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August 14, 2002
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FIRST CHESTER COUNTY CORPORATION
Commission File Number 0-12870
Gentlemen:
Pursuant to the reporting requirements of the Securities and Exchange Act of
1934, we are filing herewith the above listed Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 2002.
Very truly yours,
J. Duncan Smith, Treasurer
(Principal Accounting
and Financial Officer)
JDS/tbm
Enclosures
cc: John A. Featherman, III, Esquire, MacElree, Harvey, Gallagher, and
Featherman, Ltd., West Chester, PA
Patricia A. Gritzan, Esquire, Saul Ewing LLP, Philadelphia, PA
Barry M. Pelagatti, CPA, Grant Thornton LLP, Philadelphia, PA
Joseph T. Mcgough, VP, First Union Bank, Philadelphia, PA
James L. Bradshaw, VP, SunTrust Bank, Atlanta, GA
James Shilling, VP, Kish Bank, Belleville, PA
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, 2002, OR
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File No. 0-12870.
-------
FIRST CHESTER COUNTY CORPORATION
--------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2288763
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
- ----------------------------------------------- -----
(Address of principal executive office) (Zip code)
(484) 881-4000
--------------
(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 August
12, 2002 was 4,424,339.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INDEX
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PAGE
----
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
June 30, 2002 and December 31, 2001 4
Consolidated Statements of Income
Three and Six-Months Ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows
Six-Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 24
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 25
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 26
Item 2 - Changes in Securities 26
Item 3 - Defaults upon Senior Securities 26
Item 4 - Submission of Matters to a Vote of Security Holders 26
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 26 - 27
Signatures 28
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands) June 30, December 31,
2002 2001
-------------- ------------------
ASSETS
Cash and due from banks $ 24,878 $ 25,595
Federal funds sold and other overnight investments 21,500 12,400
Interest Bearing Deposits in banks 116 238
--------- ---------
Total cash and cash equivalents 46,494 38,233
--------- ---------
Investment securities held-to-maturity (market value of $541 at
June 30, 2002 and $547 at December 31, 2001, respectively) 532 531
--------- ---------
Investment securities available-for-sale, at market value 94,773 80,210
--------- ---------
Loans 439,625 448,110
Less: Allowance for loan losses (6,561) (6,344)
--------- ---------
Net loans 433,064 441,766
--------- ---------
Premises and equipment 15,326 15,584
Other assets 7,173 8,008
--------- ---------
Total assets $ 597,362 $ 584,332
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 100,801 $ 95,107
Interest-bearing (including certificates of deposit over $100
of $24,452 and $28,463 - June 30, 2002 and
December 31, 2001 respectively) 426,536 403,718
--------- ---------
Total deposits 527,337 498,825
Securities sold under repurchase agreements 560 4,769
Federal Home Loan Bank advances and other borrowings 18,472 31,751
Other liabilities 4,775 5,148
--------- ---------
Total liabilities 551,144 540,493
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
outstanding, 4,799,666 at June 30, 2002 and December 31, 2001. 4,800 4,800
Additional paid-in capital 807 773
Retained earnings 45,039 43,367
Accumulated other comprehensive income 764 84
Treasury stock, at cost: 375,040 shares and 377,721 shares
at June 30, 2002 and December 31, 2001, respectively. (5,192) (5,185)
--------- ---------
Total stockholders' equity 46,218 43,839
--------- ---------
Total liabilities and stockholders' equity $ 597,362 $ 584,332
========= =========
The accompanying notes are an integral part of these statements.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands - except per share data) Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 8,056 $ 8,478 $ 16,423 $ 17,086
Investment securities 1,179 1,324 2,211 2,748
Federal funds sold and other overnight investments 105 84 199 151
Deposits in Banks 1 1 3 4
--------- --------- --------- ---------
Total interest income 9,341 9,887 18,836 19,989
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 2,486 3,752 5,084 7,725
Securities sold under repurchase agreements 5 23 12 58
Federal Home Loan Bank advances and other borrowings 281 339 615 702
--------- --------- --------- ---------
Total interest expense 2,772 4,114 5,711 8,485
--------- --------- --------- ---------
Net interest income 6,569 5,773 13,125 11,504
Provision for loan losses 310 135 780 370
--------- --------- --------- ---------
Net interest income after provision
for possible loan losses 6,259 5,638 12,345 11,134
--------- --------- --------- ---------
NON-INTEREST INCOME
Financial management services 757 741 1,562 1,478
Service charges on deposit accounts 437 295 869 569
Investment securities gains, net 121 40 121 65
Other 744 393 1,693 948
--------- --------- --------- ---------
Total non-interest income 2,059 1,469 4,245 3,060
--------- --------- --------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,527 3,038 6,875 5,958
Net occupancy and equipment 1,356 1,026 2,761 2,077
FDIC deposit insurance 21 22 43 43
Bank shares tax 126 119 228 244
Professional Services 455 257 714 585
Other 1,041 849 1,997 1,645
--------- --------- --------- ---------
Total non-interest expense 6,526 5,311 12,618 10,552
--------- --------- --------- ---------
Income before income taxes
1,792 1,796 3,972 3,642
INCOME TAXES 509 496 1,150 992
--------- --------- --------- ---------
NET INCOME $ 1,283 $ 1,300 $ 2,822 $ 2,650
========= ========= ========= =========
PER SHARE DATA
Basic net income per common share $ 0.29 $ 0.30 $ 0.64 $ 0.60
========= ========= ========= =========
Diluted net income per common share $ 0.29 $ 0.30 $ 0.63 $ 0.60
========= ========= ========= =========
Dividends declared $ 0.13 $ 0.13 $ 0.26 $ 0.26
========= ========= ========= =========
Basic weighted average shares outstanding 4,422,323 4,317,294 4,422,950 4,391,780
========= ========= ========= =========
Diluted weighted average shares outstanding 4,466,067 4,365,638 4,459,403 4,435,693
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
------------------------------
(Dollars in thousands) 2002 2001
------------ -----------
OPERATING ACTIVITIES
Net Income $2,822 $ 2,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,271 870
Provision for loan losses 780 370
Amortization of investment security premiums
and accretion of discounts 220 70
Amortization of deferred fees on loans (168) 67
Investment securities (gains) losses, net (121) (65)
Decrease (Increase) in other assets 835 (798)
Decrease in other liabilities (373) (1,834)
--------- ---------
Net cash provided by operating activities 5,266 1,330
--------- ---------
INVESTING ACTIVITIES
Decrease (Increase) in loans 8,426 (9,183)
Proceeds from sales of investment securities available-for-sale 12,419 9,624
Proceeds from maturities of securities available-for-sale 7,925 24,071
Purchases of investment securities available-for-sale (34,663) (27,979)
Purchase of premises and equipment, net (1,013) (3,138)
--------- ---------
Net cash used in investing activities (6,906) (6,605)
--------- ---------
FINANCING ACTIVITIES
Decrease in securities sold under repurchase agreements (4,209) (199)
Increase in deposits 28,512 8,810
(Decrease) Increase in Federal Home Loan Bank advances and other borrowings (13,279) (6,313)
Cash dividends (1,150) (1,041)
Treasury stock transactions 27 (441)
--------- ---------
Net cash provided by financing activities 9,901 816
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,261 (4,459)
Cash and cash equivalents at beginning of period 38,233 37,973
--------- ---------
Cash and cash equivalents at end of period $ 46,494 $ 33,514
========= =========
The accompanying notes are an integral part of these statements.
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, 2001.
2. The results of operations for the three- and six-month periods ended June
30, 2002 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. 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, 2002 was $880 thousand and $680 thousand, compared
to $(431) thousand and $329 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, 2002 was $2.2 million and $3.5 million, compared to $869
thousand and $3.0 million in the same period last year.
5. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These
statements are expected to result in significant modifications relative to
the Company's accounting for goodwill and other intangible assets. SFAS No.
141 requires that all business combinations initiated after June 30, 2002
must be accounted for under the purchase method of accounting. SFAS No. 141
was effective upon issuance. SFAS No. 142 modifies the accounting for all
purchased goodwill and intangible assets. SFAS No. 142 includes
requirements to test goodwill and indefinite lived intangibles assets for
impairment rather than amortize them. SFAS No. 142 will be effective for
fiscal years beginning after December 31, 2000 and early adoption is not
permitted except for business combinations entered into after June 30,
2000. The Company is currently evaluating the provisions of SFAS No. 142,
but its preliminary assessment is that these Statements will not have a
material impact on the Company's financial position or results of
operations.
6. On July 20, 2001, FASB issued SFAS 141, and SFAS 142. SFAS 141 is effective
for all business combinations completed after June 30, 2001. SFAS 142 is
effective for fiscal years beginning after December 15, 2001; however,
certain provisions of this Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS 142.
Major provisions of these Statements and their effective dates for the
Company is as follows: All business
combinations initiated after June 30, 2001 must use the purchase method of
accounting. The pooling of interest method of accounting is prohibited
except for transactions initiated before July 1, 2001. Intangible assets
acquired in a business combination must be recorded separately from
goodwill if they arise from contractual or other legal rights or are
separable from the acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a related contract,
asset or liability. Goodwill, as well as intangible assets with indefinite
lives, acquired after June 30, 2001, will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and intangible assets
with indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator. All acquired goodwill must be assigned to
reporting units for purposes of impairment testing and segment reporting.
7. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-lived Assets". SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets
to be held and used or to be disposed of by sale. However, SFAS 144 makes
changes to the scope and certain measurement requirements of existing
accounting guidance. SFAS 144 also changes the requirements relating to
reporting the effects of a disposal or discontinuation of a segment of a
business. SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and interim periods within those
fiscal years. The adoption of this statement is not expected to have a
significant impact on the financial condition or results of operations of
the Company.
8. On January 1, 2002, the Company adopted Statement of Position (SOP) 01-6,
Accounting by Certain Entities That Lend to or Finance the Activities of
Others, which reconciles and conforms existing differences in the
accounting and financial reporting guidance in the AICPA Audit and
Accounting Guides, Banks and Savings Institutions, Audits of Credit Unions,
and Audits of Finance Companies. It also carries forward accounting
guidance for practices deemed to be unique to certain financial
institutions. The adoption of this SOP had no impact on the Company's
financial position or results of operations.
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.
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 and
timing 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 may have unanticipated consequences, such as customer
turnover; (e) changes in the regulatory environment, securities markets, general
business conditions and inflation may be adverse; including the effects of trade
, monetary, and fiscal policies of the government and interest rate policies of
the Federal Reserve system; (f) impact of changes in interest rates on customer
behavior; (g) estimated changes in net interest income; (h) anticipated pressure
on net yields; (i) the impact of changes in demographics on branch locations;
and (j) technological changes. 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, 2002 was $1,283
million, a decrease of 1.31% from $1,300 million for the same period in 2001.
Net income for the six-month period ended June 30, 2002 was $2,822 million, an
increase of 6.49% from $2,650 million for the same period in 2001. The increase
in net income for the six-month period was the direct result of decreases in
interest expense as deposit rates were reduced in reaction to the prime interest
rate cuts engineered by the Federal Reserve during 2001 as well as certain
non-recurring gains realized in the first quarter of 2002 off-set by reduction
in interest income as rates on interest-earning assets also decreased. Basic
earnings per share was $0.29 and $0.64 for the three-and six-month periods ended
June 30, 2002, respectively, compared to $0.30 and $0.60 for the same periods in
2001. Cash dividends declared during the second quarters of 2002 and 2001 were
$0.13 and $0.26 per share for the three- and six-month periods. Over the past
ten years, the Corporation's practice has been to pay a dividend of at least
35.0% of net income.
The Corporation recently preformed a review of its lending functions,
resulting in several structural changes which management believes will enhance
asset quality, underwriting practices, and productivity (see pages 14,15,21,&22
for more details). In July 2002, the Corporation issued $5.0 million of
preferred capital securities structured as Tier I capital of the Corporation for
the purpose of raising additional capital for general corporate purposes (see
page 23 for more details). The Corporation expects these elements to enhance
future earnings.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------
2002 2001 2002 2001
------------------------------ --------------------------
SELECTED RATIOS
Return on Average Assets 0.87% 0.95% 0.96% 0.98%
Return on Average Equity 11.25% 11.63% 12.47% 11.97%
Net Interest Margin 4.78% 4.57% 4.80% 4.59%
Earnings Retained 55.19% 55.08% 59.25% 55.96%
Dividend Payout Ratio 44.81% 44.92% 40.75% 44.04%
Book Value Per Share $10.45 $9.96 $10.45 $9.96
The "Consolidated Average Balance Sheet" on pages 16 and 17 may assist the
reader in understanding 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 for the three- and six-month periods ended June 30, 2002 on
a tax equivalent basis, was $6.6 million and $13.2 million, compared to $5.8
million and $11.6 million for the same periods in 2001, respectively. The
increase in tax equivalent net interest income for both periods was the result
of an increase in the average interest-earning assets and a decrease in the
average yield on interest bearing liabilities, partially offset by a decrease in
the average yield on interest-earning assets. These changes have improved the
Corporation's net interest margin. The average yield earned on interest earning
assets decreased 5.6% or 103 basis points and 5.9% or 105 basis points to 6.78%
and 6.89% for the three- and six- month periods ended June 30, 2002. The average
yield paid on interest bearing liabilities decreased 32.6% or 156 basis points
and 32.7% or 160 basis points to 2.48% and 2.57%. The average yield on interest
bearing liabilities decreased three times more than the interest earning asset
yield, thereby increasing net yield earned on interest earning assets increased.
Average interest-earning assets increased approximately $44.1 million to
$552.1 million during the second quarter of 2002 from $508.0 million in the same
period last year. For the six months ended June 30, 2002, average
interest-earning assets increased approximately $43.5 million to $548.7 million
from $505.1 million in the same period last year. The increase in average
interest-earning assets for both periods three- and six- month, ended June 30,
2002, was the direct result of an increase in the average loans outstanding and
increases in excess funds invested in Federal funds and other overnight
investments. For the three- month period, the increase in average investment
securities contributed to the increase in average interest-earning assets. For
the six- month period, the increase in average interest-earning assets was
partially offset by a decrease in investment securities.
Net-yields on interest-earning assets, on a tax equivalent basis, were
4.78% and 4.80% for the three- and six-month periods ended June 30, 2002,
respectively, compared to 4.57% and 4.59% for the three- and six-month periods
ended June 30, 2001. We had a decrease in both yields on interest earned on
interest earning assets for the three- and six- month period but we had a more
substantial decrease in both yields on interest paid on interest bearing
liabilities for the three- and six- month period ended June 30, 2002. The
Corporation also anticipates that strong competition for new loan business and
the cost of incremental deposit growth will put pressure on net-yield. Yields on
interest-bearing liabilities decreased primarily due to the lowering of rates
paid on deposit accounts as the Corporation reacted to external rate changes and
tried to off-set the decrease in asset yields.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three Months Six Months
Yield On: Ended June 30, Ended June 30,
- --------- ---------------- ----------------
2002 2001 2002 2001
---- ---- ---- ----
Interest Earning Assets 6.78% 7.81% 6.89% 7.94%
Interest Bearing Liabilities 2.48% 4.04% 2.57% 4.17%
----- ----- ----- -----
Net Interest Spread 4.30% 3.77% 4.32% 3.77%
Contribution of Interest Free Funds 0.47% 0.80% 0.48% 0.82%
----- ----- ----- -----
Net Yield on Interest Earning Assets 4.78% 4.57% 4.80% 4.59%
===== ===== ===== =====
INTEREST INCOME ON FEDERAL FUNDS SOLD AND OTHER OVERNIGHT INVESTMENTS
Interest income on Federal funds sold and other overnight investments for
the three- and six-month periods ended June 30, 2002, increased 25.0% and 31.8%
to $105 thousand and $199 thousand, respectively, when compared to the same
periods in 2001. The increase in interest income on Federal funds sold and other
overnight investments is the direct result of a 177.6% and 221.0% increase in
the average balance of federal funds sold and other overnight investments for
the three- and six- month periods ended June 30, 2002, respectively. Average
balance of federal funds sold and other overnight investments has increased due
to deposit growth from our three new branches, while loan growth this year
increased more slowly. The increase in interest income earned on federal funds
sold was partially offset by a 234 and 277 basis point decrease (one basis point
is equal to 1/100 of a percent) for the three- and six- month periods ended June
30, 2002, respectively.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
decreased 10.9% to $1.2 million for the three-month period ended June 30, 2002,
and decreased 19.4% to $2.2 million for the six-month period ended June 30,
2002, respectively, when compared to the same periods in 2001. The decrease for
the three-month period is primarily due to a 72 basis point or 12.0% decrease on
interest rates on such investments partially offset by a 1.1% or $1.0 million
increase in the average investment security balance. The decrease for the
six-month period ended June 30, 2002 is the result of a 5.2% or $4.7 million
decrease in the average investment security balance and 92 basis point or 15.0%
decrease in the yield earned compared to the same period last year. Increases in
the average investment security balance for the three- month period are the
result of the Corporation's increased cash position due to the increased
deposits generated by our new branch locations. Decreases for the six-month
period in average investment security balances are the result of periodic
payments (securities paydowns), normal maturities and security sales. Proceeds
were being used to support loan growth during 2001.
INTEREST INCOME ON LOANS
Loan interest income, on a tax equivalent basis, generated by the
Corporation's loan portfolio decreased 5.0% and 4.0% to $8.1 million and $16.5
million for the three- and six-month periods ended June 30, 2002, compared to
the same periods in 2001, respectively. The decrease in interest income for
these periods is the direct result of 93 and 96 basis point decreases in rates
earned on the portfolio as compared to last year partially offset by a past due
accrued interest recovery and late charges as a result of restructuring of a
large commercial loan relationship and by a 7.1% and 8.3% increase in the
average balance of outstanding loans for the three- and six-month periods ended
June 30, 2002, respectively. Most of this loan growth occurred in the last three
quarters of 2001. Loan growth for the first and second quarter of 2002 has been
slow but is expected to pick-up during the rest of the year.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts decreased 33.7% and 34.2% for the
three- and six-month periods ended June 30, 2002 to $2.5 million and $5.1
million, compared to $3.8 million and $7.7 million for the same periods in 2001.
The decrease for the three-month period is primarily the result of a 40.2% or
157 basis point decrease on rates paid on interest-bearing deposits partially
offset by a 10.8% or $41.3 million increase in the average interest bearing
deposits balance. The decrease for the six-month period is primarily the result
of a 40.0% or 162 basis point decrease on rates paid on interest-bearing
deposits partially offset by a 9.6% or $36.6 million increase in the average
interest bearing deposits balance compared to the same period last year. The
corporation's effective rate on interest-bearing deposits decreased to 2.34% for
the three-month period ended June 30, 2002 from 3.91% in 2001. The Corporation's
effective rate on interest bearing deposits decreased to 2.43% from the
six-month period ended June 30, 2002 from 4.05% in 2001.
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 is expected to continue to grow as we continue to open new
branches and attract new customers with new products and services. Recent growth
can be attributed primarily to our three new branch locations located in
Lionville, New Garden, and Hershey's Mill. Total deposits continued to grow in
these new branches as well as our existing sites. Other new branch sites are
currently under review, which if opened, should continue to expand the
Corporation's deposit base.
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements decreased
78.3% and 79.3% to $5 thousand and $12 thousand for the three- and six-month
periods ended June 30, 2002, respectively, compared to the same periods in 2001.
The decreases are primarily attributable to a 76.6% or 2.2 million and 64.4% or
1.7 million decrease in average balance and a 7.1%, or a 26 basis point
decrease, and 42.0%, or a 181 basis point decrease on rates paid on such
contracts, compared to the rates paid in the three- and six-month periods ended
June 30, 2001, respectively. The decrease is also attributable to the popularity
of our overnight cash sweep and tri-party repo programs totaled were $57.2
million at June 30, 2002 and $53.8 million at June 30, 2001. These programs
represent funds of our customers invested overnight with third parties and
therefore do not appear on our balance sheet. The Corporation earns a fee of
approximately 25 basis points on these balances.
INTEREST EXPENSE ON FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Interest expense on borrowings decreased $57 thousand to $281 thousand for
the three-month period ended June 30, 2002 from $338 thousand when compared to
the same period in 2001. The decrease is a direct result of 15.1% or 95 basis
point decrease in borrowings for the three-month period ending June 30, 2002
when compared to the same period last year. Interest expense on borrowings
decreased $86 thousand to $615 thousand for the six-month period ended June 30,
2002 from $701 thousand when compared to the same period in 2001. The decrease
is a direct result of 23.4% or a 145 basis point decrease on rates paid and
loans maturing this quarter. The need for borrowing decreased during the first
half of 2002 as a result of slower loan growth, increased deposits, and funds
obtained from sales of investment securities. This lower level of borrowings is
expected to continue throughout the year as the funding demand is currently
being met by deposit growth. Borrowings at any time may consist of one or more
of the following: FHLB Overnight or Term Advances and advances under agreements
with our correspondent banks.
PROVISION FOR LOAN LOSSES
During the three- and six-month periods ended June 30, 2002, the
Corporation recorded a $310 thousand and a $780 thousand provision for loan
losses compared to a $135 thousand and a $370 thousand for the same periods in
2001. The allowance for loan losses as a percentage of total loans was 1.49% at
June 30, 2002, 1.61% at June 30, 2001 and 1.42% at December 31, 2001,
respectively. See the section titled "Allowance For Loan Losses" for additional
discussion.
NON-INTEREST INCOME
Total non-interest income increased 40.2% to $2.1 million for the three-
month period ended June 30, 2002 when compared to the same period in 2001. For
the six- month period ended June 30, 2002, total non-interest income increased
38.7% to $4.2 million when compared to the same period in 2001.
The primary component of non-interest income is Financial Management
Services ("FMS") revenue, which increased 2.2% and 5.7% to $757 thousand and
$1.6 million for the three- and six-month periods ended June 30, 2002,
respectively, compared to the same periods in 2001. The market value of FMS
assets under management custody grew $56.7 million or 12.4% from $456.5 million
at June 30, 2001 to $513.2 million at June 30, 2002. While the overall value of
FMS assets under management and custody grew from period to period, much of this
growth was obtained from a few new account relationships, which were secured
late in the first quarter and income from these assets may not be fully realized
until future periods. FMS income is based primarily on the market value of the
assets under management. Over the past several months the downturn in the
financial markets devalued the portfolio and led to a lower than expected amount
of fee income.
Service charges on deposit accounts increased approximately 48.1% to $437
thousand for the three-months ended June 30, 2002 compared to $295 thousand for
the same period in 2001. For the six-month period ended June 30, 2002, service
charges on deposit accounts increased 52.7% to $869 thousand compared to $569
thousand for the same period in 2001. This increase can be attributed to the
growth in the number and volume of deposit accounts and the introduction of
"Bounce Protection" a deposit-related service, which was introduced in July
2001. Management expects this component of non-interest income to continue to
grow as deposits grow.
Investment securities gains also contributed to the increase in
non-interest income. For the three-month period ended June 30, 2002, investment
security gains increased $81 thousand from $40 thousand to $121 thousand, when
compared to the same period in 2001. For the six-month period ended June 30,
2002, investment security gains increased $56 thousand from $65 thousand to $121
thousand, when compared to the same period in 2001. These gains were realized as
a result of normal portfolio realignment.
Other non-interest income increased 89.3% to $744 thousand for the
three-months ended June 30, 2002 compared to $393 thousand for the same period
in 2001. For the six-month period ended June 30, 2002, other non-interest income
increased 78.6% to $1.7 million compared to $948 thousand for the same period in
2001. This increase is primarily the result of a gain of $245 thousand realized
on the sale of a piece of OREO property during the first quarter of 2002.
Management considers this gain to be non-recurring and is not expected in the
future time periods. Additionally, increases in rental income on operating
leases and fees earned on residential mortgage sales contributed to the change.
Rental income earned on operating leases increased $333.7 thousand for the first
six-months ended June 30, 2002 compared to the same period in 2001. Fees on
residential mortgage sales increased $86 thousand or 83.4% to $190 thousand for
the first six-months ended June 30, 2002 compared to the same period in 2001.
NON-INTEREST EXPENSE
Total non-interest expense for the three- and six-month periods ended June
30, 2002 increased 22.9% to $6.5 million and 19.6% to $12.6 million, compared to
the same periods in 2001. The various components of non-interest expense changes
are discussed below.
Employee salaries and benefits increased 16.1% to $3.5 million and 15.4% to
$6.9 million for the three-month and six-month periods ended June 30, 2002
compared to the same periods in 2001. Increased staff, annual employee raises,
promotions and a proportional increase in employee benefits are primarily
responsible for the increase. At June 30, 2002, the Corporation employed 233
full time and 53 part time employees compared to 219 full time and 48 part time
employees at June 30, 2001. This represents a 6.4% increase in full time and
10.4% increase in part time employees.
In April 2002, the Corporation announced the promotion of Kevin Quinn to
Chief Operating Officer and the creation of two new divisions. The Personal
Banking Division, managed by Peter J. D'Angelo, will focus its effort of the
branch system, consumer lending, residential mortgage, credit cards, and small
business lending. The Business Banking Division, managed by David W. Glarner,
will focus its attention on commercial mortgage, commercial lending, leasing,
loan administration, and credit administration. The creation of these two
Divisions will provide an environment to focus on the total customer
relationship as well as facilitate the improvement of officer supervision and
management. This will have an impact on this component of non-interest expense
but it is expected that these changes will have a positive effect on the
efficiency of the lending department and over time reduce the cost of putting a
loan on the books. In addition, Linda Hicks was promoted to Executive Vice
President of Financial Management Services to assume Mr. Quinn's previous
duties.
Net occupancy, equipment, and data processing expense increased 32.2% and
32.9% to $1.4 million and $2.8 million for the three- and six-month periods
ended June 30, 2002, compared to the same periods last year, respectively. The
increase is the direct result of the opening of three full service branches
during 2001. An increase of 46.3% in building depreciation as well as increased
computer and related equipment costs associated with the expansion, upgrading
and maintenance of personnel computers and our networking infrastructure.
Professional Services increased 77.0% and 22.0% to $455 thousand and $714
thousand for the three- and six-month periods ended June 30, 2002 compared to
the same periods in 2001. The increase is the result of an increase in audit
accounting and consultant fees and legal fees related to one loan relationship.
Recently the Corporation established a Credit Administration department.
The Corporation believes that the establishment of this Credit Administration
area as well as other procedural and policy
changes will allow the Corporation to improve its performance, productivity and
reduce risk. This area will be headed by Richard W. Kauffman, Senior
Vice-President. These changes are anticipated to have an impact on this
component of the Corporation's Income Statement. Management believes that
overtime the efficiences created by this department should reduce the overhead
cost of loan overwriting.
Total other non-interest expense increased 22.6% and 21.4 % to $1.0 million
and $2.0 million for the three-month and six-month periods ended June 30, 2002
compared to the same periods in 2001. The increase of the three-month and
six-month period is the result of an increase in deposit costs, purchased
services and general operating expenses due to the opening of our three new
branches.
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.
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED JUNE 30,
(Dollars in thousands) 2002 2001
-------------------------------- -------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Federal funds sold and other overnight investments $ 21,877 $ 105 1.92% $ 7,880 $ 84 4.26%
Interest bearing deposits in banks 182 1 2.20% 156 1 2.56%
Investment securities
Taxable 87,810 1,156 5.27% 86,763 1,302 6.00%
Tax-exempt (1) 1,784 32 7.21% 1,815 31 6.93%
-------- -------- -------- --------
Total investment securities 89,594 1,188 5.30% 88,578 1,333 6.02%
-------- -------- -------- --------
Loans (2)
Taxable 438,170 8,028 7.33% 408,944 8,437 8.25%
Tax-exempt (1) 2,279 41 7.24% 2,480 60 9.60%
-------- -------- -------- --------
Total loans 440,449 8,069 7.33% 411,424 8,497 8.26%
-------- -------- -------- --------
Total interest-earning assets 552,102 9,363 6.78% 508,038 9,915 7.81%
Non-interest earning assets
Allowance for loan losses (6,668) (6,653)
Cash and due from banks 23,563 24,740
Other assets 22,863 19,312
-------- --------
Total assets $ 591,860 $ 545,437
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $277,114 $ 1,020 1.47% $236,297 $1,600 2.71%
Certificates of deposits and other time 147,943 1,466 3.96% 147,426 2,152 5.84%
-------- -------- -------- --------
Total interest bearing deposits 425,057 2,486 2.34% 383,723 3,752 3.91%
Securities sold under repurchase agreements 584 5 3.42% 2,501 23 3.68%
Federal Home Loan Bank advances and 21,011 281 5.37% 21,455 338 6.30%
-------- -------- -------- --------
other borrowings
Total interest bearing liabilities 446,652 2,772 2.48% 407,679 4,113 4.04%
-------- -------- -------- --------
Non-interest bearing liabilities
Non-interest bearing demand deposits 94,514 87,279
Other liabilities 5,090 5,775
-------- --------
Total liabilities 546,256 500,733
Stockholders' equity 45,604 44,704
-------- --------
Total liabilities and stockholders' equity $ 591,860 $ 545,437
======== ========
Net interest income $ 6,591 $ 5,802
===== =====
Net yield on interest earning assets 4.78% 4.57%
===== =====
(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 2002 and 2001.
(2) Non-accruing loans are included in the average balance.
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 2002 2001
----------------------------------- -------------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Federal funds sold and other overnight investments $ 20,644 $ 199 1.93% $ 6,431 $ 151 4.70%
Interest bearing deposits in banks 203 3 2.96% 123 3 4.88%
Investment securities
Taxable 83,777 2,168 5.18% 88,450 2,703 6.11%
Tax-exempt (1) 1,783 65 7.29% 1,812 68 7.48%
-------- -------- -------- --------
Total investment securities 85,560 2,233 5.22% 90,262 2,771 6.14%
-------- -------- -------- --------
Loans (2)
Taxable 439,856 16,362 7.44% 405,068 16,979 8.38%
Tax-exempt (1) 2,393 92 7.70% 3,248 161 9.94%
-------- -------- -------- --------
Total loans 442,249 16,454 7.44% 408,316 17,140 8.40%
-------- -------- -------- --------
Total interest-earning assets 548,656 18,889 6.89% 505,132 20,065 7.94%
Non-interest earning assets
Allowance for loan losses (6,626) (6,629)
Cash and due from banks 23,128 24,486
Other assets 23,041 19,013
-------- --------
Total assets $ 588,199 $ 542,002
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $278,739 $ 1,980 1.42% $234,448 $ 3,382 2.89%
Certificates of deposits and other time 139,654 3,104 4.45% 147,309 4,343 5.90%
-------- -------- -------- --------
Total interest bearing deposits 418,393 5,084 2.43% 381,757 7,725 4.05%
Securities sold under repurchase agreements 959 12 2.50% 2,693 58 4.31%
Federal Home Loan Bank advances and 25,918 615 4.75% 22,621 701 6.20%
-------- -------- -------- --------
other borrowings
Total interest bearing liabilities 445,270 5,711 2.57% 407,071 8,484 4.17%
-------- -------- -------- --------
Non-interest bearing liabilities
Non-interest bearing demand deposits 92,525 84,629
Other liabilities 5,138 6,022
-------- --------
Total liabilities 542,933 497,722
Stockholders' equity 45,266 44,280
-------- --------
Total liabilities and stockholders' equity $ 588,199 $ 542,002
======== ========
Net interest income $13,178 $11,581
====== ======
Net yield on interest earning assets 4.80% 4.59%
===== =====
(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 2002 and 2001.
(2) Non-accruing loans are included in the average balance.
INCOME TAXES
Income tax expense for the three- and six-month periods ended June 30, 2002
was $509 thousand and $1.2 million, compared to $496 thousand and $992 thousand
in the same periods last year. This represents effective tax rates of 28.4% and
29.0% for the three- and six-month periods ended June 30, 2002, respectively.
The effective tax rate for the three- and six-month periods ended June 30, 2001
were 27.6% and 27.2%, respectively.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Corporation's ability to meet deposit withdrawals either on demand or at
contractual maturity, to repay borrowings as they mature and to make new loans
and investments as opportunities arise. Liquidity is managed on a daily basis
enabling Senior Management to monitor changes in liquidity and to react
accordingly to fluctuations in market conditions. The primary source of
liquidity for the Corporation is funding available from the FHLB, deposit
growth, and cash flow from the investment and loan portfolios. In addition, new
deposits to NOW, money-market, savings, and smaller denomination certificates of
deposit accounts provide additional liquidity. The Corporation considers funds
from such sources to comprise its "core" deposit base because of the historical
stability of such sources of funds. Additional liquidity comes from the
Corporation's non-interest bearing demand deposit accounts and credit
facilities. Other deposit sources include a three-tiered savings product and
certificates of deposit in excess of $100,000. Details of core deposits,
non-interest bearing demand deposit accounts and other deposit sources are
highlighted in the following table:
DEPOSIT ANALYSIS
(Dollars in thousands) June 30, 2002 December 31, 2001 Average Balance
--------------------------- -------------------------- -----------------------
Average Effective Average Effective Dollar Percentage
DEPOSIT TYPE Balance Yield Balance Yield Variance Variance
- ------------ ------- --------- ------- --------- -------- ---------
NOW Accounts $ 77,006 0.41% $ 71,034 1.13% $ 5,972 8.41%
Money Market 25,346 1.48% 22,490 2.37% 2,856 12.70%
Statement Savings 51,983 1.53% 47,077 2.53% 4,906 10.42%
Other Savings 1,583 1.39% 1,758 2.39% (175) (9.95%)
CD's Less than $100,000 112,854 4.58% 117,282 5.73% (4,428) (3.78%)
-------- -------- --------
Total Core Deposits 268,772 2.49% 259,641 3.58% 9,131 3.52%
Non-Interest Bearing
Demand Deposit Accounts 92,525 - 88,923 - 3,602 4.05%
-------- --------
Total Core and Non-Interest
Bearing Deposits 361,297 1.85% 348,564 2.67% 12,733 3.65%
-------- -------- --------
Tiered Savings 122,821 1.99% 97,641 3.38% 25,180 25.79%
CD's Greater than $100,000 26,800 3.87% 29,734 5.36% (2,934) (9.87%)
-------- -------- --------
Total Deposits 510,918 1.99% 475,939 2.98% 34,979 7.35%
-------- -------- --------
The Corporation, as a member of the FHLB, maintains several credit
facilities. As of June 30, 2002 the amount outstanding under the Corporation's
line of credit with the FHLB was $0. Additionally, the FHLB offers several other
credit related products which are available to the Corporation. The Corporation
currently has a maximum borrowing capacity with the FHLB of approximately $126.2
million. During the three- and six-month periods ending June 30, 2002, average
FHLB advances were approximately $21.0 million and $25.9 million, respectively,
and consisted of term advances representing a combination of maturities in each
period. The average interest rate on these advances was approximately 5.37% and
4.75% respectively. FHLB advances are collateralized by a pledge on the
Corporation's portfolio of unencumbered investment securities, certain mortgage
loans and a lien on the Corporation'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 $190.8 million or
31.9% of total assets at June 30, 2002 compared with a negative $165.2 million
or 29.9% of total assets at June 30, 2001. The change in the corporations gap
position is the result of an analysis performed on. The Corporations 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
Corporation operations with the intention of maintaining a stable net interest
margin.
INTEREST SENSITIVITY ANALYSIS
AS OF JUNE 30, 2002
(Dollars in thousands)
One Over
Within through five Non-rate
one year five years years sensitive Total
------------ ---------- ------------ --------- -------
ASSETS
Federal funds sold and other
overnight investments $ 21,500 $ -- $ -- $ -- $ 21,500
Investment securities 17,397 43,886 34,022 -- 95,305
Interest bearing deposits in banks 116 -- -- -- 116
Loans and leases 166,734 239,665 33,226 (6,561) 433,064
Cash and cash equivalents -- -- -- 24,878 24,878
Premises & equipment -- -- -- 15,326 15,326
Other assets -- -- -- 7,173 7,173
---------- ---------- ---------- ---------- ----------
Total assets $ 205,747 $ 283,551 $ 67,248 $ 40,816 $ 597,362
========== ========== ========== ========== ==========
LIABILITIES AND CAPITAL
Interest bearing deposits $ -- $ -- $ -- $ 100,801 $ 100,801
Non-interest bearing deposit 385,662 40,874 -- -- 426,536
Repurchase Agreements 560 -- -- -- 560
FHLB advances and other
borrowings 10,253 1,077 7,142 -- 18,472
Other liabilities -- -- -- 4,775 4,775
Capital -- -- -- 46,218 46,218
---------- ---------- ---------- ---------- ----------
Total liabilities & capital $ 396,475 $ 41,951 $ 7,142 $ 151,794 $ 597,362
========== ========== ========== ========== ==========
Net interest rate
sensitivity gap $ (190,728) $ 241,600 $ 60,106 $ (110,978) $ --
========== ========== ========== ========= ==========
Cumulative interest rate
sensitivity gap $ (190,728) $ 50,872 $ 110,978 $ -- $ --
========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap divided
by total assets (31.9%) 8.5% 18.6%
========== ========== ==========
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.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
Three Months Six Months
Ended Ended
June 30, June 30,
-------- --------
(Dollars in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Balance at beginning of period $ 6,746 $ 6,612 $ 6,344 $ 6,609
--------- --------- --------- ---------
Provision charged to operating expense 310 135 780 370
--------- --------- --------- ---------
Recoveries of loans previously charged-off 15 92 281 129
Loans charged-off (510) (135) (844) (404)
--------- --------- --------- ---------
Net loans charged-off (495) (43) (563) (275)
--------- --------- --------- ---------
Balance at end of period $ 6,561 $ 6,704 $ 6,561 $ 6,704
========= ========= ========= =========
Period-end loans outstanding $ 439,625 $ 415,931 $ 439,625 $ 415,931
Average loans outstanding $ 440,449 $ 411,424 $ 442,249 $ 408,316
Allowance for loan losses as a
Percentage of period-end loans outstanding 1.49% 1.61% 1.49% 1.61%
Net charge-offs to average loans
Outstanding 0.11% 0.01% 0.13% 0.07%
Non-performing loans include loans on non-accrual status and loans past due
90 days or more and still accruing. The Corporation's policy is to 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. Through the six-month period the increase in charge-offs
is principally due to management's decision to write-down additional amounts on
a loan previously recongnized as a non-performing loan. 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. The newly formed Credit
Administration area should assist in improving the components of the allowance
of loans and lease losses such as provision expense, recoveries, and charged-off
loans.
NON-PERFORMING LOANS AND ASSETS
June 30, December 31,
(Dollars in thousands) 2002 2001 2001
------ ------ ------
Past due over 90 days and still accruing $ 143 $ 3,902 $ 174
Non-accrual loans 2,771 1,869 7,630
-------- -------- --------
Total non-performing loans 2,914 5,771 7,804
Other real estate owned 368 727 831
-------- -------- --------
Total non-performing assets $ 3,282 $ 6,498 $ 8,635
======== ======== ========
Non-performing loans as a percentage
of total loans (gross) 0.66% 1.39% 1.74%
Allowance for loan losses as a
percentage of non-performing loans 225.19% 116.17% 81.29%
Allowance for loan losses as a
percentage of total loans and other real
estate owned 1.49% 1.56% 1.92%
Allowance for loan losses as a
percentage of non-performing assets 199.94% 103.17% 73.47%
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, 2002. Other real estate owned
("OREO") represents residential and commercial real estate written down to
realizable value (net of estimated disposal costs) based on professional
appraisals. The newly formed Credit Administration area should assist in
improving loans past due over 90 days and still accruing, non-accrual loans, as
well as other real estate owned.
LOAN IMPAIRMENT
The Corporation 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 $3.2 million, $7.4 million, and $1.4
million at June 30, 2002, December 31, 2001, and June 30, 2001 respectively. The
associated allowance for impaired loans was $733 thousand, $820 thousand and
$215 thousand at June 30, 2002, December 31, 2001 and June 30, 2001
respectively.
For the three-month and six-month period ended June 30, 2002, activity in
the allowance for impaired loan losses include a provision of $0, write offs of
$80 and $87 thousand, respectively, and recoveries of $0 for both periods.
Contractual interest amounted to $102 thousand for the three-months ended June
30, 2002 and $241 thousand for the six-months ended June 30, 2002. Cash
collected on loans for the three-month and six-month period ended June 30, 2002
was $445 thousand and $460 thousand, respectively. The amount applied to
principal was $220 thousand and $235 thousand for the three- and six- month
period, respectively, of which $225 thousand was applied to interest.
For the three-month and six-month period ended June 30, 2001, activity in
the allowance for impaired loan losses include a provision of $0, write offs of
$0 and $27 thousand, respectively, and recoveries of $6 thousand $0,
respectively. No interest income was recorded for both periods while contractual
interest amounted to $29 thousand for the three- months ended June 30, 2001 and
$55 thousand for the six-months ended June 30, 2001. Cash collected on loans for
the three-month and six-month period ended June 30, 2001 was $3 thousand and $8
thousand, respectively, all of which was applied to principal.
BRANCHING AND TECHNOLOGY PROJECTS
The Corporation is planning to open a new branch in the Coatesville area
during the next 12 months. The Corporation continually explores new branch
opportunities and has several additional sites under review. In June 2002, the
Corporation installed a new check imaging system that is integrated into the one
banking system that enables our customers to see images of their checks online
through the banks Net Teller and Net Cash Manager online banking services. In
addition, the Corporation plans to introduce a new integrated branch platform
system in the third quarter of 2002 which should "streamline" the account
opening process for our customers and improve back office efficiencies.
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by the
Federal Reserve Board ("FRB") for bank holding companies. The Corporation is
also subject to similar capital requirements adopted by the 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, 2001, 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.
RISK-BASED June 30, December 31, "Well Capitalized"
------------------------- ------------
CAPITAL RATIOS 2002 2001 2001 Requirements
- -------------- ---- ---- ---- ------------------
Corporation
Leverage Ratio 7.68% 8.29% 7.65% 5.00%
Tier I Capital Ratio 9.65% 10.77% 9.50% 6.00%
Total Risk-Based Capital Ratio 10.90% 12.03% 10.75% 10.00%
Bank
Leverage Ratio 7.43% 8.01% 7.42% 5.00%
Tier I Capital Ratio 9.33% 10.40% 9.22% 6.00%
Total Risk-Based Capital Ratio 10.57% 11.66% 10.47% 10.00%
In addition, Subsequent to June 30, 2002, The Corporation issued preferred
trust securities, as described in the following section titled "Post Balance
Sheet Events" a portion of which are counted as Tier 1 Capital.
The Corporation 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.
POST BALANCE SHEET EVENTS
On July 11, 2002, the Corporation issued $5.0 million (net proceeds of
$4.82 million) of preferred capital securities for the purpose of raising
additional capital for general corporate purposes. These securities were issued
through First Chester County Capital Trust I (the "Trust"), a special-purpose
statutory trust created expressly for the issuance of these securities and
investing the proceeds in junior subordinated debentures of the Corporation. The
securities provide for quarterly cash distributions calculated at a rate based
on the three-month London Inter-bank Offering Rate ("LIBOR") plus 3.65%. The
capital securities will be redeemed on October 7, 2032; however the Corporation
does have the option to shorten the maturity date to a date not earlier than
October 7, 2007. These securities have been structured so that they qualify as
Tier 1 Capital of the Corporation. Because this transaction did not occur until
July of 2002, these numbers are not reflected in the June 30, 2002 financial
statements nor the notes thereof.
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 2001 Annual Report of
the Corporation, filed as an exhibit to its Form 10-K for the fiscal year ended
December 31, 2001 with the SEC via EDGAR. Please refer to the "Management's
Discussion and Analysis" section on pages 24-38 of the Corporation's 2001 Annual
Report for additional information.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various actions and proceedings are presently pending to which
the Corporation is a party. These actions and proceedings arise
out of routine operations and, in Management's opinion, will not,
either individually or in the aggregate, have a material adverse
effect on the consolidated financial position of the Corporation
and its subsidiaries.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i). Certificate 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.
--------------------
PART II - OTHER INFORMATION (cont.)
27. Financial Data Schedule.
- --------------------------------
99.1 Certification of President and Chief Executive Officer
99.2 Certification of Chief Operating Officer
99.3 Certification of Treasurer and Principal Accounting and Financial
Officer
99.4 Certification of Assistant Treasurer/Controller
(b) Reports on Form 8-K
A Form 11-K was filed with the SEC on June 28, 2002 pertaining to the
issuance of annual report of employee stock purchase.
A Form 8-K was filed with the SEC on April 7, 2002 pertaining to a press
release announcing the 2002 first quarter earnings.
A Form 8-K was filed with the SEC on April 29, 2002 pertaining to a press
release announcing executive management promotions.
A Form 8-K was filed with the SEC on July 23, 2002 pertaining to a press
release announcing second quarter earnings.
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, 2002
Kevin C. Quinn
/s/ Kevin C. Quinn
------------------
Chief Operating Officer
J. Duncan Smith
/s/ J. Duncan Smith
-------------------
Treasurer
(Principal Accounting
and Financial Officer)
EXHIBIT 99.1
FIRST CHESTER COUNTY CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First Chester County Corporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Charles
E. Swope, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date:__________, 2002 ___________________________________
Charles E. Swope
President and Chief Executive Officer
EXHIBIT 99.2
FIRST CHESTER COUNTY CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First Chester County Corporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Charles
E. Swope, President and Chief Operating Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date:__________, 2002 ___________________________________
Kevin Quinn
Chief Operating Officer
EXHIBIT 99.3
FIRST CHESTER COUNTY CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First Chester County Corporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Duncan Smith, Treasurer (Principal Accounting and Financial Officer) of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date:__________, 2002 ___________________________________
J. Duncan Smith
Treasurer (Principal Accounting
and Financial Officer)
EXHIBIT 99.4
FIRST CHESTER COUNTY CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First Chester County Corporation (the
"Company") on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, T.
Benjamin Marsho, Assistant Treasurer/Controller of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
Date:__________, 2002 ___________________________________
T. Benjamin Marsho
Assistant Treasurer/Controller