UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 CHESTER COUNTY CORPORATION (formerly known as FIRST WEST CHESTER
CORPORATION) (Exact name of Registrant as specified in its charter)
Pennsylvania 23-2288763
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
(Address of principal executive offices)
Registrant's telephone number, including area code (610) 692-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates as of March 1, 2000, was approximately $66,575,000.
The number of shares outstanding of Common Stock of the Registrant as of March
1, 2000, was 4,279,653.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Annual Report to Shareholders for the year ended December 31,
1999, is incorporated by reference into Parts I and II hereof. The Registrant's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders is
incorporated by reference into Part III hereof.
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
PART I: Item 1 - Business 3
Item 2 - Properties 15
Item 3 - Legal Proceedings 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
PART II: Item 5 - Market for the Corporation's Common Equity and Related
Stockholder Matters 16
Item 6 - Selected Financial Data 17
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 17
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Item 8 - Financial Statements and Supplementary Data 17
Item 9 - Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III: Item 10 - Directors and Executive Officers of the Corporation 17
Item 11 - Executive Compensation 18
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 18
Item 13 - Certain Relationships and Related Transactions 18
PART IV: Item 14 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K 18
SIGNATURES 21
</TABLE>
<PAGE>
PART I
Item 1. Business.
- ------ --------
GENERAL
First Chester County Corporation, formerly known as FIRST WEST CHESTER
CORPORATION (the "Corporation") is a Pennsylvania business corporation and a
bank holding company registered under the Federal Bank Holding Company Act of
1956, as amended (the "BHC Act"). As a bank holding company, the Corporation's
operations are confined to the ownership and operation of banks and activities
deemed by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") to be so closely related to banking to be a proper incident
thereto. The Corporation was incorporated on March 9, 1984, for the purpose of
becoming a registered bank holding company pursuant to the BHC Act and acquiring
The First National Bank of Chester County, formerly known as The First National
Bank of West Chester (the "Bank"), thereby enabling the Bank to operate within a
bank holding company structure. On September 13, 1984, the Corporation acquired
all of the issued and outstanding shares of common stock of the Bank. The
principal activities of the Corporation are the owning and supervising of the
Bank, which engages in a general banking business in Chester County,
Pennsylvania. The Corporation directs the policies and coordinates the financial
resources of the Bank. In addition, the Corporation is the sole shareholder of
Turks Head Properties, Inc., formerly known as 323 East Gay Street Corp., a
Pennsylvania corporation ("EGSC"), which was formed in 1996 for the purpose of
holding the Bank's interest in and operating foreclosed real property until
liquidation of such property.
BUSINESS OF THE BANK
The Bank is engaged in the business of commercial and retail banking
and was organized under the banking laws of the United States in December 1863.
The Bank currently conducts its business through twelve banking offices located
in Chester and Delaware County, Pennsylvania, including its main office. In
addition, the Bank operates seven limited service ATM facilities. The Bank is a
member of the Federal Reserve System. At December 31, 1999, the Bank had total
assets of approximately $512 million, total loans of approximately $354 million,
total deposits of approximately $448 million and employed 240 persons, of which
170 were full-time and 70 were part-time.
The Bank is a full service commercial bank offering a broad range of
retail banking, commercial banking, trust and financial management services to
individuals and businesses. Retail services include checking accounts, savings
programs, money-market accounts, certificates of deposit, safe deposit
facilities, consumer loan programs, residential mortgages, overdraft checking,
automated tellers and extended banking hours. Commercial services include
revolving lines of credit, commercial mortgages, equipment leasing and letter of
credit services.
These retail and commercial banking activities are provided primarily
to consumers and small to mid-sized companies within the Bank's market area.
Lending services are focused on commercial, consumer and real estate lending to
local borrowers. The Bank attempts to establish a total borrowing relationship
with its customers which may typically include a commercial real estate loan, a
business line of credit for working capital needs, a mortgage loan for a
borrower's residence, a consumer loan or a revolving personal credit line.
The Bank's Financial Management Services Department (formerly, the
Trust Department) provides a broad range of personal trust services. It
administers and provides investment management services for estates, trusts,
agency accounts and employee benefit plans. At December 31, 1999, the Bank's
Financial Management Services Department administered or provided investment
management services, which possessed assets with an aggregate market value of
approximately $430 million. For the year ended December 31, 1999, gross income
from the Bank's Financial Management Services Department and related activities
amounted to approximately $2.5 million.
<PAGE>
COMPETITION
The Bank's service area consists primarily of greater Chester County,
including West Chester and Kennett Square, as well as the fringe of Delaware
County, Pennsylvania. The core of the Bank's service area is located within a
fifteen-mile radius of the Bank's main office in West Chester, Pennsylvania. The
Bank encounters vigorous competition for market share in the communities it
serves from community banks, thrift institutions and other non-bank financial
organizations. The Bank also competes with banking and financial institutions,
some from out-of-state that have opened branches in our market, which are
substantially larger and have greater financial resources than the Bank. There
are branches of many commercial banks, savings banks and credit unions,
including the Bank, in the general market area serviced by the Bank. The largest
of these institutions had assets of over $100 billion and the smallest had
assets of less than $30 million. The Bank had total assets of approximately $512
million as of December 31, 1999.
The Bank competes for deposits with various other commercial banks,
savings banks, credit unions, brokerage firms and stock, bond and money market
funds. The Bank also faces competition from major retail-oriented firms that
offer financial services similar to services traditionally available only
through commercial banks without being subject to the same degree of regulation.
Mortgage banking firms, finance companies, insurance companies and leasing
companies also compete with the Bank for traditional lending services.
Management believes that the Bank is able to effectively compete with
its competitors because of its ability to provide responsive personalized
services and competitive rates. This ability is a direct result of management's
knowledge of the Bank's market area and customer base. Management believes the
needs of the small to mid-sized commercial business and retail customers are not
adequately met by larger financial institutions, therefore creating a marketing
opportunity for the Bank.
BUSINESS OF TURKS HEAD PROPERTIES INC.
Turks Head Properties, Inc. was formed in 1996 to hold the Bank's
partnership interest in WCP Partnership. WCP Partnership was formed to
facilitate the acquisition, necessary repairs, required environmental
remediation and other actions necessary to sell real property located in West
Chester, Pennsylvania (the "West Chester Property") which secured a defaulted
loan held by the Bank. Turks Head Properties purchased a 62% interest in the
mortgage on the West Chester Property in 1996 from the Bank at book value and
the Bank immediately contributed the interest in the mortgage to WCP Partnership
as capital. Another financial institution contributed the remaining 38% interest
in the mortgage to WCP Partnership. WCP Partnership foreclosed on the West
Chester Property in 1996. During 1997, the property was liquidated. The proceeds
from the liquidation were in excess of the transferred loan amount resulting in
a gain which was included in noninterest income. As of December 31, 1998, the
WCP Partnership was dissolved. Turks Head Properties, Inc. may be used in the
future to hold and administer the Bank's interests in foreclosed real
properties.
SUPERVISION AND REGULATION
General
The Corporation is a bank holding company subject to supervision and
regulation by the Federal Reserve Board. In addition, the Bank is subject to
supervision, regulation and examination by the Office of the Comptroller of the
Currency (the "OCC") and secondary regulation by the Federal Deposit Insurance
Corporation (the "FDIC"). Federal and state laws impose a number of requirements
and restrictions on the operations of the Bank, including requirements to
maintain reserves against deposits, restrictions on the types and amounts of
loans that may be made and the types of services which may be offered, and
restrictions on the ability to acquire deposits under certain circumstances. The
Bank must also comply with various consumer laws and regulations, and approval
of the OCC is required before establishing new branches and for bank mergers if
the continuing bank would be a national bank. Certain aspects of the Bank's
operation are also subject to state laws. The following sections discuss more
fully some of the principal elements of the regulatory framework applicable to
the Corporation and the Bank. This discussion is not intended to be an
exhaustive description of the statutes and regulations applicable to the
Corporation and the Bank and is subject to and qualified by reference to the
<PAGE>
statutory and regulatory provisions. A change in these statutes, regulations or
regulatory policies, or the adoption of new statutes, regulations or regulatory
policies, may have a material effect on our business.
Bank Holding Company Act
The Corporation is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the BHC Act. Annual and other periodic reports also are
required to be filed with the Federal Reserve Board. The Federal Reserve Board
also makes examinations of bank holding companies and their subsidiaries. The
BHC Act requires each bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire substantially all of the assets of
any bank, or if it would acquire or control more than 5% of the voting shares of
such a bank. The Federal Reserve Board considers numerous factors, including its
capital adequacy guidelines, before approving such acquisitions. For a
description of certain applicable guidelines, see this Item "Capital," Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Capital Adequacy," and Part II, Item 8, "Note I -- Capital
Requirements" in the consolidated financial statements.
The Community Reinvestment Act
The Community Reinvestment Act of 1977, as amended (the "CRA"), and the
regulations promulgated to implement the CRA are designed to create a system for
bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. The CRA regulations were completely
revised in 1995 to establish performance-based standards for use in examining a
depository institution's compliance with the CRA (the "revised CRA
regulations"). The revised CRA regulations establish new tests for evaluating
both small and large depository institutions' investment in the community. For
the purposes of the revised CRA regulations, the Bank is deemed to be a large
retail institution, based upon financial information as of December 31, 1999.
The Bank has opted to be examined under a three-part test evaluating the Bank's
lending service and investment performance. The Bank received a "satisfactory"
rating in 1999.
Dividend Restrictions
The Corporation is a legal entity separate and distinct from the Bank.
Virtually all of the revenue of the Corporation available for payment of
dividends on its common stock, with a par value of $1.00 (the "Common Stock")
will result from amounts paid to the Corporation from dividends received from
the Bank. All such dividends are subject to limitations imposed by federal and
state laws and by regulations and policies adopted by federal and state
regulatory agencies.
The Bank as a national bank is required by federal law to obtain the
approval of the OCC for the payment of dividends if the total of all dividends
declared by the Board of Directors of the Bank in any calendar year will exceed
the total of Bank's net income for that year and the retained net income for the
preceding two years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. Under this formula, in 1999, the Bank,
without affirmative governmental approvals, could declare aggregate dividends in
1999 of approximately $5.1 million, plus an amount approximately equal to the
net income, if any, earned by the Bank for the period from January 1, 1999,
through the date of declaration of such dividend less dividends previously paid
in 1999, subject to the further limitations that a national bank can pay
dividends only to the extent that retained net profits (including the portion
transferred to surplus) exceed bad debts and provided that the Bank would not
become "undercapitalized" (as these terms are defined under federal law).
If, in the opinion of the applicable regulatory authority, a bank or
bank holding company under its jurisdiction is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition of
the bank or bank holding company, could include the payment of dividends), such
regulatory authority may require such bank or bank holding company to cease and
desist from such practice, or to limit dividends in the future. Finally, the
several regulatory authorities described herein, may from time to time,
establish guidelines, issue policy statements and adopt regulations with respect
to the maintenance of appropriate levels of capital by a bank or bank holding
<PAGE>
company under their jurisdiction. Compliance with the standards set forth in
such policy statements, guidelines and regulations could limit the amount of
dividends which the Corporation and the Bank may pay.
Capital
The Corporation and the Bank are both subject to minimum capital
requirements and guidelines. The Federal Reserve Board measures capital adequacy
for bank holding companies on the basis of a risk-based capital framework and a
leverage ratio. The Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines currently provide for a
minimum leverage ratio of Tier I capital to adjusted total assets of 3% for bank
holding companies that meet certain criteria, including that they maintain the
highest regulatory rating. All other bank holding companies are required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points. The Federal Reserve Board has not advised the Corporation of
any specific minimum leverage ratio under these guidelines which would be
applicable to the Corporation. Failure to satisfy regulators that a bank holding
company will comply fully with capital adequacy guidelines upon consummation of
an acquisition may impede the ability of a bank holding company to consummate
such acquisition, particularly if the acquisition involves payment of
consideration other than common stock. In many cases, the regulatory agencies
will not approve acquisitions by bank holding companies and banks unless their
capital ratios are well above regulatory minimums.
The Bank is subject to capital requirements which generally are similar
to those affecting the Corporation. The minimum ratio of total risk-based
capital to risk-adjusted assets (including certain off-balance sheet items, such
as standby letters of credit) is 8%. Capital may consist of equity and
qualifying perpetual preferred stock, less goodwill ("Tier I capital"), and
certain convertible debt securities, qualifying subordinated debt, other
preferred stock and a portion of the reserve for possible credit losses ("Tier
II capital").
A depository institution's capital classification depends upon its
capital levels in relation to various relevant capital measures, which include a
risk-based capital measure and a leverage ratio capital measure. A depository
institution is considered well capitalized if it significantly exceeds the
minimum level required by regulation for each relevant capital measure,
adequately capitalized if it meets each such measure, undercapitalized if it
fails to meet any such measure, significantly undercapitalized if it is
significantly below any such measure and critically undercapitalized if it fails
to meet any critical capital level set forth in the regulations. An institution
may be placed in a lower capitalization category if it receives an
unsatisfactory examination rating, is deemed to be in an unsafe or unsound
condition, or engages in unsafe or unsound practices. Under applicable
regulations, for an institution to be well capitalized it must have a total
risk-based capital ratio of at least 10%, a Tier I risk-based capital ratio of
at least 6% and a Tier I leverage ratio of at least 5% and not be subject to any
specific capital order or directive. As of December 31, 1999, 1998 and 1997, the
Corporation and the Bank had capital in excess of all regulatory minimums and
the Bank was "well capitalized."
Deposit Insurance Assessments
The Bank is subject to deposit insurance assessments by the FDIC's Bank
Insurance Fund ("BIF"). The FDIC has developed a risk-based assessment system,
under which the assessment rate for an insured depository institution varies
according to its level of risk. An institution's risk category is based upon
whether the institution is well capitalized, adequately capitalized or
undercapitalized and the institution's "supervisory subgroups": Subgroup A, B or
C. Subgroup A institutions are financially sound institutions with a few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. Based on its capital
and supervisory subgroups, each BIF member institution is assigned an annual
FDIC assessment rate per $100 of insured deposits varying between 0.00% per
annum (for well capitalized Subgroup A institutions) and 0.27% per annum (for
undercapitalized Subgroup C institutions). As of January 1, 1999, well
capitalized Subgroup A institutions will pay between 0.00% and 0.10% per annum.
In accordance with the Deposit Insurance Act of 1997 an additional
assessment by the Financing Corporation ("FICO") became applicable to all
<PAGE>
insured institutions as of January 1, 1998. This assessment is not tied to the
FDIC risk classification. The BIF FICO assessment was 1.296 basis points per
$100 in deposits for 1999. For 1999, the Bank's assessment for BIF FICO is $48
thousand.
Financial Services Modernization Act of 1999
On November 12, 1999, the President signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, in general, take effect on March
11, 2000. Among the Act's various provisions are some far-reaching changes
governing the operations of companies doing business in the financial services
industry. The Act eliminates the restrictions previously placed on the
activities of banks and bank holding companies, and through the creation of two
new designations, financial holding companies and financial subsidiaries, bank
holding companies and national banks permits participation in a wider array of
financial services and products (referred to as "financial activities" in the
Act), including services and products that had been reserved only for insurance
companies and securities firms. In addition, a bank holding company can now
affiliate with an insurance company and a securities firm.
A "financial activity" is an activity that does not pose a safety and
soundness risk and is financial in nature, incidental to an activity that is
financial in nature, or complementary to a financial activity. Some examples of
"financial activities" which are permitted under the Act are:
o Lending, investing or safeguarding money or securities;
o Underwriting insurance or annuities, or acting as an insurance
or annuity principal, agent or broker;
o Providing financial or investment advice;
o Underwriting, dealing in or making markets in securities; and
o Insurance company portfolio investments.
The Corporation meets the qualifications set forth under the Act to
elect to become a financial holding company, and the Bank, as a national bank,
is authorized by the Act to use "financial subsidiaries" to engage in financial
activities, subject to the limitations imposed by the Act. As of the date of
this report, we have not considered whether to elect to become a financial
holding company, or to engage in any financial activities, or to establish any
financial subsidiaries for the Bank.
Other Matters
Federal and state law also contains a variety of other provisions that
affect the operations of the Corporation and the Bank including certain
reporting requirements, regulatory standards and guidelines for real estate
lending, "truth in savings" provisions, the requirement that a depository
institution give 90 days prior notice to customers and regulatory authorities
before closing any branch, certain restrictions on investments and activities of
nationally-chartered insured banks and their subsidiaries, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders, guidelines
governing regulatory examinations, and a prohibition on the acceptance or
renewal of brokered deposits by depository institutions that are not well
capitalized or are adequately capitalized and have not received a waiver from
the FDIC.
EFFECT OF GOVERNMENTAL POLICIES
The earnings of the Bank and, therefore, of the Corporation are
affected not only by domestic and foreign economic conditions, but also by the
monetary and fiscal policies of the United States and its agencies (particularly
the Federal Reserve Board), foreign governments and other official agencies. The
Federal Reserve Board can and does implement national monetary policy, such as
the curbing of inflation and combating of recession, by its open market
operations in United States government securities, control of the discount rate
applicable to borrowings from the Federal Reserve and the establishment of
reserve requirements against deposits and certain liabilities of depository
institutions. The actions of the Federal Reserve Board influence the level of
loans, investments and deposits and also affect interest rates charged on loans
or paid on deposits. The nature and impact of future changes in monetary and
fiscal policies are not predictable.
<PAGE>
From time to time, various proposals are made in the United States
Congress and the Pennsylvania legislature and before various regulatory
authorities which would alter the powers of different types of banking
organizations, remove restrictions on such organizations and change the existing
regulatory framework for banks, bank holding companies and other financial
institutions. It is impossible to predict whether any of such proposals will be
adopted and the impact, if any, of such adoption on the business of the
Corporation.
ACCOUNTING PRONOUNCEMENT
Impairment of Long-Lived Assets
The Corporation adopted the Financial Accounting Standards Board
Statement ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" on January 1, 1996. See Note A-5 in
Notes to Consolidated Financial Statements included in the Corporation's 1999
Annual Report to Shareholders, incorporated herein by reference.
Disclosures about Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities was issued. Subsequent to this statement, SFAS No. 137 was
issued, which amended the effective date of SFAS No. 133 to be all fiscal
quarters of all fiscal years beginning after June 15, 2000. Based on the
Corporation's minimal use of derivatives at the current time, management does
not anticipate the adoption of SFAS No. 133 will have a significant impact on
earnings or financial position of the Corporation. However, the impact from
adopting SFAS No. 133 will depend on the nature and purpose of the derivative
instruments in use by the Corporation at that time
STATISTICAL DISCLOSURES
The following tables set forth certain statistical disclosures
concerning the Corporation and the Bank. These tables should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Corporation's 1999 Annual Report to
Shareholders, incorporated herein by reference.
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
RATE VOLUME ANALYSIS (1)
<TABLE>
<CAPTION>
Increase(decrease) in net interest income due to:
-------------------------------------------------
Volume (2) Rate (2) Total Volume (2) Rate (2) Total
---------- -------- ----- ---------- -------- -----
(Dollars in thousands) 1999 Compared to 1998 1998 Compared to 1997
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Federal funds sold $ (306) $ (16) $ (322) $ 138 $ (10) $ 128
Interest bearing deposits in banks - - - (12) - (12)
------ ------ ------ ------ ------ -----
Investment securities
Taxable 1,902 262 2,164 244 (410) (166)
Tax-exempt(3) 47 (6) 41 (42) 4 (38)
------ ------ ------ ------ ------ -----
Total investment securities 1,949 256 2,205 202 (406) (204)
Loans
Taxable 1,076 (1,588) (512) 2,035 (198) 1,837
Tax-exempt(3) (53) (24) (77) (205) 32 (174)
------ ------ ------ ------ ------ -----
Total loans(4) 1,023 (1,612) (589) 1,830 (167) 1,663
------ ------ ------ ------ ------ -----
Total interest income 2,666 (1,372) (1,294) 2,158 (582) 1,575
------ ------ ------ ------ ------ -----
INTEREST EXPENSE
Savings, NOW and money market
deposits 647 (339) 308 323 (46) 277
Certificates of deposits and other time 536 (648) (112) 714 18 732
------ ------ ------ ------ ------ -----
Total interest bearing deposits 1,183 (987) 196 1,037 (28) 1,009
Securities sold under repurchase
agreements (10) 4 (6) (181) 16 (165)
Other borrowings 259 (41) 218 (76) 15 (61)
------ ------ ------ ------ ------ -----
Total Interest expense 1,432 (1,023) 409 780 3 783
------ ------ ------ ------ ------ -----
Net Interest income $ 1,234 $ (349) $ 885 $ 1,378 $ (585) $ 792
====== ====== ====== ====== ====== =====
<FN>
NOTES:
- -----
(1) The related average balance sheets can be found on page 25 of the Corporation's 1999 Annual Report to Shareholders.
(2) The changes in interest due to both rate and volume has been allocated to volume and rate changes in proportion to
the relationship of the absolute dollar amounts of the change in each.
(3) The indicated changes are presented on a tax equivalent basis.
(4) Non-accruing loans have been used in the daily average balances to
determine changes in interest due to volume. Loan fees included in the
interest income computation are not material.
</FN>
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION
LOAN PORTFOLIO BY TYPE AT DECEMBER
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $ 95,820 27% $ 85,110 27% $ 93,914 30% $ 87,932 34% $ 86,686 36%
Real estate - construction 15,266 4% 13,439 4% 17,256 5% 11,447 4% 9,372 4%
Real estate - other 152,174 43% 133,191 42% 117,953 37% 109,179 41% 100,814 41%
Consumer loans (1) 55,520 16% 62,481 19% 66,753 21% 39,803 15% 33,836 14%
Lease financing receivables 35,558 10% 26,174 8% 23,023 7% 16,221 6% 11,879 5%
------- ------- ------- ------- -------
Total gross loans $354,338 100% $320,395 100% $318,899 100% $264,582 100% $242,587 100%
Allowance for possible loan
losses(2) $ (6,261) $ (5,877) $ (5,900) $ (5,218) $ (4,506)
------- ------- ------- ------- -------
Total net loans(2) $348,077 $314,518 $312,999 $259,364 $238,081
======= ======= ======= ======= =======
<FN>
NOTES:
(1) Consumer loans include open-end home equity lines of credit and credit
card receivables.
(2) The Corporation does not breakdown the allowance for possible loan
losses by area, industry or type of loan because the evaluation process
used to determine the adequacy of the reserve is based on the portfolio
as a whole. Management believes such an allocation would not be
meaningful. See pages 29-30 of the Corporation's 1999 Annual Report to
Shareholders for additional information.
(3) At December 31, 1999 there were no concentrations of loans exceeding
10% of total loans which is not otherwise disclosed as a category
of loans in the above table.
</FN>
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
MATURITIES AND RATE SENSITIVITY OF LOANS DUE TO CHANGES IN
INTEREST RATES AT DECEMBER 31, 1999 (1) (2)
<TABLE>
<CAPTION>
Maturing
Maturing After 1 Year Maturing
Within And Within After
(Dollars in thousands) 1 Year (3) 5 Years 5 Years Total
-------- ------------ -------- -----
<S> <C> <C> <C> <C>
Commercial loans $73,137 $6,263 $16,420 $ 95,820
Real Estate - construction 19,353 -- -- 19,353
------ ----- ------ -------
Total $92,490 $6,263 $16,420 $115,173
Loans maturing after 1 year with:
- ---------------------------------
Fixed interest rates $6,263 $16,420
Variable interest rates -- --
----- ------
Total $6,263 $16,420
===== ======
<FN>
NOTES:
- -----
(1) Determination of maturities included in the loan maturity table are
based upon contract terms. In situations where a "rollover" is
appropriate, the Corporation's policy in this regard is to evaluate the
credit for collectability consistent with the normal loan evaluation
process. This policy is used primarily in evaluating ongoing customer's
use of their lines of credit with the Bank that are at floating
interest rates.
(2) This data excludes real estate-other loans, consumer loans and lease
financing receivables.
(3) Demand loans and overdrafts are reported maturing "Within 1 Year".
Construction real estate loans are reported maturing "Within 1 Year"
because of their short term maturity or index to the Bank's prime rate.
An immaterial amount of loans has no stated schedule of repayments.
</FN>
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INVESTMENT SECURITIES YIELD BY MATURITY AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Due over Due over
Due 1 year 5 years Due
Within Through Through Over
(Dollars in thousands) 1 year 5 years 10 years 10 years Total
------ -------- -------- -------- -----
<S> <C> <C> <C> <C>
Held-to-Maturity
U.S. Treasury -- -- -- -- --
U.S. Government agency -- -- -- -- --
Mortgage-backed securities (1) -- 195 -- 46 241
State and municipal (2) 476 480 1,100 -- 2,056
Corporate securities 2,104 -- -- -- 2,104
Asset-backed (1) -- -- -- -- --
----- ------ ------ ------ -------
2,580 675 1,100 46 4,401
----- ------ ------ ------ -------
Available-for-Sale
U.S. Treasury 996 3,024 -- -- 4,020
U.S. Government agency -- -- 1,991 -- 1,991
Mortgage-backed securities (1) -- 3,914 14,641 58,446 77,001
State and municipal (2) -- 755 523 -- 1,278
Corporate securities -- 2,492 12,327 1,503 16,322
Asset-backed (1) -- -- 618 6,378 6,996
Mutual Funds -- -- -- 1,091 1,091
Other equity securities (3) -- -- -- 4,323 4,323
----- ------ ------ ------ -------
996 10,185 30,100 71,741 113,022
----- ------ ------ ------ -------
Total Investment securities $3,576 $10,860 $31,200 $71,787 $117,423
===== ====== ====== ====== =======
Percent of portfolio 3.05% 9.25% 26.57% 61.14% 100.00%
==== ==== ===== ===== ======
Weighted average yield 6.27% 6.09% 6.09% 7.72% 7.09%
==== ==== ==== ==== ====
<FN>
NOTES:
- -----
(1) Mortgage-backed and Asset-backed securities are included in the above table based on their contractual maturity.
(2) The yield on tax-exempt obligations has been computed on a tax equivalent basis using the Federal marginal rate of
34% adjusted for the 20% interest expense disallowance.
(3) Other equity securities having no stated maturity have been included in "Due over 10 years".
</FN>
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INVESTMENT SECURITIES AT DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------ -------------------
(Dollars in thousands) Book Market Book Market Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
U.S. Treasury $ -- $ -- $ -- $ -- $ 1,493 $ 1,494
U.S. Government agency -- -- -- -- -- --
Mortgage-backed securities 241 236 859 860 1,519 1,520
State and municipal 2,057 2,200 2,907 3,069 3,955 4,081
Corporate securities 2,104 2,099 3,110 3,144 4,115 4,129
Asset-backed -- -- 530 533 1,000 1,013
Mutual funds -- -- -- -- -- --
Other equity securities -- -- -- -- -- --
------- ------- ------- ------- ------ ------
$ 4,402 $ 4,535 $ 7,406 $ 7,606 $12,082 $12,237
======= ======= ======= ======= ====== ======
Available-for-Sale
U.S. Treasury $ 3,969 $ 3,969 $ 5,019 $ 5,019 $ 6,528 $ 6,528
U.S. Government agency 1,827 1,827 -- -- 7,392 7,392
Mortgage-backed securities 74,090 74,090 77,516 77,516 47,688 47,688
State and municipal 1,230 1,230 497 497 -- --
Corporate securities 10,669 10,669 6,262 6,262 1,000 1,000
Corporate CMO's 4,726 4,726 -- -- -- --
Asset-backed 6,874 6,874 8,760 8,760 -- --
Mutual Funds 1,015 1,015 1,039 1,039 1,042 1,042
Other equity securities 4,238 4,238 3,287 3,287 1,866 1,866
------- ------- ------- ------- ------ ------
$108,638 $108,638 $102,380 $102,380 $65,516 $65,516
======= ======= ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS,
$100,000 OR MORE, AT DECEMBER 31, 1999
Due Within Over 3 Months Over 6 Months Due Over
(Dollars in thousands) 3 Months Through 6 Months Through 12 Months 12 Months Total
---------- ---------------- ----------------- --------- -----
<S> <C> <C> <C> <C> <C>
Certificates of Deposit
$100,000 or more $ 11,340 $ 4,215 $ 4,125 $ 7,877 $27,556
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
EFFECT OF NONACCRUING LOANS ON INTEREST FOR
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income which would
have been recorded (1) $ 89 $ 129 $ 64 $ 42 $ 103
Interest income that was
received from customer -- 25 37 1 172
---- ---- ----- ----- -----
Total contractual interest
for nonaccruing loans
not collected $ 89 $ 104 $ 27 $ 41 $ (69)
==== ==== ===== ===== =====
<FN>
NOTES:
(1) Generally the Bank places a loan in nonaccrual status when principal or interest has been in default for a period of 90
days or more unless the loan is both well secured and in the process of collection.
</FN>
</TABLE>
<PAGE>
Item 2. Properties.
- ------ ----------
The Bank owns eight properties which are not subject to any mortgages.
The Corporation owns one property which is not subject to any mortgage, and
which is located at 124 West Cypress Street, Kennett Square, Pennsylvania. In
addition, the Corporation leases the Westtown-Thornbury, Exton, Frazer, Kenndal,
Crosslands, Lima, Granite Farms, Offices. Management of the Corporation believes
the Corporation's and the Bank's facilities are suitable and adequate for their
respective present needs. Set forth below is a listing of each banking office
presently operated by the Bank, and other properties owned or leased by the Bank
and the Corporation which may serve as future sites for branch offices.
<TABLE>
<CAPTION>
Current Date
Banking Acquired
Offices / Use Address or Opened
- ------------- ------- ---------
<S> <C> <C>
Main Office / Branch 9 North High Street December 1863
and Corporate West Chester, Pennsylvania
Headquarters
Walk-In Facility / Branch 17 East Market Street February 1978
West Chester, Pennsylvania
Westtown-Thornbury / Route 202 and Route 926 May 1994
Branch Westtown, Pennsylvania
Goshen / Branch 311 North Five Points Road September 1956
West Goshen, Pennsylvania
Kennett Square / Branch 126 West Cypress Street February 1987
Kennett Square, Pennsylvania
Exton / Branch Route 100 and Boot Road August 1995
West Chester, Pennsylvania
Frazer / Branch 309 Lancaster Avenue August 1999
Frazer, Pennsylvania
Former Commonwealth High & Market Streets July 1995
Building / Mortgage Center West Chester, Pennsylvania
Kendal at Longwood 1109 E. Baltimore Pike December 1999
Kennett Square, PA 19348
Crosslands 1660 E. Street Road December 1999
Kennett Square, PA 19348
Lima Estates 411 North Middletown Road December 1999
Media, PA 19063
Granite Farms Estates 1343 West Baltimore Pike December 1999
Wawa, PA 19063
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Other Date Acquired
Properties / Use Address or Opened
- ---------------- ------- -------------
<S> <C> <C>
Operations 202 Carter Drive July 1988
Center / Operations West Chester, Pennsylvania
Matlack Street / 887 South Matlack Street September 1999
Operations West Chester, Pennsylvania
Paoli Pike / Parking 1104 Paoli Pike July 1963
West Chester, Pennsylvania
Kennett Square / Parking 124 West Cypress Street July 1986
Kennett Square, Pennsylvania
Westtown / Operations 1039 Wilmington Pike February 1965
Westtown, Pennsylvania
</TABLE>
Item 3. Legal Proceedings.
- ------ -----------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Corporation, the
Bank or Turks Head Properties, Inc., is a party or of which any of their
respective property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
None.
PART II
-------
Item 5. Market for the Corporation's Common Equity and Related Stockholder
- ------ Matters.
------------------------------------------------------------------
The Corporation's Common Stock is publicly traded over the counter.
Trading is sporadic. Information regarding high and low bid quotations is
incorporated herein by reference from the Corporation's 1999 Annual Report to
Shareholders, attached as an exhibit hereto. As of March 1, 1998, there were
approximately 882 shareholders of record of the Corporation's Common Stock.
The Corporation declared cash dividends per share on its Common
Stock during each quarter of the fiscal years ended December 31, 1999 and 1998,
as set forth in the following table (which have been adjusted for the stock
split which occurred on November 24, 1998):
<PAGE>
<TABLE>
<CAPTION>
Dividends
---------
Amount Per Share
------------------
1999 1998
---- ----
<S> <C> <C>
First Quarter............................................. $ 0.120 $ 0.110
Second Quarter............................................ 0.120 0.110
Third Quarter............................................. 0.125 0.110
Fourth Quarter............................................ 0.125 0.140
------ ------
Total................................................... $ 0.490 $ 0.470
====== ======
</TABLE>
The holders of the Corporation's Common Stock are entitled to receive
such dividends as may be legally declared by the Corporation's Board of
Directors. The amount, time, and payment of future dividends, however, will
depend on the earnings and financial condition of the Corporation, government
policies, and other factors.
Item 6. Selected Financial Data.
- ------ -----------------------
Selected financial data concerning the Corporation and the Bank is
incorporated herein by reference from the Corporation's 1999 Annual
Report to Shareholders, attached as an exhibit hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ of Operations.
------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations is incorporated herein by reference from the
Corporation's 1999 Annual Report to Shareholders, attached as an
exhibit hereto.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Quantitative and Qualitative Disclosures About Market Risk are
incorporated herein by reference from the Corporation's 1999 Annual
Report to Shareholders, attached as an exhibit hereto.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
Consolidated financial statements of the Corporation and the Report
of Independent Certified Public Accountants thereon are incorporated
herein by reference from the Corporation's 1999 Annual Report to
Shareholders, attached as an exhibit hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ Financial Disclosure.
----------------------------------------------------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Corporation.
- ------- ---------------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 15, 2000, for its
2000 Annual Meeting of Shareholders.
<PAGE>
Item 11. Executive Compensation.
- ------- ----------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 15, 2000, for its
2000 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 15, 2000, for its
2000 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
The information called for by this item is incorporated herein by
reference to the Corporation's Proxy Statement dated February 15, 2000, for its
2000 Annual Meeting of Shareholders.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ------- ----------------------------------------------------------------
1. Index to Consolidated Financial Statements
------------------------------------------
<TABLE>
<CAPTION>
Page of Annual
Report to Shareholders
----------------------
<S> <C>
Consolidated Balance Sheets Page 36
at December 31, 1999 and
1998
Consolidated Statements of Page 37
Income for the years ended
December 31, 1999, 1998
and 1997
Consolidated Statement of Changes Page 38
in Stockholders' Equity and
Comprehensive Income for the years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Page 39
Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Pages 40 to 59
Financial Statements
Report of Independent Certified Page 61
Public Accountants
</TABLE>
<PAGE>
The Consolidated Financial Statements listed in the above index,
together with the report thereon of Grant Thornton LLP dated January 27, 2000,
which are included in the Corporation's Annual Report to Shareholders for the
year ended December 31, 1999, are hereby incorporated herein by reference.
2. Financial Statement Schedules
-----------------------------
Financial Statement Schedules are not required under the related
instructions of the Securities and Exchange Commission, are inapplicable or are
included in the Consolidated Financial Statements or notes thereto.
3. Exhibits
--------
The following is a list of the exhibits filed with, or
incorporated by reference into, this Report (those exhibits marked with an
asterisk are filed herewith):
* 3(i). Articles of Incorporation. Copy of the Articles of Incorporation
-------------------------
of the Corporation, as amended.
3(ii). By-Laws of the Corporation. By-Laws of the Corporation, filed as
--------------------------
Exhibit 3 (ii) to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1998 is incorporated by reference.
10. Material contracts.
------------------
(a) Copy of Employment Agreement among the Corporation, the
Bank and Charles E. Swope dated January 1, 1999, filed as Exhibit 10 (a) to
the Corporation's Annual Report on Form 10-K for the year ended December 31,
1997 is incorporated by reference.
(b) Copy of the Corporation's Dividend Reinvestment and
Stock Purchase Plan, filed as an exhibit to the Corporation's registration
statement on Form S-3 filed August 8, 1997 (File no. 333-33175) is incorporated
herein by reference.
(c) Copy of the Corporation's Amended and Restated Stock
Bonus Plan, filed as an exhibit to the Corporation's registration statement
on Form S-8 filed August 12, 1997 (File no. 333-33411) is incorporated
herein by reference.
(d) Copy of the Bank's Amended and Restated Supplemental
Benefit Retirement Plan, effective date January 1, 1995, is incorporated herein
by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994.
(e) Copy of the Corporation's and the Bank's Directors
Deferred Compensation Plan, effective December 30, 1995, is incorporated herein
by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995.
(f) Copy of the Corporation's Amended and Restated 1995
Stock Option Plan, filed as an appendix to the Corporation's Proxy statement
for the 2000 Annual Meeting of Shareholders as filed with the SEC via
EDGAR is incorporated herein by reference.
* (g) Copy of Employment Agreement between the Bank and James
Duncan Smith (EVP), dated December 1, 1999. Kevin C. Quinn, EVP, and Peter J. D'
Angelo, EVP, are also parties to employment agreements with the Bank
which are substantially identical to Mr. Smith's.
<PAGE>
* 13. Annual Report to Security Holders, Form 10-Q or Quarterly
Report to Security Holders. The Corporation's Annual Report to Shareholders for
the year ended December 31, 1999. With the exception of pages 17-61 and the
items referred to in Items 1, 5, 6, 7, 7A, 8 and 16 hereof, the Corporation's
1999 Annual Report to Shareholders is not deemed to be filed as part of this
report.
* 21. Subsidiaries of the Corporation. First National Bank of
Chester County, formerly known as The First National Bank of West Chester, a
banking institution organized under the banking laws of the United States in
December 1863. Turks Head Properties, Inc., formerly known as 323 East Gay
Street Corporation, incorporated, in 1996 in the State of Pennsylvania.
* 23. Consents of experts and counsel. Consent of Grant Thornton
LLP, dated March 24, 2000.
* 27. Financial Data Schedules. A Financial Data Schedule is being
submitted with the Corporation's 1999 Annual Report on Form 10-K in the
electronic format prescribed by the EDGAR Filer Manual and sets forth the
financial information specified by Article 9 of Regulation S-X and Securities
Act Industry Guide 3 information and Exchange Act Industry Guide 3 listed in
Appendix C to Item 601 of Regulation S-K.
(b) Reports on Form 8-K. A Form 8-K was filed by the Corporation on October 15,
-------------------
1999 that reported the Corporation's third quarter earnings for September 20,
1999, filed with the SEC via EDGAR.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST CHESTER COUNTY CORPORATION
(Formerly known as FIRST WEST CHESTER
CORPORATION)
/s/ Charles E. Swope
___________________________
By:
Charles E. Swope,
President
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Corporation and in the capacities indicated on March 29, 2000.
Signature Title
--------- -----
/s/ Charles E. Swope President, Chief Executive
______________________________ Officer and Chairman of the
Board of Directors
Charles E. Swope
/s/ J. Duncan Smith Treasurer (Principal
______________________________ Accounting and Financial Officer)
J. Duncan Smith
(Signatures continued on following page)
<PAGE>
(Signatures continued from previous page)
Signature Title
--------- -----
/s/ John J. Ciccarone Director
- --------------------------------
John J. Ciccarone
/s/ M. Robert Clarke Director
- ---------------------------------
M. Robert Clarke
/s/ Clifford E. DeBaptiste Director
- ---------------------------------
Clifford E. DeBaptiste
/s/ John A. Featherman, III Director
- ---------------------------------
John A. Featherman, III
/s/ John S. Halsted Director
- ---------------------------------
John S. Halsted
/s/ J. Carol Hanson Director
- ---------------------------------
J. Carol Hanson
/s/ David L. Peirce Director
- ---------------------------------
David L. Peirce
/s/ John B. Waldron Director
- ---------------------------------
John B. Waldron
<PAGE>
Index to Exhibits
The following is a list of the exhibits filed with, or
incorporated by reference into, this Report (those exhibits marked with an
asterisk are filed herewith):
* 3(i). Articles of Incorporation. Copy of the Articles of
Incorporation of the Corporation, as amended.
-------------------------
3(ii). By-Laws of the Corporation. By-Laws of the Corporation, filed as
--------------------------
Exhibit 3 (ii) to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997 is incorporated by reference.
10. Material contracts.
------------------
(a) Copy of Employment Agreement among the Corporation, the
Bank and Charles E. Swope dated January 1, 1999, filed as Exhibit 10 (a) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997 is
incorporated by reference.
(b) Copy of the Corporation's Dividend Reinvestment and Stock
Purchase Plan, filed as an exhibit to the Corporation's registration statement
on Form S-3 filed August 8, 1997 (File no. 333-33175) is incorporated herein by
reference.
(c) Copy of the Corporation's Amended and Restated Stock Bonus
Plan, filed as an exhibit to the Corporation's registration statement on Form
S-8 filed August 12, 1997 (File no. 333-33411) is incorporated herein by
reference.
(d) Copy of the Bank's Amended and Restated Supplemental
Benefit Retirement Plan, effective date January 1, 1995, is incorporated herein
by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994.
(e) Copy of the Corporation's and the Bank's Directors
Deferred Compensation Plan, effective December 30, 1995, is incorporated herein
by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995.
(f) Copy of the Corporation's Amended and Restated 1995 Stock
Option Plan, filed as an appendix to the Corporation's Proxy statement for the
2000 Annual Meeting of Shareholders as filed with the SEC via EDGAR is
incorporated herein by reference.
* (g) Copy of Employment Agreement between the Bank and James
Duncan Smith (EVP), dated December 1, 1999. Kevin C. Quinn, EVP, and Peter J.
D'Angelo, EVP, are also parties to employment agreements with the Bank which are
substantially identical to Mr. Smith's.
* 13. Annual Report to Security Holders, Form 10-Q or Quarterly
------------------------------------
Report to Security Holders. The Corporation's Annual Report to Shareholders for
the year ended December 31, 1999. With the exception of pages 17-61and the items
referred to in Items 1, 5, 6, 7, 7A and 8 hereof, the Corporation's 1999 Annual
Report to Shareholders is not deemed to be filed as part of this Report.
* 21. Subsidiaries of the Corporation. The First National Bank of
---------------------------------
Chester County, formerly known as The First National Bank of West Chester, a
banking institution organized under the banking laws of the United States in
December 1863. Turks Head Properties, Inc.formerly known as 323 East
Gay Street Corporation, incorporated in 1996 in the State of Pennsylvania.
* 23. Consents of experts and counsel. Consent of Grant Thornton
LLP, dated March 24, 2000.
* 27. Financial Data Schedules. A Financial Data Schedule is being
-------------------------
submitted with the Corporation's 1999 Annual Report on Form 10-K in the
electronic format prescribed by the EDGAR Filer Manual and sets forth the
financial information specified by Article 9 of Regulation S-X and Securities
Act Industry Guide 3 information and Exchange Act Industry Guide 3 listed in
Appendix C to Item 601 of Regulation S-K.
(b) Reports on Form 8-K. A Form 8-K was filed by the
----------------------
Corporation on October 15, 1999 that reported the Corporation's third quarter
earnings for September 20, 1999, filed with the SEC via EDGAR.
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
ARTICLES OF INCORPORATION
OF
FIRST WEST CHESTER CORPORATION
In compliance with the requirements of the Business Corporation
Law, approved the fifth day of May, A.D., 1933, as amended, the undersigned,
desiring to be incorporated as a business corporation, does hereby certify:
Article 1
---------
The name of the Corporation is First Chester County Corporation.
Article 2
---------
The location and post office address of the initial registered
office of the Corporation in the Commonwealth of Pennsylvania is: Nine North
High Street, West Chester, Pennsylvania 19380.
Article 3
---------
The Corporation is incorporated under the Business Corporation
law of the Commonwealth of Pennsylvania for the following purposes: To engage in
and do any lawful act concerning all lawful business for which corporations may
be incorporated under the Business Corporation Law of Pennsylvania and to do all
things and exercise all powers, rights and privileges which a business
corporation may now or hereafter be organized or authorized to do or to exercise
under the laws of the Commonwealth of Pennsylvania.
Article 4
---------
The term for which the Corporation is to exist is perpetual.
Article 5
---------
The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is (10,000,000) shares of common stock
with a par value of $1.00 per share.
<PAGE>
Article 6
---------
A. The provisions of this Article 6 shall apply to any of the
following transactions (hereinafter referred to as "Business Combinations"):
(1) any merger or consolidation of the Corporation or any
subsidiary of the Corporation with or into any other
corporation, person or other entity which is the owner or
beneficial owner, directly or indirectly, of 20% or more of the
outstanding voting securities of the Corporation; or
(2) any sale or lease or exchange or other disposition (in
one transaction or a series of related transactions) of all or
substantially all of the assets of the Corporation to any other
corporation, person or other entity which is the beneficial
owner, directly or indirectly, of 20% or more of the outstanding
voting securities of the Corporation; or
(3) any sale or lease or exchange or other disposition (in
one transaction or a series of related transactions) to the
Corporation or any subsidiary of the Corporation of any agents
having an aggregate fair market value equal to or greater than
ten (10%) percent of the Corporation's consolidated
stockholders' equity as of the date thereof in exchange for
voting securities (or securities convertible into or
exchangeable for voting securities, or options, warrants or
rights to purchase voting securities or securities convertible
into or exchangeable for voting securities) of the Corporation
or any subsidiary of the Corporation by any other corporation,
person or other entity which is the beneficial owner, directly
or indirectly, of 20% or more of the outstanding voting
securities of the Corporation; or
(4) any reclassification of securities, recapitalization or
other transactions designed to decrease the numbers of hollers
of the Corporation's voting securities remaining after any other
corporation, person or other entity has acquired 20% or more of
the outstanding voting securities of the Corporation. A
corporation, person or other entity (other than the Corporation
or any subsidiary of the Corporation) which is the beneficial
owner, directly or indirectly, of 20% or more of the
Corporation's outstanding voting securities (taken together as a
single class) is herein referred to as the "Acquiring Entity".
B. Notwithstanding the fact that by law or by agreement with a
national securities exchange or otherwise, no vote, or a lesser vote, of
shareholders may be specified or required, the affirmative vote of the holders
of at least seventy-five (75%) percent of outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors (taken
together as a single class) shall be required to approve any Business
Combination or any plan or proposal for the liquidation or dissolution of the
Corporation which would require or permit a distribution of any surplus
remaining after payment of all debts and liabilities o the Corporation to the
shareholders in accordance with their respective rights and preferences.
C. Notwithstanding the foregoing, if three-fourths (3/4) of the
entire Board of Directors (or if there is a person or persons serving on the
Board other than Continuing Directors (as hereinafter defined); in which event
this requirement shall be for three-fourths (3/4) of the Continuing Directors )
recommends in favor of acceptance of Business Combination or a plan of
liquidation or dissolution described in paragraph B of this Article 6, the Board
may waive the provisions above requiring a greater percentage of shareholder
vote and the same may be effected upon the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Corporation entitled
to vote generally in the election of directors (taken together as a single
class). If any provision herein requiring a 75% shareholder approval is finally
judicially determined invalid, then a Business Combination or plan of
liquidation or dissolution must be approved by the affirmative vote of the
holders of not less than two-thirds (2/3) of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors
(taken together as a single class). A "Continuing Director" shall mean a person
who was a member of the Board of Directors of the Corporation elected prior to
the date as of which any Acquiring Entity acquired in excess of twenty (20%)
percent of the Corporation's outstanding voting securities (taken together as a
single class), or a person designated (before his initial election as a
director) as a Continuing Director by a majority of the then Continuing
Directors.
<PAGE>
Article 7
---------
Any amendment, alteration, change or repeal of these Articles of
Incorporation or the By-Laws of the Corporation shall require the affirmative
vote of the holders of at least seventy-five (75%) percent of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (taken as a single class); provided, however, that this
Article 7 shall not apply to, and such seventy-five (75%) percent vote shall not
be required for, and the affirmative vote of a majority of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (taken together as a single class) shall be required for,
any amendment, alteration, change or repeal recommended to the stockholders by
three-fourths (3/4) of the entire Board of Directors (or if there is a person or
persons serving on the Board other than Continuing Directors, by three-fourths
(3/4) of the Continuing Directors). If any of the foregoing provisions are
finally judicially determined to be invalid, then these Articles of
Incorporation and the By-Laws of the Corporation may only be amended, altered,
changed or repealed by the affirmative vote of the holders of not less than
two-thirds (2/3) of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (taken together as a
single class).
Article 8
---------
The management, control and government of the Corporation shall
be vested in a Board of Directors consisting of not less than five (5) nor more
than twenty-five (25) members in number, as fixed from time to time by the Board
of Directors of the Corporation. The Directors of the Corporation shall be
divided into three classes: Class I, Class II and Class III. Each class shall be
as nearly equal in number as possible. If the number of Class I, Class II or
Class III Directors is fixed for any term of office, it shall not be increased
during that term, except by a majority vote of Directors, the term of office of
each class shall be three years; provided, however, that the term of office of
the initial Class I Directors shall expire at the annual election of Directors
by the shareholders of the Corporation in 1985; the term of office of the
initial Class II Directors shall expire at the annual election of Directors by
the shareholders of the Corporation in 1986; the term of office of the initial
Class III Directors shall expire at the annual election of Directors by the
shareholders of the Corporation in 1987, so that, after the expiration of each
such initial term, the terms of office of one class of Directors shall expire
each year when their respective successors have been duly elected by the
shareholders and qualified. At each annual election of the Directors by the
shareholders of the Corporation held during and after 1984, the Directors chosen
to succeed those whose terms then expire shall be identified as being of the
same class as the Directors they succeed. A Director must be a shareholder of
the Corporation. If a vacancy occurs on the Board of Directors of the
Corporation after the first annual election of Directors for the class in which
such Director sits, a majority of the remaining Directors shall have the
exclusive power to fill the vacancy by electing a Director to hold office for
the unexpired term in respect of which the vacancy occurred.
Article 9
---------
The shareholders of this Corporation shall not be permitted to
cumulate their votes for the election of directors.
Article 10
----------
The Corporation shall indemnify its officers, directors,
employees and agents of the Corporation and its subsidiaries to the extent set
forth in the By-Laws of the COrporation.
Article 11
----------
The name and post office address of the incorporators and the
number and class of shares subscribed by him is:
Number of and
Name Address Class of Shares
- ---- ------- ---------------
David B. Harwi 3800 Centre Square West 1
Philadelphia, PA 19102 Common
IN TESTIMONY WHEREOF, the incorporator has signed and sealed
these Articles of Incorporation this 7th day of March 1984.
/s/ DAVID B. HARWI(SEAL)
------------------------
David B. Harwi
EXECUTIVE EMPLOYMENT AGREEMENT
FIRST WEST CHESTER CORPORATION
THE FIRST NATIONAL BANK OF WEST CHESTER
and
J. DUNCAN SMITH
MacELREE, HARVEY, GALLAGHER, FEATHERMAN & SEBASTIAN, LTD.
17 West Miner Street
P.O. Box 660
West Chester, PA 19381-0660
(610) 436-0100
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT made this 1st day of December, 1999,
by and between THE FIRST NATIONAL BANK OF WEST CHESTER, a wholly owned
subsidiary of First West Chester Corporation and a National Banking association
with its principal offices located at 9 North High Street, West Chester,
Pennsylvania (hereinafter referred to as "Bank) and J. DUNCAN SMITH, of West
Chester, Pennsylvania (hereinafter referred to as "Executive").
W I T N E S S E T H:
--------------------
WHEREAS, Executive is the Executive Vice President, Financial
Support Services Division of the Bank and has served as the Executive Vice
President, Financial Support Services Division of the Bank continuously since
January 1, 1998 and has served as an executive employee of the Bank continuously
since March 15, 1993; and
WHEREAS, Executive's leadership skills and services have
constituted a major factor in the successful growth and development of Bank; and
WHEREAS, BANK desires to employ and retain the experience and
financial ability and services of Executive as Executive Vice President,
Financial Support Services Division, from the effective date hereof and to
prevent any other business in competition with Bank from securing the benefit of
his services, background and expertise in the Banking business; and
WHEREAS, the terms, conditions and undertakings of this
Agreement were submitted to and duly approved and authorized by the Board of
Directors of the Bank at a meeting held on or about the 17th day of December,
1 999.
NOW, THEREFORE, in consideration of the foregoing recitals,
which are hereby incorporated by reference, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Employment. Bank hereby employs Executive, and
Executive hereby accepts such employment, under and subject to the terms and
conditions hereinafter set forth.
2. Term. Subject to the provisions for termination of this
Agreement provided in Paragraph 6 hereof, the term of this Agreement shall be
for a period of three (3) years, commencing December 1, 1999, and terminating
November 30, 2002 (the "Term"). In the event that the Executive shall continue
in the full-time employment of the Bank after such three (3) year period without
a written extension of this Agreement, such continued employment shall be for
successive annual periods, shall be subject to the terms and conditions of this
Agreement, and the period of employment shall include the period during which
the Executive in fact so continues in such employment.
3. Compensation. During the Term of this Agreement, Bank shall
pay Executive a salary (hereinafter referred to as "Compensation") and provide
Executive with life, health and disability insurance coverage, retirement
benefits, vacations, bonuses, and other benefits (hereinafter collectively
referred to as the "Benefits"), the amounts and nature of which shall be fixed
by the President of the Bank from time to time and set forth on the attached
Exhibit "A"; provided, however, that in no event shall Executive's Compensation
be less than one hundred percent (100%) of the Compensation which he is
receiving as of the date of this Agreement and in no event shall Executive's
Benefits be less than or materially different from the Benefits he is receiving
as of the date of this Agreement.
4. Position and Responsibilities.
(a) During the first twelve (12) months of the Term
of this Agreement, Executive shall be employed as the Executive Vice President,
Financial Support Services Division of the Bank, and it is contemplated by the
parties that Executive shall continue to serve as the Executive Vice President,
Financial Support Services Division of the Bank throughout the entire Term of
this Agreement; provided, however, that in no event shall Executive be employed
<PAGE>
by the Bank after the first twelve (12) months of this Agreement at a lower
position or rank or with substantially diminished authority or responsibilities
than Vice President and any such diminution in position or authority shall not
be considered a breach of this Agreement. Executive shall devote his full time
and efforts solely to the business of Bank and shall diligently, efficiently and
effectively perform such duties as shall be assigned to him, which shall consist
of the general and active management of the Financial Support Services Division
of Bank and such other duties of supervision and management as are generally
vested in the office of a financial support services department of a corporation
or as are set forth in job descriptions established from time to time by the
Board of Directors of the Bank for such offices. Executive shall at all times
during the Term of this Agreement refrain from doing any act, disclosing any
information or making any statements to any person other than Officers or
Directors of Bank which may result in the disclosure of confidential information
or adversely affect the good reputation of Bank in the community or which might
adversely affect the professional or business relationship between Bank and any
business, depositor, borrower or any other person with whom Bank is doing
business or is contemplating doing business.
(b) Bank shall provide Executive with an office,
secretarial assistance and such other facilities and support services as shall
be suitable to Executive's position and responsibilities as set forth above and
as may be necessary to enable Executive to perform such duties effectively and
efficiently.
(c) In connection with Executive's employment by
the Bank, Executive shall maintain his office at the principal executive offices
of Bank located at 9 North High Street, West Chester, Pennsylvania, or at such
other Bank office as the President or Board of Directors of the Bank may select
within the immediate vicinity of West Chester, Pennsylvania.
5. Breach of Agreement by Bank. If Bank breaches any
material provision of this Agreement (specifically including, but not limited
to, substantial diminution in the position and authority of Executive as set
forth in the preceding paragraphs), Executive may leave the employment of Bank
whereupon he shall be under no obligation to perform his duties hereunder and,
with the exception of the covenants set forth in Paragraphs 9 and 10 hereof,
shall have no further liability or obligations under any provisions of this
Agreement. In such event, however, Bank shall be obligated to continue to
provide Executive with the Compensation and Health and Life Insurance Benefits
provided for herein for a period of one (1) year at the rate, times and
intervals at which such Compensation and Health and Life Insurance Benefits are
being paid on the date on which Bank commits a breach of this Agreement.
However, prior to terminating this Agreement by reason of Bank's breach of any
provision of this Agreement, Executive shall first give Bank written notice
specifically identifying the manner in which Bank has breached the terms of this
Agreement and the approximate date or dates on which such violations have
occurred. Bank shall have thirty (30) days from his receipt of such notice
within which to cure or correct the effects of such breach and to report in
writing to the Executive all steps which have been taken to cure such breach. If
Bank shall not have corrected or cured such breach or diligently taken all steps
which are necessary to do so within the aforesaid thirty (30) day period,
Executive may terminate this Agreement effective immediately upon giving Bank
written notice of such termination on or after the 31st day following the date
on which notice of the breach was delivered to Bank.
6. Termination.
(a) Termination by Executive. Executive may terminate
this Agreement by giving the President of the Bank written notice thereof. If
Executive terminates this Agreement pursuant to this subparagraph, Executive's
obligations under Paragraphs 9 and 10 below shall remain in full force and
effect and Bank shall be under no obligation to pay any Compensation or provide
any Benefits to Executive following the effective date of such termination,
except that Bank shall remain liable to pay Compensation and Benefits which have
accrued but which remain unpaid or unfurnished as of the effective date of such
termination.
(b) Termination for Cause. The Board of Directors or
President of the Bank may terminate this Agreement at any time for Cause.
"Cause" shall encompass the following: (i) Executive has committed any act of
fraud; (ii) illegal conduct or gross misconduct by the Executive, in either case
that is willful and results in material and demonstrable damage to the business
or reputation of the Bank. No act or failure on the part of the Executive shall
be considered "willful" unless it is done, or omitted to be done, by the
Executive in bad faith or without reasonable belief that the Executive's action
or omission was in the best interests of the Bank. Any act or failure to act
that is based upon authority given pursuant to a resolution duly adopted by the
Board, or the advice of counsel for the Bank, shall be conclusively presumed to
be done, or omitted to be done, by the Executive in good faith and in the best
interests of the Bank; (iii) Executive has been convicted of a felony. If Bank
terminates this Agreement pursuant to this subparagraph, Executive's obligations
under Paragraphs 9 and 10 below shall remain in full force and effect and Bank
shall be under no obligation to pay any Compensation or provide any Benefits to
Executive following the effective date of such termination, except that Bank
shall remain liable to pay Compensation and Benefits which have accrued but
which remain unpaid or unfurnished as of the effective date of such termination.
<PAGE>
(c) Termination for failure to perform duties. If
Executive fails to provide the services which are reasonably required of him
under Paragraph 4 the terms of this Agreement then the Bank may terminate the
Agreement as provided below. However, prior to terminating this Agreement by
reason of Executive's failure to provide services hereunder, the Board of
Directors or President of the Bank shall first give Executive written notice
specifically identifying the manner in which Executive has failed to perform
services under this Agreement. Executive shall have thirty (30) days from his
receipt of such notice within which to cure or correct the effects of such
breach and to report in writing to the Boards of Directors or President of the
Bank, whichever gave written notice, all steps which he has taken to cure such
breach. If Executive shall not have corrected or cured such deficiencies nor
diligently taken all steps which are necessary to do so within the aforesaid
thirty (30) day period, the Board of Directors or President of the Bank may
terminate this Agreement effective immediately upon giving Executive written
notice of such termination on or after the 31st day following the date on which
notice of the breach was delivered to Executive. In the event that this
Agreement is terminated by Bank pursuant to this subparagraph, Executive's
obligations under Paragraph 10 below shall remain in full force and effect after
termination, and the obligations under Paragraph 9 below shall remain in full
force and effect for a period of one year from the date of termination, and Bank
shall be obligated to provide Executive with the compensation and health and
life insurance benefits provided for herein for a period of one year on the
terms and conditions that such compensation and health and life insurance
benefits are being paid on the date on which Executive is terminated.
(d) Except as provided in Paragraphs 5 and 6, this
Agreement may not be terminated by either party.
7. Expenses . Executive is authorized to incur
reasonable expenses for promoting the business of Bank, including expenses for
travel, entertainment and similar items on behalf of Bank business. Bank shall
reimburse Executive for all such expenses upon the presentation by Executive,
from time to time, of an itemized account of such expenditures.
8. Death or Disability. If, during the Term of this
Agreement, Executive's physical or mental health shall have become impaired so
as to make it impossible or impractical for him to perform the duties and
responsibilities contemplated hereunder for a period of at least ninety (90)
consecutive days or a total of one hundred and eighty (180) days in a twelve
month period, then Bank shall have the right to terminate this Agreement upon
fifteen (15) days written notice to Executive. In the event of termination due
to disability, Executive shall be entitled to receive all compensation hereunder
accrued and unpaid as of the date of termination. In the event of Executive's
death during the term of this Agreement or while receiving payments or benefits
hereunder, Executive's employment and the Bank's obligations shall terminate
thirty (30) days following the date of death, and Executive's estate or personal
representative shall be entitled to receive all compensation hereunder accrued
and unpaid as of the date of termination.
9. Restrictive Covenant. During the Term of this
Agreement and for a period of one (1) year following termination thereof, for
any reason whatsoever, Executive shall not, directly or indirectly: (a) be
employed in Chester County, Pennsylvania by any other bank or similar financial
institution; (b) on behalf of a competing bank or similar financial institution,
solicit, engage in, or accept business or perform any services for any
organization or individual which at any time during the one (1) year ending with
Executive's termination was a Bank client, customer or affiliate, or a source of
business with which or who Executive dealt or had any contact during the term of
employment; (c) solicit any employee of the Bank for the purpose of inducing
such employee to resign from the Bank; nor (d) induce or assist others in
engaging in the activities described in subparagraphs (a) through (c) above.
10. Covenant against Disclosure of Confidential
Information. During the term of Executive's employment with the Bank and
following the voluntary or involuntary termination of Executive's employment
with the Bank for any reason whatsoever, Executive shall not use for any purpose
or disclose to any person or entity any confidential information acquired during
the course of employment with the Bank. Executive shall not, directly or
indirectly, copy, take, or remove from the Bank's premises, any of the Bank's
books, records, customer lists, or any other documents or materials. The term
"confidential information" as used in this Agreement includes, but is not
limited to, records, lists, and knowledge of the Bank's customers, suppliers,
methods of operation, processes, trade secrets, methods of determination of
prices and rates, financial condition, as the same may exist from time to time.
<PAGE>
11. Binding Effect. This Agreement shall inure to the
benefit of and be binding upon Bank, its successors and assigns, including,
without limitation, any person, partnership, bank or corporation which may
acquire all or substantially all of the assets or business of Bank or into which
Bank may be liquidated, consolidated, merged or otherwise combined, regardless
of the identity or form of the surviving entity, and shall inure to the benefit
of and be binding upon Executive, his heirs, and personal representatives.
Should any of the events referenced in the preceding sentence occur, the
compensation and benefits of Executive shall not be reduced to less than that
being paid at the time of occurrence of the event.
12. Notice. Any notice required or permitted to be given
under this Agreement shall be sufficient if in writing and if sent by registered
mail, return receipt requested, correctly addressed to Executive's residence, in
the case of Executive, or to its principal office, in the case of Bank. Copies
of all such notices shall simultaneously be personally delivered or sent by
United States first class mail, postage prepaid, to John A. Featherman, III,
Esquire, MacElree, Harvey, Gallagher, Featherman & Sebastian, Ltd., 17 West
Miner Street, West Chester, Pennsylvania, General Counsel to Bank.
13. Waiver of Breach. Waiver by either party of the
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
14. Vested Benefits. This Agreement shall not limit or in
any way affect any benefits which Executive may be entitled to receive under
Bank's pension plan or any other benefits in which Executive has a vested
interest as of the date of this Agreement.
15. Successors.
(a) This Agreement is personal to the Executive and,
without the prior written consent of the Bank, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and
be binding upon the Bank and its successors and assigns.
(c) The Bank shall require any successor (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Bank expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Bank would have been required to perform it if no such succession had
taken place. As used in this Agreement, "Bank" shall mean both the Bank as
defined above and any such successor that assumes and agrees to perform this
Agreement, by operation of law or otherwise.
16. Savings Clause. Should any provision contained herein
be determined by decree or court or other judicial body to be illegal or
unenforceable, such provision shall be considered null and void and the
remainder of this Agreement shall remain in full force and effect and shall be
construed without reference to any such provision. Nevertheless, it is the
intention of the parties hereto that any such invalid or unenforceable provision
shall, if possible, be construed and enforced in such a manner as to make the
same valid and enforceable under applicable law and consistent with the
reasonable intention of the parties as expressed in such provision.
17. Governing Law. Questions pertaining to the validity,
construction and administration of this Agreement shall be determined in
accordance with the laws of the Commonwealth of Pennsylvania.
18. Entire Agreement; Modification. This Agreement
constitutes the entire understanding and agreement between the parties hereto
with regard to the subject matter hereof, and there are no other agreements,
conditions, representations or understandings, oral or written, expressed or
implied, with regard to the subject of this Agreement. This Agreement may be
amended or modified only by a written instrument executed by the parties hereto.
WITNESS: THE FIRST NATIONAL BANK OF WEST CHESTER
By: /s/Charles E. Swope
- ------------------------------ -----------------------------------------
Charles E. Swope, President
WITNESS:
- ------------------------------ -----------------------------------------
J. Duncan Smith, Executive Vice President
Financial Support Services Division
<PAGE>
EXHIBIT "A"
COMPENSATION AND BENEFITS
AS OF DECEMBER 1, 1999
<PAGE>
1. Annual Salary as of December 1, 1999: $120,000.00
2. Health Insurance: Standard Bank Medical and Dental Insurance Programs.
3. Pension Plan: 401(k) Plan.
4. Salary Continuance (Disability) Policy/Plan: Long-Term disability equal
to sixty percent (60%) of salary to a maximum of $60,000.00 per year.
5. Life Insurance: Group Term Life Insurance at three times salary to a
maximum of $345,000.00.
6. Supplemental Benefit Pension Plan.
7. Executive Officers Bonus Plan as defined by the Bank's Board of
Directors.
8. Five (5) Weeks Paid Vacation.
9. Stock Options as awarded by the Board of Directors.
<PAGE>
TABLE OF CONTENTS
Page
1. Employment............................................................2
2. Term..................................................................2
3. Compensation..........................................................2
4. Position and Responsibilities.........................................3
5. Breach of Agreement...................................................4
6. Termination...........................................................5
7. Expenses..............................................................7
8. Death or Disability...................................................7
9. Restrictive Covenant..................................................8
10. Covenant Against Disclosure of Confidential Information...............8
11. Binding Effect........................................................9
12. Notice................................................................9
13. Waiver of Breach......................................................9
14. Vested Benefits......................................................10
15. Successors...........................................................10
16. Savings Clause.......................................................10
17. Governing Law........................................................11
18. Entire Agreement; Modification.......................................11
EXHIBIT "A"...................................................................12
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
FIVE-YEAR STATISTICAL SUMMARY
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
December 31
--------------------------------------------------------------
STATEMENTS OF CONDITION 1999 1998 1997 1996 1995
- ----------------------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Assets $511,902 $470,693 $431,368 $397,684 $388,500
Loans 354,338 320,395 318,899 264,582 242,587
Investment securities 113,040 109,786 77,598 97,675 93,511
Deposits 448,433 418,398 374,249 351,266 343,926
Stockholders' equity 38,182 39,723 36,213 33,175 30,692
Financial Management Services
assets, at market value 429,597 405,217 348,069 271,212 255,992
Year Ended December31
--------------------------------------------------------------
STATEMENTS OF INCOME 1999 1998 1997 1996 1995
- -------------------- -------- -------- -------- -------- ------
Interest income $ 35,107 $ 33,753 $ 32,114 $ 29,627 $ 28,466
Interest expense 14,543 14,135 13,351 12,135 11,564
------- ------- ------- ------- -------
Net interest income 20,564 19,618 18,763 17,492 16,902
Provision for possible loan losses 799 911 1,135 1,079 1,666
------- ------- ------- ------- -------
Net interest income after
provision for possible loan
losses 19,765 18,707 17,628 16,413 15,236
Non-interest income 5,008 4,687 3,787 3,562 3,497
Non-interest expense 17,506 16,278 14,911 13,632 12,768
------- ------- ------- ------- -------
Income before income taxes 7,267 7,116 6,504 6,343 5,965
Income taxes 2,050 2,100 1,889 2,038 1,865
------- ------- ------- ------- -------
Net income $ 5,217 $ 5,016 $ 4,615 $ 4,305 $ 4,100
======= ======= ======= ======= =======
PER SHARE DATA (1)
- --------------
Net income per share (Basic) $ 1.14 $ 1.09 $ 1.00 $ 0.94 $ 0.88
Net income per share (Diluted) $ 1.13 $ 1.07 $ 1.00 $ 0.94 $ 0.88
Cash dividends declared $ 0.49 $ 0.47 $ 0.43 $ 0.38 $ 0.34
Book value $ 8.40 $ 8.61 $ 7.89 $ 7.25 $ 6.72
Basic weighted average shares
outstanding 4,571,929 4,609,874 4,580,814 4,569,712 4,673,100
========= ========= ========= ========= =========
Diluted weighted average shares
outstanding 4,624,370 4,676,031 4,619,620 4,584,668 4,673,342
========= ========= ========= ========= =========
<FN>
(1) All per share data has been retroactively adjusted for stock splits and
stock dividends.
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is intended to further your understanding of the
consolidated financial condition and results of operations of First West Chester
Corporation (the "Corporation") which intends to change its name to the First
West Chester Corporation and its wholly-owned subsidiaries, The First National
Bank of West Chester (the "Bank") which intends to change its name to The First
National Bank of Chester County 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) anticipated pressure on net yields; and
(h) the impact of changes in demographics on branch locations. These risks and
uncertainties are all difficult to predict and most are beyond the control of
the Corporation's Management.
Although the Corporation believes that its expectations are based on
reasonable assumptions, readers are cautioned that such forward looking
statements are only projections. The Corporation undertakes no obligation to
publicly release any revisions to the forward-looking statements to reflect
events or circumstances after the date of this report.
EARNINGS AND DIVIDEND SUMMARY
In 1999, net income increased $201 thousand or 4.0% to $5.217 million
from $5.016 million in 1998. Several factors contributed to the improvement;
increases in net interest income and non-interest income, gains on the sale of
certain investment securities, a reduction on the effective tax rate and an
overall lower provision for loan losses. These factors were partially offset by
increased operating expenses during the period. Net income for 1998 increased
$401 thousand or 8.7% from $4.6 million in 1997. The 1998 increase was primarily
the result of an increase in net interest income and non-interest income,
partially offset by increased operating expenses. On a per share basis, 1999
earnings were $1.14, an increase of 4.6% over 1998 earnings of $1.09. On a per
share basis, 1998 earnings were 9.0% higher than 1997 earnings of $1.00. Cash
dividends per share in 1999 were $0.49, a 4.3% increase over the 1998 dividend
of $0.47. Cash dividends per share in 1998 were 9.3% higher than the 1997
dividend of $0.43. In the past, the Corporation's practice has been to pay a
dividend of at least 35.0% of net income. The following performance ratios for
1999 remained stable compared to 1998 and 1997 ratios.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PERFORMANCE RATIOS 1999 1998 1997
- ------------------ -------- -------- --------
Return on Average Assets 1.09% 1.14% 1.12%
Return on Average Equity 13.30% 13.13% 13.36%
Earnings Retained 57.08% 57.26% 57.88%
Dividend Payout Ratio 42.92% 42.74% 42.12%
The "Consolidated Average Balance Sheet" on page may assist the reader in the
following 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, on a tax equivalent basis, increased 4.5% or $885 thousand,
from $19.9 million in 1998 to $20.7 million in 1999, compared to a 4.2% increase
or $792 thousand from 1997 to 1998. The increases in net interest income can be
attributed to the growth of average interest-earning assets of 9.3% or $38.3
million from 1998 to 1999 and 6.8% or $26.1 million from 1997 to 1998, partially
offset by a decrease in the net yield on interest-earning assets. The increases
in average interest-earning assets are primarily the result of increased loan
and investment activity during the period. While loan demand was light during
the first half of the year, the Corporation experienced modest to strong growth
during the third and fourth quarters. This increased demand is expected through
the first quarter of 2000. Average net yields on interest-earning assets, on a
tax equivalent basis, were 4.60% for 1999, and 4.82% for 1998 and 4.94% for
1997. The decrease in the Corporation's average net yield on interest-earning
assets in 1999 was primarily the result of a decrease in the average yield
earned on its interest-earning assets, partially offset by a decrease in the
cost or average yield paid on interest bearing liabilities. The decrease in the
average net yield on interest-earning assets was primarily the result of a
decrease in the average interest rate on loans. The Corporation anticipates
continued pressure on the net yield on interest-earning assets as competition
for new loan business remains strong and the cost of incremental deposit growth
and other funding sources becomes more expensive.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
YIELD ON 1999 1998 1997
- -------- ------ ------ -----
Interest-Earning Assets 7.83% 8.24% 8.39%
Interest-Bearing Liabilities 3.99 4.28 4.25
---- ---- ----
Net Interest Spread 3.84 3.96 4.14
Contribution of Interest-Free Funds 0.76 0.86 0.80
---- ---- ----
Net Yield on Interest-Earning Assets 4.60% 4.82% 4.94%
==== ==== ====
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds decreased $322 thousand from $436
thousand in 1998 to $114 thousand in 1999. The decrease in 1999 is primarily the
result of a $5.6 million decrease in the average federal funds sold, and a 69
basis point (a basis point equals one hundredth of one percent) decrease in
rates compared to 1998. In 1998, interest income on federal funds increased $128
thousand to $436 thousand. The increase is primarily the result of a $2.5
million increase in the average federal funds sold, partially offset by a 12
basis point decrease in rates compared to 1997.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
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 $2.2 million or 43.6%, from $5.1 million in 1998 to $7.3 million in
1999, compared to an $204 thousand decrease from 1997 to 1998. The increase in
investment interest income from 1998 to 1999 was the direct result of a $32.4
million increase in average investment securities and a 22 basis point increase
in the yield on investment securities. The decrease in investment interest
income from 1997 to 1998 was the direct result of a 49 basis point decrease in
the yield on investment securities, partially offset by a $3.2 million increase
in average investment securities.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio decreased 2.1%, from $28.5 million in 1998 to $27.9
million in 1999. The decrease in interest income for the year was the direct
result of a 49 basis point decrease in the rates earned on the loan portfolio,
partially offset by an increase in average balances of $11.6 million. This rate
reduction can be attributed to increased competition for new and existing loan
relationships and the generally lower interest rate environment through the
second quarter of 1999 as compared to the corresponding periods in 1998.
Interest income, on a tax equivalent basis, generated by the Corporation's loan
portfolio increased 6.2%, from $26.8 million in 1997 to $28.5 million in 1998.
The increase in interest income during 1998 was attributable to a $20.6 million
increase in average loans outstanding, partially offset by a 5 basis point
decrease in rates. It is anticipated that pricing pressure will continue to
reduce overall loan yields and net interest margins for future time periods.
However, increases in the prime interest rate is expected to have a positive
impact on interest income. Fee reductions could also negatively affect
non-interest income.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposits increased 1.4% from $13.7 million in 1998
to $13.9 million in 1999. The increase in interest expense on deposits from 1998
to 1999 was the result of increases in average interest-bearing deposit balances
of $30.2 million, partially offset by a 31 basis point decrease in the rates
paid. The 8.0% increase in interest expense on deposits from 1997 to 1998 was
the result of a $22.7 million increase in average interest-bearing deposits and
a 2 basis point decrease in rates paid.
While total average interest-bearing deposits have grown 9.4% and 7.6%
in 1999 and 1998, respectively, the components have not grown proportionately.
During 1999, average savings, NOW, and money market deposits increased $20.9
million or 11.4%, while average certificates of deposit and other time deposits
increased $9.3 million or 6.7%. During 1998, average savings, NOW, and money
market deposits increased $10.3 million or 5.9%, while average certificates of
deposit and other time deposits increased $12.4 million or 9.9%. The
Corporation's effective rate on interest-bearing deposits changed from 4.21%,
4.27%, 4.29%, and 4.22% in the first, second, third, and fourth quarters of
1998, respectively, to 4.01%, 3.97%, 3.97%, and 4.04% in the first, second,
third, and fourth quarters of 1999, respectively. Competition for deposits from
other banks and non-banking institutions such as credit unions and mutual fund
companies continues to grow. Despite the competition, the Corporation's deposit
base continues to grow and growth is expected to continue for future time
periods. The Corporation believes it has benefited from customer fallout during
the latest wave of merger activity of regional institutions during the early
part of 1999. Additionally, growth can be attributed to our new branch sites in
the Frazer area, and at the Matlack Training Center and most recently at our
four new limited service retirement community branches located in Chester and
Delaware counties.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
During 1999, the Corporation recorded a provision for loan losses of
$799 thousand, compared to $911 thousand and $1.14 million in 1998 and 1997,
respectively. The decrease in the provision expense can be attributed to the
decreased rate in total non-performing assets and by a decrease in charge-offs.
Net charge-offs in 1999 were $415 thousand, compared to $934 thousand and $453
thousand in 1998 and 1997, respectively. Net charge-offs as a percentage of
average loans outstanding were 0.13%, 0.29%, and 0.15% for 1999, 1998, and 1997,
respectively. The allowance for loan loss was $6.26 million or 1.77% of loans
outstanding at December 31, 1999.
NON-INTEREST INCOME
Total non-interest income increased $321 thousand or 6.8%, from $4.7
million in 1998 to $5.0 million in 1999, compared to an increase of $900
thousand or 23.8% from 1997 to 1998. The primary component of non-interest
income is Financial Management Services revenue, which increased $270 thousand
or 11.9%, from $2.3 million in 1998 to $2.5 million in 1999, compared to an
increase of $266 thousand or 13.3% from 1997 to 1998. These revenues are largely
based upon the market value of assets under management. The market value of
Financial Management Services assets under management increased $24.4 million or
6.0%, from $405.2 million at the end of 1998 to $429.6 million at the end of
1999, and increased $57.1 million or 16.4% from 1997 to 1998. The 1999 and 1998
increases in market value of assets under management are attributable to new
business development in the areas of trust, investment and pension management
and market value appreciation.
Service charges on deposit accounts decreased $45 thousand or 4.3% from
$1.0 million in 1998 to $992 thousand in 1999 compared to an increase of $50
thousand or 5.1% from 1997 to 1998. This decrease in 1999, can be attributed to
a more competitive pricing structure for our deposit accounts.
During 1999, the Corporation realized securities gains of approximately
$207 thousand compared to $87 thousand in 1998. These gains relate to the sale
of certain equity securities that were sold in the second quarter of 1999.
Other non-interest income decreased $24 thousand or 1.9% to $1.273
million in 1999 from $1.297. This decrease can be attributed to the sale of less
residential mortgages to the secondary market in 1999 than 1998 resulting in
fewer gains being recorded. Other non-interest income increased 59% to $1.3
million in 1998 from $815 thousand in 1997. The increase can be attributed to
income from service charges for non-customer ATM transactions, which commenced
during the second quarter of 1998. Income from the sale of residential mortgages
to the secondary market during the first and second quarters of 1998 also
contributed to the increase.
NON-INTEREST EXPENSE
Total non-interest expense increased $1.2 million or 7.5%, from $16.3
million in 1998 to $17.5 million in 1999, compared to an increase of $1.4
million or 9.2% from 1997 to 1998. The growth in non-interest expense reflects
the increased costs incurred to service the Corporation's expanding customer
base. The components of non-interest expense changes are discussed below.
Salary and employee benefits increased $648 thousand or 7.2%, from $9.1
million in 1998 to $9.7 million in 1999. The increase in 1999 was a result of an
average 4.0% salary increase for annual salary increases and a 2.5% increase in
staff. As the Corporation expands and the cost of providing benefits increases,
especially health insurance, it is anticipated that this component of
non-interest expense will continue to rise. Salary and employee benefits
increased $685 thousand or 8.2% from 1997 to 1998, primarily as a result of an
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
average 4.0% in salary increases and 3.1% increase in staff, partially offset by
decreases in pension costs. The Corporation's full-time equivalent employees
were 205, 200, and 194 at the end of 1999, 1998, and 1997, respectively.
Net occupancy, equipment and data processing expense increased $487
thousand or 14.8%, from $3.3 million in 1998 to $3.8 million in 1999. The
increases are a direct result of increased capital and related equipment costs
associated with completion of the conversion of the Bank's core computer system,
the phase out of certain maintenance related costs, a payroll system conversion,
and direct Y2K expenses. Increases in the Corporations facilities and branch
offices also contributed to the increase. As the Corporation expands its
presence in the County as well as the products and services it offers this cost
will continue to rise. Occupancy, equipment and data processing expense
increased $334 thousand or 11.3% from 1997 to 1998. The increase in 1998 from
1997 was primarily a result of building renovations on the mortgage center and
Financial Management Services building. See section titled "Building
Improvements and Technology Projects" for additional information.
Other non-interest expense increased $93 thousand or 2.4% from $3.9
million in 1998 to $4.0 million in 1999. This increase is the result of the
Corporation's expanded marketing efforts to attract new borrowers and depositors
as well as promotion of the new branch sites. Additional operating expenses
associated with the increases in staff and premises also contributed to the
increase.
Additional components of non-interest expense are the FDIC's Bank
Insurance Fund ("BIF") assessments and Pennsylvania Bank Shares Tax. The BIF
insurance assessment was $0 for 1999, 1998, and 1997. On January 1, 1997, in
accordance with the Deposit Insurance Act of 1996 an additional assessment by
the Financing Corporation ("FICO") became applicable to all insured
institutions. This assessment is not tied to the FDIC risk classification. The
BIF FICO assessment is 1.296 basis points per $100 in deposits for 1999. The
Bank's assessment for the BIF FICO in 1999 was $48 thousand. Bank Shares Tax was
0.60%, 0.68%, and 0.84% of average stockholders' equity for 1999, 1998, and
1997, respectively. In 1998 and 1997 bank shares tax expense benefited from
credits related to community development projects which were not available in
1999. The Pennsylvania Bank Shares Tax is based primarily on Bank Stockholders
equity and paid annually.
Preliminary plans for the opening of additional branch sites continue
to be pursued. The Corporation believes that the costs associated with achieving
these objectives will have a direct impact on all the above components of
non-interest expense. It is anticipated that increased costs and expenses will
be offset over time by increases in net interest and fee income generated by
business in new marketing areas.
INCOME TAXES
Income tax expense was $2.05 million in 1999 compared to $2.10 million
in 1998 and $1.9 million in 1997, representing an effective tax rate of 28.2%,
29.5%, and 29.0%, respectively. Tax rates in 1999 and 1998 were affected by tax
credits resulting from investments in a community development project. The Bank
is actively pursuing additional community development projects for investments.
These investments will result in additional tax credits which should further
decrease the Corporation's effective rate. The primary reason for the increase
in the effective tax rates from 1997 to 1998 was a decrease in tax exempt assets
as a percentage of total average assets and a smaller amount of tax credits.
Average tax-exempt assets as a percentage of total average assets were 1.8%,
1.8% and 2.6% in 1999, 1998 and 1997, respectively.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET AND TAX EQUIVALENT INCOME/EXPENSES
AND RATES FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- ---------------------
(Dollars in thousands) Daily Daily Daily
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 2,398 $ 114 4.75% $ 8,022 $ 436 5.44% $ 5,544 $ 308 5.56%
Interest bearing deposits in Banks -- -- -- -- -- -- 197 12 6.09
Investment securities
Taxable 114,175 7,102 6.22 82,434 4,938 5.99 78,672 5,104 6.49
Tax-exempt (1) 2,165 160 7.39 1,548 119 7.69 2,114 157 7.43
-------- ------ -------- ------ ------- ------
Total investment securities 116,340 7,262 6.24 83,982 5,057 6.02 80,786 5,261 6.51
-------- ------ -------- ------ ------- ------
Loans (2)
Taxable 326,021 27,337 8.39 313,893 27,849 8.87 291,114 26,012 8.94
Tax-exempt (1) 5,945 571 9.61 6,473 649 10.03 8,623 823 9.54
-------- ------ -------- ------ ------- ------
Total loans 331,966 27,908 8.41 320,366 28,498 8.90 299,737 26,835 8.95
-------- ------ -------- ------ ------- ------
Total interest-earning assets 450,704 35,284 7.83 412,370 33,991 8.24 386,264 32,416 8.39
------ ------ ------
Non-interest-earning assets
Allowance for possible loan losses (5,998) (5,900) (5,607)
Cash and due from banks 22,681 20,121 18,853
Other assets 17,081 14,772 13,218
------- -------- -------
Total assets $484,468 $ 441,363 $412,728
======= ======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Savings, NOW, and money market
deposits $204,986 $ 6,021 2.94% $ 184,081 $ 5,713 3.10% $173,753 $ 5,436 3.13%
Certificates of deposit and other
time 147,091 7,854 5.34 137,825 7,966 5.78 125,436 7,234 5.77
-------- ------ -------- ------ ------- ------
Total interest-bearing deposits 352,077 13,875 3.94 321,906 13,679 4.25 299,189 12,670 4.23
Securities sold under repurchase
agreements 2,741 110 4.01 3,019 116 3.84 8,560 280 3.28
Other borrowings 9,284 558 6.01 5,269 340 6.45 6,508 401 6.16
-------- ------ -------- ------ ------- ------
Total interest-bearing
liabilities 364,102 14,543 3.99 330,194 14,135 4.28 314,257 13,351 4.25
------ ------ ------
Non-interest-bearing liabilities
Non-interest-bearing demand deposits 72,493 64,705 57,659
Other liabilities 6,028 8,268 6,264
-------- -------- --------
Total liabilities 442,623 403,167 378,180
Stockholders' equity 41,845 38,196 34,548
-------- -------- --------
Total liabilities and
stockholders' equity $ 484,468 $ 441,363 $412,728
======== ======== =======
Net interest income $20,741 $ 19,856 $ 19,065
====== ======= =======
Net yield on interest-earning assets 4.60% 4.82% 4.94%
==== ==== ====
<FN>
(1) The indicated income and annual rate are presented on a tax equivalent basis
using the federal marginal rate of 34%, adjusted for the TEFRA 20% interest
expense disallowance for 1999, 1998, and 1997.
(2) Nonaccruing loans are included in the average balance.
</FN>
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Corporation's ability to meet deposit withdrawals either on demand or at
contractual maturity, to repay borrowings as they mature, and to make new loans
and investments as opportunities arise. Liquidity is managed on a daily basis
enabling Senior Management to effectively monitor changes in liquidity and to
react accordingly to fluctuations in market conditions. The primary source of
liquidity for the Corporation is its available-for-sale portfolio of liquid
investment grade securities. Funding sources also include NOW, money market,
savings, and small denomination certificates (< $100,000) of deposit accounts.
The Corporation considers funds from such sources as its "core" deposit base
because of the historical stability of such sources of funds. Additional
liquidity comes from the Corporation's non-interest-bearing demand deposit
accounts, a three-tiered savings product and certificates of deposit in excess
of $100,000. Details of core deposits, non-interest-bearing demand deposit
accounts and other deposit sources are highlighted in the following table:
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands)
1999 1998 1997
----------------------- ---------------------- -----------------------
Average Effective Average Effective Average Effective
DEPOSIT TYPE Balance Yield Balance Yield Balance Yield
------------ -------- --------- ------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
NOW $ 58,356 1.71% $ 55,203 2.04% $ 52,758 2.19%
Money Market 27,139 2.90 27,596 3.09 28,433 3.15
Statement Savings 49,144 3.00 47,046 3.28 48,381 3.31
Other Savings 2,280 2.76 2,382 2.73 2,996 2.74
CD's Less than $100,000 118,228 5.38 114,372 5.81 108,022 5.80
------- ------- -------
Total Core Deposits 255,147 3.79 246,599 4.15 240,590 4.16
Non-interest-Bearing
Demand Deposits 72,493 -- 64,705 -- 57,659 --
-------- -------- -------
Subtotal 327,640 -- 311,304 -- 298,249 --
Tiered Savings 68,067 3.97 51,854 4.09 41,184 4.14
CD's Greater than $100,000 28,863 5.19 23,453 5.63 17,415 5.54
-------- -------- -------
Total Deposits $ 424,570 -- $ 386,611 -- $ 356,848 --
======== ======== ========
</TABLE>
The Bank as a member of the Federal Home Loan Bank ("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. The Corporation utilizes borrowings from the FHLB and collateralized
repurchase agreements in managing its interest rate risk and as a tool to
augment deposits and in funding asset growth. The Corporation may utilize these
funding sources to better match its longer term repricing assets (i.e., between
one and five years).
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 of its "gap position" within one
year is ($277,341) million or 44.4% of total assets at December 31, 1999,
compared with ($151,780) million or 32.2% of total assets at the end of 1998.
This negative position indicates that more liabilities than assets my reprice
within the next twelve months, which in a rising rate environment may result in
an increase in interest expense that would not be offset by repricing assets.
The data in this analysis is static and represents the gap position at a
specific point in time and may not be inductive of actual results.
INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1999
<TABLE>
(Dollars in thousands) One Over
Within Through Five Non-Rate
One Year Five Years Years Sensitive Total
------------ ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 5,000 $ - $ - $ - $ 5,000
Investment securities 22,314 58,165 32,561 - 113,040
Loans and leases 85,620 198,094 70,626 (6,261) 348,079
Cash and cash equivalents - - - 27,257 27,257
Premises & equipment - - 34 10,410 10,444
Other assets 3,976 - - 4,106 8,082
-------- -------- --------- -------- --------
Total assets $ 116,910 $ 256,259 $ 103,221 $ 35,512 $ 511,902
======== ======== ========= ======== ========
LIABILITIES AND CAPITAL
Non-interest-bearing deposits$ - $ - $ - $ 82,734 $ 82,734
Interest bearing deposits 330,478 33,303 1,918 - 365,699
Securities sold under repurchase
agreements 3,365 - - - 3,365
FHLB Advances 10,408 1,569 4,690 - 16,667
Other liabilities - - 5,255 - 5,255
Capital - - - 38,182 38,182
-------- -------- --------- -------- --------
Total liabilities and capital $ 344,251 $ 34,872 $ 11,863 $ 120,916 $ 511,902
======== ======== ========= ======== ========
Net interest rate sensitivity gap $(227,341) $ 221,387 $ 91,358 $ (85,404) $ -
======== ======== ========= ========= ========
Cumulative interest rate
sensitivity gap $(227,341) $ (5,954) $ 85,404 $ - $ -
======== ======== ========= ========= ========
Cumulative interest rate
sensitivity gap divided
by total assets (44.4)% (1.2)% 16.7%
</TABLE>
The Corporation's gap position is one factor used to evaluate interest
rate risk and the stability of net interest margins. Other factors include
computer simulations of what might happen to net interest income under various
interest rate forecasts and scenarios. The Corporation's Asset Liability
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management Policy requires quarterly calculation of the effects of changes in
interest rates on net interest income. These calculations are prepared quarterly
using computer based asset liability software. The table below summarizes
estimated changes in net interest income over a twelve-month period, under
alternative interest rate scenarios. The change in interest rates was based on
an immediate and proportional shift in the December 31, 1999 Wall Street Journal
prime rate of 8.50%.
<TABLE>
<CAPTION>
(Dollars in thousands)
Change in Net Dollar Percent Management
Interest Rates Interest Income Change Change Limits
-------------- --------------- ------ ------ ------
<S> <C> <C> <C> <C>
+300 Basis Points $27,369 $-885 -3.13% 4.50%
+200 Basis Points 27,666 -588 -2.08 4.00
+100 Basis Points 27,961 -293 -1.04 3.00
FLAT RATE 28,254 0 0 0.00
-100 Basis Points 28,910 656 2.32 3.00
-200 Basis Points 28,834 580 2.05 4.00
-300 Basis Points 29,120 866 3.07 4.50
</TABLE>
Management believes that the assumptions utilized in evaluating the
vulnerability of the Corporation's net interest income to changes in interest
rates approximate actual experience; however, the interest rate sensitivity of
the Corporation's assets and liabilities as well as the estimated effect of
changes in interest rates on net interest income could vary substantially if
different assumptions are used or actual experience differs from the experience
on which the assumptions were based. For example, certain assets, such as
adjustable rate loans, have features which restrict changes in interest rates on
a short term basis or over the life of the assets.
In the event the Corporation should experience a mismatch in its
desired gap position or an excessive decline in its net interest income
subsequent to an immediate and sustained change in interest rates, it has a
number of options which it could utilize to remedy such a mismatch. The
Corporation could restructure its investment portfolio through sale or purchase
of securities with more favorable repricing attributes. It could also promote
loan products with appropriate maturities or repricing attributes. The
Corporation could also solicit deposits or search for borrowings with more
desirable maturities. However, market circumstances might make execution of
these strategies cost prohibitive or unattainable.
The nature of the Corporation's current operation is such that it is
not subject to foreign currency exchange or commodity price risk. Additionally,
neither the Corporation nor the Bank own trading assets. At December 31, 1999,
the Corporation did not have any hedging transactions in place such as interest
rate swaps, caps or floors.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is an amount that management believes
will be adequate to absorb loan losses on existing loans that may become
uncollectible based on evaluations of the collectibility of loans. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, adequacy of collateral,
review of specific problem loans, and current economic conditions that may
affect the borrower's ability to pay.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
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>
December 31
----------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,877 $ 5,900 $ 5,218 $ 4,506 $ 3,303
--------- --------- --------- --------- ---------
Provision charged to operating expense 799 911 1,135 1,079 1,666
--------- --------- --------- --------- ---------
Recoveries of loans previously charged off
Commercial loans 81 48 67 36 4
Real estate - mortgages - 145 - - 46
Consumer loans 97 52 16 8 29
--------- --------- --------- --------- ---------
Total recoveries 178 245 83 44 79
--------- --------- --------- --------- ---------
Loan charge-offs
Commercial loans (38) (247) (237) (118) (348)
Real estate - mortgages (67) (45) (117) (218) (25)
Consumer loans (488) (887) (182) (62) (108)
Lease financing receivables - - - (13) (61)
--------- --------- --------- --------- ---------
Total charge-offs (593) (1,179) (536) (411) (542)
--------- --------- --------- --------- ---------
Net loan charge-offs (415) (934) (453) (367) (463)
--------- --------- --------- --------- ---------
Balance at end of year $ 6,261 $ 5,877 $ 5,900 $ 5,218 $ 4,506
========= ========== ========= ========= =========
Year-end loans outstanding $ 354,338 $ 320,395 $ 318,899 $ 264,582 $ 242,587
Average loans outstanding $ 331,966 $ 320,366 $ 299,737 $ 249,697 $ 243,657
Allowance for possible loan losses as
a percentage of year-end loans
outstanding 1.77% 1.83% 1.85% 1.97% 1.86%
Ratio of net charge-offs to average
loans outstanding 0.13% 0.29% 0.15% 0.15% 0.19%
</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 of
collateral. Non-performing loans are generally collateralized by real estate and
are in the process of collection. Management believes that loans that are past
due over 90 days and still accruing are adequately collateralized as to
principal and interest. Such loans are in the process of collection.
The allowance for loan losses as a percentage of non-performing loans
ratio indicates that the allowance for loan losses is sufficient to cover the
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
principal of all non-performing loans at December 31, 1999. Other real estate
owned ("OREO") represents residential and commercial real estate owned by the
Bank following default by borrowers by and what has been written down to
realizable value (net of estimated disposal costs) based on professional
appraisals. In October 1999, the Corporation liquidated from OREO a commercial
property for a net amount of $192 thousand resulting in a recovery of certain
legal and tax expenses and a gain of approximately $13 thousand. In October, the
Bank took another property into OREO in the amount of $470 thousand.
Management is not aware of any loans other than those included in these
tables and mentioned in this paragraph that would be considered potential
problem loans and cause Management to have doubts as to the borrower's ability
to comply with loan repayment terms. The Corporation decided to withdraw from
third party automobile lending on July 10, 1998 due to less than expected
results. The Corporation continues to service the existing portfolio but has not
added any additional volume. The portfolio totaled approximately $14 million and
$24 million as of December 31, 1999 and December 31, 1998, respectively.
Approximately 4.19% and 9.92% was past due 30 days or more as of December 31,
1999 and December 31, 1998.
NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Past due over 90 days and still accruing $ 175 $ 546 $ 466 $ 2,772 $ 419
Non-accrual loans 1,207 1,316 1,443 713 726
-------- -------- -------- -------- --------
Total non-performing loans 1,382 1,862 1,909 3,485 1,145
Other real estate owned ("OREO") 470 192 1,651 1,274 1,447
--------- --------- -------- -------- --------
Total non-performing assets $ 1,852 $ 2,054 $ 3,560 $ 4,759 $ 2,592
======== ======== ======== ======== ========
Non-performing loans as a
percentage of total loans 0.39% 0.58% 0.60% 1.32% 0.47%
Allowance for loan losses as a
percentage of non-performing
loans 453.0% 315.6% 309.1% 149.7% 393.5%
Non-performing assets as a percentage
of total loans and other real estate
owned 0.5% 0.6% 1.1% 1.8% 1.1%
Allowance for loan losses as a
percentage of nonperforming
assets 338.1% 286.1% 165.7% 109.6% 173.8%
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by
the Federal Reserve Board for bank holding companies. The Bank is also subject
to similar capital requirements adopted by the Office of the Comptroller of the
Currency ("OCC"). Under these requirements, the regulatory agencies have set
minimum thresholds for Tier I Capital, Total Capital, and Leverage ratios. At
December 31, 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 1994.
The Corporation's and Banks Risk-Based Capital Ratios, shown below, have been
computed in accordance with regulatory accounting policies.
<TABLE>
<CAPTION>
December 31
RISK-BASED -------------------------------------- "Well Capitalized"
CAPITAL RATIOS 1999 1998 1997 Requirements
- -------------- ------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Corporation
Leverage Ratio 8.48% 8.59% 8.57% N/A
Tier I Capital Ratio 10.73% 11.67% 11.22% N/A
Total Risk-Based Capital Ratio 11.98% 12.95% 12.48% N/A
Bank
Leverage Ratio 8.05% 8.36% 8.30% 5.00%
Tier I Capital Ratio 10.47% 11.35% 10.89% 6.00%
Total Risk-Based Capital Ratio 11.73% 12.62% 12.14% 10.00%
</TABLE>
The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current recommendations by the regulatory authorities that,
if they were to be implemented, would have a material effect on liquidity,
capital resources or operations of the Corporation.
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 will serve the residents and employees of
their communities and bring the total number of branches in the Corporations
network to twelve.
In September of 1998, the Corporation purchased a 25,000 square foot
office building adjacent to the Corporation's existing Operation Center in West
Chester, Pennsylvania for approximately $1.7 million. The new building at 887
Matlack Street was put in service in the second quarter of 1999. It houses a
branch teller training center that is open to the public as well as the new
location for the administrative services, audit, compliance and facilities
departments. During the third quarter of 1999, the Corporation purchased
additional land in the Lionville area to accommodate future expansion.
In November 1998, the Corporation completed a conversion of its core
processing system to the Jack Henry and Associates, Inc. ("JHA") Silverlake
system. JHA is a major provider of community bank core processing systems.
Technology projects in process at December 31, 1999 include a conversion of our
existing branch teller system to Jack Henry's Vertex system.
On October 1, 1999, the Corporation launched our consumer Internet
banking services, "Net Teller" and "BillPay". These new products allow our
retail customers the convenience to access their accounts and pay bills on-line
twenty-four hours a day from home. A commercial version of this product is
expected in early 2000.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUES
Results of the Century Date Change
The Corporation as with the financial industry as a whole, has
experienced no significant problems or irregularities with regard to the Y2K
issue. However, there can be no assurance that the Corporation, its suppliers
and customers, or the financial industry, will not experience any problems in
the future. If any problems were to occur in the future, the Corporation intends
to react according to its contingency plan.
State of Readiness
The Corporation 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 and on various dates through
2000. The Corporation, similar to most financial services providers, is
particularly vulnerable to the potential impact of the Y2K Issue due to the
nature of financial information. Potential impacts to the Corporation may arise
from software, computer hardware, and other equipment failure both within the
Corporation's direct control and outside of the Corporation's ownership yet with
which the Corporation electronically or operationally interfaces. The
Corporation has no internally generated software coding to correct.
Substantially all of the software utilized by the Corporation is purchased or
licensed from external providers.
In order to address the Y2K Issue, the Corporation has developed and
implemented a five phase compliance plan. The compliance plan is divided into
the following major components: (1) Awareness; (2) Assessment; (3) Renovation;
(4) Validation and Testing; and (5) Implementation. The Corporation completed
all five phases of the plan for all of its mission-critical systems on October
15, 1999.
JHA has tested the unmodified version of its Silverlake system and the
Federal Financial Institutions Examination Council ("FFIEC") has reviewed JHA
test procedures and has provided the Corporation with a copy of the results. The
Corporation conducted an independent test on the Silverlake system and related
hardware during the week of March 7, 1999. The Corporation has documented and
evaluated the results of that test and is satisfied with the results.
The Corporation's check processing and imaging systems, operate on a
combination of NCR, Unisys, Novell and Microsoft hardware and software. Parts of
this system required certain upgrades. These upgrades were installed and tested
prior to October 15, 1999. The Corporation is satisfied with the results of
these tests. The Corporation has completed Y2K testing on all PC hardware and
software. Any machines failing these tests were replaced or repaired.
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 believed its systems were Y2K compliant. The
Corporation relied on testing conducted by STS and also relied on Proxy Tests
conducted by certain STS customers. Testing and related documentation was
completed by March 31, 1999.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Costs to Address the Corporation's Year 2000 Issues
The Corporation incurred direct Y2K project costs of $203 thousand. The
Corporation has incurred total direct and indirect Y2K project costs of $337
thousand. This estimated project cost is based upon currently available
information and includes expenses for the review and testing by third parties,
including government entities. However, there can be no guarantee that the
hardware, software, and systems of such third parties will be free of
unfavorable Y2K issues and therefore not present a material adverse impact upon
the Corporation. The aforementioned Y2K project cost estimate also may change as
the Corporation progresses in its Y2K program and obtains additional information
associated with, and conducts further testing concerning, third parties. At this
time, no significant projects have been delayed as a result of the Corporation's
Y2K effort.
Risk Assessment
In assessing the Corporation's Y2K exposure the Corporation identified
those suppliers and customers whose lack of Y2K preparedness might expose the
Corporation to financial loss. Financial loss includes but is not limited to the
following: (1) monies paid to suppliers for which no performance is rendered;
(2) inability of suppliers to furnish necessary items potentially resulting in
costly business interruptions; and (3) inability of loan customers to repay
amounts due.
The Corporation initiated formal communications with all of its
significant vendors and large loan customers (over $250,000) to determine its
vulnerability as a result of the failure of those third parties to remediate
their own Y2K Issues. The Corporation completed its review of the Y2K
capabilities of its significant vendors in the second quarter of 1999.
Cash Contingency and Customer Awareness Programs
The Corporation has a cash contingency plan to meet anticipated
year-end customer needs. The Corporation is also participated in several
customer / community awareness seminars. These seminars were designed to educate
our customers and the community about Y2K risk and the steps the Corporation was
taking to prepare itself. The Corporation has an ongoing employee awareness
program with similar objectives.
As part of the Corporation's cash contingency plan the Bank secured
several sources of funds in the event they were needed in the fourth quarter of
1999 or the first quarter of 2000. Sources include: Unsecured credit lines at
our correspondent banks, a guaranteed line of credit from the Federal Home Loan
Bank and availability under the "Special Y2K Liquidity Facility" provided by the
Federal Reserve.
The Corporation's Contingency Plan
The Corporation has several back-up system contingency plans, which was
designed to render the Corporation operational for a period of one to thirty
days should a Y2K problem surface. These contingency plans utilize secondary
computer systems and / or various manual tasks, which include but are not
limited to the following:
1. Maintenance of loan data on Microsoft Excel spreadsheets or paper
ledgers;
2. Maintenance of core deposit account information on Microsoft Excel
spreadsheets or paper ledgers;
3. Manual sorting of deposit tickets and checks by account number; and
4. Maintenance of FMS account information on Microsoft Excel spreadsheets
or manual ledgers;
5. A check processing contingency plan involving the use of a used
reader-sorter and JHA's proof of deposit program has been developed,
fine tuned and tested. Other
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 was
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 and
the results to date, there can be no assurance that partial or total systems
interruptions may not yet occur which would have a material adverse effect upon
the Corporation's business, financial condition, results of operations, and
business prospects.
DESCRIPTION OF CAPITAL STOCK AND MARKET INFORMATION
The authorized capital stock of the Corporation consists of 10,000,000
shares of common stock, par value $1.00 per share, of which 4,799,666 shares
were outstanding at the end of 1999 and 1998.
The Corporation's common stock is publicly traded over the counter
under the symbol "FWCC". Trading is sporadic. The following table, which shows
the range of high and low month-end bid prices for the stock, is based upon
transactions reported by the Philadelphia brokerage firm of Janney Montgomery
Scott, LLC, one of the Corporation's market makers.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Bid Prices (1)
----------
Month End
---------
1999 1998
---- ----
Quarter Ended High Low High Low
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $21.00 $18.75 $20.25 $16.75
Second $20.50 $17.00 $20.25 $20.25
Third $17.75 $14.50 $20.00 $17.00
Fourth $20.50 $14.50 $19.00 $18.00
<FN>
(1) All per share data has been retroactively adjusted for stock splits and
stock dividends.
</FN>
</TABLE>
Other information regarding the Corporation can be found in the
Corporation's Form 10-K, to be filed with the Securities and Exchange Commission
by March 30, 1999. Copies of the form 10-K can be obtained from the
Corporation's Shareholder Relations Officer, P.O. Box 523, West Chester, PA
19381-0523, at 610-344-2686.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 27,257 $ 25,006
Federal funds sold 5,000 5,675
--------- ---------
Total cash and cash equivalents 32,257 30,681
--------- ---------
Investment securities held-to-maturity (fair value of
$4,535 and $7,606 in 1999 and 1998, respectively) 4,402 7,406
Investment securities available-for-sale, at fair value 108,638 102,380
Loans 354,338 320,395
Less allowance for possible loan losses (6,261) (5,877)
--------- ---------
Net loans 348,077 314,518
Premises and equipment, net 10,444 9,579
Other assets 8,084 6,129
--------- ---------
Total assets $ 511,902 $ 470,693
========= =========
LIABILITIES
Deposits
Non-interest-bearing $ 82,734 $ 72,556
Interest-bearing (including certificates of deposit over $100 of
$28,377 and $28,984 - 1999 and 1998, respectively) 365,699 345,842
--------- ---------
Total deposits 448,433 418,398
Securities sold under repurchase agreements 3,365 2,795
Federal Home Loan Bank advances 16,667 5,027
Other liabilities 5,255 4,750
--------- ---------
Total liabilities 473,720 430,970
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
Outstanding, 1999 - 4,799,666 and 1998 - 4,799,666. 4,800 4,800
Additional paid-in capital 602 542
Retained earnings 38,652 35,675
Accumulated Other Comprehensive Income (2,893) 292
Treasury stock, at cost: 1999 - 254,509 and 1998 - 183,640. (2,979) (1,586)
--------- ---------
Total stockholders' equity 38,182 39,723
--------- ---------
Total liabilities and stockholders' equity $ 511,902 $ 470,693
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands, except per share) December 31
-------------------------------------
1999 1998 1997
------------ ------------ --------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 27,730 $ 28,296 $ 26,580
Investment securities 7,260 5,021 5,214
Federal funds sold 114 436 308
Deposits in banks 3 - 12
-------- -------- --------
Total interest income 35,107 33,753 32,114
-------- -------- --------
INTEREST EXPENSE
Deposits 13,875 13,679 12,670
Securities sold under repurchase agreements 110 116 280
Other borrowings 558 340 401
-------- -------- --------
Total interest expense 14,543 14,135 13,351
-------- -------- --------
Net interest income 20,564 19,618 18,763
PROVISION FOR POSSIBLE LOAN LOSSES 799 911 1,135
-------- -------- --------
Net interest income after provision for possible loan losses 19,765 18,707 17,628
-------- -------- --------
NON-INTEREST INCOME
Financial Management Services 2,536 2,266 2,000
Service charges on deposit accounts 992 1,037 987
Investment securities gains (losses), net 207 87 (15)
Other 1,273 1,297 815
-------- -------- --------
Total non-interest income 5,008 4,687 3,787
-------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 9,694 9,046 8,361
Occupancy, equipment, and data processing 3,785 3,298 2,964
Other 4,027 3,934 3,586
-------- -------- --------
Total non-interest expense 17,506 16,278 14,911
-------- -------- --------
Income before income taxes 7,267 7,116 6,504
INCOME TAXES 2,050 2,100 1,889
-------- -------- --------
NET INCOME $ 5,217 $ 5,016 $ 4,615
======== ======== ========
PER SHARE
Basic Earnings Per Common Share $ 1.14 $ 1.09 $ 1.00
======== ======== ========
Diluted Earnings Per Common Share $ 1.13 $ 1.07 $ 1.00
======== ======== ========
Dividends declared $ 0.49 $ 0.47 $ 0.43
======== ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Stockholders' Comprehensive
(Dollars in thousands) Shares Par Value Capital Earnings Income Stock Equity Income
------ --------- ---------- -------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 1,799,941 $ 1,800 $ 3,305 $30,133 $ (242) $(1,821) $ 33,175 $ -
Net income - - - 4,615 - - 4,615 4,615
Cash dividends declared - - - (1,945) - - (1,945) -
Other Comprehensive Income
Net unrealized gain on
investment securities
available-for-sale - - - - 209 - 209 209
4 for 3 stock split 599,892 600 (600) - - - - -
Treasury stock transactions - - 24 - - 135 159 -
--------- ------ ------ ------ ------ ------ ------- -------
Comprehensive Income - $ 4,824
=======
Balance at December 31, 1997 2,399,833 $ 2,400 $ 2,729 $32,803 $ (33) $(1,686) $ 36,213 $ -
Net income - - - 5,016 - - 5,016 5,016
Cash dividends declared - - - (2,144) - - (2,144) -
Other Comprehensive Income
Net unrealized gain on
investment securities
available-for-sale - - - - 325 - 325 325
2 for 1 stock split 2,399,833 2,400 (2,400) - - - - -
Treasury stock transactions - - 213 - - 100 313 -
--------- ------ ------ ------ ------ ------ ------- -------
Comprehensive Income - $ 5,341
=======
Balance at December 31, 1998 4,799,666 $ 4,800 $ 542 $35,675 $ 292 $(1,586) $ 39,723 $ -
Net income - - - 5,217 - - 5,217 5,217
Cash dividends declared - - - (2,240) - - (2,240) -
Other Comprehensive Income
Net unrealized gain
(loss) on
investment securities
available-for-sale - - - - (3,185) - (3,185) (3,185)
Treasury stock transactions - - 60 - - (1,393) (1,333) -
--------- ------ ------ ------ ------ ------ ------- -------
Comprehensive Income - $ 2,032
=======
Balance at December 31, 1999 4,799,666 $ 4,800 $ 602 $38,652 $(2,893) $ (2,979) $ 38,182
========= ======= ====== ====== ====== ======= =======
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
---------------------------------------
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,217 $ 5,016 $ 4,615
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 965 1,279 860
Provision for loan losses 799 911 1,135
Amortization of investment security
premiums and accretion of discounts, net 335 275 52
Amortization of deferred fees, net on loans 137 (92) 53
Investment securities (gains) losses, net (207) (87) 15
(Increase) decrease in other assets (5,039) 1,703 (634)
Increase (decrease) in other liabilities 505 (1,151) 601
-------- --------- ---------
Net cash provided by operating activities 2,712 7,854 6,697
-------- --------- ---------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits with banks -- -- 1,000
Net decrease in loans (34,495) (2,338) (54,823)
Proceeds from sales of investment securities available-for-sale 15,899 22,061 30,646
Proceeds from maturities of investment securities available-for-sale 28,889 29,790 13,588
Proceeds from maturities of investment securities held-to-maturity 4,216 4,719 3,635
Purchase of investment securities available-for-sale (52,386) (88,789) (27,543)
Purchase of premises and equipment, net (1,930) (4,199) (767)
-------- --------- ---------
Net cash used in investing activities (39,807) (38,756) (34,264)
-------- --------- ---------
FINANCING ACTIVITIES
(Increase) decrease in Federal Home Loan Bank advances and
other borrowings 11,640 (2,353) (318)
Increase in deposits 30,033 44,149 22,983
Increase (decrease) in securities sold under repurchase agreements 570 (4,830) 7,380
Cash dividends (2,239) (2,144) (1,945)
Treasury stock transactions (1,333) 313 159
-------- --------- ---------
Net cash provided by financing activities 38,671 35,135 28,259
-------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,576 4,233 692
Cash and cash equivalents at beginning of year 30,681 26,448 25,756
-------- --------- ---------
Cash and cash equivalents at end of year $ 32,257 $ 30,681 $ 26,448
======== ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First West Chester Corporation (the "Corporation") which intends to change
its name to the First Chester County Corporation, through its wholly-owned
subsidiary, The First National Bank of West Chester (the "Bank") which
intends to change its name to the First National Bank of Chester County, has
been serving the residents and businesses of Chester County, Pennsylvania,
since 1863. The Bank is a locally managed community bank providing loan,
deposit, and trust services from its twelve branch locations. The Bank
encounters vigorous competition for market share in the communities it
serves from bank holding companies, other community banks, thrift
institutions, credit unions and other non-bank financial organizations such
as mutual fund companies, insurance companies, and brokerage companies.
The Corporation and the Bank are subject to regulations of certain state and
federal agencies. These regulatory agencies periodically examine the
Corporation and the Bank for adherence to laws and regulations. As a
consequence, the cost of doing business may be affected.
1. Basis of Financial Statement Presentation
The accounting policies followed by the Corporation and its wholly-owned
subsidiaries, the Bank and 323 East Gay Street Corp ("EGSC"), conform to
generally accepted accounting principles and predominant practices within
the banking industry. The accompanying consolidated financial statements
include the accounts of the Corporation, the Bank, and EGSC. All significant
intercompany transactions have been eliminated.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the balance sheets, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The principal estimate that is susceptible to significant change in the near
term relates to the allowance for loan and lease losses. The evaluation of
the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
conditions, the capability of specific borrowers to pay specific loan
obligations, as well as current loan collateral values. However, actual
losses on specific loans, which also are encompassed in the analysis, may
vary from estimated losses.
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.
2. Financial Instruments
The Corporation follows Statement of Financial Accounting Standards ("SFAS")
No. 107, "Disclosures about Fair Value of Financial Instruments," which
requires all entities to disclose the estimated fair value of their assets
and liabilities considered to be financial instruments. Financial
instruments requiring disclosure consist primarily of investment securities,
loans, and deposits and borrowings.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
3. Investment Securities
The Corporation follows SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires investments in securities to be
classified in one of three categories: held-to-maturity, trading, or
available-for-sale. Debt securities that the Corporation has the positive
intent and ability to hold to maturity are classified as held-to-maturity
and are reported at amortized cost. As the Corporation does not engage in
security trading, the balance of its debt securities and any equity
securities are classified as available-for-sale. Net unrealized gains and
losses for such securities, net of tax effect, are required to be recognized
as a separate component of stockholders' equity and excluded from the
determination of net income.
4. Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are stated at the amount of unpaid
principal, reduced by unearned discount and an allowance for loan losses.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loan principal considered to be uncollectible by
management is charged against the allowance for loan losses. The allowance
is an amount that management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible based upon an
evaluation of known and inherent risks in the loan portfolio, the evaluation
takes into consideration such factors as changes in the nature and size of
the loan portfolio, overall portfolio quality, specific problem loans, and
current and future economic conditions which may affect the borrowers'
ability to pay. The evaluation also details historical losses by loan
category, the resulting loss rates for which are projected at current loan
total amounts. Low estimates for specified problem loans are also detailed.
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. Certain origination and commitment fees and
related direct loan origination costs are deferred and amortized over the
contractual life of the related loans, resulting in an adjustment of the
related loan's yield.
Accrual of interest is discontinued on a loan when management believes that
the borrower's financial condition is such that collection of interest and
principal is doubtful. Upon such discontinuance, all unpaid accrued interest
is reversed. The determination of the allowance for loan losses is based
upon the character of the loan portfolio, current economic conditions, loss
experience, and other relevant factors, which, in management's judgment,
deserve recognition in estimating possible losses.
The Corporation accounts for impairment in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." SFAS No. 114 requires loan impairment to be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, its observable market price or the fair value of
the collateral if the loan is collateral dependent. If it is probable that a
creditor will foreclose on a property, the creditor must measure impairment
based on the fair value of the collateral. SFAS No. 118 allows creditors to
use existing methods for recognizing interest income on impaired loans.
5. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Assets are depreciated over their estimated useful lives, principally by the
straight-line method.
The Corporation accounts for long-lived fixed assets in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." This statement provides
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
guidance on when assets should be reviewed for impairment, how to determine
whether an asset or group of assets is impaired, how to measure an
impairment loss, and the accounting for long lived-lived assets that a
company plans to dispose of.
6. Contributions
The Corporation accounts for contributions in accordance with SFAS No. 116,
"Accounting for Contributions Received and Contributions Made." SFAS No. 116
specifies that contributions made by the Corporation be recognized as
expenses in the period made and as decreases of assets or increases of
liabilities depending on the form of the benefits given. In accordance with
SFAS No. 116, the Corporation incurred contribution expenses relating to
long-term commitments to local not-for-profit organizations of $12,500,
$63,000 and $83,000 during 1999, 1998 and 1997, respectively.
7. Income Taxes
The Corporation accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes. Under the liability method specified by SFAS
No. 109, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense and benefits are the
result of changes in deferred tax assets and liabilities.
8. Employee Benefit Plans
The Corporation has certain employee benefit plans covering eligible
employees. The Bank accrues such costs as earned.
9. Stock Based Compensation Plan
The Corporation follows SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then recognized over
the service period, which is usually the vesting period. Alternately, the
standard permits entities to continue accounting for employee stock options
and similar instruments under Accounting Principles Board (APB) Opinion No.
25 "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net income and earnings per share, as if the fair-value
based method of accounting defined in SFAS No. 123 had been applied. The
Corporation's stock option plan is accounted for under APB Opinion No. 25.
10. Financial Management Services Assets and Income
Assets held by the Corporation in fiduciary or agency capacities for its
customers are not included in the accompanying consolidated balance sheets
since such items are not assets of the Corporation. Operating income and
expenses of Financial Management Services are included under their
respective captions in the accompanying consolidated statements of income
and are recorded on the accrual basis.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
11. Earnings per Share and Stockholders' Equity
The Corporation adopted the provisions of SFAS No. 128, "Earnings Per
Share," which eliminates primary and fully diluted earnings per share (EPS)
and requires presentations of basic and diluted EPS in conjunction with the
disclosure of the methodology used in computing such EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders
by the weighted average common shares outstanding during the period. On
September 22, 1998, the Board of Directors declared a stock split, in the
form of a 100% stock dividend to stockholders of record on October 23, 1998,
payable November 24, 1998. Par value remained at $1.00 per share. The stock
split resulted in the issuance of 2,399,833 additional shares of common
stock from authorized but unissued shares. The issuance of authorized but
unissued shares resulted in the transfer of $2,399,833 from additional
paid-in capital to common stock, representing the par value of the shares
issued. Accordingly, earnings per share, cash dividends per share, and
weighted average shares of common stock outstanding have been restated to
reflect the stock split.
12. Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods. Cash paid during the years
ended December 31, 1999, 1998, and 1997 for interest was $15,200,000,
$14,100,000, and $12,600,000, respectively. Cash paid during the years ended
December 31, 1999, 1998, and 1997 for income taxes was $2,298,000,
$2,053,000, and $2,045,000, respectively.
13. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Corporation follows SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," as
amended by SFAS No. 127, which provides accounting guidance on transfers of
financial assets, servicing of financial assets, and extinguishments of
liabilities.
14. Reporting Comprehensive Income
On January 1, 1998, the Corporation adopted the provisions of SFAS No. 130,
Reporting of Comprehensive Income, which establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of financial statements. This statement also
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement.
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------
(Dollars in thousands) Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
------ ------- ------
<S> <C> <C> <C>
Unrealized loss on securities
Unrealized holding loss arising during the period $(4,474) $1,134 $(3,340)
Reclassification adjustment
for gains realized in net income 207 (52) 155
------ ----- ------
Other comprehensive loss $(4,267) $1,082 $(3,185)
====== ===== ======
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
(Dollars in thousands) Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
------ ------- ------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gain arising during the period $ 349 $ 133 $ 260
Reclassification adjustment
for gains realized in net income 87 (22) 65
-------- ------ --------
Other comprehensive income $ 436 $ (111) $ 325
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
(Dollars in thousands) Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
------ ------- ------
<S> <C> <C> <C>
Unrealized gains on securities
Unrealized holding gain arising during the period $ 295 $ (75) $ 228
Reclassification adjustment
for losses realized in net income (15) 4 (19)
-------- ------- --------
Other comprehensive income $ 280 $ (71) $ 209
======== ======= ========
</TABLE>
15. Disclosure about Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities was issued. Subsequent to this statement, SFAS No. 137
was issued, which amended the effective date of SFAS No. 133 to be all
fiscal quarters of all fiscal years beginning after June 15, 2000. Based on
the Corporation's minimal use of derivatives at the current time, management
does not anticipate the adoption of SFAS No. 133 will have a significant
impact on earnings or financial position of the Corporation. However, the
impact from adopting SFAS No. 133 will depend on the nature and purpose of
the derivative instruments in use by the Corporation at that time
16. Advertising Costs
The Bank expenses advertising costs as incurred.
17. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair market value
of the Corporation's available-for-sale and held-to-maturity securities at
December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
--------------------------------------- ----------------------------------------
(Dollars in thousands) Gross Gross Gross Gross
1999 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
---- Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ----- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ - $ - $ - $ - $ 4,020 $ - $ (51) $ 3,969
U.S. Government agency - - - - 1,991 - (164) 1,827
Mortgage-backed securities 241 - (5) 236 77,001 - (2,911) 74,090
State and municipal 2,057 143 - 2,200 1,278 - (48) 1,230
Corporate securities 2,104 - (5) 2,099 11,457 - (788) 10,669
Corporate CMO's - - - - 4,864 - (138) 4,726
Asset-backed securities - - - - 6,996 - (122) 6,874
Mutual funds - - - - 1,091 - (76) 1,015
Other equity securities - - - - 4,323 27 (112) 4,238
---------- -------- ------- ---------- --------- ------- ------- ---------
$ 4,402 $ 143 $ (10) $ 4,535 $113,021 $ 27 $ (4,410) $108,638
====== ===== ===== ====== ======= ==== ======= =======
Held-to-Maturity Available-for-Sale
--------------------------------------- --------------------------------------
(Dollars in thousands) Gross Gross Gross Gross
1998 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
---- Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ----- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ - $ - $ - $ - $ 4,996 $ 23 $ - $ 5,019
U.S. Government agency - - - - - - - -
Mortgage-backed securities 859 1 - 860 77,405 144 (33) 77,516
State and municipal 2,907 162 - 3,069 500 - (3) 497
Corporate securities 3,110 34 - 3,144 6,272 - (10) 6,262
Asset-backed securities 530 3 - 533 8,637 123 - 8,760
Mutual funds - - - - 1,091 - (52) 1,039
Other equity securities - - - - 3,037 250 - 3,287
------ ----- ----- ------ ------- ------ ----- -------
$ 7,406 $ 200 $ - $ 7,606 $101,938 $ 540 $ (98) $102,380
====== ===== ===== ====== ======= ====== ===== =======
</TABLE>
The amortized cost and estimated fair value of debt securities classified as
available-for-sale and held-to-maturity at December 31, 1999, by contractual
maturity, are shown in the following table. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - INVESTMENT SECURITIES - continued
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
-------------------------- -----------------------------
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 2,580 $ 2,582 $ 996 $ 989
Due after one year through five years 1,556 1,692 6,774 6,591
Due after five years through ten years 25 25 14,337 13,404
Due after ten years - - 1,503 1,436
-------- -------- -------- --------
4,161 4,299 23,610 22,420
Mortgage-backed securities 241 236 77,001 74,091
Asset-backed securities - - 6,996 6,874
Other equity securities - - 5,414 5,253
-------- -------- -------- --------
$ 4,402 $ 4,535 $ 113,021 $ 108,638
======== ======== ======== ========
</TABLE>
Proceeds from the sale of investment securities available for sale during
1999 were $15.9 million. Gains of $231,000, $155,000, and $330,000, and
losses of $24,000, $68,000, and $345,000 were realized on sales of
securities in 1999, 1998, and 1997, respectively. The Corporation uses the
specific identification method to determine the cost of the securities sold.
The principal amount of investment securities pledged to secure public
deposits and for other purposes required or permitted by law was $38,793,000
and $30,493,000 at December 31, 1999 and 1998, respectively. There were no
securities held from a single issuer that represented more than 10% of
stockholders' equity.
NOTE C - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
---------- --------
<S> <C> <C>
Commercial loans $ 95,820 $ 85,110
Real estate - construction 15,266 13,439
Real estate - other 152,174 133,191
Consumer loans 55,520 62,481
Lease financing receivables 35,558 26,174
-------- --------
354,338 320,395
Less: Allowance for loan losses (6,261) (5,877)
-------- --------
$ 348,077 $ 314,518
======== ========
</TABLE>
Loan balances on which the accrual of interest has been discontinued
amounted to approximately $1,207,000 and $1,316,000 at December 31, 1999 and
1998, respectively. Interest on these nonaccrual loans would have been
approximately $141,000 and $176,000 in 1999 and 1998, respectively. Loan
balances past due 90 days or more which are not on a nonaccrual status, but
which management expects will eventually be paid in full, amounted to
$175,000 and $546,000 at December 31, 1999 and 1998, respectively. Changes
in the allowance for loan losses are summarized as follows:
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - LOANS - continued
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 5,877 $ 5,900 $ 5,218
Provision charged to operating expenses 799 911 1,135
Recoveries of charged-off loans 178 245 83
Loans charged-off (593) (1,179) (536)
---------- ---------- ----------
Balance at end of year $ 6,261 $ 5,877 $ 5,900
========= ========= =========
</TABLE>
The Bank identifies a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the
loan agreement. The accrual of interest is discontinued on impaired loans
and no income is recognized until all recorded amounts of interest and
principal are recovered in full. Retail loans and residential mortgages have
been excluded from these calculations.
The balance of impaired loans was $648,000, $919,000, and $1,121,000 at
December 31, 1999, 1998, and 1997, respectively. The associated allowance
for loan losses for impaired loans was $305,000, $286,000, and $306,000 at
December 31, 1999, 1998, and 1997, respectively.
During 1999, activity in the allowance for impaired loan losses included a
provision of $85,000, write offs of $70,000 and recoveries of $3 thousand.
Interest income of $0 was recorded in 1999, while contractual interest in
the same period amounted to $89,000. Cash collected on impaired loans in
1999 was $188,000, all of which was applied to principal.
During 1998, activity in the allowance for impaired loan losses included a
provision of $150,000, write offs of $170,000 and recoveries of $0. Interest
income of $25,000 was recorded in 1998, while contractual interest in the
same period amounted to $129,000. Cash collected on impaired loans in 1998
was $836,000, of which $811,000 was applied to principal and $25,000 was
applied to principal.
In the normal course of business, the Bank makes loans to certain officers,
directors, and their related interests. All loan transactions entered into
between the Bank and such related parties were made on the same terms and
conditions as transactions with all other parties. In management's opinion,
such loans are consistent with sound banking practices and are within
applicable regulatory lending limitations. The balance of these loans at
December 31, 1999 and 1998, was approximately $8,516,000 and $6,025,000,
respectively. In 1999, new loans and principal payments amounted to
approximately $3,344,000 and $853,000, respectively.
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
(Dollars in thousands) 1999 1998
------------ ----------
Premises $ 12,456 $ 10,813
Equipment 7,962 7,675
---------- ----------
20,418 18,488
Less Accumulated depreciation (9,974) (8,909)
---------- ----------
$ 10,444 $ 9,579
========== ==========
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - DEPOSITS
At December 31, 1999, the scheduled maturities of certificates of deposit
are as follows:
(Dollars in thousands)
2000 $ 108,416
2001 23,481
2002 4,235
2003 4,225
2004 and thereafter 3,282
----------
$ 143,639
NOTE F - SHORT-TERM BORROWINGS AND CREDIT FACILITY
Securities sold under agreements to repurchase are generally overnight
transactions. These borrowings had interest rates of approximately 4.0%,
3.8% and 3.3% and balances of $3,365,000, $2,795,000 and $7,625,000 at
December 31, 1999, 1998 and 1997, respectively. Daily average balances and
weighted average interest rates for the years ended December 31, 1999, 1998
and 1997 were $2,741,000, $3,019,000 and $8,560,000 and 4.0%, 3.8% and 3.3%,
respectively.
The Bank, as a member of the FHLB, maintains a credit facility secured by
the Bank's mortgage-related assets. Additionally, the FHLB offers several
other credit related products which are available to the Bank. FHLB
borrowings provide additional funds to meet the Bank's liquidity needs. As
of December 31, 1999 the amount outstanding under the Bank's credit facility
with the FHLB was $10.0 million as compared to $0 during the same period in
1998. Other FHLB borrowings for the period totaled $6.7 million compared to
$5.0 million in 1998. During 1999 and 1998, total average FHLB advances were
approximately $9.3 million and $5.2 million, respectively and consisted of
short and long term advances representing a combination of maturities. The
average interest rate for 1999 and 1998 on these advances was approximately
6.0% and 6.5% respectively. The Bank currently has a maximum borrowing
capacity with the FHLB of approximately $117.0 million. 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.
NOTE G - OTHER NON-INTEREST EXPENSE
The components of other non-interest expense are detailed as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Purchased services $ 903 $ 826 $ 833
Telephone, postage, and supplies 701 669 583
Marketing and corporate communications 689 652 406
Loan and deposit supplies 455 476 436
Director costs 256 262 276
Bank shares tax 439 259 290
FDIC Insurance 48 45 43
Other 536 745 719
------- ------- -------
$ 4,027 $ 3,934 $ 3,586
====== ====== ======
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES
The components of income tax expense are detailed as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Current expense $ 2,106 $ 2,255 $ 2,124
Deferred expense (56) (155) (235)
-------- -------- --------
Total tax expense $ 2,050 $ 2,100 $ 1,889
======== ======== ========
</TABLE>
The income tax provision reconciled to the statutory federal rate was as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax rate from
Tax-exempt loan and investment income (2.3) (2.0) (3.0)
Tax credits (2.2) (0.9) (3.0)
Other, net (1.3) (1.6) 1.0
----- ----- -----
Applicable income tax rate 28.2% 29.5% 29.0%
==== ==== ====
</TABLE>
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
---------- -----------
<S> <C> <C>
Allowance for possible loan losses $ 1,853 $ 1,715
Unrealized gain loss on securities available-for-sale 1,491 (150)
Deferred loan fees 119 158
Accrued pension and deferred compensation 389 421
Depreciation 240 181
Other - 21
------- -------
4,092 2,346
Valuation allowance - -
------- -------
Total deferred tax asset 4,092 2,346
------- -------
Bond accretion (81) (32)
------- -------
Total deferred tax liabilities (81) (32)
------- -------
Net deferred tax asset $ 4,011 $ 2,314
======= =======
</TABLE>
NOTE I - CAPITAL REQUIREMENTS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - CAPITAL REQUIREMENTS - continued
corrective action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of Total and
Tier I capital to risk-weighted assets, and Tier I capital to average
quarterly assets. Management believes that the Corporation and the Bank meet
all capital adequacy requirements to which it is subject, as of December 31,
1999.
As of December 31, 1999, the most recent notification from the federal
banking agencies categorized the Corporation and the Bank as well
capitalized under the regulatory framework for corrective action. To be
categorized as adequately capitalized the Corporation and the Bank must
maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
the notification that management believes have changed the institutions
category.
The Corporation's actual capital amounts and ratios are presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets)
Corporation $ 45,882 11.98% $ 30,632 =>8.00% $ 38,291 N/A
Bank $ 44,908 11.73% $ 30,629 =>8.00% $ 38,286 =>10.00%
Tier I Capital
(to Risk Weighted Assets)
Corporation $ 41,071 10.73% $ 15,316 =>4.00% $ 22,974 N/A
Bank $ 40,104 10.47% $ 15,315 =>4.00% $ 22,972 =>6.00%
Tier I Capital
(to Average Assets)
Corporation $ 41,071 8.48% $ 19,379 =>4.00% $ 24,223 N/A
Bank $ 40,104 8.05% $ 19,930 =>4.00% $ 24,913 =>5.00%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets)
Corporation $ 43,742 12.95% $ 27,027 =>8.00% $ 33,784 N/A
Bank $ 42,638 12.62% $ 27,024 =>8.00% $ 33,780 =>10.00%
Tier I Capital
(to Risk Weighted Assets)
Corporation $ 39,431 11.67% $ 13,513 =>4.00% $ 20,270 N/A
Bank $ 38,327 11.35% $ 13,512 =>4.00% $ 20,268 =>6.00%
Tier I Capital
(to Average Assets)
Corporation $ 39,431 8.59% $ 18,369 =>4.00% $ 22,961 N/A
Bank $ 38,327 8.36% $ 18,344 =>4.00% $ 22,930 =>5.00%
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the estimated fair value of an entity's assets and
liabilities considered to be financial instruments. For the Corporation, as
for most financial institutions, the majority of its assets and liabilities
are considered financial instruments as defined in SFAS No. 107. However,
many such instruments lack an available trading market, as characterized by
a willing buyer and seller engaging in an exchange transaction. Also, it is
the Corporation's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, the Corporation had to use significant estimations and present
value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimated fair value of cash
and cash equivalents, deposits with no stated maturities, Repos and FHLB
advances and commitments to extend credit, and outstanding letters of credit
has been estimated to equal the carrying amount. Quoted market prices were
used to determine the estimated fair value of investment securities
held-to-maturity and available-for-sale. Fair values of net loans and
deposits with stated maturities were calculated using estimated discounted
cash flows based on the year-end offering rate for instruments with similar
characteristics and maturities.
The estimated fair values and carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
(Dollars in thousands) Fair Carrying Fair Carrying
Value Amount Value Amount
----- ------ ----- ------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 32,257 $ 32,257 $ 30,681 $ 30,681
Investment securities held-to-maturity 4,535 4,402 7,606 7,406
Investment securities available-for-sale 108,638 106,638 102,380 102,380
Net loans 331,784 348,077 313,921 314,518
Financial Liabilities
Deposits with no stated maturities 306,145 304,796 267,615 267,615
Deposits with stated maturities 142,815 143,637 152,005 150,783
Securities sold under repurchase agreements 3,365 3,365 2,795 2,795
FHLB advances 16,667 16,667 5,027 5,027
Off-Balance-Sheet Investments
Commitments for extended credit
and outstanding letters of credit 65,531 65,531 103,132 103,132
</TABLE>
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk to meet the financing needs of its customers and reduce its own
exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK - continued
financial statements when they become payable. Those instruments involve, to
varying degrees, elements of credit and interest rate risks in excess of the
amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the
Corporation has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Corporation uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Corporation does not require collateral or other
security to support financial instruments with credit risk. The contract
amounts are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
------------ ------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $58,731 $95,500
Standby letters of credit and financial guarantees written 6,800 7,632
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and
similar transactions. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Corporation holds residential or commercial real estate,
accounts receivable, inventory and equipment as collateral supporting those
commitments for which collateral is deemed necessary. The extent of
collateral held for those commitments at December 31, 1999, varies up to
100%; the average amount collateralized is 80%.
Substantially all of the Corporation's loans, commitments, and commercial
and standby letters of credit have been granted to customers in the
Corporation's primary market area, Chester County, Pennsylvania. Investments
in state and municipal securities also involve governmental entities within
the Corporation's market area. The concentrations of credit by type of loan
are set forth in Note C - Loans. Although the Corporation has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the economic sector. The distribution of
commitments to extend credit approximates the distribution of loans
outstanding.
Commercial and standby letters of credit were granted primarily to
commercial borrowers.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Corporation has one stock option plan, the 1995 Stock Option Plan. This
plan allows the Corporation to grant up to 807,500 fixed stock options to
key employees and directors. The options have a term of ten years and become
exercisable six months after grant. The exercise price of each option equals
the average between the high and low bid price of the Corporation's stock on
the date of grant.
The Corporation has elected to account for its stock option plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the plan been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Corporation's net income and
earnings per share would have been:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -------
<S> <C> <C> <C> <C>
Net income (in thousands) As reported $ 5,217 $ 5,016 $ 4,615
Pro forma $ 4,196 $ 4,016 $ 4,053
Earnings per share (Basic) As reported $ 1.14 $ 1.09 $ 1.00
Pro forma $ 0.92 $ 0.87 $ 0.88
Earnings per share (Diluted) As reported $ 1.13 $ 1.07 $ 1.00
Pro forma $ 0.91 $ 0.85 $ 0.88
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend
yield of 2.40%, 2.20% and 2.82%; expected volatility of 0.65, 0.48 and 0.48;
risk-free interest rate of 5.68%, 4.39% and 5.99%; and an expected life of 4
1/2 years, 4 1/2 years and 5 years.
Information about stock options outstanding at December 31, 1999, is
summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Outstanding Exercise Price
----------- --------------
<S> <C> <C>
Balance 1/1/97 120,000 $ 9.93
Granted 125,000 15.51
Exercised (16,600) 9.55
Cancelled -- --
------- -----
Balance 1/1/98 228,400 13.01
Granted 233,000 18.76
Exercised (33,400) 12.16
Cancelled (37,600) 20.05
------- -----
Balance 1/1/99 390,400 15.84
Granted 216,150 15.21
Exercised (10,400) 13.82
Cancelled (52,398) 19.73
------- -----
Balance 12/31/99 543,752 $15.25
======= =====
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and
1997 was $7.43, $6.10 and $3.53, respectively.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS - continued
Options Outstanding
-------------------
<TABLE>
<CAPTION>
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise-Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------- ----------- ----------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 8.66 - $11.11 80,200 6.28 years $10.00 80,200 $10.00
$14.75 - $14.75 160,750 9.75 years $14.75 - -
$15.50 - $15.83 146,100 8.13 years $15.61 117,947 $15.59
$17.69 - $21.13 156,702 8.72 years $18.13 144,702 $18.15
------- ------- -----
543,752 342,849 $15.36
======= ======= =====
</TABLE>
NOTE M - EARNINGS PER SHARE
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
-------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS:
Net income available to common stockholders $5,217,139 $4,571,929 $1.14
Effect of Dilutive Securities
Add options to purchase common stock -- 52,441 (.01)
--------- --------- ----
Diluted EPS: $5,217,139 $4,624,370 $1.13
========= ========= ====
</TABLE>
54,334 anti-dilutive weighted shares have been excluded in the computation
of 1999 diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS:
Net income available to common stockholders $5,016,039 4,609,874 $1.09
Effect of Dilutive Securities
Add options to purchase common stock -- 66,157 (.02)
--------- --------- ----
Diluted EPS: $5,016,039 4,676,031 $1.07
========= ========= ====
</TABLE>
15,633 anti-dilutive weighted shares have been excluded in the computation
of 1998 diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - EARNINGS PER SHARE - continued
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS:
Net income available to common stockholders $4,615,000 4,580,814 $1.00
Effect of Dilutive Securities
Add options to purchase common stock -- 38,806 --
--------- --------- ----
Diluted EPS: $4,615,000 4,619,620 $1.00
========= ========= ====
</TABLE>
30,945 anti-dilutive weighted shares have been excluded in the computation
of 1997 diluted EPS because the options' exercise price was greater than the
average market price of the common shares.
NOTE N - REGULATORY MATTERS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank based upon deposit levels and other factors. The average amount
of those reserve balances for the years ended December 31, 1999 and 1998,
was approximately $4,885,000 and $3,753,000, respectively.
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Corporation in
the form of cash dividends, loans or advances. The Bank, without the prior
approval of regulators, can declare dividends to the Corporation totaling
approximately $5,088,000 plus additional amounts equal to the net earnings
of the Bank for the period from January 1, 1999, through the date of
declaration, less dividends previously paid in 1999.
NOTE O - EMPLOYEE BENEFIT PLANS
1. Qualified
The Corporation has a qualified deferred salary savings 401(k) plan (the
"401(k) Plan") under which the Corporation contributes $0.75 for each $1.00
that an employee contributes, up to the first 5% of the employee's salary.
The Corporation's expenses were $266,000, $181,000, and $152,000 in 1999,
1998, and 1997, respectively. The Corporation also has a qualified defined
contribution pension plan (the "QDCP Plan"). Under the QDCP Plan, the
Corporation makes annual contributions into the 401(k) Plan on behalf of
each eligible participant in an amount equal to 3% of salary up to $30,000
in salary plus 6% in excess of $30,000 up to $160,000. Contribution expense
in 1999, 1998 and 1997 under the QDCP Plan was $246,000, $199,000 and
$138,000, respectively. The Corporation may make additional discretionary
employer contributions subject to approval of the Board of Directors.
2. Non-Qualified
The Corporation makes annual contributions to a non-qualified defined
contribution Plan ("the NQDCP Plan ") equal to 3% of the participant's
salary up to $160,000 plus 9% in excess of $160,000. Contribution expense
for 1999, 1998 and 1997 under the NQDCP Plan was $49,000, $43,000 and
$39,000, respectively. The Corporation may make additional discretionary
employer contributions subject to approval of the Board of Directors.
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - COMMITMENTS AND CONTINGENCIES
The Corporation has employment agreements with several of the Corporation's
Officers. These agreements provide for severance payments upon termination
of employment under certain circumstances or a change of control as defined.
Other
The Corporation is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the outcome of this
litigation will not have a significant effect on the accompanying financial
statements.
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY
Condensed financial information for First West Chester Corporation (parent
Corporation only) follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(Dollars in thousands) December 31
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 290 $ 260
Investment securities available for sale, at market value 396 741
Investment in subsidiaries, at equity 37,380 38,624
Intercompany loan 110 105
Other assets 73 23
-------- --------
Total assets $ 38,249 $ 39,753
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 67 $ 30
Stockholders' equity 38,182 39,723
-------- --------
Total liabilities and stockholders' equity $ 38,249 $ 39,753
======== ========
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - continued
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands) Year ended December 31
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries $ 3,517 $ 1,948 $ 2,022
Dividends from investment securities 46 1 1
Investment securities gains, net 32 23 182
Other income 8 35 16
--------- --------- ---------
Total income 3,603 2,007 2,221
--------- --------- ---------
EXPENSES
Other expenses 223 203 169
--------- --------- ---------
Total expenses 223 203 169
--------- --------- ---------
Income before equity in undistributed
income of subsidiaries 3,380 1,804 2,052
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES 1,837 3,212 2,563
--------- --------- ---------
NET INCOME $ 5,217 $ 5,016 $ 4,615
========= ========= =========
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - continued
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------
(Dollars in thousands) 1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,217 $ 5,016 $ 4,615
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary (1,837) (3,212) (2,563)
Investment securities gains, net (31) (23) (182)
(Increase) decrease in other assets (105) 114 (61)
Increase in other liabilities 37 5 8
-------- -------- ---------
Net cash provided by operating activities 3,281 1,900 1,817
-------- -------- ---------
INVESTING ACTIVITIES
Proceeds from sales and maturities of investment securities 206 - 510
Purchases of investment securities available for sale - (672) -
-------- -------- ---------
Net cash (used in) provided by investing activities 206 (672) 510
-------- -------- ---------
FINANCING ACTIVITIES
Intercompany loan 115 796 (933)
Dividends paid (2,239) (2,144) (1,945)
Effect of treasury stock transactions (1,333) 313 159
-------- -------- ---------
Net cash used in financing activities (3,457) (1,035) (2,719)
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 30 193 (393)
Cash and cash equivalents at beginning of year 260 67 460
-------- -------- ---------
Cash and cash equivalents at end of year $ 290 $ 260 $ 67
======== ======== =========
</TABLE>
<PAGE>
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the unaudited quarterly results of operations is as follows:
<TABLE>
<CAPTION>
1999
(Dollars in thousands, except per share) December 31 September 30 June 30 March 31
----------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Interest income $ 9,182 $ 8,909 $ 8,659 $ 8,357
Interest expense 3,817 3,642 3,557 3,527
Net interest income 5,366 5,266 5,102 4,830
Provision for loan losses 306 184 171 138
Investment securities gains, net 5 - 198 4
Income before income taxes 1,757 1,945 2,003 1,562
Net income 1,386 1,351 1,394 1,086
Per share
Net income (Basic) $ 0.30 $ 0.30 $ 0.30 $ 0.24
Net Income (Diluted) 0.30 0.29 0.30 0.23
Dividends declared 0.125 0.125 0.120 0.120
1998
(Dollars in thousands, except per share) December 31 September 30 June 30 March 31
----------- ------------ ------------- ---------
Interest income $ 8,725 $ 8,472 $ 8,338 $ 8,240
Interest expense 3,640 3,588 3,482 3,424
Net interest income 5,085 4,884 4,856 4,816
Provision for loan losses 298 201 188 224
Investment securities gains (losses), net 85 5 - 3
Income before income taxes 1,855 1,727 1,837 1,625
Net income 1,308 1,252 1,276 1,179
Per share
Net income (Basic) $ 0.28 $ 0.28 $ 0.27 $ 0.26
Net Income (Diluted) 0.28 0.26 0.27 0.26
Dividends declared 0.140 0.110 0.110 0.110
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
First West Chester Corporation
We have audited the accompanying consolidated balance sheets of First
West Chester Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity
and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
West Chester Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 27, 2000
SUBSIDIARIES OF THE CORPORATION
First National Bank of Chester County
9 North High Street
P.O. Box 523
West Chester, PA 19381-0523
Turks Head Properties, Inc.
323 East Gay Street
West Cheseter, PA 19381-0523
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 27, 2000 accompanying the
consolidated financial statements included in the 1999 Annual Report of First
West Chester Corporation and subsidiaries on Form 10-K for the year ended
December31, 1998. We hereby consent to the incorporation by reference of said
reports in the Registration Statement of First West Chester Corporation on Forms
S-8 (File No. 333-09241, effective July 31, 1996, File No. 333-15733, effective
November 7, 1996, File No. 333-33411, effective August 12, 1997, File No.
333-69315, effective December 21, 1998).
Philadelphia, Pennsylvania
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
FDS for First Chester County Corporation Formerly First West Chester
Corporation
</LEGEND>
<CIK> 0000744126
<NAME> First Chester County Corporation
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1000
<CASH> 27,257
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 108,638
<INVESTMENTS-CARRYING> 4,402
<INVESTMENTS-MARKET> 4,535
<LOANS> 354,338
<ALLOWANCE> 6,261
<TOTAL-ASSETS> 511,902
<DEPOSITS> 448,433
<SHORT-TERM> 13,773
<LIABILITIES-OTHER> 11,514
<LONG-TERM> 0
0
0
<COMMON> 4,800
<OTHER-SE> 33,382
<TOTAL-LIABILITIES-AND-EQUITY> 511,902
<INTEREST-LOAN> 27,730
<INTEREST-INVEST> 7,260
<INTEREST-OTHER> 117
<INTEREST-TOTAL> 35,107
<INTEREST-DEPOSIT> 13,875
<INTEREST-EXPENSE> 14,543
<INTEREST-INCOME-NET> 20,564
<LOAN-LOSSES> 799
<SECURITIES-GAINS> 207
<EXPENSE-OTHER> 17,506
<INCOME-PRETAX> 7,267
<INCOME-PRE-EXTRAORDINARY> 7,267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,217
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 4.60
<LOANS-NON> 1,207
<LOANS-PAST> 175
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,877
<CHARGE-OFFS> 593
<RECOVERIES> 178
<ALLOWANCE-CLOSE> 6,261
<ALLOWANCE-DOMESTIC> 6,261
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
