FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 offi (Zip code)
(610) 692-1423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of Common Stock of the Registrant as of May 1,
1999 was 4,581,182.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
Part I. FINANCIAL INFORMATION
<S> <C>
Item 1 - Financial Statements
Consolidated Statements of Condition
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three-Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Stockholder's Equity 5
Consolidated Statements of Cash Flows
Three-Months Ended March 31, 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 9-24
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 25
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 26
Item 2 - Changes in Securities 26
20
Item 3 - Defaults upon Senior Securities 26
Item 4 - Submission of Matters to a Vote of Security Holders 26-27
Item 5 - Other Information 27
Item 6 - Exhibits and Reports on Form 8-K 28
Signatures 28
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands) March 31, December 31,
1999 1998
---------- ----------
ASSETS
Cash and due from banks $ 22,110 $ 25,006
Federal funds sold 8,000 5,675
---------- ----------
Total cash and cash equivalents 30,110 30,681
--------- ---------
Investment securities held-to-maturity (market value of $6,130 and
$7,606 at March 31, 1999 and December 31, 1998, respectively) 5,896 7,406
Investment securities available-for-sale, at market value 110,120 102,380
Loans 320,864 320,395
Less: Allowance for possible loan losses (5,937) (5,877)
---------- ----------
Net loans 314,927 314,518
Premises and equipment 9,370 9,579
Other assets 6,422 6,129
---------- ----------
Total assets $ 476,845 $ 470,693
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 72,161 $ 72,556
Interest-bearing 349,773 345,842
-------- --------
Total deposits 421,934 418,398
Securities sold under repurchase agreements 4,337 2,795
Federal Home Loan Bank Advances 4,988 5,027
Other liabilities 6,209 4,750
-------- --------
Total liabilities 437,468 430,970
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
outstanding, 4,799,666 at March 31, 1999 and December 31, 1998. 4,800 4,800
Additional paid-in capital 599 542
Retained earnings 36,209 35,675
Accumulated other comprehensive income (3) 292
Treasury stock, at cost: 210,140 shares and 183,640 shares
at March 31, 1999 and December 31, 1998, respectively. (2,228) (1,586)
-------- --------
Total stockholders' equity 39,377 39,723
-------- --------
Total liabilities and stockholders' equity $ 476,845 $ 470,693
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
3
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share) Three Months Ended
March 31,
---------------------------
1999 1998
-------- ---------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 6,636 $ 7,001
Investment securities 1,660 1,170
Federal funds sold 61 69
Deposits in banks -- --
--------- ---------
Total interest income 8,357 8,240
--------- ---------
INTEREST EXPENSE
Deposits 3,411 3,290
Securities sold under repurchase agreements 31 37
Other borrowings 85 97
--------- ---------
Total interest expense 3,527 3,424
--------- ---------
Net interest income 4,830 4,816
Provision for loan losses 138 224
--------- ---------
Net interest income after provision for possible loan losses 4,692 4,592
--------- ---------
NON-INTEREST INCOME
Financial Management Services 629 561
Service charges on deposit accounts 245 253
Investment securities gains (losses), net 4 (3)
Other 311 265
--------- ---------
Total non-interest income 1,189 1,076
--------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,346 2,213
Net occupancy and equipment 958 802
FDIC Bank insurance fund assessments 12 11
Bank shares tax 100 87
Other 903 860
--------- ---------
Total non-interest expense 4,319 3,973
--------- ---------
Income before income taxes 1,562 1,695
INCOME TAXES 476 516
--------- ---------
NET INCOME $ 1,086 $ 1,179
========= =========
PER SHARE DATA
Basic net income per common share $ 0.24 $ 0.26
========= =========
Diluted net income per common share $ 0.23 $ 0.25
========= =========
Dividends declared $ 0.12 $ 0.11
========= =========
Weighted average shares outstanding 4,598,887 4,593,815
========= =========
Diluted weighted average shares outstanding 4,673,886 4,667,518
========= =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
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 1,086 1,179
Cash dividends declared (553) (482)
Net unrealized gain (loss) on securities available-for-sale (294) 77
Paid-in capital from treasury stock transactions 57 17
Treasury stock transactions (642) 68
------- -------
Balance at March 31, $ 39,377 $ 37,072
======= =======
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
5
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
---------------------------
(Dollars in thousands) 1999 1998
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,086 $ 1,179
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 342 265
Provision for loan losses 138 224
Amortization of investment security premiums
and accretion of discounts 119 34
Amortization of deferred fees on loans 14 9
Investment securities (gains) losses, net (4) 3
(Increase) decrease in other assets (587) 1,289
Increase (decrease) in other liabilities 1,460 (293)
-------- -------
Net cash provided by operating activities 2,568 2,710
-------- -------
INVESTING ACTIVITIES
(Increase) decrease in interest bearing deposits in banks -- --
Increase in loans (561) (2,327)
Proceeds from sale of investment securities available-for-sale 2,441 8,408
Proceeds from maturities of investment securities available-for-sale 9,503 5,082
Proceeds from maturities of investment securities held-to-maturity 1,733 1,077
Purchases of investment securities available-for-sale (20,022) (10,720)
Purchase of premises and equipment, net (134) (532)
-------- -------
Net cash provided by (used) in investing activities (7,040) 988
-------- -------
FINANCING ACTIVITIES
Increase (decrease) in Federal Home Loan Bank advances 1,542 (3,987)
Increase in deposits 3,536 6,596
Decrease in securities sold under repurchase agreements (39) (2,898)
Cash dividends (553) (482)
Treasury stock transactions (585) 85
-------- -------
Net cash provided by (used in) financing activities 3,901 (686)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (571) 3,012
Cash and cash equivalents at beginning of year 30,681 26,448
-------- -------
Cash and cash equivalents at end of period $ 30,110 $ 29,460
======== =======
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
6
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of Management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair
presentation of the financial position and the results of operations
for the interim period presented have been included. For further
information, refer to the consolidated financial statements and
footnotes thereto included in First West Chester Corporation and
Subsidiaries (the "Corporation") Annual Report on Form 10-K for the
year ended December 31, 1998.
2. The results of operations for the three-month period ended March 31,
1999 are not necessarily indicative of the results to be expected for
the full year.
3. Per share data is based on the weighted average number of shares of
common stock outstanding during the period. Diluted net income
includes the effect of options granted. All per share data in this
report has been restated to reflect the new standards imposed by the
Financial Accounting Standards Board Statement ("SFAS") No. 128,
"Earnings Per Share" which became effective for financial statements
issued after December 15, 1997.
4. The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income"
which became effective January 1, 1998. This new standard requires
entities presenting a complete set of financial statements to include
details of comprehensive income. Comprehensive income consists of net
income or loss for the current period and income, expenses, gains and
losses that bypass the income statement and are reported directly in a
separate component of equity. Other comprehensive income/(loss) for
the periods ending March 31, 1999 and 1998 is $(294) thousand and $77
thousand, respectively.
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 Financial Accounting Standards Board ("FASB") issued SFAS No. 132,
"Employers Disclosures About Pensions and Other Postretirement
Benefits" which amends FASB statements No. 87, 88 and 106. The
statement revises employers' disclosures about pension and other
postretirement benefit plans and does not change the measurement of
recognition of these plans. It standardizes the disclosure
requirements and requires additional information on benefit
obligations and the fair value of plan assets that will facilitate
financial analysis, and eliminate certain disclosures that are no
longer useful. The statement is effective for fiscal years beginning
after December 15, 1997. Adoption of the new standard is not expected
to have a material impact on the Corporation's financial statement.
7
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. 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.
8. FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which amends FASB statements No. 52, 80, 105, 119
and 107. The statement requires that entities recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
statement is effective for quarters of fiscal years beginning after
June 15, 1999. The statement is not expected to have a material impact
on the Corporation's financial statements.
9. Certain prior year amounts have been reclassified to conform to the
current year presentations.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
Net income for the three months ended March 31, 1999 was $1.086 million,
a decrease of $93 thousand or 7.9% from $1.179 million for the same period in
1998. The decrease in net income can be partially attributed to an increase in
staffing, occupancy, equipment, data processing and marketing costs.
Additionally, limited loan growth and competitive pressures on margins also
contributed to the decrease. Basic earnings per share for the three months
ending March 31, 1999 were $0.24 per share, a $0.02 or 7.7% decrease over the
same period in 1998. Cash dividends declared during the first quarter of 1999
increased $0.01 per share, a 14.3% increase compared to $0.11 per share in the
first 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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
March December
--------------------------- ----------
1999 1998 1998
---- ---- ----------
<S> <C> <C> <C>
SELECTED RATIOS
Return on average assets 0.93% 1.11% 1.14%
Return on average equity 10.98% 12.87% 13.13%
Earnings retained 49.08% 59.12% 57.26%
Dividend payout ratio 50.92% 40.88% 42.74%
Book value per share $8.58 $8.06 $8.61
<FN>
The "Consolidated Average Balance Sheet" on page 14 may assist the reader in
following this discussion.
</FN>
</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 each of the three-month periods ended March 31, 1999 and
1998, on a tax equivalent basis, was $4.9 million. The average net yield on
interest-earning assets, on a tax equivalent basis was 4.45% for the three-month
period ended March 31, 1999 compared to 4.88% for the same period in 1998.
Average interest-earning assets increased approximately $37.0 million or 9.2% to
$436.7 million during the twelve-month period ending March 31, 1999 compared to
$400.0 million during the same period last year. The increase in average earning
assets was the direct result of increased investment activity. The decrease in
the average net yield on interest-earning assets was primarily the result of a
decrease in the average yield earned on its interest-earning assets partially
off set 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 decreases in loan demand, which resulted in more assets being
reinvested in lower yielding investments as opposed to higher yielding loans.
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)
<TABLE>
<CAPTION>
Three-Months
Ended March 31,
-------------------------
YIELD ON 1999 1998
- -------- ------ ------
<S> <C> <C>
Interest-Earning Assets 7.68% 8.31%
Interest Bearing Liabilities 4.01% 4.24%
---- ----
Net Interest Spread 3.67% 4.07%
Contribution of Interest-Free Funds 0.78% 0.81%
---- ----
Net Yield on Interest-Earning Assets 4.45% 4.88%
==== ====
</TABLE>
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold for the three-month period ended
March 31, 1999 decreased 11.6% to $61 thousand when compared to the same period
in 1998. The decrease in 1999's first quarter federal funds sold interest income
is primarily the result of a 79-basis point (a basis point equals one hundredth
of one percent) decrease in interest rates compared to the same period in 1998,
partially offset by a 3.2% increase in average balances.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased 41.6% for the three-month period ended March 31, 1999 to approximately
$1.7 million compared to the same period in 1998. The increase was primarily the
result of a 48.6% increase in average balances, partially offset by a 29-basis
point decrease in the yield earned. 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 5.7% to $6.7 million for the three-month
period ended March 31, 1999, compared to $7.1 million for the same time period
in 1998. The decrease in interest income for the three-month period ended March
31, 1999 is the direct result of a 52-basis point decrease in the rates earned
on the loan portfolio. This rate reduction can be attributed to increased
competition for new and existing loan relationships and the generally lower
interest rate environment in the first quarter of 1999 as compared to the first
quarter of 1998. It is anticipated that pricing pressure will continue to reduce
overall loan yields and net interest margins for future time periods. Fee
reductions will affect non-interest income.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts increased 3.7% for the three-month
period ended March 31, 1999 to approximately $3.4 million, compared to the same
period in 1998. The increase is primarily the result of an increase in average
interest-bearing deposits of $31.3 million, partially offset by a 24-basis point
decrease in the rates paid on interest bearing deposits, compared to the same
period in 1998.
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 area regional institutions.
Additionally, growth can be attributed to the Corporation's decision to open a
new branch site in the Frazer area. This site opened on August 3, 1998. The
Matlack Street Training Center and other future branch sites are expected to
expand the Bank's deposit base. The Corporation's effective rate on
interest-bearing deposits decreased from 4.21% in the first quarter of 1998 to
3.97% for the first quarter of 1999.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements
decreased 16.2% to $31 thousand for the three-month period ended March 31, 1999
compared to the same time period in 1998. The decrease is attributable to a $1.3
million decrease in average securities sold under repurchase agreements
outstanding, partially offset by a 57-basis point increase in rates paid on
securities sold under repurchase agreements.
11
<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 decreased 12.4% for the three-month
period ended March 31, 1999. The need for borrowings has decreased as a result
of increased deposit growth and a decrease in the loan growth rate. Borrowings
at any time consist of one or more of the following: Overnight Fed Funds
purchased, Federal Home Loan Bank ("FHLB") Term Advances, FHLB Open Repo and
Repo Plus Advances.
PROVISION FOR POSSIBLE LOAN LOSSES
During the first quarter of 1999, the Corporation recorded a $138
thousand provision for possible loan losses compared to $224 thousand for the
same period in 1998. The decrease in the provision expense for the three-month
period ended March 31, 1999 is attributed to the modest loan growth rate and a
$106 thousand reduction in net charge-offs compared to the same time period in
1998. The allowance for possible loan losses as a percentage of total loans was
1.85% as of March 31, 1999 and March 31, 1998.
See the section titled "Allowance For Possible Loan Losses" for additional
discussion.
NON-INTEREST INCOME
Total non-interest income increased 10.5% to $1.2 million for the three
months ended March 31, 1999, compared to the same period in 1998. The primary
component of non-interest income is Financial Management Services revenue, which
increased $68 thousand or 12.1% to $629 thousand for the three-months ended
March 31, 1999 compared with the same period in 1998. The market value of
Financial Management Services assets under management grew $24.7 million or 6.4%
from $385.2 million at March 31, 1998 to $409.9 million at March 31, 1999. The
increase in Financial Management Services revenue and growth in assets under
management is primarily the result of market appreciation and new account
relationships acquired through strong marketing and business development
efforts.
Service charges on deposit accounts decreased 3.2% to $245 thousand for
the three-months ended March 31, 1999 compared to $253 thousand for the same
period in 1998. Other non-interest income increased 17.4% to $311 thousand for
the three-months ended March 31, 1999 compared to $265 thousand for the same
period in 1998. This can be attributed to an increase in various sources of fee
income such as service charges from non-customer ATM transactions, which
commenced during the second quarter of 1998.
NON-INTEREST EXPENSE
Total non-interest expense for the first quarter of 1999 increased 8.7%
to $4.3 million compared to the same period in 1998. The various components of
non-interest expense changes are discussed below.
First quarter 1999 salaries and employee benefits increased 6.0% to $2.3
million for the three-month period ended March 31, 1999 compared to the same
period in 1998. Annual employee raises, a new salary administration program, and
a proportional increase in employee benefits are primarily responsible for the
increase. The hiring of additional staff for the Frazer Branch during the third
quarter of 1998 also contributed to this increase. Average full time equivalent
staff increased from 195 for the period ended March 31, 1998 to 205 for the
period ended March 31, 1999.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net occupancy, equipment and data processing expense increased 19.5% to
$958 thousand for the three-month period ended March 31, 1999 compared to the
same period last year. The increase is the direct result of increased computer
and related equipment costs associated with the completion of the Core-System
conversion process, the phase out of certain main-frame related costs, a payroll
conversion and direct Y2K costs. Increases in the Corporations facilities also
contributed the increase. See "Building Improvements and Technology Projects"
and "Year 2000 Issues" sections for more detail.
Total other non-interest expense increased 5.0% to $903 thousand for the
three months ended March 31, 1999 compared to the same period in 1998. This
increase can be partially attributed to an increase in the Corporation's
marketing efforts to attract new customers and to promote its corporate image
and a one-time non-cash loss on disposal of the asset.
Planning for additional branch sites continues. The Corporation believes
that the costs associated with the opening of new branch sites will have a
direct impact on all the components of non-interest expense. It is anticipated
that the increases in costs will be offset over time by an increase in net
interest and fee income generated by business in the new marketing areas.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
---------------------------- ---------------------------
Daily Daily
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
-------- -------- ------ ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 5,181 $ 61 4.71% $ 5,022 $ 69 5.50%
Investment securities
Taxable 109,422 1,634 5.97% 73,460 1,150 6.26%
Tax-exempt(1) 1,938 36 7.40% 1,479 29 7.76%
------- ----- ------- -----
Total investment securities 111,360 1,670 6.00% 74,939 1,179 6.29%
------- ----- ------- -----
Loans(2)
Taxable 316,716 6,568 8.30% 312,797 6,879 8.80%
Tax-exempt(1) 3,412 84 9.89% 6,947 177 10.21%
------- ----- ------- -----
Total loans 320,128 6,652 8.31% 319,744 7,056 8.83%
------- ----- ------- -----
Total interest-earning assets 436,669 8,383 7.68% 399,705 8,304 8.31%
Non-interest earning assets
Allowance for possible loan losses (5,913) (5,920)
Cash and due from banks 20,672 19,115
Other assets 15,816 13,678
------- -------
Total assets $467,244 $426,578
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $194,008 1,393 2.87% $180,607 $1,409 3.12%
Certificates of deposits and other time 149,531 2,018 5.40% 131,631 1,881 5.72%
------- ----- ------- -----
Total interest bearing deposits 343,539 3,411 3.97% 312,238 3,290 4.21%
Securities sold under repurchase agreements 3,263 31 3.80% 4,575 37 3.23%
Federal Home Loan Bank advances and
Other borrowings 5,274 85 6.45% 6,093 97 6.37%
------- ----- ------- -----
Total interest bearing liabilities 352,076 3,527 4.01% 322,906 3,424 4.24%
------- ----- ------- -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 69,324 60,195
Other liabilities 6,285 6,834
------- -------
Total liabilities 427,685 389,935
Stockholders' equity 39,559 36,643
------- -------
Total liabilities and stockholders' equity $467,244 $426,578
======= =======
Net interest income $4,856 $4,880
===== =====
Net yield on interest earning assets 4.45% 4.88%
==== ====
<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>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCOME TAXES
Income tax expense for the three-month period ended March 31, 1999 was
$476 thousand, compared to $516 thousand in the same period last year. This
represents an effective tax rate of 30.5% and 30.4% for the first quarter of
1999 and 1998, respectively.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Corporation's ability to meet deposit withdrawals either on demand or at
contractual maturity, to repay borrowings as they mature and to make new loans
and investments as opportunities arise. Liquidity is managed on a daily basis
enabling Senior Management to effectively monitor changes in liquidity and to
react accordingly to fluctuations in market conditions. The primary source of
liquidity for the Corporation is its available-for-sale portfolio of liquid
investment grade securities. Funding sources include NOW, money-market, savings
and smaller denomination certificates of deposit accounts. The Corporation
considers funds from such sources to comprise its "core" deposit base because of
the historical stability of such sources of funds. Additional liquidity comes
from the Corporation's non-interest bearing demand deposit accounts and credit
facilities. Other deposit sources include a three-tiered savings product and
certificates of deposit in excess of $100,000. Details of core deposits,
non-interest bearing demand deposit accounts and other deposit sources are
highlighted in the following table:
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1999 December 31, 1998 Average Balance
-------------------- ----------------------- ------------------------
Average Effective Average Effective Dollar Percentage
Deposit Type Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $ 56,609 1.69% $ 55,203 2.04% $ 1,406 2.55%
Money Market 25,724 2.86 27,596 3.09 (1,872) -6.78
Statement Savings 48,528 2.94 47,046 3.28 1,482 3.15
Other Savings 2,215 2.71 2,382 2.73 (167) -7.01
CD's Less than $100,000 121,021 5.44 114,372 5.81 6,649 5.81
------- ------- ------
Total Core Deposits 254,097 3.84 246,599 4.15 7,498 3.04
Non-Interest Bearing
Demand Deposit Accounts 69,324 - 64,705 - 4,619 7.14
------- ------- ------
Total Core and Non-Interest
Bearing Deposits 323,421 3.02 311,304 3.29 12,117 3.89
------- ------- ------
Tiered Savings 60,933 3.93 51,854 4.09 9,079 13.83
CD's Greater than $100,000 28,509 5.21 23,453 5.63 5,056 17.51
------- ------- -------
Total Deposits $412,863 3.30 $386,611 - $ 26,252 6.79
======= ======= =======
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. As of March 31, 1999
the amount outstanding under the Bank's line of credit with the FHLB was $0. The
Bank currently has a maximum borrowing capacity with the FHLB of approximately
$117.0 million. During the first quarter of 1999, average FHLB advances were
approximately $6.1 million and consisted of term advances representing a
combination of maturities. The average interest rate on these advances was
approximately 6.5%. 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 future time periods. The Corporation's net
interest rate sensitivity gap within one year is a negative $165.7 million or
34.7% of total assets at March 31, 1999 compared with a negative $151.8 million
or 32.2% of total assets at December 31, 1998. 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST SENSITIVITY ANALYSIS
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
One Over
(Dollars in thousands) Within through five Non-rate
one year five years years sensitive Total
------------ ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 8,000 $ -- $ -- $ -- $ 8,000
Investment securities 38,792 56,611 20,613 -- 116,016
Interest bearing deposits in banks -- -- -- -- --
Loans and leases 87,226 171,215 62,421 (5,937) 314,925
Cash and cash equivalents -- -- -- 22,110 22,110
Premises and equipment -- -- -- 9,371 9,371
Other assets 2,616 -- -- 3,807 6,423
-------- --------- ------- ------- -------
Total assets $ 136,634 $ 227,826 $ 83,034 $ 29,351 $476,845
======== ======= ======= ======== =======
LIABILITIES AND CAPITAL
Interest bearing deposits $ 297,187 $ 50,805 $ 1,781 $ -- $349,773
Non-interest bearing deposits -- -- -- 72,161 72,161
Borrowed funds 4,337 -- -- -- 4,337
FHLB Advances 812 2,142 2,034 -- 4,988
Other liabilities -- -- -- 6,209 6,209
Capital -- -- -- 39,377 39,377
-------- --------- ------- ------- -------
Total liabilities & capital $ 302,336 $ 52,947 $ 3,815 $117,747 $476,845
======== ========= ======= ======= =======
Net interest rate
sensitivity gap $(165,702) $ 174,879 $ 79,219 $(88,396) $ --
======== ========= ======= ======= =======
Cumulative interest rate
sensitivity gap $(165,702) $ 9,177 $ 88,396 $ -- $ --
======== ========= ======= ======= ============
Cumulative interest rate
sensitivity gap divided
by total assets (34.7%) 1.9% 18.5%
======= ========= =======
</TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is an amount that Management
believes will be adequate to absorb possible loan losses on existing loans that
may become uncollectible based on evaluations of the collectibility of loans.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, adequacy of
collateral, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
------------------------ ------------
1999 1998 1998
--------- -------- ------------
<S> <C> <C> <C>
Balance at beginning of period $ 5,877 $ 5,900 $ 5,900
------- ------- -------
Provision charged to operating expense 138 224 911
------- ------- -------
Recoveries of loans previously charged-off 48 7 245
Loans charged-off (126) (191) (1,179)
------- ------- -------
Net loans charged-off (78) (184) (934)
------- ------- -------
Balance at end of period $ 5,937 $ 5,940 $ 5,877
======= ======= =======
Period-end loans outstanding $320,864 $321,034 $320,395
Average loans outstanding $320,128 $319,744 $320,366
Allowance for possible loan losses as a
percentage of period-end loans outstanding 1.85% 1.85% 1.83%
Ratio of net charge-offs to average loans
Outstanding (annualized) 0.10% 0.23% 0.29%
</TABLE>
Non-performing loans include loans on non-accrual status and loans
past due 90 days or more and still accruing. The Bank's policy is to write
down all non-performing loans to net realizable value based on updated
appraisals. Non-performing loans are generally collateralized by real
estate and are in the process of collection. Management is not aware of any
loans other than those included in the following table that would be
considered potential problem loans and cause Management to have doubts as
to the borrower's ability to comply with loan repayment terms.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, December 31,
----------------------- -------------
1999 1998 1998
----- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 909 $ 389 $ 546
Non-accrual loans 1,372 1,763 1,316
----- ----- ------
Total non-performing loans 2,281 2,152 1,862
Other real estate owned 192 1,600 192
----- ----- ------
Total non-performing assets $2,473 $3,752 $ 2,054
===== ===== ======
Non-performing loans as a percentage
of total loans 0.71% 0.67% 0.58%
Allowance for possible loan losses as a
percentage of non-performing loans 260.3% 276.0% 315.6%
Non-performing assets as a percentage of
total loans and other real estate owned 0.8% 1.2% 0.6%
Allowance for possible loan losses as a
percentage of non-performing assets 240.1% 158.3% 286.1%
</TABLE>
The allowance for possible loan losses as a percentage of
non-performing loans indicates that the allowance for possible loan losses is
sufficient to cover the principal of all non-performing loans at March 31, 1999.
Other real estate owned ("OREO") represents residential and commercial real
estate written down to realizable value (net of estimated disposal costs) based
on professional appraisals. Management intends to liquidate OREO in the most
expedient and cost-effective manner. This process could take up to twenty-four
months, although swifter disposition is anticipated. The decrease in other real
estate owned for the period ended March 31, 1999, is the result of a 1998 sale
of foreclosed property.
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 increase in the past due 90 days and
accruing category can be attributed to two borrowers with loans totaling
approximately $720 thousand of which $269 thousand has since been brought
current.
The Corporation continues to service its third party automobile lending
portfolio but has not added any additional volume since June 30, 1998. This
portfolio totaled approximately $19 million as of March 31, 1999 and $24 million
as of December 31, 1998. These loans have become more seasoned as evidenced by a
decrease in the portfolios past due numbers, but continue to inflate
non-performing loan numbers. As of March 31, 1999 and December 31, 1998 5.5% and
9.9% of the portfolio was past due 30 days or more.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition, $20 thousand at March 31, 1999 and $51 thousand at December 31,
1998 in repossessed vehicles are included in other assets. These assets have
been charged down and recorded at their estimated realizable value. At March 31,
1999 there were no concentrations of loans exceeding 10% of total loans which
are not otherwise disclosed.
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.
The balance of impaired loans was $1,078,000, $919,000, and $1,377,000
at March 31, 1999, December 31, 1988, and March 31, 1998 respectively. The
associated allowance for impaired loans was $333,000, $286,000 and $274,000 at
March 31, 1999, December 31, 1998, and March 31, 1998, respectively.
For the three months ended March 31, 1999, activity in the allowance
for impaired loan losses include a provision of $50,000, write offs of $3,000
and recoveries of $0. Interest income of $0 was recorded for the period while
contractual interest amounted to $23,000. Cash collected on loans for the period
was $25,000 all of which was applied to principal.
For the twelve months ended December 31, 1998, activity in the
allowance for impaired loan losses include a provision of $150,000, write offs
of $170,000 and recoveries of $0. Interest income of $25,000 was recorded for
the period while contractual interest amounted to $129,000. Cash collected on
loans for the period was $836,000 of which $811,000 was applied to principal and
$25,000 was applied to interest.
For the three months ended March 31, 1998, activity in the allowance
for impaired loan losses include a provision of $50,000, write offs of $82,000
and recoveries of $0. Interest income of $0 was recorded for the period while
contractual interest amounted to $28,000. Cash collected on loans for the period
was $10,000 all of which was applied to principal.
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 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 Corporation expects to
occupy the building in the second quarter of 1999. The new building at 887
Matlack Street, will house a branch teller training center that will be open to
the public in June as well as be the new location for the and the administrative
services, audit, compliance and facilities departments. During 1998, the
Corporation also entered into an agreement to purchase 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 during the first quarter of 1999 include the
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
building and upgrade of the Corporation's local and wide area networks and
payroll processing. FNB recently entered into contracts with JHA for their
Internet banking solution, Net-Teller. Net-Teller will be used for retail and
commercial customers. A January 2000 roll-out is anticipated.
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 June 30, 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 is in the process of
documenting and evaluating the results of that test. Documentation is expected
to be completed by May 25, 1999.
The Corporation's check processing and imaging system, operate on a
combination of NCR, Unisys, Novell and Microsoft hardware and software. Parts of
this system require certain upgrades. These upgrades are being installed in the
second quarter of 1999. The Corporation has completed Y2K testing on all PC
hardware and software. Any machines failing these tests are being replaced or
repaired. This process will be complete by June 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
will rely on testing conducted by STS and will also rely on Proxy Tests
conducted by certain STS customers. Testing and related documentation was
completed by March 31, 1999.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Costs to Address the Corporation's Year 2000 Issues
- -------------------------------------------------------
The Corporation has incurred direct Y2K project costs of $79,000
through March 31, 1999. The Corporation has incurred total direct and indirect
Y2K project costs of $184,000 through March 31, 1999. The Corporation
anticipates that its total Y2K project cost will not exceed $275,000. 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.
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. The Corporation will review the Y2K capabilities of all
significant vendors by June 30, 1999. The Corporation will take appropriate
action based upon each large loan customer's response to the Corporation's Y2K
communication.
Cash Contingency and Customer Awareness Programs
- ------------------------------------------------
The Corporation is preparing 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 is also preparing
several employee awareness programs with similar objectives.
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 one to thirty
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;
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A check processing contingency plan involving the use of a used
reader-sorter and JHA's proof of deposit program is being developed. At this
time the Corporation cannot estimate the cost, if any, that might be required to
implement such 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 for bank holding companies. The Bank is also subject
to similar capital requirements adopted by the Office of the Comptroller of the
Currency. Under these requirements, the regulatory agencies have set minimum
thresholds for Tier I Capital, Total Capital, and Leverage ratios. At March 31,
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 1992. The
Corporation's Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
March 31, December 31,
RISK-BASED ------------------------ ------------ "Well Capitalized"
CAPITAL RATIOS 1999 1998 1998 Requirements
- -------------- ---- ---- --------- -----------------
<S> <C> <C> <C> <C>
Corporation
-----------
Leverage Ratio 8.43% 8.68% 8.59% 5.00%
Tier I Capital Ratio 11.44% 11.33% 11.67% 6.00%
Total Risk-Based Capital Ratio 12.70% 12.59% 12.95% 10.00%
Bank
----
Leverage Ratio 8.20% 8.42% 8.36% 5.00%
Tier I Capital Ratio 11.12% 11.01% 11.35% 6.00%
Total Risk-Based Capital Ratio 12.37% 12.27% 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 which,
if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation. The internal capital growth
for the Corporation was (0.87)% and 9.98% for the three months ended March 31,
1999 and 1998, respectively. The growth rate is computed by annualizing the
change in equity during the last period and dividing it by total stockholder's
equity at March 31, 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,
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 Annual Report for more
information.
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 a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of the Corporation was held
on March 16, 1999 (the "Meeting"). Notice of the Meeting was
mailed to shareholders of record on or about February 3, 1999,
together with proxy solicitation materials prepared in
accordance with Section 14(a) of the Securities Exchange Act
of 1934, as amended, and the regulations promulgated
thereunder.
The matters submitted to a vote of shareholders at the meeting
were the following:
1. The election of three Class III directors, with each
director to serve until the 2002 Annual Meeting of
Shareholders and until the election and qualification of
his respective successor;
2. The approval of certain amendments to the Corporation's
1995 Stock Option Plan to grant additional options to
non-employee directors of the Corporation;
3. The approval of an amendment to the Corporation's
Articles of Incorporation to increase the number of
authorized shares of the Corporation; and
4. The ratification of the appointment of Grant Thornton,
LLP as the Corporation's independent public accountants
for the year ending December 31, 1999; and
There was no solicitation in opposition to the nominees of the
Board of Directors for election to the Board of Directors.
Prior to the meeting, one of the incumbent nominees for
election to the Board of Directors, Devere Kauffman, resigned
from the Board and withdrew from the election. Both of the
other nominees were elected. The number of votes cast for or
withheld as well as the number of abstentions and broker
non-votes for each of the nominees for election to the Board
of Directors were as follows:
25
<PAGE>
PART II - OTHER INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Abstentions and
Nominee For Withheld Broker Non-Votes
------- --- -------- ----------------
<S> <C> <C> <C>
John A. Featherman, III 3,413,412 552,458 0
John S. Halsted 3,414,029 551,841 0
</TABLE>
The names of the other directors whose terms of office as
directors continued after the Meeting are as follows: John J.
Ciccarone, M. Robert Clarke, Edward J. Cotter, Clifford E.
DeBaptiste, J. Carol Hanson, David L. Peirce, Charles E. Swope
and John B. Waldron.
The proposal to make certain amendments to the Corporation's 1995
Stock Option Plan was approved. The number of votes cast for or
against as well as the number of abstentions and broker non-votes
for the proposal were as follows:
<TABLE>
<CAPTION>
For Against Abstentions Broker non-votes
--- ------- ----------- ----------------
<S> <C> <C> <C>
3,800,605 73,455 91,810 0
</TABLE>
The proposal to amend the Corporation's Articles of Incorporation
was approved. The number of votes cast for or against as well as
the number of abstentions and broker non-votes for the proposal
were as follows:
<TABLE>
<CAPTION>
For Against Abstentions Broker non-votes
--- ------- ----------- ----------------
<S> <C> <C> <C>
3,875,561 23,243 67,066 0
</TABLE>
The proposal to ratify the appointment of Grant Thornton, LLP as
the Corporation's independent public accountants for the year
ending December 31, 1999 was ratified. The number of votes cast
for or against as well as the number of abstentions and broker
non-votes for the ratification were as follows:
<TABLE>
<CAPTION>
For Against Abstentions Broker non-votes
--- ------- ----------- ----------------
<S> <C> <C> <C>
3,914,843 2,042 48,985 0
</TABLE>
There was no other business that came before the Meeting or
matters incident to the conduct of the Meeting.
Item 5. Other Information
-----------------
None
27
<PAGE>
PART II - OTHER INFORMATION - CONTINUED
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3(i). Certificate of Incorporation. Copy of the Corporation's
Certificate 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.
10. Material contracts.
------------------
(a) Copy of the Corporation's Amended and Restated 1995 Stock
Option Plan, is incorporated herein by reference to the appendix to the
Corporation's Proxy Statement for the 1999 Annual Meeting of Shareholders as
filed with the SEC via EDGAR (File No. 000-12870).
27. Financial Data Schedule.
-----------------------
(b) Reports on Form 8-K
-------------------
A Form 8-K was filed on February 17, 1999 with the SEC
via EDGAR pertaining to a press release on 1998 earnings.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST WEST CHESTER CORPORATION
Charles E. Swope
/S/ Charles E. Swope
--------------------
DATE: May 14, 1999 Charles E. Swope
President
J. Duncan Smith
/s/ J. Duncan Smith
-------------------
J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
29
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First West Chester Corporations Financial Data Schedule
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<NAME> First West Chester Corporation
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