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, 2000, 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 CHESTER COUNTY 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, 2000 was 4,490,693.
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income
Three- and Nine-Months Ended September 30, 2000 and 1999 4
Consolidated Statement of Changes in Stockholder's Equity 5
Consolidated Statements of Cash Flows
Nine-Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-22
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 24
Item 2 - Changes in Securities 24
Item 3 - Defaults upon Senior Securities 24
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands - except per share data)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,409 $ 27,257
Federal funds sold - 5,000
Interest bearing deposits in banks 126 -
--------- ---------
Total cash and cash equivalents 25,535 32,257
--------- ---------
Investment securities held-to-maturity (market value of $2,072 and $4,535 at
September 30, 2000 and December 31,
1999, respectively) 1,969 4,402
Investment securities available-for-sale at market value 100,581 108,638
Loans 392,070 354,338
Less allowance for loan losses (6,766) (6,261)
--------- ---------
Net loans 385,304 348,077
Premises and equipment, net 10,658 10,444
Other assets 9,422 8,084
--------- ---------
TOTAL ASSETS $ 533,469 $ 511,902
========= =========
LIABILITIES
Deposits
Non-interest bearing $ 82,454 $ 82,734
Interest-bearing (including certificates of deposit over $100 of 367,347 365,699
--------- ---------
$28,124 and $28,377 - September 30, 2000 and December 31, 1999,
respectively)
Total deposits 449,801 448,433
Securities sold under repurchase agreements 3,134 3,365
Federal Home Loan Bank advances and other borrowings 33,929 16,667
Other liabilities 5,645 5,255
--------- ---------
Total liabilities 492,509 473,720
--------- ---------
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, 2000 and
December 31, 1999.
Additional paid-in capital 610 602
Retained earnings 41,399 38,652
Accumulated other Comprehensive Income (Loss) (2,064) (2,893)
Treasury stock, at cost: 307,478 shares at September 30, 2000 and
254,509 shares at December 31, 1999. (3,785) (2,979)
--------- ---------
Total stockholders' equity 40,960 38,182
--------- ---------
Total liabilities and stockholders' equity $ 533,469 $ 511,902
========= ========
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
FIRST CHESTER COUNTY 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,
------------------------ ----------------------
2000 1999 2000 1999
----- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 8,317 $ 6,979 $ 23,952 $ 20,423
Investment securities 1,725 1,912 5,395 5,388
Federal funds sold - 14 37 109
Deposits in banks 1 3 4 3
------- -------- ------- -------
Total interest income 10,043 8,908 29,388 25,923
------- -------- ------- -------
INTEREST EXPENSE
Deposits 3,964 3,495 11,232 10,350
Securities sold under repurchase agreements 35 28 100 80
Federal Home Loan Bank advances and other borrowings 423 119 1,120 295
------- -------- ------- -------
Total interest expense 4,422 3,642 12,452 10,725
------- -------- ------- -------
Net interest income 5,621 5,266 16,936 15,198
Provision for loan losses 355 184 822 493
------- -------- ------- -------
Net interest income after provision
for possible loan losses 5,266 5,082 16,114 14,705
------- -------- ------- -------
NON-INTEREST INCOME
Financial Management Services 718 650 2,290 1,907
Service charges on deposit accounts 261 246 777 748
Investment securities gains (losses), net 1 -- (40) 202
Other 978 316 1,664 946
------- -------- ------- -------
Total non-interest income 1,958 1,212 4,691 3,803
------- -------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,827 2,457 8,149 7,172
Net occupancy and equipment 1,004 915 2,991 2,846
FDIC deposit insurance 22 12 67 35
Bank shares tax 106 117 319 334
Other 1,147 848 3,114 2,609
------- -------- ------- -------
Total non-interest expense 5,106 4,349 14,640 12,996
------- -------- ------- -------
Income before income taxes 2,118 1,945 6,165 5,512
INCOME TAXES 590 594 1,701 1,681
------- -------- ------- -------
NET INCOME $ 1,528 $ 1,351 $ 4,464 $ 3,831
======= ====== ======= =======
PER SHARE DATA
Basic earnings per common share $ 0.340 $ 0.300 $ 0.980 $ 0.840
======= ====== ======= =======
Diluted earnings per common share $ 0.330 $ 0.290 $ 0.980 $ 0.830
======= ====== ======= =======
Dividends declared $ 0.130 $ 0.125 $ 0.380 $ 0.365
======= ====== ======= =======
Basic weighted average shares outstanding 4,546,678 4,563,431 4,536,580 4,580,140
========= ========= ========= =========
Diluted weighted average shares outstanding 4,563,990 4,586,577 4,556,024 4,625,196
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
------- -------
<S> <C> <C>
Balance at January 1, $38,182 $39,723
Net income to date 4,464 3,831
Cash dividends declared (1,718) (1,671)
Net unrealized gain (loss) on securities available-for-sale 829 (2,257)
Treasury stock transactions 1 60
Paid in capital from treasury stock transactions (798) (1,320)
------ ------
Balance at September 30, $40,960 $38,366
====== ======
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
(Dollars in thousands) 2000 1999
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 4,464 $ 3,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,362 1,094
Provision for loan losses 822 493
Amortization of investment security premiums
and accretion of discounts 89 287
Amortization of deferred fees on loans 145 53
Investment securities gains, net 40 (202)
Increase in other assets (900) (556)
Increase in other liabilities 425 968
------- -------
Net cash provided by operating activities 6,447 5,968
------- -------
INVESTING ACTIVITIES
Increase in loans (38,193) (14,074)
Proceeds from sales of investment securities available-for-sale 8,129 13,338
Proceeds from maturities of investment securities available-for-sale 8,269 22,692
Proceeds from maturities of investment securities held-to-maturity 1,468 2,874
Purchases of investment securities available-for-sale (7,505) (51,674)
Purchase of premises and equipment, net (1,220) (668)
------- -------
Net cash used in investing activities (29,052) (27,512)
------- -------
FINANCING ACTIVITIES
Increase (decrease) in securities sold under repurchase agreements (231) 721
Increase in deposits 1,368 9,874
Increase in Federal Home Loan Bank advances and other borrowings 17,262 3,340
Cash dividends (1,718) (1,671)
Treasury stock transactions (798) (1,260)
------- -------
Net cash provided by financing activities 15,883 11,004
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (6,722) (10,540)
Cash and cash equivalents at beginning of period 32,257 30,681
------- -------
Cash and cash equivalents at end of period $ 25,535 $ 20,141
======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
FIRST CHESTER COUNTY 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. These
interim statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in
our Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
2. The results of operations for the three- and nine-month period ended
September 30, 2000 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. We have 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, 2000 was $738 thousand and
$829 thousand, compared to $(2072) 106 thousand and ($2,257) thousand
in the same period last year. Total comprehensive income (which is
the sum of net income and other comprehensive income mentioned above)
for the three- and nine-month periods ended September 30, 2000 was
($2,266) thousand and ($5,213) thousand, compared to ($721) thousand
and ($1,574) thousand in the same period last year.
5. We have adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued as amended
by SFAS 137 and SFAS 138. Because we do not use derivatives at the
current time, management does not anticipate the adoption of SFAS No.
133, last amended by SFAS 138, will have a significant impact on our
earnings or financial position. However, the impact from adopting
SFAS No. 133, as amended by SFAS 138, will depend on the nature and
purpose of derivative instruments we may be using at that time.
6. 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 Chester
County Corporation (the "Corporation") and its wholly-owned subsidiaries, First
National Bank of Chester County (the "Bank") and Turks Head Properties, Inc. It
should be read in conjunction with the consolidated financial statements
included in this report.
On February 17, 2000, the Board of Directors of First West Chester
Corporation voted to change its name to First Chester County Corporation and to
modify the name of its banking subsidiary to First National Bank of Chester
County.
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 mergers of competing
financial institutions which 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) estimated changes in net
interest income; (h) anticipated pressure on net yields; and (i) 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-month period ended September 30, 2000 was
$1.53 million, an increase of 13.1% from $1.35 million for the same period in
1999. Net income for the nine-month period ended September 30, 2000 was $4.46
million, an increase of 16.5% from $3.83 million for the same period in 1999.
The increases in net income are the direct result of increases in net interest
income, gains on the sale of certain fixed assets, and increases in several
other non-interest income components partially offset by increases in operating
expenses and in the provision for loan loss expense for both the three-month and
the nine-month periods.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cash dividends declared during the third quarter of 2000 increased to
$0.13 per share, a 4.0% increase compared to the third quarter of 1999. Over the
past ten years, the Corporation's practice has been to pay a dividend of at
least 35.0% of net income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS
Return on Average Assets 1.16% 1.11% 1.15% 1.06%
Return on Average Equity 15.17% 13.90% 15.26% 13.07%
Earnings Retained 62.89% 57.81% 61.51% 56.38%
Dividend Payout Ratio 37.11% 42.19% 38.49% 43.62%
Book Value Per Share $9.12 $8.43 $9.12 $8.43
</TABLE>
The "Consolidated Average Balance Sheet on pages 14 and 15 may assist the reader
in following this discussion.
NET INTEREST INCOME
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income for the three- and nine-month periods ended September 30,
2000, on a tax equivalent basis, was $5.7 million and $17.1 million, compared to
$5.4 million and $15.3 million for the same periods in 1999, respectively. The
increase in net interest income for both periods was the result of higher
interest rates earned on interest-earning assets and an increase in the average
amount of interest-earning assets, partially offset by an increase in the
average amount of interest-bearing liabilities and a higher average rate paid on
these liabilities.
Average net yields on interest-earning assets, on a tax equivalent
basis, were 4.63% and 4.72% for the three- and nine-month periods ended
September 30, 2000, respectively, compared to 4.76% and 4.56% for the three- and
nine-month periods ended September 30, 1999, respectively. The decrease in the
average net yield on interest-earning assets for the three-month period ended
September 30, 2000 was primarily the result of an increase in the average
interest rate paid on interest bearing liabilities, partially offset by an
increase in the average interest rate earned on interest-earning assets. The
increase in the average net yield earned on interest-earning assets for the
nine-month period ended September 30, 2000, can be attributed to an increase in
the average interest rate earned on interest-earning assets, partially offset by
an increase in the average interest rate paid on interest-bearing liabilities.
Average interest-earning assets increased approximately $39.5 million
to $490.3 million during the third quarter of 2000 from $450.7 million in the
same period last year. For the nine months ended September 30, 2000, average
interest-earning assets increased approximately $34.9 million to $482.4 million
from $447.5 million in the same period last year. The increase in average
interest-earning assets was primarily the result of an increase in the average
loans outstanding as we continue to experience modest loan demand.
Despite the increase in the average net yield for the nine-months ended
September 30, 2000, the Corporation anticipates that there will be continued
pressure on the net yield on interest-earning assets as competition for new loan
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
business remains strong and especially as the cost of incremental deposit growth
increases and other funding sources becomes more expensive. This is evident by
the decrease in the average net yield experienced in the three-month period
compared to the nine-month period ended September 30, 2000.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
Three Months Nine Months
Yield On: Ended September 30, Ended September 30,
--------- ------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Earning Assets 8.24% 7.99% 8.13% 7.76%
Interest Bearing Liabilities 4.41% 3.97% 4.21% 3.98%
---- ---- ---- ----
Net Interest Spread 3.83% 4.02% 3.92% 3.78%
Contribution of Interest Free Funds 0.80% 0.74% 0.77% 0.78%
---- ---- ---- ----
Net Yield on Interest Earning Assets 4.63% 4.76% 4.69% 4.56%
==== ==== ==== ====
</TABLE>
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold for the three- and nine-month
periods ended September 30, 2000, decreased to $0 and $37 thousand,
respectively, when compared to the same periods in 1999. The decrease in
interest income on federal funds is the direct result of a 71.0% decrease in the
average balance of federal funds sold for the nine-month period ended September
30, 2000, when compared to the same period in 1999, partially offset by a 80
basis point (one basis point is equal to one hundredth of one percent) increase
in the rates earned on federal funds sold. Excess funds which in prior periods
were sold in the federal funds market have been used to support loan growth in
the current periods.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
decreased 9.7% to $1.7 million for the three-month period ended September 30,
2000, and increased 1.2% to $5.4 million for the nine-month period ended
September 30, 2000, respectively, when compared to the same periods in 1999. The
decrease for the three-month period is primarily due to a decrease in average
investment securities of 10.9%, partially offset by a 9 basis point increase on
rates earned on such investments. The increase for the nine-month period ended
September 30, 2000 is the result of a 7.3% or 45 basis point increase in the
yield earned compared to the same period last year, partially offset by a $6.6
million or 5.7% decrease in average investment security balances. Decreases in
average investment securities are the result of periodic payments (securities
paydowns) and normal maturities. These funds are being used to support loan
growth.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio increased 18.3% and 16.5%, respectively, to $8.4
million and $24.0 million for the three- and nine-month periods ended September
30, 2000, compared to the same periods in 1999. The increase in interest income
for these periods is the direct result of 16.3% and 13.3% increases in the
average loans outstanding for the three- and nine-month periods ended September
30, 2000, respectively. For the three- and nine-month periods ended September
30, 2000, loan interest income also benefited from 14 and 23 basis point
increases in rates earned on the portfolio as compared to the same periods last
year.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts increased 13.4% and 8.5% for the
three- and nine-month periods ended September 30, 2000 to $4.0 million and $11.2
million, compared to the same periods in 1999. The increase for the three-month
period ended September 30, 2000 is the result of an increase in average
interest-bearing deposits of 4.9% or $17.5 million and a 32 basis point increase
in the rates paid on interest-bearing deposits. The increase for the nine-month
period ended September 30, 2000 is the result of an increase in average
interest-bearing deposits of 5.3% or $18.6 million and a 12 basis point increase
in rates paid on interest-bearing deposits. The Corporation's effective rate on
interest-bearing deposits increased to 4.25% and 4.06% for the three- and
nine-month periods ended September 30, 2000 from 3.93% and 3.94% for the same
periods, respectively, in 1999.
The recent rising interest rate environment that has positively
impacted the interest income earned on the Corporation's loan portfolio has also
caused upward pressure on the Corporation's interest bearing deposits. While
interest rate increases impact earnings on floating-rate loan portfolios in a
relatively short time, the impact on deposit interest expense is more gradual.
The Corporation anticipates that the current rising rate environment will
continue to put upward pressure on deposit rates in future time periods.
Competition for deposits from local community banks as well as
non-banking institutions such as credit union and mutual fund companies
continues to be a strong factor. Despite this competition, the Corporation's
deposit base continues to grow and growth is expected to continue as we open new
branches and attract new customers with new products and services. Recent growth
can be attributed primarily to our four new limited service retirement community
branches located in Chester and Delaware counties. New branch sites in expanding
areas of our county are being researched. New branch sites will help expand the
Corporation's deposit base.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements
increased 25.0% and 25.0% to $35 thousand and $100 thousand for the three- and
nine-month periods ended September 30, 2000, respectively, compared to the same
periods in 1999. The increases are primarily attributable to 29.4%, or a 120
basis point increase, and 27.3%, or a 108 basis point increase, in rates paid on
such contracts, compared to the rates paid in the three- and nine-month periods
ended September 30, 1999, respectively.
INTEREST EXPENSE ON FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Interest expense on borrowings increased 255.5% and 246.1% for the
three- and nine-month periods ended September 30, 2000, respectively. The
increase is a direct result of a $16.7 million or 196.7% and a $16.9 million or
257.7% increase in average borrowings for the three- and nine-month periods
ending September 30, 2000 when compared to the same periods last year. The
increases in loans for the three- and nine-month periods have outpaced our
deposit growth during the same periods, necessitating that the Corporation
obtain funds from other sources. Borrowings may consist of overnight Fed Funds
purchased, FHLB term advances and FHLB Open Repo and Repo Plus overnight
advances.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
During the three- and nine-month periods ended September 30, 2000, the
Corporation recorded a $355 thousand and a $822 thousand provision for loan loss
compared to $184 thousand and a $493 thousand for the same periods in 1999. The
increase in the provision for loan losses is a result of increased loan growth
for the three- and nine-month periods ended September 30, 2000, compared to the
same periods in 1999, and is not indicative of a deterioration in the overall
credit quality of the Bank's loan portfolio. The allowance for loan losses as a
percentage of total loans was 1.73% at September 30, 2000, 1.77% at December 31,
1999 and 1.81% at September 30, 1999, respectively. See the section titled
"Allowance For Loan Losses" for additional discussion.
NON-INTEREST INCOME
Total non-interest income increased 61.6% to $2.0 million for the
three- month period ended September 30, 2000 when compared to the same period in
1999. For the nine- month period ended September 30, 2000, total non-interest
income increased 23.4% to $4.7 million when compared to the same period in 1999.
The primary recurring component of non-interest income is Financial Management
Services revenue, which increased 10.5% and 20.1% to $718 thousand and $2.3
million for the three- and nine-month periods ended September 30, 2000,
respectively, compared to the same periods in 1999. The increase in Financial
Management Services revenue is primarily the result of an increase in assets
under management and custody. The market value of Financial Management Services
assets under management and custody grew $43.6 million or 10.8% from $403.0
million at September 30, 1999 to $446.6 million at September 30, 2000. The
increase in Financial Management Services revenue and growth in assets under
management and custody is primarily the result of market appreciation and new
account relationships acquired through marketing and business development
efforts. Additionally, during the quarter the Financial Management Services Fee
structure changed in an effort to cover rising costs. This change will produce
additional fee revenue. Although the fees were increased they still remain very
competitive in the market place and Management does not anticipate any negative
impact on growth in these revenues.
Service charges on deposit accounts increased approximately 6.1% to
$261 thousand for the three-months ended September 30, 2000 compared to $246
thousand for the same period in 1999. For the nine-month period ended September
30, 2000, service charges on deposit accounts increased 3.9% to $777 thousand
compared to $748 thousand for the same period in 1999. This increase can be
attributed to the growth in the number and volume of deposit accounts for the
current periods when compared with the same periods last year. Other
non-interest income increased 209.5% to $978 thousand for the three-months ended
September 30, 2000 compared to $316 thousand for the same period in 1999. For
the nine-month period ended September 30, 2000, other non-interest income
increased 75.9% to $1.7 million compared to $946 thousand for the same period in
1999. These increases in other non-interest income can be attributed to the sale
of two fixed assets. On August 31, 2000, the Corporation sold a property
adjacent to its Kennett Square branch which resulted in a gain of approximately
$69 thousand. The former Westtown branch/Training Center was sold on September
29, 2000, which resulted in a gain of approximately $560 thousand. Total other
non-interest income also benefited from fees related to Community Development
Corporation ("CDC") activities.
Investment securities gains (losses) also contributed to the change in
non-interest income. For the three-month period ended September 30, 2000, gains
on investment securities increased $1 thousand to $1 thousand, when compared to
the same period in 1999. For the nine-month period ended September 30, 2000,
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
investment security gains (losses) decreased $242 thousand or 119.8% from a gain
of $202 thousand to a loss of $40 thousand, when compared to the same period in
1999. The loss in 2000 reflects Management's decision to sell certain
low-yielding investment securities at a loss in order to reinvest the proceeds
in investments that will contribute higher interest income in future periods
than the investments sold.
NON-INTEREST EXPENSE
Total non-interest expense for the three- and nine-month periods ended
September 30, 2000 increased 17.4% to $5.1 million and $12.7% to $14.6 million,
compared to the same periods in 1999. The various components of non-interest
expense changes are discussed below.
Employee salaries and benefits increased 15.1% to $2.8 million and
13.6% to $8.1 million for the three-month and nine-month periods ended September
30, 2000 compared to the same periods in 1999. Increased staff due to the
opening of our four new retirement home branches, annual employee raises, and an
increase in the cost of employee benefits are primarily responsible for the
increase. At September 30, 2000, the Corporation employed 200 full time and 41
part time employees compared to 199 full time and 31 part time employees at
September 30, 1999.
Net occupancy, equipment, and data processing expense increased 9.7%
and 5.1% to $1.0 million and $3.0 million for the three- and nine-month periods
ended September 30, 2000, compared to the same periods last year, respectively.
The increase is the direct result of increased computer and related equipment
costs associated with the expansion, upgrading and maintenance of personal
computers and our networking infrastructure. Increases in the Corporation's
facilities also contributed to the increase. See "Building Improvements and
Technology Project" section for more detail.
Total other non-interest expense increased 35.3% and 19.4% to $1.1
million and $3.1 million for the three-month and nine-month periods ended
September 30, 2000 compared to the same periods in 1999. These increases can be
attributed to increased advertising and marketing efforts to attract new
customers and to promote our corporate image and an increase in the amount of
professional consulting services utilized by the Corporation.
The planning for additional branch sites continues and our list of
products is growing. The Corporation believes that the costs associated with the
opening of new branch sites and expanding services and operations 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.
The Corporation is currently working on four new branch sites. We have
already broken ground on two of these sites, Lionville and Kennett Square. These
two sites are expected to be completed and opened during the first quarter of
2001. The other branch sites are in various stages of development, and are
expected to be completed and opened within the next six to twelve months.
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 SEPTEMBER 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
------------------------------- -------------------------------
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%
Interest bearing deposits in banks 213 1 1.88% 130 3 9.23%
Investment securities
Taxable 104,078 1,696 6.52% 117,274 1,885 6.43%
Tax-exempt (1) 2,292 41 7.22% 2,154 39 7.23%
------- ------ ------- ------
Total investment securities 106,370 1,737 6.53% 119,428 1,924 6.44%
------- ------ ------- ------
Loans (2)
Taxable 377,614 8,224 8.71% 324,031 6,925 8.55%
Tax-exempt (1) 6,077 136 8.93% 5,980 144 9.62%
------- ------ ------- ------
Total loans 383,691 8,360 8.71% 330,011 7,069 8.57%
------- ------ ------- ------
Total interest earning assets 490,274 10,098 8.24% 450,758 9,007 7.99%
Non-interest earning assets
Allowance for possible loan losses (6,612) (5,999)
Cash and due from banks 25,693 22,466
Other assets 19,301 17,864
------- -------
Total assets $528,656 $485,089
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $233,431 $ 1,895 3.25% $210,273 1,556 2.96%
Certificates of deposits and other time 140,138 2,069 5.91% 145,767 1,939 5.32%
------- ------ ------- -----
Total interest bearing deposits 373,569 3,964 4.25% 356,040 3,495 3.93%
Securities sold under repurchase agreements 2,652 35 5.28% 2,645 28 4.08%
Federal Home Loan Bank advances and
other borrowings 25,154 423 6.73% 8,477 119 5.62%
------- ------ ------- -----
Total interest bearing liabilities 401,375 4,423 4.41% 367,162 3,642 3.97%
------- ------ ------- -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 81,348 72,910
Other liabilities 5,647 6,114
------- -------
Total liabilities 488,370 446,186
Stockholders' equity 40,286 38,903
------- -------
Total liabilities and stockholders' equity $528,656 $485,089
======= =======
Net interest income $ 5,675 $5,365
====== =====
Net yield on interest earning assets 4.63% 4.76%
==== ====
<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 2000 and 1999.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
----------------------------------- --------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 897 $ 37 5.50% $ 3,089 $ 109 4.70%
Interest bearing deposits in banks 144 4 3.70% - 3 2.88%
Investment securities
Taxable 107,492 5,309 6.59% 114,278 5,255 6.13%
Tax-exempt (1) 2,279 130 7.58% 2,136 120 7.47%
------- ------ ------- -------
Total investment securities 109,771 5,439 6.61% 116,414 5,375 6.16%
------- ------ ------- ------
Loans (2)
Taxable 365,480 23,518 8.58% 322,079 20,128 8.33%
Tax-exempt (1) 6,147 434 9.42% 5,937 429 9.63%
------- ------ ------- -------
Total loans 371,627 23,952 8.59% 328,016 20,557 8.36%
------- ------ ------- ------
Total Interest Earning Assets 482,439 29,431 8.13% 447,519 26,040 7.76%
Non-interest earning assets
Allowance for possible loan losses (6,261) (5,878)
Cash and due from banks 19,672 21,599
Other assets 22,757 16,581
------- -------
Total assets $518,607 $479,821
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $229,978 $ 5,426 3.15% $202,297 $ 4,426 2.92%
Certificates of deposits and other time 138,628 5,806 5.58% 147,748 5,924 5.35%
------- ------ ------- ------
Total interest bearing deposits 368,606 11,232 4.06% 350,045 10,350 3.94%
Securities sold under repurchase agreements 2,652 100 5.03% 2,698 80 3.95%
Federal Home Loan Bank advances and
other borrowings 23,480 1,120 6.36% 6,564 295 5.99%
------- ------ ------- ------
Total interest bearing liabilities 394,738 12,452 4.21% 359,307 10,725 3.98%
------- ------ ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 79,027 71,496
Other liabilities 5,597 5,990
--------- -------
Total liabilities 479,362 436,793
Stockholders' equity 39,245 43,028
-------- -------
Total liabilities and stockholders' equity $518,607 $479,821
======= =======
Net interest income $16,979 $15,315
====== ======
Net yield on interest earning assets 4.69% 4.56%
==== ====
<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 2000 and 1999.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCOME TAXES
Income tax expense for the three- and nine-month periods ended
September 30, 2000 was $590 thousand and $1.7 million, compared to $594 thousand
and $1.7 million in the same periods last year. This represents effective tax
rates of 27.9% and 27.6% for the three- and nine-month periods ended September
30, 2000, respectively. The effective tax rate for the three- and nine-month
periods ended September 30, 1999 was 30.5% and 30.5%, respectively. This
decrease in the effective tax rate can be attributed to tax planning strategies
put in place by management.
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 monitor changes in liquidity and to react
accordingly to fluctuations in market conditions. The primary source of
liquidity for the Corporation is funding available from the FHLB, deposit
growth, and cash flow from the investment and loan portfolios. In addition, new
deposits to NOW, money-market, savings, and smaller denomination certificates of
deposit accounts provide additional liquidity. 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>
(Annualized)
(Dollars in thousands) September 30, 2000 December 31, 1999 Average Balance
--------------------- --------------------- -----------------------
Average Effective Average Effective Dollar Percentage
Balance Yield Balance Yield Variance Variance
------- --------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $ 67,358 1.71% $ 58,356 1.71% $ 9,002 15.43%
Money Market 26,524 2.93 27,139 2.90 (615) (2.27)
Statement Savings 49,255 3.03 49,144 3.00 111 0.23
Other Savings 2,230 2.75 2,280 2.76 (50) 2.19
CD's Less than $100,000 111,741 5.57 118,228 5.38 (6,487) (5.49)
------- ------- ------
Total Core Deposits 257,108 3.77 255,147 3.79 1,961 0.77
Non-Interest bearing
Demand Deposit Accounts 79,027 -- 72,493 -- 6,534 9.01
------- ------- ------
Total Core and Non-Interest
Bearing Deposits 336,135 2.89 327,640 2.95 8,495 2.59
------- ------- ------
Tiered Savings 84,611 4.44 68,067 3.97 16,544 24.31
CD's Greater than $100,000 26,887 5.65 28,863 5.19 1,976 (6.85)
------- ------- ------
Total Deposits $447,633 3.35 $424,570 3.27 $23,063 5.43
======= ======= ======
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Bank, as a member of the FHLB, maintains several credit facilities.
As of September 30, 2000 the amount outstanding under the Bank's line of credit
with the FHLB was $33.4 million. The Bank currently has a maximum borrowing
capacity with the FHLB of approximately $124.8 million. During the three- and
nine-month periods ending September 30, 2000, average FHLB advances were
approximately $25.2 million and $23.5 million, respectively, and consisted of
term advances with a variety of maturities. The average interest rate on these
advances was approximately 6.73% and 5.80% respectively. FHLB advances are
collateralized by a pledge on the Bank's 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
$180.6 million or 33.8% of total assets at September 30, 2000, compared with
negative $210.1 million or 43.4% at September 30, 1999, respectively. This
negative position indicates that more liabilities than assets will be repriced
within the next twelve months which, in a rising interest rate environment, may
result in increased interest expense that would not be offset by correspondingly
repriced 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST SENSITIVITY ANALYSIS
AS OF SEPTEMBER 30, 2000
<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 $ 20,945 $ 53,586 $ 28,019 $ -- $ 102,550
Interest bearing deposits in banks -- -- -- 126 126
Loans and leases 131,891 225,887 34,292 (6,766) 385,304
Cash and cash equivalents -- -- -- 25,409 25,409
Premises & equipment -- -- -- 10,658 10,658
Other assets 12 -- -- 9,410 9,422
----------- ---------- ---------- ---------- ----------
Total assets $ 152,848 $ 279,473 $ 62,311 $ 38,837 $ 533,469
=========== ========== ========== ========== ==========
LIABILITIES AND CAPITAL
Non-interest bearing deposit $ -- $ -- $ -- $ 82,454 $ 82,454
Interest bearing deposits 302,150 63,068 2,129 -- 367,347
Borrowed funds 3,134 -- -- -- 3,134
FHLB Term Advance 28,142 1,064 4,723 -- 33,929
Other liabilities -- -- -- 5,645 5,645
Capital -- -- -- 40,960 40,960
----------- ---------- ---------- ---------- ----------
Total liabilities & capital $ 333,426 $ 64,132 $ 6,852 $ 129,059 $ 533,469
=========== ========== ========== ========== ==========
Net interest rate
sensitivity gap $ (180,578) $ 215,341 $ 55,459 $ (90,222) $ --
========== ========== ========== ========= ==========
Cumulative interest rate
sensitivity gap $ (180,578) $ 34,763 $ 90,222 $ -- $ --
========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap divided
by total assets (33.8%) (6.5%) 16.9%
=========== ========== ==========
</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 our borrowers
ability to pay.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------------ -------------------------
(Dollars in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 6,541 $ 5,922 $ 6,261 $ 5,877
------- ------- -------
Provision charged to operating expense 355 184 822 493
------- ------- ------- -------
Recoveries of loans previously charged-off 25 11 100 86
Loans charged-off (155) (80) (417) (419)
------- ------- ------- -------
Net loans charged-off (130) (69) (317) (333)
------- ------- ------- -------
Balance at end of period $ 6,766 $ 6,037 $ 6,766 $ 6,037
======= ======= ======= =======
Period-end loans outstanding $392,070 $334,084 $392,070 $334,084
Average loans outstanding $383,691 $330,011 $371,627 $328,016
Allowance for possible loan losses as a
percentage of period-end loans outstanding 1.73% 1.81% 1.73% 1.81%
Ratio of net charge-offs to average loans
outstanding (annualized) 0.03% 0.02% 0.09% 0.10%
</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:
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- -------------
(Dollars in thousands) 2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 346 $ 407 $ 175
Non-accrual loans 1,784 1,402 1,207
------- ------- -------
Total non-performing loans 2,130 1,809 1,382
Other real estate owned 385 192 470
------- ------- -------
Total non-performing assets $ 2,515 $ 2,001 $ 1,852
======= ======= =======
Non-performing loans as a percentage
of total loans 0.54% 0.54% 0.39%
Allowance for possible loan losses as a
percentage of non-performing loans 317.65% 333.72% 453.04%
Non-performing assets as a percentage
of total loans and other real estate owned 0.64% 0.60% 0.52%
Allowance for possible loan losses as a
percentage of non-performing assets 269.03% 301.70% 338.07%
</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, 2000. Other Real Estate
Owned ("OREO") represents residential and commercial real estate owned by the
Bank following default by borrowers and has been written down to realizable
value (net of estimated disposal costs) based on professional appraisals.
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 $1,167 thousand, $678 thousand, and
$984 thousand at September 30, 2000, December 31, 1999, and September 30, 1999
respectively. The associated allowance for impaired loans was $287 thousand,
$286 thousand $365 thousand at September 30, 2000, December 31, 1999, and
September 30, 1999, respectively.
For the three-month and nine-month period ended September 30, 2000,
activity in the allowance for impaired loan losses include a provision of $0,
write off's of $15 thousand and $22 thousand, respectively, and recoveries of $1
and $4 thousand, respectively. Contractual interest amounted to $22 for the
three-months ended September 30, 2000 and $54 thousand for the nine-months ended
September 30, 2000. Cash collected on loans for the three-month and nine-month
period ended September 30, 2000 was $17 and $81 thousand, respectively, all of
which $13 thousand and $77 thousand was applied to principal and interest income
of $4 was recorded.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
thousand and $85 thousand, respectively, write offs of $4 thousand and $7
thousand, respectively, and recoveries of $0 for both time periods. Contractual
interest amounted to $23 thousand for the three-months ended September 30, 1999
and $71 thousand for the nine-months ended September 30, 1999. While no interest
income was recorded for both periods, cash collected on loans for the
three-month and nine-month period ended September 30, 1999 was $9 thousand and
$85 thousand, respectively, all of which was applied to principal.
BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS
The Corporation acquired and opened 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 serve the residents and employees of their
communities and bring the total number of branches in the Corporation's network
to twelve.
Total non-interest income also benefited from the sale of two fixed
assets. On August 31, 2000, the Corporation sold a property adjacent to its
Kennett Square branch, which resulted in a gain of $68.5 thousand. The former
Westtown branch was sold on September 29, 2000, which resulted in a gain of
$560.7 thousand.
In October of 1999, the 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. Since it's release over 1,400 customers have
signed up for "Net Teller". A commercial version of "Net Teller" "Net Cash
Manager" was released in March of 2000. Currently there are over 500 customers
signed up for "Net Cash Manager". Other technology products include "FNB
Portfolio Link", which gives our Financial Management Services customers the
ability to access their accounts over the Internet, and the Bank's new web site
at www.fnbchestercounty.com.
The Corporation is currently working on four new branch sites. We have
already broken ground on two of these sites, Lionville and Kennett Square. These
two sites are expected to be completed and opened during the first quarter of
2001. The other branch sites are in various stages of development, and are
expected to be completed and opened within the next six to twelve months.
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, 2000, 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.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
RISK-BASED September 30, December 31, "Well Capitalized"
CAPITAL RATIOS ------------------------ ------------
-------------- 2000 1999 1999 Requirements
---- ---- ---- --------------------
<S> <C> <C> <C>
Corporation
-----------
Leverage Ratio 8.14% 8.31% 8.48% 5.00%
Tier I Capital Ratio 10.75% 11.21% 10.73% 6.00%
Total Risk-Based Capital Ratio 12.00% 12.47% 11.98% 10.00%
Bank
----
Leverage Ratio 8.13% 8.12% 8.05% 5.00%
Tier I Capital Ratio 10.72% 10.94% 10.47% 6.00%
Total Risk-Based Capital Ratio 11.98% 12.19% 11.73% 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 3.81% and a negative 7.49% for the nine months
ended September 30, 2000 and 1999, 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, 2000 and 1999, respectively.
22
<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 1999 Annual Report
of the Corporation, filed as an exhibit to its Form 10-K for the fiscal year
ended December 31, 1999, with the SEC via EDGAR. Please refer to the
"Management's Discussion and Analysis" section on pages 27-28 of the
Corporation's 1999 Annual Report for this assessment.
23
<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, 1999.
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, 1999.
27. Financial Data Schedule.
-----------------------
(b) Reports on Form 8-K
A Form 8-K was filed with the SEC on July 13, 2000, under Item
5, the issuance of a press release announcing second quarter earnings.
24
<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 CHESTER COUNTY CORPORATION
Charles E. Swope
--------------------
/s/ Charles E. Swope
President
DATE: November 14, 2000
J. Duncan Smith
-------------------
/s/ J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
25
