30, 1999 to $1.9 million and $5.4 million, respectively, when compared to the
same periods in 1998. The increases for the three- and nine-month periods are
primarily due to increases in average investment security balances of 42.2% and
48.7%. For the three- and nine-month periods ended September 30, 1999, a 38 and
3 basis point increase in the yield earned also contributed to the increase in
income. Increases in average investment security balances are the result of the
combined effect of modest loan growth offset by proportionally larger increases
in deposits over the last twelve months.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio decreased 0.3% and 3.5% to $7.1 million and $20.6
million for the three- and nine-month periods ended September 30, 1999, compared
to the same periods in 1998, respectively. The decreases in interest income for
these periods are the direct result of 34 and 49, respectively, basis point
decreases in the rates earned on the loan portfolio. These rate reductions can
be attributed to increased competition for new and existing loan relationships
and the generally lower interest rate environment through the third quarter of
1999 as compared to the corresponding periods in 1998. It is anticipated that
pricing pressure will continue to reduce overall loan yields and net interest
margins for future time periods. However, increases in the prime interest rate
is expected to have a positive impact on interest income. Fee reductions will
affect non-interest income.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts increased 0.5% and 2.0% for the
three- and nine-month periods ended September 30, 1999 to $3.6 million and $10.7
million, compared to the same periods in 1998. The increases for the three- and
nine-month periods ended September 30, 1999 are the result of increases in
average interest bearing deposits of $31.9 million and $32.3 million, partially
offset by a 36 and 32 basis point decrease in the rates paid on interest-bearing
deposits.
Competition for deposits from non-banking institutions such as credit
union and mutual fund companies continues to grow. Despite the competition, the
Corporation's deposit base continues to grow and growth is expected to continue
for future time periods. The Corporation believes it has benefited from customer
fallout during the latest wave of merger activity of regional institutions
during the early part of 1999. Additionally, growth can be attributed to the
opening of the new branch sites in the Frazer area and our new Matlack Training
Center branch, which opened on August 30, 1998 and, September 7, 1999
respectively. Other future branch sites are expected to expand the Bank's
deposit base further. The Corporation's effective rate on interest-bearing
deposits decreased from 4.29% to 3.93% for the three month period ended
September 30, 1999, and from 4.26% to 3.94% for the nine month periods ended
September 30, 1999, when compared to the three- and nine-month periods ended
September 30, 1998.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST EXPENSE ON FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Interest expense on borrowings increased 38.4% to $119 thousand and
14.3% to $295 thousand for the three- and nine-month periods ended September 30,
1999, respectively, as compared to $86 thousand and $256 thousand for the same
period in 1998. The need for borrowings has increased in the third quarter of
1999 as a result of a modest increase in loan demand since the second quarter.
As a result, average FHLB borrowings increased in the third quarter of 1999 from
5,093 thousand to $8,477 thousand when compared to the same period in 1998.
Borrowings at any point in time may consist of one or more of the following:
Federal Home Loan Bank ("FHLB") Term Advances, FHLB Open Repo and overnight or
term advances.
PROVISION FOR LOAN LOSSES
During the three- and nine-month periods ended September 30, 1999, the
Corporation recorded a $184 thousand and a $493 thousand provision for loan
losses, compared to $201 thousand and $613 thousand for the same periods in
1998. The decrease in the provision expense can be attributed to a decreased
rate in loan growth for the three- and nine-month periods ended September 30,
1999, compared to the same periods in 1998 and the continued decrease in total
non-performing assets. The allowance for loan losses as a percentage of total
loans was 1.81% at September 30, 1999, 1.83% at December 31, 1998 and 1.82% at
September 30, 1998. See the section titled "Allowance For Loan Losses" for
additional discussion.
NON-INTEREST INCOME
Total non-interest income increased 3.0% and 11.0% to $1.2 million and
$3.8 million for the three- and nine-month periods ended September 30, 1999,
compared to the same periods in 1998. The primary component of non-interest
income is Financial Management Services revenue, which increased 13.4% and 12.6%
to $650 thousand and $1.9 million for the three- and nine-month periods ended
September 30, 1999, respectively, compared to the same periods in 1998. The
Corporation took securities gains of approximately $202 thousand for the nine
month-period ended September 30, 1999. These gains relate to the sale of certain
specialty equity securities that were sold in the second quarter of 1999. The
market value of Financial Management Services' assets under management increased
$33.0 million to $403.0 million at September 30, 1999 from $370.0 million at
September 30, 1998. The increase in Financial Management Services assets under
management and revenues is primarily the result of market appreciation and new
account relationships acquired through stronger marketing efforts.
NON-INTEREST EXPENSE
Total non-interest expense for the three- and nine-month periods ended
September 30, 1999 increased 5.2% and 7.5% to $4.4 million and $13.0 million
compared to 4.1 million and 12.1 million for the same periods in 1998. The
various components of non-interest expense changes are discussed below.
Salaries and employee benefits increased 9.2% and 6.6% for the three-
and nine-month periods ended September 30, 1999 to $2.5 million and $7.2 million
compared to the same periods in 1998, respectively. Employee raises, promotions
and proportional increases in employee benefits are primarily responsible for
the increases. The hiring of additional staff also contributed to the increases.
Average full time equivalent staff increased from 203 for the period ended
September 30, 1998 to 215 for the period ended September 30, 1999.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net occupancy, equipment, and data processing expense increased 9.2%
and 16.3% for the three- and nine-month period ended September 30, 1999 to $915
thousand and $2.9 million compared to the same periods in 1998, respectively.
The increases are the direct result of increased computer and related equipment
costs associated with the completion of the conversion of the bank's core
computer System, the phase out of certain main-frame related costs, a payroll
conversion and direct Y2K costs. Increases in the Corporation's facilities, such
as our newly open branches in the Frazer area and on Matlack Street, also
contributed to the increase. See "Building Improvements and Technology Projects"
and "Year 2000 Issues" sections for more detail.
Other non-interest expense decreased 16.6% and 3.4% to $848 thousand
and $2.6 million for the three- and nine-month periods ended September 30, 1999
compared to the same periods in 1998. This decrease can be attributed to
decreases in the Corporation's annual marketing expenses of $47 thousand, as
well as other non-interest expense.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
--------------------------------- ---------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 1,319 $ 14 4.25% $ 11,908 $ 167 5.61%
Investment securities
Taxable 117,274 1,885 6.43% 82,500 1,245 6.04%
Tax-exempt (1) 2,154 39 7.23% 1,502 29 7.60%
------- ----- ------- ------
Total investment securities 119,428 1,924 6.44% 84,002 1,274 6.06%
------- ----- ------- ------
Loans (2)
Taxable 324,031 6,925 8.55% 311,710 6,932 8.90%
Tax-exempt (1) 5,980 144 9.62% 6,423 158 9.86%
------- ----- ------- ------
Total loans 330,011 7,069 8.57% 318,133 7,090 8.91%
------- ----- ------- ------
Total interest earning assets 450,758 9,007 7.99% 414,043 8,531 8.24%
Non-interest earning assets
Allowance for possible loan losses (5,999) (5,881)
Cash and due from banks 22,466 21,056
Other assets 17,864 13,907
------- -------
Total assets $485,089 $443,125
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $210,273 $1,556 2.96% $186,108 $ 1,642 3.53%
Certificates of deposits and other time 145,767 1,939 5.32% 138,027 1,835 5.32%
------- ----- ------- ------
Total interest bearing deposits 356,040 3,495 3.93% 324,135 3,477 4.29%
Securities sold under repurchase agreements 2,645 28 4.08% 2,334 26 4.46%
Federal Home Loan Bank advances and
other borrowings 8,477 119 5.62% 5,093 86 6.75%
------- ----- ------- ------
Total interest bearing liabilities 367,162 3,642 3.97% 331,562 3,589 4.33%
------- ----- ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 72,910 65,047
Other liabilities 6,114 8,168
------- -------
Total liabilities 446,186 404,777
Stockholders' equity 38,903 38,348
------- -------
Total liabilities and stockholders' equity $485,089 $443,125
======= =======
Net interest income $5,365 $ 4,942
===== ======
Net yield on interest earning assets 4.76% 4.77%
==== ====
<FN>
(1) The indicated income and annual rate are presented on a taxable equivalent
basis using the Federal marginal rate of 34% adjusted for the TEFRA 20%
interest expense disallowance for 1999 and 1998.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
--------------------------------- -------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 3,089 $ 108 4.70% $ 7,680 $ 319 5.54%
Investment securities
Taxable 114,278 5,255 6.13% 76,805 3,513 6.10%
Tax-exempt (1) 2,136 120 7.47% 1,490 86 7.69%
------- ------ ------- ------
Total investment securities 116,414 5,375 6.16% 78,295 3,599 6.13%
------- ------ ------- ------
Loans (2)
Taxable 322,079 20,128 8.33% 314,084 20,790 8.83%
Tax-exempt (1) 5,937 429 9.63% 6,619 502 10.12%
------- ------ ------- ------
Total loans 328,016 20,557 8.36% 320,703 21,292 8.85%
------- ------ ------- ------
Total Interest Earning Assets 447,519 26,040 7.76% 406,678 25,210 8.27%
Non-interest earning assets
Allowance for possible loan losses (5,878) (5,924)
Cash and due from banks 21,599 20,113
Other assets 16,581 13,747
------- -------
Total assets $479,821 $434,614
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $202,297 $ 4,426 2.92% $182,773 $ 4,306 3.14%
Certificates of deposits and other time 147,748 5,924 5.35% 134,989 5,845 5.77%
------- ------ ------- ------
Total interest bearing deposits 350,045 10,350 3.94% 317,762 10,151 4.26%
Securities sold under repurchase agreements 2,698 80 3.95% 3,069 86 3.74%
Federal Home Loan Bank advances and
other borrowings 6,564 295 5.99% 5,343 258 6.44%
------- ------ ------- ------
Total interest bearing liabilities 359,307 10,725 3.98% 326,174 10,495 4.29%
------- ------ ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 71,496 63,502
Other liabilities 5,990 7,124
------- -------
Total liabilities 436,793 396,800
Stockholders' equity 43,028 37,814
------- -------
Total liabilities and stockholders' equity $479,821 $434,614
======= =======
Net interest income $15,315 $14,715
====== ======
Net yield on interest earning assets 4.56% 4.82%
==== ====
<FN>
(1) The indicated income and annual rate are presented on a taxable equivalent
basis using the Federal marginal rate of 34% adjustedfor the TEFRA 20%
interest expense disallowance for 1999 and 1998.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
<PAGE>
INCOME TAXES
Income tax expense for the three- and nine-month periods ended
September 30, 1999 was $594 thousand and $1.6 million, respectively, compared to
$475 thousand and $1.7 million for the same periods last year. This represents
effective tax rates of 30.5% in each of these periods.
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 smaller denomination certificates of deposit accounts. The
Corporation considers funds from such sources to comprise its "core" deposit
base because of the historical stability of such sources of funds. Additional
liquidity comes from the Corporation's non-interest bearing demand deposit
accounts. Other deposit sources include a three-tiered savings product and
certificates of deposit in excess of $100,000. Details of core deposits,
non-interest bearing demand deposit accounts and other deposit sources are
highlighted in the following table:
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Annualized)
(Dollars in thousands) September 30, 1999 December 31, 1998 Average Balance
----------------------- ------------------------ ------------------------
Average Effective Average Effective Dollar Percentage
Balance Yield Balance Yield Variance Variance
------- ----- ------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $ 57,994 1.71% $ 55,203 2.04% $ 2,672 5.06%
Money Market 26,994 2.89 27,596 3.09 (387) (1.36)
Statement Savings 49,009 2.99 47,046 3.28 (1,658) (3.43)
Other Savings 2,379 1.96 2,382 2.73 (476) (15.89)
CD's Less than $100,000 119,190 5.38 114,372 5.81 4,838 4.48
------- -------- ------
Total Core Deposits 255,556 3.79 246,599 4.15 4,989 2.07
Non-Interest bearing
Demand Deposit Accounts 71,496 -- 64,705 -- 5,843 10.13
------- -------- ------
Total Core and Non-Interest
Bearing Deposits 327,062 2.97 311,304 3.29 10,832 3.63
------- -------- ------
Tiered Savings 65,921 3.95 51,854 4.09 8,870 21.54
CD's Greater than $100,000 28,558 5.03 23,453 5.63 4,714 27.07
------- -------- ------
Total Deposits $421,541 3.26 $ 386,611 3.54 $24,416 6.84
======= ======== ======
</TABLE>
15
<PAGE>
The Bank, as a member of the FHLB, maintains a credit facility secured
by the Bank's mortgage-related assets. Additionally, the FHLB offers several
other credit related products which are available to the Bank. FHLB borrowings
provide additional funds to meet the Bank's liquidity needs. As of September 30,
1999 the amount outstanding under the Bank's line of credit with the FHLB was
$1.7 million as compared to $0 during the same period in 1998. The Bank
currently has a maximum borrowing capacity with the FHLB of approximately $117.0
million. During the three- and nine-month period of 1999, average FHLB advances
were approximately $8.5 and $6.6 million respectively and consisted of term
advances representing a combination of maturities. The average interest rate on
these advances was approximately 5.6% and 6.0% respectively. FHLB advances are
collateralized by a pledge on the Bank's entire portfolio of unencumbered
investment securities, certain mortgage loans and a lien on the Bank's FHLB
stock.
The goal of interest rate sensitivity management is to avoid
fluctuating net interest margins, and to enhance consistent growth of net
interest income through periods of changing interest rates. Such sensitivity is
measured as the difference in the volume of assets and liabilities in the
existing portfolio that are subject to repricing in a future time period. The
Corporation's net interest rate sensitivity gap within one year is a negative
$210.1 million or 43.3% of total assets at September 30, 1999, compared with
negative $109.2 million or 24.4% at September 30, 1998, respectively. This
negative position indicates that more liabilities than assets will be repricing
with in the next twelve months which in a rising interest rate environment may
result in an increased interest expense that would not be offset be repricing
assets. The data in this analysis is static and represents the position at a
specific point in time and may not be indicative of actual results. The
Corporation's gap position is one factor used to evaluate interest rate risk and
the stability of net interest margins. Other factors include computer
simulations of what might happen to net interest income under various interest
rate forecasts and scenarios. Management monitors interest rate risk as a
regular part of bank operations with the intention of maintaining a stable net
interest margin.
16
<PAGE>
INTEREST SENSITIVITY ANALYSIS
AS OF SEPTEMBER 30, 1999
<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
Investment securities $ 27,246 $ 58,577 $ 32,913 $ -- $ 118,736
Loans and leases 87,137 185,421 61,524 (6,037) 328,045
Cash and cash equivalents -- -- -- 20,141 20,141
Premises & equipment -- -- -- 10,630 10,630
Other assets 3,551 -- -- 3,135 6,686
----------- ---------- ---------- ---------- ----------
Total assets $ 117,934 $ 243,998 $ 94,437 $ 27,869 $ 484,238
=========== ========== ========== ========== ==========
LIABILITIES AND CAPITAL
Non-interest bearing deposit $ -- $ -- $ -- $ 72,860 $ 72,860
Interest bearing deposits 322,418 32,994 -- -- 355,412
Borrowed funds 5,166 -- -- -- 5,166
FHLB Term Advance 408 1,644 4,664 -- 6,716
Other liabilities -- -- 1,651 4,067 5,719
Capital -- -- -- 38,366 38,366
--------- --------- --------- --------- --------
Total liabilities & capital $ 327,992 $ 34,638 $ 6,315 $ 115,293 $ 484,238
=========== ========== ========== ========== ==========
Net interest rate
sensitivity gap $ (210,058) $ 209,360 $ 88,122 $ (87,424) $ --
========== ========== ========== ========= ==========
Cumulative interest rate
sensitivity gap $ (210,058) $ (698) $ 87,424 $ -- $ --
========== ========= ========== ========== ==========
Cumulative interest rate
sensitivity gap divided
by total assets (43.4%) (0.1%) 18.1%
========== ======= =========
</TABLE>
ALLOWANCE FOR 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 and is established based on management's evaluations of
the collectibility of loans in the portfolio. 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>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------------- ------------------------
(Dollars in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 5,922 $ 5,912 $ 5,877 $ 5,900
------ ------ ------ ------
Provision charged to operating expense 184 201 493 613
------ ------ ------ ------
Recoveries of loans previously charged-off 11 9 86 26
Loans charged-off (80) (344) (419) (751)
------ ------ ------ ------
Net loans charged-off (69) (335) (333) (725)
------ ------ ------ ------
Balance at end of period $ 6,037 $ 5,788 $ 6,037 $ 5,788
====== ====== ====== ======
Period-end loans outstanding $334,084 $317,568 $334,084 $317,568
Average loans outstanding $330,011 $318,133 $328,016 $320,703
Allowance for possible loan losses as a
percentage of period-end loans outstanding 1.81% 1.82% 1.81% 1.82%
Ratio of net charge-offs to average loans
outstanding (annualized) 0.02% 0.11% 0.10% 0.23%
</TABLE>
NON-PERFORMING LOANS AND ASSETS
Non-performing loans include loans on non-accrual status and loans past
due 90 days or more and still accruing. The Corporation's policy is to write
down all non-performing loans to net realizable value based on updated
appraisals. Non-performing loans are generally collateralized by real estate and
are in the process of collection. The following chart represents detailed
information regarding non-performing loans:
18
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
--------------------- ------------
(Dollars in thousands) 1999 1998 1998
----- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 407 $ 614 $ 546
Non-accrual loans 1,402 2,183 1,316
----- ----- -----
Total non-performing loans 1,809 2,797 1,862
Other real estate owned 192 192 192
----- ----- -----
Total non-performing assets $2,001 $2,989 $2,054
===== ===== =====
Non-performing loans as a percentage
of total loans 0.54% 0.88% 0.58%
Allowance for possible loan losses as a
percentage of non-performing loans 333.72% 206.94% 315.60%
Non-performing assets as a percentage
of total loans and other real estate owned 0.60% 0.94% 0.60%
Allowance for possible loan losses as a
percentage of non-performing assets 301.70% 193.64% 286.10%
</TABLE>
The allowance for loan losses as a percentage of non-performing loans
ratio indicates that the allowance for loan losses is sufficient to cover the
principal of all non-performing loans at September 30, 1999. Other Real Estate
Owned ("OREO") represents residential and commercial real estate owned by the
Bank following default by borrowers by and what has been written down to
realizable value (net of estimated disposal costs) based on professional
appraisals. In October 1999, the Corporation liquidated from OREO a commercial
property for a net amount of $192 thousand resulting in a recovery of certain
legal and tax expenses and a gain of approximately $12.6 thousand. In October,
the Bank took another property into OREO resulting in a balance of $470 thousand
as of the date of this report.
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. The portfolio totaled approximately $14 million
and $24 million as of September 30, 1999 and December 31, 1998, respectively.
Approximately 4.19% and 9.92% was past due 30 days or more as of September 30,
1999 and December 31, 1998.
LOAN IMPAIRMENT
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.
19
<PAGE>
The balance of impaired loans was $984 thousand, $919 thousand, and
$1.7 million at September 30, 1999, December 31, 1998, and September 30, 1998
respectively. The associated allowance for impaired loans was $365 thousand,
$286 thousand $338 thousand at September 30, 1999, December 31, 1998, and
September 30, 1998, respectively.
For the three-month and nine-month period ended September 30, 1999,
activity in the allowance for impaired loan losses include a provision of
$25,000 and $85,000, respectively, write offs of $4,000 and $7,000,
respectively, and recoveries of $0 for both time periods. Contractual interest
amounted to $23,000 for the three-months ended September 30, 1999 and $71,000
for the nine-months ended September 30, 1999. While no interest income of $0 was
recorded for both periods' cash collected on loans for the three-month and
nine-month period ended September 30, 1999 was $9,000 and $85,000, respectively,
all of which was applied to principal.
For the three-month and nine-month period ended September 30, 1998,
activity in the allowance for impaired loan losses include a provision of
$50,000 and $125,000, respectively, write offs of $9,000 and $93,000,
respectively, and recoveries of $0 and $0, respectively. Interest income of $20
thousand was recorded for both periods while contractual interest amounted to
$31,000 for the three-months ended September 30, 1998 and $59,000 for the
nine-months ended September 30, 1998. Cash collected on loans for the
three-month and nine-month period ended September 30, 1998 was $102,000 thousand
and $123,000 of which $81 thousand and $102 thousand was credited to the
principal balances outstanding.
BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS
During 1998, the Corporation opened a 2,750 square foot branch office
in the Frazer area on August 3, 1998. In September of 1998, the Corporation
purchased 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 new building at 887 Matlack Street was put in service in the second
quarter of 1999. It houses a branch teller training center that is open to the
public as well as the new location for the administrative services, audit,
compliance and facilities departments. During the third quarter of 1999, the
Corporation purchased additional land in the Lionville area to accommodate
future expansion.
In November 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.
Technology projects in process at September 30, 1999 include an installation of
a bankwide e-mail system.
On October 1, 1999, the First National Bank launched a full line of
retail Internet banking services, "Net Teller" and "BillPay". These new products
allow our retail customers the convenience to access their accounts and pay
bills on-line twenty-four hours a day from home. A commercial version of this
product is expected in early 2000.
The First National Bank plans to open limited access branch banking
facilities in four local retirement communities in December of 1999. The
locations include Granite Farms Estates, Lima Estates, and Kendal and Crosslands
Communities. These branch locations will serve the residents and employees of
their communities and bring the total number of branches in First National's
network to twelve.
20
<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 completed
all five phases of the plan for all of its mission-critical systems by October
15, 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 conducted an independent test on the Silverlake system and related
hardware during the week of March 7, 1999. The Corporation has documented and
evaluated the results of that test and is satisfied with the results.
The Corporation's check processing and imaging systems, operate on a
combination of NCR, Unisys, Novell and Microsoft hardware and software. Parts of
this system required certain upgrades. These upgrades were installed and tested
prior to October 15, 1999. The Corporation is satisfied with the results of
these tests. The Corporation has completed Y2K testing on all PC hardware and
software. Any machines failing these tests are being replaced or repaired. The
PC hardware and software repair and replacement process will be complete by
November 30, 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
is relying on testing conducted by STS and is also relying on Proxy Tests
conducted by certain STS customers. Testing and related documentation was
completed by March 31, 1999.
The Costs to Address the Corporation's Year 2000 Issues
- -------------------------------------------------------
The Corporation incurred direct Y2K project costs of $121 thousand
through September 30, 1999. The Corporation has incurred total direct and
indirect Y2K project costs of $297 thousand through September 30, 1999. The
Corporation anticipates that its total Y2K project cost will not exceed $350
21
<PAGE>
thousand. 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.
Risk Assessment
- ---------------
In assessing the Corporation's Y2K exposure the Corporation is
identifying those suppliers and customers whose 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. The Corporation completed its review of the Y2K
capabilities of its significant vendors in the second quarter of 1999. The
Corporation is continuing its evaluation of each loan customer's response and is
formulating a Y2K risk assessment for the loan portfolio as a whole. This
process is expected to continue through November 30, 1999.
Cash Contingency and Customer Awareness Programs
- ------------------------------------------------
The Corporation has a cash contingency plan to meet anticipated
year-end customer needs. The Corporation is also participating in several
customer / community awareness seminars. These seminars are designed to educate
our customers and the community about Y2K risk and the steps the Corporation is
taking to prepare itself. The Corporation has an ongoing employee awareness
program with similar objectives.
As part of the Corporation's cash contingency plan the Bank has secured
several sources of funds in the event they are needed in the fourth quarter of
1999 or the first quarter of 2000. Sources include: Unsecured credit lines at
our correspondent banks, a guaranteed line of credit from the Federal Home Loan
Bank and availability under the "Special Y2K Liquidity Facility" provided by the
Federal Reserve.
The Corporation's Contingency Plan
- ----------------------------------
The Corporation has developed several back-up system contingency plans,
which are designed to render the Corporation operational for a period of one to
thirty days should a Y2K problem surface. These contingency plans utilize
secondary computer systems and / or 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;
5. A check processing contingency plan involving the use of a used reader-
sorter and JHA's proof of deposit program has been developed, fine tuned
and tested.
22
<PAGE>
The Corporation is in the process of validating and testing its Y2K
Contingency plan and anticipates completion of this task by November 30, 1999.
At this time the Corporation cannot estimate the cost, if any, that might be
required to implement the contingency Y2K preparedness 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
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.
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by
the Federal Reserve Board ("FRB") for bank holding companies. The Corporation is
also subject to similar capital requirements adopted by the OCC. Under these
requirements, the regulatory agencies have set minimum thresholds for Tier I
Capital, Total Capital, and Leverage ratios. At September 30, 1999, both the
Corporation's and the Bank's capital exceeded all minimum regulatory
requirements, and were considered "well capitalized" as defined in the
regulations issued pursuant to the FDIC Improvement Act of 1991. The
Corporation's Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.
23
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
RISK-BASED ------------------------ ------------ "Well Capitalized"
CAPITAL RATIOS 1999 1998 1998 Requirements
- -------------- ---- ---- ---- ------------------
<S> <C> <C> <C> <C>
Corporation
- -----------
Leverage Ratio 8.31% 8.75% 8.59% 5.00%
Tier I Capital Ratio 11.21% 11.71% 11.67% 6.00%
Total Risk-Based Capital Ratio 12.47% 12.96% 12.95% 10.00%
Bank
Leverage Ratio 8.12% 8.56% 8.36% 5.00%
Tier I Capital Ratio 10.94% 11.46% 11.35% 6.00%
Total Risk-Based Capital Ratio 12.19% 12.71% 12.62% 10.00%
</TABLE>
The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current recommendations by the regulatory authorities that,
if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
rate for the Corporation was a negative 7.49% and a positive 13.18% for the nine
months ended September 30, 1999 and 1998, respectively. The growth rate is
computed by annualizing the change in equity during the last period and dividing
it by total stockholders equity at September 30, 1999 and 1998, respectively.
24
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's assessment of
its sensitivity to market risk since its presentation in the 1998 Annual Report
of the Corporation, filed as an exhibit to its Form 10-K for the fiscal year
ended December 31, 1998, with the SEC via EDGAR. Please refer to the
"Management's Discussion and Analysis" section on pages 27-28 of the
Corporation's 1998 Annual Report for this assessment.
25
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various actions and proceedings are presently pending to which
the Corporation is a party. These actions and proceedings
arise out of routine operations and, in Management's opinion,
will not, either individually or in the aggregate, have a
material adverse effect on the consolidated financial position
of the Corporation and its subsidiaries.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following is a list of exhibits incorporated by
reference into this report:
3(i). Articles of Incorporation. Copy of the Corporation's Articles of
Incorporation, as amended, is incorporated herein by reference to Exhibit 3(i)
to the Corporation's Annual Report on Form 10-K for the year ended December 31,
1998.
3(ii). Bylaws of the Corporation, as amended. Copy of the Corporation's
Bylaws, as amended, is incorporated herein by reference to Exhibit 3(ii) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1998.
27. Financial Data Schedule.
(b) Reports on Form 8-K
A Form 8-K was filed on February 17, 1999 with the SEC via
EDGAR pertaining to a press release on 1998 earnings.
A Form 8-K was filed on July 14, 1999 with the SEC via EDGAR
pertaining to a press release on second quarter earnings.
A Form 8-K was filed on October 18, 1999 with the SEC via
EDGAR pertaining to a press release on third quarter earnings.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized as amended.
FIRST WEST CHESTER CORPORATION
Charles E. Swope
/s/ Charles E. Swope
--------------------
President
DATE: November 15, 1999
J. Duncan Smith
/s/ J. Duncan Smith
-------------------
Treasurer
(Principal Accounting
and Financial Officer)
27
<PAGE>
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