UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000, OR
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( ) 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.
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FIRST CHESTER COUNTY CORPORATION
--------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2288763
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
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(Address of principal executive office) (Zip code)
(610) 692-1423
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of Common Stock of the Registrant as of July
31, 2000 was 4,503,418.
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income
Three and Six-Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Changes in Stockholder's
Equity 5
Consolidated Statements of Cash Flows
Six-Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 22
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 23
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K 24 - 25
Signatures 26
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Unaudited)
(Dollars in thousands) June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,822 $ 27,257
Federal funds sold - 5,000
Interest Bearing Deposits in banks 115 -
-------- --------
Total cash and cash equivalents 31,937 32,257
-------- --------
Investment securities held-to-maturity (market value of $3,174 and $4,535 at
June 30, 2000 and December 31, 1999,
respectively) 3,080 4,402
Investment securities available-for-sale, at market value 105,276 108,638
Loans 378,389 354,338
Less: Allowance for loan losses (6,541) (6,261)
-------- --------
Net loans 371,848 348,077
Premises and equipment 10,448 10,444
Other assets 8,379 8,084
-------- --------
Total assets $ 530,968 $ 511,902
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 82,036 $ 82,734
Interest-bearing (including certificates of deposit over $100
of $28,594 and $28,377 - June 30, 2000 and
December 31, 1999 respectively) 379,260 365,699
-------- --------
Total deposits 461,296 448,433
Securities sold under repurchase agreements 2,531 3,365
Federal Home Loan Bank advances and other borrowings 22,630 16,667
Other liabilities 4,962 5,255
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Total liabilities 491,419 473,720
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STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
outstanding, 4,799,666 at June 30, 2000 and December 31, 1999. 4,800 4,800
Additional paid-in capital 610 602
Retained earnings 40,456 38,652
Accumulated other comprehensive income (loss) (2,854) (2,893)
Treasury stock, at cost: 284,248 shares and 254,509 shares
at June 30, 2000 and December 31, 1999, respectively. (3,463) (2,979)
-------- --------
Total stockholders' equity 39,549 38,182
-------- --------
Total liabilities and stockholders' equity $ 530,968 $ 511,902
======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands - except per share data) Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 7,989 $6,808 $15,635 $13,445
Investment securities 1,791 1,817 3,670 3,476
Federal funds sold 9 34 37 95
Deposits in Banks 1 - 2 -
------ ----- ------ ------
Total interest income 9,790 8,659 19,344 17,016
------ ----- ------ ------
INTEREST EXPENSE
Deposits 3,711 3,444 7,267 6,855
Securities sold under repurchase agreements 29 22 65 53
Federal Home Loan Bank advances and other borrowings 362 91 698 176
------ ----- ------ ------
Total interest expense 4,102 3,557 8,030 7,084
------ ----- ------ ------
Net interest income 5,688 5,102 11,314 9,932
Provision for loan losses 177 171 467 309
------ ----- ------ ------
Net interest income after provision
for possible loan losses 5,511 4,931 10,847 9,623
------ ----- ------ ------
NON-INTEREST INCOME
Financial management services 786 629 1,571 1,258
Service charges on deposit accounts 268 256 517 502
Investment securities gains (losses), net 3 198 (40) 202
Other 339 319 686 629
------ ----- ------ ------
Total non-interest income 1,396 1,402 2,734 2,591
------ ----- ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,691 2,401 5,322 4,747
Net occupancy and equipment 997 973 1,987 1,779
FDIC deposit insurance 23 12 45 24
Bank shares tax 106 117 213 217
Other 1,040 827 1,967 1,881
------ ----- ------ ------
Total non-interest expense 4,857 4,330 9,534 8,648
------ ----- ------ ------
Income before income taxes and cumulative
effect of change in accounting for income taxes 2,050 2,003 4,047 3,566
INCOME TAXES 545 609 1,112 1,087
------ ----- ------ ------
NET INCOME $ 1,505 $1,394 $ 2,935 $ 2,479
====== ===== ====== ======
PER SHARE DATA
Basic net income per common share $ 0.33 $ 0.30 $ 0.65 $ 0.54
======= ====== ====== ======
Diluted net income per common share $ 0.33 $ 0.30 $ 0.64 $ 0.53
======= ====== ====== ======
Dividends declared $ 0.125 $ 0.120 $ 0.250 $ 0.240
======= ====== ====== ======
Basic weighted average shares outstanding 4,525,496 4,578,491 4,531,447 4,588,633
========= ========= ========= =========
Diluted weighted average shares outstanding 4,543,329 4,631,111 4,551,945 4,648,016
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT'S OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(Dollars in thousands) 2000 1999
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<S> <C> <C>
Balance at January 1, $38,182 $39,723
Net income to date 2,935 2,479
Cash dividends declared (1,132) (1,101)
Net unrealized gain (loss) on securities available-for-sale 91 (479)
Treasury stock transactions 1 60
Paid in capital from treasury stock transactions (528) (955)
------ ------
Balance at June 30, $39,549 $39,727
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
--------------------=-------
(Dollars in thousands) 2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,935 $ 2,479
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 802 285
Provision for loan losses 467 309
Amortization of investment security premiums
and accretion of discounts 58 116
Amortization of deferred fees on loans 151 16
Investment securities (gains) losses, net 40 (202)
Increase in other assets (248) (2,271)
(Decrease) increase in other liabilities (335) 1,237
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Net cash provided by operating activities 3,870 1,969
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INVESTING ACTIVITIES
Increase in loans (24,389) (7,439)
Increase in Interest bearing deposits (115) -
Proceeds from sales of investment securities available-for-sale 4,644 12,338
Proceeds from maturities of investment securities available-for-sale 6,184 16,903
Proceeds from maturities of investment securities held-to-maturity - 2,375
Purchases of investment securities available-for-sale (6,127) (39,314)
Purchase of premises and equipment, net (771) (170)
-------- ---------
Net cash used in investing activities (20,574) (15,307)
-------- ---------
FINANCING ACTIVITIES
Decrease in securities sold under repurchase agreements (834) (185)
Increase in deposits 12,863 10,821
Increase (decrease) in Federal Home Loan Bank advances and other borrowings 5,963 (717)
Cash dividends (1,132) (1,101)
Treasury stock transactions (476) (895)
-------- ---------
Net cash provided by financing activities 16,384 7,923
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (320) (5,414)
Cash and cash equivalents at beginning of period 32,257 30,681
-------- ---------
Cash and cash equivalents at end of period $ 31,937 $ 25,266
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of Management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of
operations for the interim period presented have been included. These
interim financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in
our Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
2. The results of operations for the three- and six-month periods ended
June 30, 2000 are not necessarily indicative of the results to be
expected for the full year.
3. Earnings per share is based on the weighted average number of shares
of common stock outstanding during the period. Diluted net income per
share includes the effect of options granted.
4. We have adopted the provisions of FASB issued SFAS No. 130, Reporting
of Comprehensive Income, which establishes standards for reporting
and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of financial statements.
This statement also requires that all items that are required to be
recognized under accounting standards as components of year-end
comprehensive income be reported in a financial statement that is
displayed with the same prominence as others financial statements.
Other comprehensive income (loss) net of taxes for the three- and
six-month periods ended June 30, 2000 was $82 thousand and $91
thousand, compared to $106 thousand and ($479) thousand in the same
period last year. Total comprehensive income (which is the sum of net
income and other comprehensive income mentioned above) for the three-
and six-month periods ended June 30, 2000 was $1.6 million and $3.0
million, compared to $1.5 million and $2.0 million in the same period
last year.
5. 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 and SFAS 138 was issued which amended the accounting for
various derivative and hedging activities as previously required
under SFAS No. 133. Based on our minimal use of derivatives at the
current time, management does not anticipate the adoption of SFAS No.
133, last amended by SFAS 138, will have a significant impact on our
earnings or financial position. However, the impact from adopting
SFAS No. 133, as amended by SFAS 138, will depend on the nature and
purpose of derivative instruments we may be using at that time.
6. Certain prior year amounts have been reclassified to conform to the
current year presentations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is intended to further your understanding of the
consolidated financial condition and results of operations of First Chester
County Corporation (the "Corporation") and its wholly-owned subsidiaries, The
First National Bank of Chester County (the "Bank") and Turks Head Properties,
Inc. It should be read in conjunction with the consolidated financial statements
included in this report.
On February 17, 2000, the Board of Directors of First West Chester
Corporation voted to modify the name of the banks holding company's banking
subsidiary to First National Bank of Chester County and changed the name of the
bank's parent corporation to First Chester County Corporation.
In addition to historical information, this discussion and analysis
contains statements relating to future results of the Corporation that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements can often be
identified by the use of forward-looking terminology such as "believes,"
"expects," "intends," "may," "will," "should," "or "anticipates" or similar
terminology. These statements involve risks and uncertainties and are based on
various assumptions. Investors and prospective investors are cautioned that such
statements are only projections. The risks and uncertainties noted below, among
others, could cause the Corporation's actual future results to differ materially
from those described in forward looking statements made in this report or
presented elsewhere by Management from time to time.
These risks and uncertainties include, but are not limited to, the
following: (a) loan growth and/or loan margins may be less than expected due to
competitive pressures in the banking industry and/or changes in the interest
rate environment; (b) general economic conditions in the Corporation's market
area may be less favorable than expected resulting in, among other things, a
deterioration in credit quality causing increased loan losses; (c) costs of the
Corporation's planned training initiatives, product development, branch
expansion, new technology and operating systems may exceed expectations; (d)
volatility in the Corporation's market area due to mergers of competing
financial institutions which may have unanticipated consequences, such as
customer turnover; (e) changes in the regulatory environment, securities
markets, general business conditions and inflation may be adverse; (f) impact of
changes in interest rates on customer behavior; (g) estimated changes in net
interest income; (h) anticipated pressure on net yields; and (i) branch
locations. These risks and uncertainties are all difficult to predict and most
are beyond the control of the Corporation's Management.
Although the Corporation believes that its expectations are based on
reasonable assumptions, readers are cautioned that such statements are only
projections. The Corporation undertakes no obligation to publicly release any
revisions to the forward-looking statements to reflect events or circumstances
after the date of this report.
EARNINGS AND DIVIDEND SUMMARY
Net income for the three-month period ended June 30, 2000 was $1.5
million, an increase of 8.0% from $1.4 million for the same period in 1999. Net
income for the six-month period ended June 30, 2000 was $2.9 million, an
increase of 18.4% from $2.5 million for the same period in 1999. Increases in
net income are the direct result of increases in interest income earned from our
loan portfolio and non-interest income sources, such as Financial Management
Services Revenue, partially offset by increases in interest expense for deposits
and borrowings and increases in operating expenses.
Cash dividends declared during the second quarter of 2000 increased to
$0.125 per share, a 4.2% increase compared to $0.120 per share in the second
quarter of 1999. Over the past ten years, the Corporation's practice has been to
pay a dividend of at least 35.0% of net income.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED RATIOS
---------------
Return on Average Assets 1.16% 1.15% 1.14% 1.04%
Return on Average Equity 15.46% 14.10% 15.21% 12.52%
Earnings Retained 62.46% 60.62% 61.43% 55.59%
Dividend Payout Ratio 37.54% 39.38% 38.57% 44.41%
Book Value Per Share $8.76 $8.69 $8.76 $8.69
</TABLE>
The "Consolidated Average Balance Sheet" on pages 14 and 15 may assist the
reader in following this discussion.
NET INTEREST INCOME
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income for the three- and six-month periods ended June 30, 2000, on
a tax equivalent basis, was $5.7 million and $11.4 million, compared to $5.2
million and $10.1 million for the same periods in 1999, respectively. The
increase in net interest income for both periods was the result of higher net
yields on interest-earning assets and an increase in the average amount of
interest-earning assets, partially offset by an increase in average
interest-bearing liabilities and higher average rates paid on these liabilities.
Net yields on interest-earning assets, on a tax equivalent basis, were
4.78% for the three- and six-month periods ended June 30, 2000 compared to 4.58%
for the three-months ended June 30, 1999 and 4.51% for the six-months ended June
30, 1999. The increase in the average net yield on interest-earning assets for
the three-and six-month periods ended June 30, 2000 was primarily the result of
an increase in the average yield earned on interest-earning assets, partially
offset by an increase in the average yield paid on interest bearing liabilities.
The increase in the average net yield earned on interest-earning assets can be
attributed to increases in the rates charged on the Corporation's loan portfolio
in the current rising rate environment, partially offset by increases in the
cost of deposits and borrowings.
Average interest-earning assets increased approximately $26.0 million
to $481.0 million during the second quarter of 2000 from $455.0 million in the
same period last year. For the six months ended June 30, 2000, average
interest-earning assets increased approximately $32.6 million to $478.5 million
from $445.9 million in the same period last year. The increase in average
interest-earning assets was primarily the result of an increase in the average
loans outstanding due to increased loan originations.
Despite the increase in the average net yield for both periods, the
Corporation anticipates that there will be 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
Three Months Six Months
Yield On: Ended June 30, Ended June 30,
--------- ------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets 8.19% 7.70% 8.14% 7.69%
Interest Bearing Liabilities 4.17% 4.05% 4.10% 3.99%
---- ---- ---- ----
Net Interest Spread 4.02% 3.65% 4.04% 3.70%
Contribution of Interest Free Funds 0.76% 0.93% 0.74% 0.81%
---- ---- ---- ----
Net Yield on Interest Earning Assets 4.78% 4.58% 4.78% 4.51%
==== ==== ==== ====
</TABLE>
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold for the three- and six-month
periods ended June 30, 2000, decreased 73.5% and 61.1% to $9 thousand and $37
thousand, respectively, when compared to the same periods in 1999. The decrease
in interest income on federal funds is the direct result of a 79.7% and 66.1%
decrease in the average balance of federal funds sold for the three- and six-
month periods ended June 30, 2000, respectively, when compared to the same
periods in 1999, partially offset by a 146 and 72 basis point (one basis point
is equal to one hundredth of one percent) increase in the rates earned on
federal funds sold, for the three- and six- month periods ended June 30, 2000
when compared to the same period in 1999. Funds which in prior periods were sold
in the federal funds market have been paid to support loan growth in the current
periods.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
decreased 1.4% to $1.8 million for the three-month period ended June 30, 2000,
and increased 5.6% to $3.7 million for the six-month period ended June 30, 2000,
respectively, when compared to the same periods in 1999. The decrease for the
three-month period is primarily due to a decrease in average investment security
balances of 7.7%, partially offset by a 42 basis point increase on rates earned
on such investments. The increase for the six-month period ended June 30, 2000
is the result of a 8.9% or 54 basis point increase in the yield earned compared
to the same period last year, partially offset by a $3.4 million or 3.0%
decrease in average investment security balances. Decreases in average
investment security balances are the result of periodic payments (securities
paydowns) and normal maturities. These funds are being used to support loan
growth.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio increased 16.4% and 16.2% to $8.0 million and $15.7
million for the three- and six-month periods ended June 30, 2000, compared to
the same periods in 1999, respectively. The increase in interest income for
these periods is the direct result of an 11.1% and 11.8% increase in the average
loans outstanding for the three- and six-month periods ended June 30, 2000,
respectively. For the three- and six-month period ended June 30, 2000, loan
interest income also benefited from 39 and 33 basis point increases in rates
earned on the portfolio as compared to last year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts increased 7.1% and 6.0% for the
three- and six-month periods ended June 30, 2000 to $3.7 million and $7.3
million, compared to the same periods in 1999. The increase for the three-month
period ended June 30, 2000 is the result of an increase in average
interest-bearing deposits of $24.4 and a 2 basis point increase in the rates
paid on interest-bearing deposits. The increase for the six-month period ended
June 30, 2000 is the result of an increase in average interest-bearing deposits
of $19.1 million and a 2 basis point increase in rates paid on interest-bearing
deposits. The Corporation's effective rate on interest-bearing deposits
increased to 4.03% and 3.97% for the three- and six-month periods ended June 30,
2000 from 4.01% and 3.95% for the same periods, respectively, in 1999.
The recent rising interest rate environment that has positively
impacted the interest income earned in the Corporation's loan portfolio has also
caused upward pressure on the Corporation's interest bearing deposits. While
interest rate increases impact earnings on floating-rate loan portfolios in a
relatively short time, the impact on deposit interest expense is more gradual.
The Corporation anticipates that the current rising rate environment will
continue to put upward pressure on deposit rates in future time periods.
Competition for deposits from local community banks as well as
non-banking institutions such as credit union and mutual fund companies
continues to be a strong factor. Despite this competition, the Corporation's
deposit base continues to grow and growth is expected to continue as we continue
to open new branches and attract new customers with new products and services.
Recent growth can be attributed primarily to our four new limited service
retirement community branches located in Chester and Delaware counties. New
branch sites are currently under review. New branch sites will help expand the
Corporation's deposit base.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements
increased 31.8% and 22.6% to $29 thousand and $65 thousand for the three- and
six-month periods ended June 30, 2000, respectively, compared to the same
periods in 1999. The increases are primarily attributable to 28.4%, or a 114
basis point increase, and 26.0%, or a 101 basis point increase, in rates paid on
such contracts, compared to the rates paid in the three- and six-month periods
ended June 30, 1999, respectively.
INTEREST EXPENSE ON FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Interest expense on borrowings increased 298.9% and 296.6% for the
three- and six-month periods ended June 30, 2000, respectively. The increase is
a direct result of a $17.5 million or 296.1% and a $17.0 million or 304.7%
increase in borrowings for the three- and six-month periods ending June 30, 2000
when compared to the same periods last year. The increases in loans outstanding
for the three- and six-month periods have outpaced our deposit growth during the
same periods, necessitating that the Corporation obtain funds from other
sources. Borrowings consist of overnight Fed Funds purchased, Federal Home Loan
Bank ("FHLB") FlexLine, FHLB term advances and FHLB Open Repo and Repo Plus
advances.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
During the three- and six-month periods ended June 30, 2000, the
Corporation recorded a $177 thousand and a $467 thousand provision for loan
losses compared to a $171 thousand and a $309 thousand for the same periods in
1999. The increase in the provision expense is a result of an increase in loan
growth for the three- and six-month periods ended June 30, 2000, compared to the
same periods in 1999. The allowance for loan losses as a percentage of total
loans was 1.73% at June 30, 2000, 1.77% at December 31, 1999 and 1.81% at June
30, 1999, respectively. See the section titled "Allowance For Loan Losses" for
additional discussion.
NON-INTEREST INCOME
Total non-interest income decreased 0.4% to $1.4 million for the three-
month period ended June 30, 2000 when compared to the same period in 1999. For
the six- month period ended June 30, 2000, total non-interest income increased
5.5% to $2.7 million when compared to the same period in 1999. The primary
component of non-interest income is Financial Management Services revenue, which
increased 25.0% and 24.9% to $786 thousand and $1.6 million for the three- and
six-month periods ended June 30, 2000, respectively, compared to the same
periods in 1999. The increase in Financial Management Services revenue is
primarily the result of an increase in assets under management and custody. The
market value of Financial Management Services assets under management and
custody grew $18.6 million or 4.5% from $414.7 million at June 30, 1999 to
$433.3 million at June 30, 2000. The increase in Financial Management Services
revenue and growth in assets under management and custody is primarily the
result of market appreciation and new account relationships acquired through
strong marketing and business development efforts.
Service charges on deposit accounts increased approximately 4.7% to
$268 thousand for the three-months ended June 30, 2000 compared to $256 thousand
for the same period in 1999. For the six-month period ended June 30, 2000,
service charges on deposit accounts increased 3.0% to $517 thousand compared to
$502 thousand for the same period in 1999. This increase can be attributed to
the growth in the number and volume of deposit accounts for the current periods
when compared with the same periods last year. Other non-interest income
increased 6.3% to $339 thousand for the three-months ended June 30, 2000
compared to $319 thousand for the same period in 1999. For the six-month period
ended June 30, 2000, other non-interest income increased 9.1% to $686 thousand
compared to $629 thousand for the same period in 1999. The increases in other
non-interest income can be partially attributed to fees related to Community
Development Corporation ("CDC") activities.
Investment securities gains (losses) also contributed to the change in
non-interest income. For the three-month period ended June 30, 2000, investment
security gains (losses) decreased $195 thousand or 98.5% from $198 thousand to
$3 thousand, when compared to the same period in 1999. For the six-month period
ended June 30, 2000, investment security gains (losses) decreased $242 thousand
or 119.8% from $202 thousand to $(40) thousand, when compared to the same period
in 1999. During the first and second quarters of 1999, the Corporation realized
gains on the sale of certain early securities.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-INTEREST EXPENSE
Total non-interest expense for the three- and six-month periods ended
June 30, 2000 increased 12.2% to $4.9 million and $10.3% to $9.5 million,
compared to the same periods in 1999. The various components of non-interest
expense changes are discussed below.
Employee salaries and benefits increased 12.1% to $2.7 million and
12.1% to $5.3 million for the three-month and six-month periods ended June 30,
2000 compared to the same periods in 1999. Increased staff, annual employee
raises, and a proportional increase in employee benefits are primarily
responsible for the increase. At June 30, 2000, the Corporation employed 218
full time and 40 part time employees compared to 189 full time and 39 part time
employees at June 30, 1999. The hiring of additional staff for the Matlack
Street and Retirement Community branches during the second half of 1999
also contributed to the increase.
Net occupancy, equipment, and data processing expense increased 2.5%
and 11.7% to $1.0 million and $2.0 million for the three- and six-month periods
ended June 30, 2000, compared to the same periods last year, respectively. The
increase is the direct result of increased computer and related equipment costs
associated with the expansion, upgrading and maintenance of personal computers
and our networking infrastructure. Increases in the Corporation's facilities
also contributed to the increase. See "Building Improvements and Technology
Project" section for more detail.
Total other non-interest expense increased 25.8% and 4.6% to $1.0
million and $2.0 million for the three-month and six-month periods ended June
30, 2000 compared to the same periods in 1999. These increases can be attributed
to increased advertising and marketing efforts to attract new customers and to
promote our corporate image and an increase in the amount of professional
consulting services utilized by the Corporation.
Planning for additional branch sites continues. The Corporation believes
that the costs associated with the opening of new branch sites will have a
direct impact on all the components of non-interest expense. It is anticipated
that the increases in costs will be offset over time by an increase in net
interest and fee income generated by business in the new marketing areas.
The Corporation is currently working on four new branch sites. These
branch sites, which are in various stages of development, are expected to be
completed and opened within the next six to twelve months.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
--------------------------------- --------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 571 $ 9 6.30% $ 2,809 $ 34 4.84%
Interest bearing deposits in banks 169 2 4.73% - - -
Investment securities
Taxable 106,973 1,761 6.58% 116,051 1,787 6.16%
Tax-exempt (1) 2,279 43 7.55% 2,312 43 7.39%
------- ----- ------- -----
Total investment securities 109,252 1,804 6.60% 118,363 1,830 6.18%
------- ----- ------- -----
Loans (2)
Taxable 364,795 7,894 8.66% 327,926 6,742 8.22%
Tax-exempt (1) 6,175 139 8.99% 5,876 157 10.68%
------- ----- ------- -----
Total loans 370,970 8,033 8.66% 333,802 6,899 8.27%
------- ----- ------- -----
Total interest-earning assets 480,962 9,848 8.19% 454,974 8,763 7.70%
Non-interest earning assets
Allowance for loan losses (6,490) (5,961)
Cash and due from banks 23,285 21,923
Other assets 19,651 15,997
------- -------
Total assets $517,408 $486,933
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $231,599 $1,823 3.15% $195,551 $1,477 3.02%
Certificates of deposits and other time 136,380 1,888 5.54% 147,988 1,967 5.32%
------- ----- ------- -----
Total interest bearing deposits 367,979 3,711 4.03% 343,539 3,444 4.01%
Securities sold under repurchase agreements 2,252 29 5.15% 2,194 22 4.01%
Federal Home Loan Bank advances and
other borrowings 23,388 363 6.21% 5,904 91 6.17%
------- ----- ------- -----
Total interest bearing liabilities 393,619 4,103 4.17% 351,637 3,557 4.05%
------- ----- ------- -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 80,094 72,213
Other liabilities 4,763 12,454
------- -------
Total liabilities 478,476 436,304
Stockholders' equity 38,932 50,629
------- -------
Total liabilities and stockholders' equity $517,408 $486,933
======= =======
Net interest income $5,745 $5,206
===== =====
Net yield on interest earning assets 4.78% 4.58%
==== ====
<FN>
(1) The indicated income and annual rate are presented on a taxable equivalent
basis using the Federal marginal rate of 34% adjusted for the TEFRA 20%
interest expense disallowance for 2000 and 1999.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
---------------------- ------------------------------- --------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold $ 1,351 $ 37 5.48% $ 3,989 $ 95 4.76%
Interest bearing deposits in banks 109 2 3.67% - - -
Investment securities
Taxable 109,219 3,614 6.62% 112,755 3,421 6.07%
Tax-exempt (1) 2,272 86 7.56% 2,126 83 7.80%
------- ------- ------- ------
Total investment securities 111,491 3,700 6.64% 114,881 3,504 6.10%
------- ------- ------- ------
Loans (2)
Taxable 359,343 15,441 8.59% 321,077 13,247 8.25%
Tax-exempt (1) 6,186 293 9.46% 5,926 298 10.04%
------- ------- ------- ------
Total loans 365,529 15,734 8.61% 327,003 13,545 8.28%
------- ------- ------- ------
Total interest-earning assets 478,480 19,473 8.14% 445,873 17,144 7.69%
Non-interest earning assets
Allowance for loan losses (6,403) (5,878)
Cash and due from banks 21,958 21,301
Other assets 19,492 15,846
------- -------
Total assets $513,527 $477,142
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $228,233 $ 3,531 3.09% $198,244 $ 2,870 2.90%
Certificates of deposits and other time 137,864 3,736 5.42% 148,754 3,985 5.36%
------- ------- ------- ------
Total interest bearing deposits 366,097 7,267 3.97% 346,998 6,855 3.95%
Securities sold under repurchase agreements 2,652 65 4.90% 2,725 53 3.89%
Federal Home Loan Bank advances and
other borrowings 22,633 698 6.17% 5,592 176 6.29%
------- ------- ------- ------
Total interest bearing liabilities 391,382 8,030 4.10% 355,315 7,084 3.99%
------- ------- ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 77,854 70,777
Other liabilities 5,572 5,926
------- -------
Total liabilities 474,808 432,018
Stockholders' equity 38,719 45,124
------- -------
Total liabilities and stockholders' equity $513,527 $477,142
======= =======
Net interest income $ 11,443 $10,060
======= ======
Net yield on interest earning assets 4.78% 4.51%
==== ====
<FN>
(1) The indicated income and annual rate are presented on a taxable equivalent
basis using the Federal marginal rate of 34% adjusted for the TEFRA 20%
interest expense disallowance for 2000 and 1999.
(2) Non-accruing loans are included in the average balance.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INCOME TAXES
Income tax expense for the three- and six-month periods ended June 30,
2000 was $545 thousand and $1.1 million, compared to $609 thousand and $1.1
million in the same periods last year. This represents effective tax rates of
26.6% and 27.5% for the three- and six-month periods ended June 30, 2000,
respectively. The effective tax rate for the three- and six-month periods ended
June 30,1999 were 30.4% and 30.5%, respectively. This decrease in the effective
tax rate can be attributed to tax planning strategies put in place by
management.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Corporation's ability to meet deposit withdrawals either on demand or at
contractual maturity, to repay borrowings as they mature and to make new loans
and investments as opportunities arise. Liquidity is managed on a daily basis
enabling Senior Management to monitor changes in liquidity and to react
accordingly to fluctuations in market conditions. The primary source of
liquidity for the Corporation is funding available from the FHLB, deposit
growth, and cash flow from the investment and loan portfolios. In addition, new
deposits to NOW, money-market, savings, and smaller denomination certificates of
deposit accounts provide additional liquidity. The Corporation considers funds
from such sources to comprise its "core" deposit base because of the historical
stability of such sources of funds. Additional liquidity comes from the
Corporation's non-interest bearing demand deposit accounts and credit
facilities. Other deposit sources include a three-tiered savings product and
certificates of deposit in excess of $100,000. Details of core deposits,
non-interest bearing demand deposit accounts and other deposit sources are
highlighted in the following table:
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, 2000 December 31, 1999 Average Balance
-------------------------- ------------------------- -----------------------
Average Effective Average Effective Dollar Percentage
DEPOSIT TYPE Balance Yield Balance Yield Variance Variance
------------ ------- ---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts $ 65,522 1.71% $ 58,356 1.71% $ 7,166 12.28
Money Market 27,441 2.90 27,139 2.90 302 1.11
Statement Savings 49,736 3.00 49,144 3.00 592 1.20
Other Savings 2,151 2.79 2,280 2.76 (129) (5.66)
CD's Less than $100,000 111,816 5.42 118,228 5.38 (6,412) (5.42)
------- ------- ------
Total Core Deposits 256,666 3.71 255,147 3.79 1,519 0.60
Non-Interest Bearing
Demand Deposit Accounts 77,854 - 72,493 - 5,361 7.40
------- ------- ------
Total Core and Non-Interest
Bearing Deposits 334,520 2.85 327,640 2.95 6,880 2.10
------- ------- ------
Tiered Savings 83,383 4.31 68,067 3.97 15,316 22.50
CD's Greater than $100,000 26,048 5.43 28,863 5.19 (2,815) (9.75)
------- ------- ------
Total Deposits $443,951 3.27 $424,570 3.27 $19,381 4.56
======= ======= ======
</TABLE>
The Bank, as a member of the FHLB, maintains several credit facilities.
As of June 30, 2000 the amount outstanding under the Bank's line of credit with
the FHLB was $22.4 million. The Bank currently has a maximum borrowing capacity
with the FHLB of approximately $117.6 million. During the three- and six-month
periods ending June 30, 2000, average FHLB advances were approximately $23.3
million and $22.6 million, respectively, and consisted of term advances
representing a combination of maturities in each period. The average interest
rate on these advances was approximately 6.21% and 6.17% respectively. FHLB
advances are collateralized by a pledge on the Bank's portfolio of unencumbered
investment securities, certain mortgage loans and a lien on the Bank's FHLB
stock.
The goal of interest rate sensitivity management is to avoid
fluctuating net interest margins, and to enhance consistent growth of net
interest income through periods of changing interest rates. Such sensitivity is
measured as the difference in the volume of assets and liabilities in the
existing portfolio that are subject to repricing in a future time period. The
Corporation's net interest rate sensitivity gap within one year is a negative
$179.2 million or 33.7% of total assets at June 30, 2000 compared with a
negative $181.5 million or 37.7% of total assets at June 30, 1999. The
Corporation's gap position is one factor used to evaluate interest rate risk and
the stability of net interest margins. Other factors include computer
simulations of what might happen to net interest income under various interest
rate forecasts and scenarios. Management monitors interest rate risk as a
regular part of bank operations with the intention of maintaining a stable net
interest margin.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTEREST SENSITIVITY ANALYSIS
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
(Dollars in thousands)
One Over
Within through five Non-rate
one year five years years sensitive Total
------------ ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment securities $ 23,808 $ 57,982 $ 26,566 $ -- $ 108,356
Interest bearing deposits in banks -- -- -- 115 115
Loans and leases 127,182 213,910 37,297 (6,541) 371,848
Cash and cash equivalents -- -- -- 31,822 31,822
Premises & equipment -- -- -- 10,448 10,448
Other assets 4,155 -- -- 4,224 8,379
----------- ---------- ---------- ---------- ----------
Total assets $ 155,145 $ 271,892 $ 63,863 $ 40,068 $ 530,968
=========== ========== ========== ========== ==========
LIABILITIES AND CAPITAL
Interest bearing deposits $ 324,858 $ 52,157 $ 2,245 $ -- $ 379,260
Non-interest bearing deposit -- -- -- 82,036 82,036
Repurchase Agreements 2,531 -- -- -- 2,531
FHLB advances and other
borrowings 7,017 11,710 3,903 -- 22,630
Other liabilities -- -- -- 4,962 4,962
Capital -- -- -- 39,549 39,549
----------- ---------- ---------- ---------- ----------
Total liabilities & capital $ 334,406 $ 63,867 $ 6,148 $ 126,547 $ 530,968
=========== ========== ========== ========== ==========
Net interest rate
sensitivity gap $ (179,261) $ 208,025 $ 57,715 $ (86,479) $ --
========== ========== ========== ========= ==========
Cumulative interest rate
sensitivity gap $ (179,261) $ 28,764 $ 86,479 $ -- $ --
========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap divided
by total assets (33.8%) 5.4% 16.3%
========== ========== =========
</TABLE>
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 upon Management's periodic evaluations of the collectibility
of loans. These periodic 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------------------ -----------------------
(Dollars in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 6,412 $ 5,937 $ 6,261 $ 5,877
------- ------- ------- -------
Provision charged to operating expense 177 171 467 309
------- ------- ------- -------
Recoveries of loans previously charged-off 32 27 75 75
Loans charged-off (80) (213) (262) (339)
------- ------- ------- -------
Net loans charged-off (48) (186) (187) (264)
------- ------- ------- -------
Balance at end of period $ 6,541 $ 5,922 $ 6,541 $ 5,922
======= ======= ======= =======
Period-end loans outstanding $378,389 $327,554 $378,389 $327,554
Average loans outstanding $370,970 $333,802 $365,529 $327,003
Allowance for loan losses as a
Percentage of period-end loans outstanding 1.73% 1.81% 1.73% 1.81%
Net charge-offs to average loans
Outstanding 0.01% 0.06% 0.05% 0.08%
</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 charge-off all
non-performing loans to net realizable value based on updated appraisals.
Non-performing loans are generally collateralized by real estate and are in the
process of collection. Management is not aware of any loans other than those
included in the following table that would be considered potential problem loans
and cause Management to have doubts as to the borrower's ability to comply with
loan repayment terms.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NON-PERFORMING LOANS AND ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
------------------------- ------------
(Dollars in thousands) 2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Past due over 90 days and still accruing $ 426 $ 176 $ 175
Non-accrual loans 1,659 1,443 1,207
----- ----- -----
Total non-performing loans 2,085 1,619 1,382
Other real estate owned 447 192 470
----- ----- -----
Total non-performing assets $2,532 $1,811 $1,852
===== ===== =====
Non-performing loans as a percentage
of total loans (gross) 0.55% 0.49% 0.39%
Allowance for loan losses as a
percentage of non-performing loans 313.72% 365.78% 453.04%
Allowance for loan losses as a
percentage of total loans and other real
estate owned 0.67% 0.55% 0.52%
Allowance for loan losses as a
percentage of non-performing assets 258.33% 327.00% 338.07%
</TABLE>
The allowance for loan losses as a percentage of non-performing loans
ratio indicates that the allowance for loan losses is sufficient to cover the
principal of all non-performing loans at June 30, 2000. Other Real Estate Owned
("OREO") represents residential and commercial real estate that has been written
down to realizable value (net of estimated disposal costs) based on professional
appraisals acquired by the bank as a result of foreclosures on defaulted loans.
The increase in the current levels of non-performing assets from year end 1999
levels can be primarily attributed to two items: In June an asset was brought
into OREO (other real estate owned); and a $297 thousand loan classified as
non-performing in April.
LOAN IMPAIRMENT
The bank identifies a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest is discontinued on impaired loans
and no income is recognized until all recorded amounts of interest and principal
are recovered in full.
The balance of impaired loans was $659 thousand, $678 thousand, and
$1,027 thousand at June 30, 2000, December 31, 1999, and June 30, 1999
respectively. The associated allowance for impaired loans was $301 thousand,
$305 thousand and $296 thousand at June 30, 2000, December 31, 1999, and June
30, 1999, respectively.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the three-month and six-month period ended June 30, 2000, activity
in the allowance for impaired loan losses include a provision of $0 and $0,
write offs of $2 thousand and $7 thousand, respectively, and recoveries of $3
thousand and $3 thousand, respectively. Interest income of $0 was recorded for
both periods while contractual interest amounted to $15 thousand for the
three-months ended June 30, 2000 and $32 thousand for the six-months ended June
30, 2000. Cash collected on loans for the three-month and six-month period ended
June 30, 2000 was $29 thousand and $64 thousand, respectively, all of which was
applied to principal.
For the three-month and six-month period ended June 30, 1999, activity
in the allowance for impaired loan losses include a provision of $10 thousand
and $60 thousand, respectively, write offs of $0 and $3 thousand, respectively,
and recoveries of $0 in each period. Interest income of $0 was recorded for both
periods while contractual interest amounted to $25 thousand for the three-months
ended June 30, 1999 and $48 thousand for the six-months ended June 30, 1999.
Cash collected on loans for the three-month and six-month period ended June 30,
1999 was $51 thousand and $76 thousand, respectively, all of which was applied
to principal.
BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS
The Corporation acquired and opened limited access branch banking
facilities in four local retirement communities in December of 1999. The
locations include Granite Farms Estates, Lima Estates, and Kendal and Crosslands
Communities. These branch locations will serve the residents and employees of
their communities and bring the total number of branches in the Corporation's
network to twelve.
The Corporation has accepted an offer to sell its vacant property
located on route 202 in Westtown, Pennsylvania, formerly known as the "Corporate
Center." Final closing on this property is expected to be in late August. The
Company expects to realize a gain from this transaction, however, this gain will
not be calculated until settlement occurs and all costs are realized.
In October of 1999, the Bank launched a full line of retail Internet
banking services, "Net Teller" and "BillPay". These new products allow our
retail customers the convenience to access their accounts and pay bills on-line
twenty-four hours a day from home. Since it's release over 1,000 customers have
signed up for "Net Teller". A commercial version of "Net Teller" "Net Cash
Manager" was released in March of 2000. Other technology products include "FNB
Portfolio Link", which gives our Financial Management Services customers the
ability to access their accounts over the Internet, and the banks new web site
at www.fnbchestercounty.com.
The Corporation is currently working on four new branch sites. These
branch sites, which are in various stages of development, are expected to be
completed and opened within the next six to twelve months.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 ISSUES
To date, our efforts to be prepared for the Year 2000 appear to have
been successful, but if problems were to develop with our systems or with those
of our suppliers and other vendors, we might be unable to engage in normal
business activities for a period of time or times. Any such disruption could
cause our business to suffer. The Corporation incurred direct Y2K project costs
of $134 thousand and indirect Y2K project costs of $219 thousand through June
30, 2000.
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by
the Federal Reserve Board ("FRB") for bank holding companies. The Bank is also
subject to similar capital requirements adopted by the Office of the Comptroller
of the Currency. Under these requirements, the regulatory agencies have set
minimum thresholds for Tier I Capital, Total Capital, and Leverage ratios. At
June 30, 2000, both the Corporation's and the Bank's capital exceeded all
minimum regulatory requirements, and were considered "well capitalized" as
defined in the regulations issued pursuant to the FDIC Improvement Act of 1991.
The Corporation's Risk-Based Capital Ratios, shown below, have been computed in
accordance with regulatory accounting policies.
<TABLE>
<CAPTION>
RISK-BASED June 30, December 31, "Well Capitalized"
CAPITAL RATIOS --------------------------- ------------ Requirements
-------------- 2000 1999 1999 ----------------
---- ---- ----
<S> <C> <C> <C> <C>
Corporation
-----------
Leverage Ratio 8.20% 8.20% 8.48% 5.00%
Tier I Capital Ratio 10.82% 11.44% 10.73% 6.00%
Total Risk-Based Capital Ratio 12.08% 11.69% 11.98% 10.00%
Bank
----
Leverage Ratio 8.13% 7.96% 8.05% 5.00%
Tier I Capital Ratio 10.72% 11.09% 10.47% 6.00%
Total Risk-Based Capital Ratio 11.98% 12.33% 11.73% 10.00%
</TABLE>
The Bank is not under any agreement with the regulatory authorities nor
is it aware of any current recommendations by the regulatory authorities that,
if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation.
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's assessment of
its sensitivity to market risk since its presentation in the 1999 Annual Report
of the Corporation, filed as an exhibit to its Form 10-K for the fiscal year
ended December 31, 1999 with the SEC via EDGAR. Please refer to the
"Management's Discussion and Analysis" section on pages 27-28 of the
Corporation's 1999 Annual Report for additional information.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Various actions and proceedings are presently pending to which
the Corporation is a party. These actions and proceedings
arise out of routine operations and, in Management's opinion,
will not, either individually or in the aggregate, have a
material adverse effect on the consolidated financial position
of the Corporation and its subsidiaries.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
None
(a) Exhibits
--------
3(i). Articles of Incorporation. Copy of the Corporation's Articles
-------------------------
of Incorporation, as amended, is incorporated herein by reference to Exhibit
3(i) to the Corporation's Annual Report on Form 10-K for the year ended December
31, 1999.
3(ii). Bylaws of the Corporation, as amended. Copy of the Corporation's
-------------------------
Bylaws, as amended, is incorporated herein by reference to Exhibit 3(ii) to the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1997.
10. Material contracts.
------------------
(a) Copy of the Corporation's Amended and Restated 1995 Stock Option Plan, is
incorporated herein by reference to the appendix to the Corporation's Proxy
Statement for the 2000 Annual Meeting of Shareholders as filed with the SEC.
<PAGE>
PART II - OTHER INFORMATION (cont.)
27. Financial Data Schedule.
-----------------------
(b) Reports on Form 8-K
A Form 8-K was filed with the SEC on June 2, 2000, reporting,
under Item 5, the issuance of a press release regarding a change in it's market
ticker symbol.
A Form 8-K was filed with the SEC on April 14, 2000 reporting,
under Item 5, the issuance of a press release announcing the first quarter
earnings.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHESTER COUNTY CORPORATION
Charles E. Swope
/s/ Charles E. Swope
--------------------
President
DATE: August 14, 2000
J. Duncan Smith
/s/ J. Duncan Smith
-------------------
Treasurer
(Principal Accounting
and Financial Officer)
