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May 14, 2003
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FIRST CHESTER COUNTY CORPORATION
Commission File Number 0-12870
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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 March 31, 2003.
Very truly yours,
/s/ J. Duncan Smith
-----------------------------
J. Duncan Smith, Treasurer
(Principal Accounting
and Financial Officer)
JDS/jd
Enclosures
cc: John A. Featherman, III, Esquire, MacElree, Harvey, Ltd., West Chester, PA
Patricia A. Gritzan, Esquire, Saul Ewing LLP, Philadelphia, PA
Rick Huff, CPA, Grant Thornton, Philadelphia, PA
Ward Johnson, VP, First Union Bank, Philadelphia, PA
James Shilling, VP, Kish Bank, Belleville, PA
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003, 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.
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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
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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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
The number of shares outstanding of Common Stock of the Registrant as of May 9,
2003 was 4,455,586.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INDEX
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PAGE
----
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income
Three-Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows
Three-Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-22
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 23
Item 4 - Controls & Procedures 23-24
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 25
Item 2 - Changes in Securities 25
Item 3 - Defaults Upon Senior Securities 25
Item 4 - Submission of Matters to a Vote of Security Holders 25-26
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands) March 31, December 31,
2003 2002*
------------------- --------------
ASSETS
Cash and due from banks $ 37,344 $ 31,777
Federal funds sold and other overnight investments 41,000 17,000
Interest Bearing Deposits in banks 203 90
--------- ---------
Total cash and cash equivalents 78,547 48,867
--------- ---------
Investment securities held-to-maturity (market value of $33
at March 31, 2003 and $34 at December 31, 2002, respectively) 31 31
Investment securities available-for-sale, at fair value 129,315 128,344
Loans 436,348 447,682
Less: Allowance for loan losses (6,389) (6,230)
--------- ---------
Net loans 429,959 441,452
Premises and equipment 13,619 13,944
Other assets 7,455 7,372
--------- ---------
Total assets $ 658,926 $ 640,010
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 119,345 $ 109,012
Interest-bearing (including certificates of deposit over $100
of $21,919 and $22,845 - March 31, 2003 and
December 31, 2002 respectively) 457,815 449,726
--------- ---------
Total deposits 577,160 558,738
Federal Home Loan Bank advances and other borrowings 22,275 22,678
Guaranteed preferred beneficial interest in Corporation's
subordinated debentures 5,000 5,000
Other liabilities 4,898 4,982
--------- ---------
Total liabilities $ 609,333 $ 591,398
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
outstanding, 4,799,666 at March 31, 2003 and December 31, 2002. 4,800 4,800
Additional paid-in capital 971 860
Retained earnings 47,698 46,746
Accumulated other comprehensive income 1,166 1,378
Treasury stock, at cost: 354,214 shares and 370,202 shares
at March 31, 2003 and December 31, 2002, respectively. (5,042) (5,172)
--------- ---------
Total stockholders' equity 49,593 48,612
--------- ---------
Total liabilities and stockholders' equity $ 658,926 $ 640,010
========= =========
The accompanying notes are an integral part of these statements.
* Derived from our audited, consolidated financial statements included in our
Annual Report on Form 10-K for the fiscal year ended 12/31/02.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands - except per share) Three Months Ended
----------------------------
March 31,
2003 2002
--------- ---------
INTEREST INCOME
Loans, including fees $ 7,007 $ 8,333
Investment securities 1,222 1,032
Federal funds sold 93 94
Deposits in banks 1 2
--------- ---------
Total interest income 8,323 9,461
--------- ---------
INTEREST EXPENSE
Deposits 1,695 2,598
Securities sold under repurchase agreements 3 7
Interest on Trust preferred securities 63 -
Federal Home Loan Bank advances and other borrowings 180 334
--------- ---------
Total interest expense 1,941 2,939
--------- ---------
Net interest income 6,382 6,522
Provision for loan losses 394 470
--------- ---------
Net interest income after provision for possible loan losses 5,988 6,052
--------- ---------
NON-INTEREST INCOME
Financial Management Services 783 805
Service charges on deposit accounts 533 433
Investment securities gains (losses), net 58 -
Operating lease rental income 251 180
Gain on the sale of premises and other real-estate owned - 245
Gains and fees on the sale of residential mortgages 411 118
Gains and fees on the sale of credit card portfolio 306 -
Other 527 419
--------- ---------
Total non-interest income 2,869 2,200
--------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,678 3,349
Net occupancy, equipment and data processing 1,343 1,205
Depreciation expense on operating leases 171 200
FDIC deposit insurance 22 21
Bank shares tax 109 102
Professional service 338 279
Other 979 915
--------- ---------
Total non-interest expense 6,640 6,071
--------- ---------
Income before income taxes and cumulative effect
of change in accounting for income taxes 2,217 2,181
INCOME TAXES 664 641
--------- ---------
NET INCOME $ 1,553 $ 1,540
========= =========
PER SHARE DATA
Basic earnings per common share $ 0.35 $ 0.35
========= =========
Diluted earnings per common share $ 0.34 $ 0.35
========= =========
Dividends declared $ 0.135 $ 0.130
========= =========
Basic weighted average shares outstanding 4,437,965 4,423,584
========= =========
Diluted weighted average shares outstanding 4,514,025 4,453,480
========= =========
The accompanying notes are an integral part of these statements.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
(Dollars in thousands) March 31,
---------------------------------
2003 2002
---- ----
OPERATING ACTIVITIES
Net Income $ 1,553 $ 1,540
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 708 716
Provision for loan losses 394 470
Amortization of investment security premiums
and accretion of discounts 492 133
Amortization of deferred fees on loans (169) (52)
Investment securities (gains) losses, net (58) -
Decrease in other assets 130 337
Decrease in other liabilities (84) (207)
--------- ---------
Net cash provided by operating activities $ 2,966 $ 2,937
--------- ---------
INVESTING ACTIVITIES
Increase in loans 9,950 3,908
Proceeds from sales of investment securities available-for-sale 1,140 -
Proceeds from maturities of investment securities available-for-sale 22,175 6,667
Proceeds from maturities of investment securities held - 1,005
Purchases of investment securities available-for-sale (23,827) (13,077)
Purchase of premises and equipment, net (383) (1,036)
--------- ---------
Net cash (used in) provided by investing activities $ 9,055 $ (2,533)
--------- ---------
FINANCING ACTIVITIES
Decrease in Federal Home Loan Bank advances (403) (10,387)
Increase in deposits 18,422 19,365
(Decrease) increase in securities sold under repurchase agreement - (3,616)
Cash dividends (600) (575)
Treasury stock transactions 240 48
--------- ---------
Net cash provided by (used in) financing activities 17,659 4,835
--------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 29,680 5,239
Cash and cash equivalents at beginning of year 48,867 38,233
Cash and cash equivalents at end of period $ 78,547 $ 43,472
======== =========
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, 2002.
2. The results of operations for the three-month period ended March 31, 2003
are not necessarily indicative of the results to be expected for the full
year. Information regarding risks and uncertainties that could cause actual
results to vary materially from our prior performance may be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part I, Item 2 of our Quarterly Report on Form 10-Q for the
period ending March 31, 2003.
3. Earnings per share are 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. The Corporation adopted the provisions of FASB issued SFAS No. 130,
Reporting of Comprehensive Income on January 1, 2002. SFAS No. 130
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-month period ended
March 31, 2003 was ($213) thousand compared to ($200) 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-month
ended March 31, 2003 and 2002 was $1.340 million.
5. The Corporation adopted SFAS No. 141, "Business Combinations", on January
1, 2002. SFAS 141 requires all business combinations be accounted for by a
single method--the purchase method. The provisions of this SFAS No. 141
apply to all business combinations initiated after June 30, 2001. The
adoption of the provisions of SFAS No. 141 did not have an impact on the
Corporation's financial condition, results of operations or cash flows. The
Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
on January 1, 2002. SFAS 142 requires that, upon its adoption, amortization
of goodwill will cease and instead, the carrying value of goodwill will be
evaluated for impairment on an annual basis. The Corporation has no
goodwill or intangible assets that are affected by this provision;
therefore, the adoption of SFAS No. 142 did not have an impact on the
Corporation's financial condition, results of operations or cash flows.
6. The Corporation adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, on January 1, 2002. 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. SFAS No. 144
changes the requirements relating to reporting the effects of a disposal or
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
discontinuation of a segment of a business. The adoption of this statement
did not have a material impact on the financial condition or results of
operations of the Corporation.
7. 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%. As of March 31, 2003, the effective interest
rate was 5.04%. 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.
8. The Corporation adopted FIN 45 Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness
of Others, on January 1, 2003. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Bank has issued financial and
performance letters of credit. Financial letters of credit require the Bank
to make payment if the customer's financial condition deteriorates, as
defined in the agreements. Performance letters of credit require the Bank
to make payments if the customer fails to perform certain non-financial
contractual obligations. FIN 45 defines the initial fair value of these
letters of credit as the fee received from the customer. Prior to the
adoption by the Corporation of FIN 45, the Corporation had already
established the practice of recording an initial liability equal to the
fees received for financial and performance letters of credit. Thus, the
adoption of FIN 45 is not expected to have a material impact on the
Corporation's financial performance. The maximum potential undiscounted
amounts of future payments of letters of credit outstanding as of March 31,
2003 were $5.3 million, and they expire through May 8, 2007. Amounts due
under these letters of credit would be reduced by any proceeds that the
Corporation would be able to obtain in liquidating the collateral for the
loans, which varies depending on the customer.
9. In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the
application of Accounting Research Bulletin 51, "Consolidated Financial
Statements", for certain entities that do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial
interest ("variable interest entities"). Variable interest entities within
the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Corporation is in the process of determining
what impact, if any; the adoption of the provisions of FIN 46 will have
upon its financial condition or results of operations.
10. Stock-based Compensation
At March 31, 2003, the Bank had one stock-based employee compensation plan.
The Bank accounts for that plan under the recognition and measurement
principles of APB 25, "Accounting for Stock Issued to Employees, and
related interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under the plan had an
exercise price equal to the market value of the underlying common stock on
the date of grant.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS No. 148") in December 2002.
SFAS No. 148 amends the disclosure and certain transition provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock
Based Compensation". The new disclosure provisions are effective for
financial statements for fiscal years ending after December 15, 2002 and
for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002.
The following table provides the disclosures required by SFAS No. 148 and
illustrates the effect on net income and earnings per share if the
Corporation had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation.
3/31/03 3/31/02
------- -------
Net income (in thousands) As reported $ 1,553 $ 1,540
Stock-based compensation costs determined
under fair value method for all awards $ 35 $ 65
------- -------
Pro forma net income $ 1,518 $ 1,475
Earnings per share (Basic) As reported $ 0.35 $ 0.35
Pro forma $ 0.34 $ 0.34
Earnings per share (Diluted) As reported $ 0.34 $ 0.35
Pro forma $ 1.33 $ 0.34
There were no options granted in the first quarter of 2003 or 2002.
ITEM 2. 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 and its direct and indirect wholly-owned subsidiaries, The
First National Bank of Chester County (the "Bank"), FNB Property Management,
LLC, First National Insurance Services, LLC, Turks Head Properties, Inc., and
First Chester County Capital Trust I, (collectively, the "Corporation"). 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. Although the Corporation believes that its expectations are
based on reasonable 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 our historic results or the results 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)
competition among financial and non-financial institutions in the Corporation's
market area that may result in customer turnover and lower interest rate
margins; (e) changes in the regulatory environment, securities markets, general
business conditions and inflation may adversely affect loan demand, credit
quality, consumer spending and saving habits, and interest rate margins; (f)
impact of changes in interest rates on customer behavior; (g) the impact of
changes in demographics on branch locations; (h) technological changes; (i)
changes in the value of securities and investments managed for others may affect
the growth level of the Corporation's non-interest income; (j) changes in the
credit of our borrowers, the collateral securing assets or other aspects of
credit quality; and (k) our ability to manage the risks involved in the
foregoing. These risks and uncertainties are all difficult to predict and most
are beyond the control of the Corporation's Management.
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.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Corporation conform with the
accounting principals generally accepted in the United States of America and
general practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
ALLOWANCE FOR CREDIT LOSSES
The Corporation considers that the determination of the allowance for loan
losses involves a higher degree of judgment and complexity than its other
significant accounting policies. The balance in the allowance for loan losses is
determined based on Management's review and evaluation of the loan portfolio in
relation to past loss experience, the size and composition of the portfolio,
current economic events and conditions, and other pertinent factors, including
Management's assumptions as to future delinquencies, recoveries and losses. All
of these factors may be susceptible to significant change. To the extent actual
outcomes differ from Management's estimates, additional provisions for loan
losses may be required that would adversely impact earnings in future periods.
INCOME TAXES
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities. Deferred tax assets are subject to Management's
judgment based upon available evidence that future realization is more likely
than not. If Management determines that the Corporation may be unable to realize
all or part of the net deferred tax assets in the future, a direct charge to
income tax expense may be required to reduce the recorded value of the net
deferred tax asset to the expected realizable amount.
EARNINGS AND DIVIDEND SUMMARY
Net income for the three months ended March 31, 2003 was $1.553 million, an
increase of $13 thousand or 0.84% from $1.540 million for the same period in
2002. The increase in net income for the three-month period was the direct
result of an increase in non-interest income partially offset by increases in
non-interest expenses and decreases in net-interest income. The increase in
non-interest income can be attributed to gains realized on the sale of the
Bank's credit card portfolio and increased gains and fees earned on the sale of
residential mortgages. Basic earnings per share for the three months ending
March 31, 2003 and 2002 were $0.35 per share. Cash dividends declared during the
three-month period ended March 31, 2003 were $0.135 an increase of 3.8% from
$0.130 per share for the same period in 2002. Over the past ten years, the
Corporation's practice has been to pay a dividend of at least 35.0% of net
income.
March December
--------------------------- ---------
2003 2002 2002
---- ---- ----
SELECTED RATIOS
Return on average assets 0.98% 1.05% 0.94%
Return on average equity 12.53% 13.71% 12.25%
Earnings retained 61.37% 62.66% 59.26%
Dividend payout ratio 38.63% 37.34% 40.74%
Book value per share $11.16 $10.09 $10.97
The table of "Consolidated Average Balance Sheet and Taxable Equivalent
Income/Expense and Rates" on page 15 may assist the reader in the following
discussion.
NET INTEREST INCOME
Net interest income is the difference between interest income earned on
interest-earning assets and interest expense paid on interest-bearing
liabilities. Net interest income on a tax equivalent basis for the three-month
periods ended March 31, 2003 was $6.4 million, a decrease of 2.0% from $6.5
million for the same period in 2002. The decrease in tax equivalent net interest
income can be attributed to a decrease in the net yield on interest-earning
assets when compared to the same period last year, partially
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
offset by increases in average interest-earning asset balances and lower yields
paid on interest-bearing liabilities.
The average net yield on interest-earning assets, on a tax equivalent basis
was 4.31% for the three-month period ended March 31, 2003, compared to 4.80% for
the same period in 2002, a decrease of 10.2% or 49 basis points (one basis point
is equal to 1/100 of a percent). The average yield on interest-earning assets
decreased 19.4% or 135 basis points to 5.61% in 2003 compared to 6.96% in 2002.
The average yield paid on interest-bearing liabilities decreased 38.9% or 103
basis points to 1.62% in 2003 from 2.65% in 2002. Continued low interest rates
and pricing competition may continue to put pressure on our net-interest margin
and may adversely impact net-interest income in future time periods.
Average interest-earning assets increased approximately $50.3 million or
9.2% to $595.4 million during the three-month period ending March 31, 2003,
compared to $545.2 million during the same period last year. The increase in
average interest-earning assets was the result of a 56.1% increase in investment
securities and a 50.1% increase in federal funds sold and other overnight
investments, partially offset by a 1.2% decrease in average total loans.
Average interest-bearing liabilities increased approximately $36.4 million
or 8.2% to $480.2 million during the three-month period ending March 31, 2003,
compared to $443.9 million during the same period last year. The increase in
average interest-bearing liabilities was the result of a 9.9% increase in
interest-bearing deposits.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three-Months
Ended March 31,
----------------------
YIELD ON 2003 2002
- -------- ---- ----
Interest-Earning Assets 5.61% 6.96%
Interest Bearing Liabilities 1.62% 2.65%
---- ----
Net Interest Spread 3.99% 4.31%
Contribution of Interest-Free Funds 0.32% 0.49%
---- ----
Net Yield on Interest-Earning Assets 4.31% 4.80%
==== ====
INTEREST INCOME ON FEDERAL FUNDS SOLD
Interest income on federal funds sold and other overnight investments for
the three-month period ended March 31, 2003 decreased 1.1% to $93 thousand when
compared to the same period in 2002. This decrease is primarily the result of a
34.0% or 66 basis point decrease on rates earned, offset by an increase in the
average balance of federal funds sold and other overnight investments of $9.7
million or 50.1% from $19.4 million in 2002 to $29.1 million in 2003. The
increase in the average balance of federal funds sold and overnight investments
can be attributed to the increased liquidity provided by increases in deposit
balances and a $5.1 million or 1.2% decrease in the average total loan balances.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased 17.8% for the three-month period ended March 31, 2003 to approximately
$1.2 million compared to $1.0 million during the same period in 2002. The
increase was primarily the result of a 56.1% or $45.7 million increase in the
average balance of investment securities to $127.2 million on a tax equivalent
basis, partially offset by a 24.6% or 126 basis point decrease on the average
interest rate earned on investment securities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
INTEREST INCOME ON LOANS
Interest income on loans, on a tax equivalent basis, generated by the
Corporation's loan portfolio decreased 15.7% to $7.0 million for the three-month
period ended March 31, 2003 compared to $8.3 million at March 31, 2002. The
decrease in interest income for the three-month period ended March 31, 2003 is
the direct result of a 14.8% or 111 basis point decrease on rates earned on the
portfolio as well as a decrease in the average balance of $5.1 million or 1.2%
compared to the same period last year. The sale of the Bank's credit card
portfolio to "Elan" Financial Services accounted for a significant portion of
the decrease in average loan balances. See "Non-Interest Income" for more
details.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts decreased 34.8% for the three-month
period ended March 31, 2003 to approximately $1.7 million compared to $2.6
million for the same period in 2002. The decrease is primarily the result of a
40.5% or 102 basis point decrease on rates paid on interest-bearing deposits.
This decrease was partially offset by a 9.9% or $40.6 million increase in
average interest-bearing deposits to $452.2 million when compared to the same
period in 2002.
Competition for deposits from non-banking institutions such as credit union
and mutual fund companies continues to be strong. Despite the 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 services.
Total deposits continue to grow at our new branches as well as at our existing
sites. Our newest branch office in Coatesville, located at 258 East Lincoln
Highway, is expected to open in the second quarter of 2003 and 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
57.1% to $3 thousand for the three-month period ended March 31, 2003, compared
to the same period in 2002. The decrease is attributable to a 59.6% or $798
thousand decrease in average securities sold under repurchase agreements for the
comparable periods partially offset by a 6.2% or 13 basis point increase on
average rates paid on securities sold under repurchase agreements.
INTEREST EXPENSE ON FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Interest expense on Federal Home Loan Bank ("FHLB") and other borrowings
decreased $154 thousand to $180 thousand for the three-month period ended March
31, 2003 from $334 thousand when compared to the same period in 2002. The need
for borrowing has decreased over the last several quarters as a result of slower
loan growth, increased deposits, and cash flow from the Bank's investment
securities portfolio. Average FHLB and other borrowings decreased to $22.5
million as of March 31, 2003 compared to $30.9 million during the same period in
2002. This lower level of borrowings is expected to continue throughout the year
as the funding demand is currently being met by deposit growth and cash flow
from other sources. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
PROVISION FOR LOAN LOSSES
During the first quarter of 2003, the Corporation recorded a $394 thousand
provision for loan losses compared to $470 thousand for the same period in 2002,
a decrease of 16.2%. The allowance for loan losses as a percentage of total
loans was 1.46% as of March 31, 2003 and 1.39% as of December 31, 2002.
Management believes that the allowance for loan losses is adequate based on its
current assessment of probable and estimated losses. See the section titled
"Allowance For Loan Losses" page 18 for additional discussion.
NON-INTEREST INCOME
Total non-interest income increased 30.4% to $2.9 million for the three
months ended March 31, 2003, compared to $2.2 million in the same period of
2002. The primary component of non-interest income is Financial Management
Services ("FMS") revenue, which decreased $22 thousand or 2.7% to $783 thousand
for the three-months ended March 31, 2003 compared with the same period in 2002.
FMS income is based primarily on the market value of assets under management.
The decrease in FMS revenue is the result of a 2.5% decrease in the market value
of assets under management, from $507.0 million at March 31, 2002 to $494.3
million at March 31, 2003. The decrease is primarily attributed to declines in
equity values due to stock market fluctuations.
Service charges on deposit accounts increased approximately 23.1% to $533
thousand for the three-months ended March 31, 2003 compared to $433 thousand for
the same period in 2002. The increase in service charge revenue is primarily the
result of an 11.4% deposit growth and the implementation of new fee schedule
which became effective February 15, 2003.
Gains on the sale of investment securities also contributed to the increase
in non-interest income. For the three-month period ended March 31, 2003, gains
on the sale of investment securities were $58 thousand. These gains were
realized as a result of normal portfolio management.
The Corporation has operating lease agreements with several of our
customers; their income is classified as "Rental Income". Rental income on
operating lease agreements for the three-month period ended March 31, 2003
increased $71 thousand from $180 thousand to $251 thousand when compared to the
same period in 2002. See related depreciation expense in the non-interest
expense section.
There were no gains on sale of premises and Other Real Estate Owned "OREO"
for the three-month period ended March 31, 2003. Gains on the sale of premises
and OREO were $245 thousand for the three-months ended March 31, 2002.
Gains and fee income generated in the sale of residential mortgages for the
three-month period ended March 31, 2003 increased $293 thousand from $118
thousand to $411 thousand compared to the same period in 2002. The increase is
primarily due to higher volume of originations of residential mortgage resulting
from record low mortgage interest rates. As long as the current low rate
environment continues, we expect this component of non-interest income to grow.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Gains on the sale of credit card portfolio also contributed to the increase
in non-interest income. For the three-month period ended March 31, 2003, gains
on the sale of credit card portfolio to Elan Financial Services was $306
thousand. The simultaneous establishment of an agency agreement with Elan
enables us to offer enhanced service to our credit card holders. Elan processes
card transactions for more than 1,200 financial institutions. Management
considers this gain to be non-recurring and is not expected in future time
periods.
Other non-interest income increased $108 thousand for the three-month
period ended March 31, 2003 when compared to the same period in 2002. The
increase in other non-interest income can be attributed to increases in
Electronic banking fees and miscellaneous loan fee income.
NON-INTEREST EXPENSE
Total non-interest expense for the first quarter of 2003 increased 9.4% to
$6.6 million compared to the same period in 2002. The various components of
non-interest expense are discussed below.
First quarter 2003 salaries and employee benefits increased 9.8% to $3.7
million for the three-month period ended March 31, 2003 compared to the same
period in 2002. Annual employee salary increases and a proportional increase in
employee benefits are primarily responsible for the increase as well as the
establishment of our Credit Administration area. At March 31, 2003, the
Corporation employed 238 full time and 44 part time employees compared to 228
full time and 59 part time employees at March 31, 2002.
Net occupancy, equipment and data processing expense increased 11.5% to
$1.3 million for the three-month period ended March 31, 2003 compared to the
same period last year. The increase is the result of increased building
maintenance cost and asset depreciation expenses. Additionally, computers and
related equipment costs associated with the expansion, upgrading and maintenance
of technology and networking infrastructure contributed to the increase.
Depreciation on operating leases decreased 14.5% to $171 thousand for the
three-month period ended March 31, 2003 from $200 thousand when compared at the
same period last year. This depreciation expense is the result of operating
lease agreements the Corporation has with two of our customers. Depreciation
expense declined because there were no new operating leases written in 2003. The
income associated with these operating leases is classified as Rental Income.
Professional services increased $59 thousand or 21.2% to $338 thousand for
the three-month period ended March 31, 2003 compared to the same period in 2002.
The increase is the result of increased consultant fees, trust servicing fees
and legal fees.
Total other non-interest expense increased 7.0% to $979 thousand for the
three months ended March 31, 2003 compared to the same period in 2002. This
increase can be attributed to increases in postage, bank telephone, travel and
mileage, and meals and entertainment expenses.
In the second quarter of 2003, the Corporation will open a new branch
office in Coatesville. Planning for other additional branches continues. The
Corporation believes that the costs associated with the opening of this new
branch 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
increases in net interest and fee income generated by business in the new
marketing areas.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands) 2003 2002
------------------------------ ----------------------------
Daily Daily
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Federal funds sold $ 29,107 $ 93 1.28% $ 19,397 $ 94 1.94%
Interest-bearing deposits in banks 242 1 1.65% 226 2 3.54%
Investment securities
Taxable 125,979 1,208 3.84% 79,699 1,010 5.07%
Tax-exempt(1) 1,194 21 6.94% 1,782 33 7.30%
------- ------- ------- -------
Total investment securities 127,173 1,229 3.86% 81,481 1,043 5.12%
------- ------- ------- -------
Loans (2)
Taxable 434,304 6,949 6.40% 441,569 8,300 7.52%
Tax-exempt(1) 4,619 86 7.44% 2,500 48 7.72%
------- ------- ------- -------
Total loans 438,923 7,035 6.41% 444,069 8,348 7.52%
------- ------- ------- -------
Total interest-earning assets 595,445 8,358 5.61% 545,173 9,487 6.96%
Non-interest earning assets
Allowance for possible loan losses (6,230) (6,582)
Cash and due from banks 24,325 22,688
Other assets 21,024 23,217
------- -------
Total assets $ 634,564 $ 584,496
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $ 327,980 $ 727 0.89% $270,466 $ 959 1.42%
Certificates of deposits and other time 124,252 968 3.12% 141,190 1,639 4.64%
------- ------- ------- -------
Total interest bearing deposits 452,232 1,695 1.50% 411,656 2,598 2.52%
Securities sold under repurchase agreements 540 3 2.22% 1,338 7 2.09%
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures 5,000 63 5.04% - - -
Federal Home Loan Bank advances and
other borrowings 22,461 180 3.21% 30,879 334 4.33%
------- ------- ------- -------
Total interest bearing liabilities 480,233 1,941 1.62% 443,873 2,939 2.65%
------- ------- ------- -------
Non-interest bearing liabilities
Non-interest bearing demand deposits 99,417 90,512
Other liabilities 5,346 5,187
------- -------
Total liabilities 584,996 539,572
Stockholders' equity 49,568 44,924
------- -------
Total liabilities and stockholders' equity $634,564 $584,496
======= =======
Net interest income $ 6,417 $ 6,548
====== ======
Net yield on interest earning assets 4.31% 4.80%
==== ====
(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 2003 and 2002.
(2) Non-accruing loans are included in the average balance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
INCOME TAXES
Income tax expense for the three-month period ended March 31, 2003 was $664
thousand, compared to $641 thousand in the same period last year. This
represents an effective tax rate of 30.0% and 29.4% for the first quarter of
2003 and 2002, 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, deposit growth, FHLB
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 six-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) March 31, 2003 December 31, 2002 Average Balance
-------------------------- ------------------------- ------- -----------
Average Effective Average Effective Dollar Percentage
Deposit Type Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- -------- ----------- -------- -----------
NOW Accounts $ 84,270 0.27% $ 79,587 0.38% $ 4,683 5.88%
Money Market 26,364 0.86% 25,430 1.37% 934 3.67%
Statement Savings 60,152 0.96% 53,754 1.44% 6,398 11.90%
Other Savings 1,482 1.08% 1,567 1.34% (85) (5.42%)
CD's Less than $100,000 101,729 3.21% 109,362 4.18% (7,633) (6.98%)
------- ------- -------
Total Core Deposits 273,997 1.58% 269,700 2.23% 4,297 1.59%
Non-Interest Bearing
Demand Deposit Accounts 99,417 - 97,266 - 2,151 2.21%
------- ------- -------
Total Core and Non-Interest
Bearing Deposits 373,414 1.16% 366,966 1.64% 6,448 1.76%
------- ------- -------
Tiered Savings 155,714 1.19% 132,108 1.84% 23,606 17.87%
CD's Greater than $100,000 22,521 2.70% 25,644 3.52% (3,123) (12.18%)
------- ------- -------
Total Deposits $551,649 1.23% $524,718 1.78% $ 26,931 5.13%
======= ======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
The Bank, as a member of the FHLB, maintains several credit facilities. As
of March 31, 2003, the amount outstanding under the Bank's line of credit with
the FHLB was $0. Additionally, the FHLB offers several other credit related
products which are available to the Bank. During the first quarter of 2003,
average FHLB advances were approximately $22.5 million and consisted of term
advances with a variety of maturities. The average interest rate on these
advances was approximately 3.2%. The Bank currently has a maximum borrowing
capacity with the FHLB of approximately $210.1 million. 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 $134.2 million or
20.4% of total assets at March 31, 2003 compared with a negative $143.5 million
or 22.4% of total assets at December 31, 2002. The Corporation's gap position is
one tool used to evaluate interest rate risk and the stability of net interest
margins. Another tool that management uses to evaluate interest rate risk is a
computer simulation model that assesses the impact of changes in interest rates
on net interest income, net-income under various interest rate forecasts and
scenarios. Management has set acceptable limits of risk within its Asset
Liability Committee ("ALCO") policy and monitors the results of the simulations
against these limits quarterly. As of the most recent quarter end all results
are within policy limits and indicate an acceptable level of interest rate risk.
Management monitors interest rate risk as a regular part of corporate operations
with the intention of maintaining a stable net interest margin.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
INTEREST SENSITIVITY ANALYSIS
AS OF MARCH 31, 2003
One Over
(Dollars in thousands) Within through five Non-rate
one year five years years sensitive Total
------------ ---------- ------------ --------- ----------
ASSETS
Federal funds sold $ 41,000 $ -- $ -- $ -- $ 41,000
Investment securities 59,949 31,435 37,962 -- 129,346
Interest bearing deposits in banks 203 -- -- -- 203
Loans and leases 192,734 209,820 33,794 (6,389) 429,959
Cash and due from banks -- -- -- 37,344 37,344
Premises and equipment -- -- -- 13,619 13,619
Other assets -- -- -- 7,455 7,455
-------- -------- -------- -------- --------
Total assets $ 293,886 $ 241,255 $ 71,756 $ 52,029 $ 658,926
======== ======== ======== ======== ========
LIABILITIES AND CAPITAL
Non-interest bearing deposits $ -- $ -- $ -- $ 119,345 $ 119,345
Interest bearing deposits 422,750 35,065 -- -- 457,815
FHLB term advance 266 17,535 4,474 -- 22,275
Guaranteed Preferred Securities 5,000 -- -- -- 5,000
Other liabilities 92 -- 4,806 -- 4,898
Capital -- -- -- 49,593 49,593
-------- -------- -------- -------- --------
Total liabilities & capital $ 428,108 $ 52,600 $ 9,280 $ 168,938 $ 658,926
======== ======== ======== ======== ========
Net interest rate
sensitivity gap $(134,222) $ 188,655 $ 62,476 $(116,909)
======== ======== ======== ========
Cumulative interest rate
sensitivity gap $(134,222) $ 54,433 $ 116,909 $ --
======== ======== ======== ========
Cumulative interest rate
sensitivity gap divided
by total assets (20.4%) 8.3% 17.7%
======== ======== =======
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is an amount that Management believes will be
adequate to absorb possible loan losses on existing loans that may become
uncollectible and is established based on Management's evaluations of the
collectibility of loans. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, adequacy of collateral, review of specific problem loans, and current
economic conditions that may affect our borrower's ability to pay.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
(Dollars in thousands) March 31, December 31,
------------------------- ---------------------
2003 2002 2002
----------- ----------- ---------------------
Balance at beginning of period $ 6,230 $ 6,344 $ 6,344
-------- -------- --------
Provision charged to operating expense 394 470 2,231
-------- -------- --------
Recoveries of loans previously charged-off 120 266 325
Loans charged-off (355) (344) (2,670)
-------- -------- --------
Net loans charged-off (235) (68) (2,345)
-------- -------- --------
Balance at end of period $ 6,389 $ 6,746 $ 6,230
======== ======== ========
Period-end loans outstanding $ 436,348 $ 444,589 $ 447,682
Average loans outstanding $ 438,923 $ 444,069 $ 442,613
Allowance for loan losses as a
percentage of period-end loans outstanding 1.46% 1.52% 1.39%
Ratio of net charge-offs to average loans
outstanding (annualized) 0.21% 0.06% 0.53%
Non-performing loans include loans on non-accrual status and loans
past due 90 days or more and still accruing. The Corporation's policy is to
write down all non-performing loans to net realizable value based on
current assessments of the value of collateral securing such loans.
Non-performing loans are primarily collateralized by real estate and are in
the process of collection. As of March 31, 2003, the level of
non-performing loans has decreased $1.3 million from March 31, 2002,
however, non-performing loans increased $501 thousand from December 31,
2002 to March 31, 2003. In addition, in May of 2003, the Corporation
classified an additional $2.8 million in loans to one customer as
non-accrual. These loans are secured by real estate, equipment, and
receivables. 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. Non-performing loans reduce the Corporation's
earnings because interest income is not earned on such assets. Management
has taken aggressive steps to control current and future credit quality
issues. In June 2002, the Corporation formed a Credit Administration
department to assist Management to monitor and improve the components of
the allowance of loans and lease losses including the provision for loan
and lease losses, recoveries, and charge-off loans. The following chart
represents detailed information regarding non-performing loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
NON-PERFORMING LOANS AND ASSETS
(Dollars in thousands) March 31, December 31,
------------------------- ---------------------
2003 2002 2002
----------- ----------- ---------------------
Past due over 90 days and still accruing $ 72 $ 173 $ 321
Non-accrual loans* 5,965 7,137 5,216
------ ------ ------
Total non-performing loans 6,037 7,310 5,537
Other real estate owned 368 366 368
------ ------ ------
Total non-performing assets $ 6,405 $ 7,676 $ 5,905
====== ====== ======
Non-performing loans as a percentage
of total loans 1.38% 1.64% 1.24%
Allowance for loan losses as a
percentage of non-performing loans 105.83% 92.28% 112.52%
Non-performing assets as a percentage of
total loans and other real estate owned 1.47% 1.73% 1.32%
Allowance for loan losses as a
percentage of non-performing assets 99.75% 87.88% 105.50%
* In May of 2003, the Corporation classified an additional $2.8 million in
loans to one customer as non-accrual. These loans are secured by real-estate,
equipment, and receivables.
Other real estate owned ("OREO") represents residential and commercial real
estate that had secured non-performing loans that the Bank acquired through
foreclosure or other collection efforts and that is held for sale. The value of
OREO has been written down to realizable value (net of estimated disposal costs)
based on professional appraisals.
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.
FASB 114 "Accounting by Creditors for Impairment of Loans" requires the
Corporation to examine commercial and non-residential mortgage loans on
non-accrual status for impairment. The balance of impaired loans was $5.8
million, $4.9 million, and $7.0 million at March 31, 2003, December 31, 2002,
and March 31, 2002, respectively. The associated allowance for impaired loans
was $938 thousand, $834 thousand and $813 thousand at March 31, 2003, December
31, 2002, and March 31, 2002, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
For the three months ended March 31, 2003, activity in the allowance for
impaired loan losses included a provision of $203 thousand, charge offs of $30
thousand , principal payments of $14 thousand, and recoveries of $10 thousand.
There was no interest income recorded for the three-month period ended March 31,
2003 while contractual interest amounted to $104 thousand. Total cash collected
on loans for the three-month period ended March 31, 2003 was $756 thousand, $655
thousand was applied to principal and $101 thousand was applied to recovery.
BUILDING IMPROVEMENTS AND TECHNOLOGY PROJECTS
In the second quarter of 2003, the Corporation will open its sixteenth
branch. This branch office will be located at 258 East Lincoln Highway in
Coatesville. The Bank continually explores new branch opportunities and has
several additional sites under review. The Corporation opened a new Customer
Contact Center in March 2003. This Center promotes the Bank's array of products
and services and develops new business through proactive call center inbound
opportunities and outbound campaigns. In the first quarter of 2003, the
Corporation completed a new system to expedite the consumer loan process and
other technology projects that will improve service to our customer's base and
allow us to operate more efficiently.
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 March 31, 2003, both the Corporation's and the Bank's capital
exceeded all minimum regulatory requirements, and were considered "well
capitalized" as defined in the regulations issued pursuant to the FDIC
Improvement Act of 1992. The Corporation's Risk-Based Capital Ratios, shown
below, have decreased from March 31, 2002 due to lower than expected earnings in
2002, have been computed in accordance with regulatory accounting policies.
RISK-BASED March 31, December 31,
-------------------------- -------------------- "Well Capitalized"
CAPITAL RATIOS 2003 2002 2002 Requirements
- -------------- ---------- ---------- ---- -------------------
Corporation
-----------
Leverage Ratio 8.42% 7.66% 8.29% 5.00%
Tier I Capital Ratio 11.14% 9.58% 10.83% 6.00%
Total Risk-Based Capital Ratio 12.39% 10.83% 12.08% 10.00%
Bank
----
Leverage Ratio 8.16% 7.44% 8.05% 5.00%
Tier I Capital Ratio 10.80% 9.30% 10.53% 6.00%
Total Risk-Based Capital Ratio 12.05% 10.55% 11.78% 10.00%
The Bank is not under any agreement with the regulatory authorities nor is
it aware of any current recommendations by the regulatory authorities that, if
they were to be implemented, would have a material affect on liquidity, capital
resources or operations of the Corporation.
The Corporation and the Bank's risk-based capital ratios were positively
impacted by the July 11, 2002 issuance of preferred capital securities.
ITEM 3. 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,
filed with the SEC via EDGAR as an exhibit to its Form 10-K for the fiscal year
ended December 31, 2002. Please refer to the "Management's Discussion and
Analysis" section on pages 24-38 of the Corporation's Annual Report for more
information.
ITEM 4. CONTROLS AND PROCEDURES
Appearing immediately following the "Signatures" section of this Quarterly
Report there are four certifications (the "Section 302 Certifications"), one by
each of our principal executive and financial officers (the "Principal
Officers"). This section of the Quarterly Report contains information concerning
the evaluation of the Corporation's disclosure controls and procedures and
matters regarding our internal controls that are referred to in the Section 302
Certifications. This information should be read in conjunction with the Section
302 Certifications for a more complete understanding of the topics presented.
The Securities and Exchange Commission (the "SEC") requires that within 90
days prior to the filing of this Quarterly Report on Form 10-Q, the Principal
Officers evaluate the effectiveness of the design and operation of the
Corporation's "disclosure controls and procedures" and report their conclusions
on the effectiveness of the design and operation of the Corporation's disclosure
controls and procedures in this report.
"Disclosure controls and procedures" mean the controls and other procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act"), such as this Quarterly Report, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
promulgated by the Securities and Exchange Commission (the "SEC"). Our
disclosure controls and procedures are also designed with the objective of
ensuring that such information is accumulated and communicated to our Principal
Officers as appropriate to allow timely decisions regarding required disclosure.
The SEC also requires that the Principal Officers certify certain matters
regarding the Corporation's "internal controls."
"Internal controls" mean our procedures which are designed with the
objective of providing reasonable assurance that (1) our transactions are
properly authorized; (2) our assets are safeguarded against unauthorized or
improper use; and (3) our transactions are properly recorded and reported, all
to permit the preparation of our financial statements in conformity with
generally accepted accounting principles. The Corporation evaluates its internal
controls annually as banking regulations dictate.
Among the matters our Principal Officers certify in the Section 302
Certifications are whether all "significant deficiencies" or "material
weaknesses" in the Corporation's internal controls have been disclosed to the
Corporation's auditors and the audit committee of the Corporation's Board of
Directors. In the professional auditing literature, "significant deficiencies"
are referred to as "reportable conditions"; these are control issues that could
have a significant adverse effect on the ability to record, process, summarize
and report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions.
The Corporation's Principal Officers do not expect that our disclosure
controls and procedures or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Corporation have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Based upon their evaluation of the disclosure controls and procedures, our
Principal Officers have concluded that, subject to the limitations noted above,
our disclosure controls and procedures are effective to provide reasonable
assurance that material information relating to the Corporation and its
consolidated subsidiaries is made known to the Principal Officers on a timely
basis.
There were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls, subsequent to the
date of our last evaluation of our internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various actions and proceedings are presently pending to which
the Corporation is a party. These actions and proceedings arise
out of routine operations and, in Management's opinion, will not,
either individually or in the aggregate, have a material adverse
effect on the consolidated financial position of the Corporation
and its subsidiaries.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Corporation was held on
March 11, 2003 (the "Meeting"). Notice of the Meeting was mailed
to shareholders of record on or about February 14, 2003, together
with proxy solicitation materials prepared in accordance with
Section 14(a) of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated there under.
The matters submitted to a vote of shareholders at the meeting were the
following:
1. The election of three Class I directors, with each director
to serve until the 2006 Annual Meeting of Shareholders and
until the election and qualification of his or her
respective success; and
2. The ratification of the appointment of Grant Thornton, LLP
as the Corporation's independent public accountants for the
year ending December 31, 2003.
There was no solicitation in opposition to the nominees of the
Board of Directors for election to the Board of Directors. All
three of the nominees were elected. The number of votes cast for
or withheld as well as the number of abstentions and broker
non-votes for each of the nominees for election to the Board of
Directors were as follows:
PART II - OTHER INFORMATION - CONTINUED
Nominee For Withheld
John Ciccarone 3,357,586 335,494
Clifford E. DeBaptiste 3,357,559 335,521
John B. Waldron 3,367,640 325,440
The names of the other directors whose terms of office as
directors continued after the Meeting are as follows: Charles E.
Swope, David L. Peirce, M. Robert Clarke, John A. Featherman,
III, John S. Halsted, and J. Carol Hanson.
The proposal to ratify the appointment of Grant Thornton, LLP as
the Corporation's independent public accountants for the year
ending December 31, 2003 was ratified. The numbers of votes cast
for or against as well as the number of abstentions and broker
non-votes for the ratification were as follows:
For Against Abstentions Broker Non-votes
3,680,126 600 12,354 0
There was no other business that came before the Meeting or
matters incident to the conduct of the Meeting.
Item 5. Other Information
None
PART II - OTHER INFORMATION - CONTINUED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i). Certificate of Incorporation. Copy of the Corporation's Certificate
of Incorporation, as amended, is incorporated herein by reference to Exhibit
3(i) to the Corporation's Annual Report on Form 10-K for the year ended December
31, 2000.
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, 2000.
27. Financial Data Schedule.
99.1 Certification of President
99.2 Certification of Assistant Treasurer
99.3 Certification of Treasurer
99.4 Certification of Assistant Treasurer
(b) Reports on Form 8-K
A Form 8-K was filed with the SEC on January 2, 2003
pertaining to a dividend increase and 2002 earning
highlights.
A Form 8-K was filed with the SEC on January 29, 2003
pertaining to a press release announcing the Fourth
Quarter 2002 earnings.
A Form 8-K was filed with the SEC on January 30, 2003
pertaining to a press release announcing the Fourth
Quarter 2002 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
/s/ Charles E. Swope
--------------------------
May 14, 2003 Charles E. Swope
President and CEO
May 14, 2003 /s/ J. Duncan Smith
--------------------------
J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
I, Charles E. Swope, President and CEO of the Corporation, certify that:
----------------
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003
/s/ Charles E. Swope
- ----------------------------------
Charles E. Swope
President and CEO
I, Kevin C. Quinn, Assistant Treasurer of the Corporation, certify that:
--------------
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003
/s/ Kevin C. Quinn
- ----------------------------------
Kevin C. Quinn
Assistant Treasurer
I, J. Duncan Smith, Treasurer of the Corporation, certify that:
---------------
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003
/s/ J. Duncan Smith
- ----------------------------------
J. Duncan Smith
Treasurer
I, T. Benjamin Marsho, Assistant Treasurer of the Corporation, certify that:
------------------
1. I have reviewed this quarterly report on Form 10-Q of March 31, 2003;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 14, 2003
/s/ T. Benjamin Marsho
- ----------------------------------
T. Benjamin Marsho
Assistant Treasurer
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 March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Charles
E. Swope, President and CEO 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.
May 14, 2003 /s/ Charles E. Swope
--------------------
Charles E. Swope
President and CEO
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 March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin
C. Quinn, Assistant Treasurer 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.
May 14, 2003 /s/ Kevin C. Quinn
-------------------
Kevin C. Quinn
Assistant Treasurer
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 March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, J.
Duncan Smith, Treasurer 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.
May 14, 2003 /s/ J. Duncan Smith
-------------------
J. Duncan Smith
Treasurer
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 March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, T.
Benjamin Marsho, Assistant Treasurer 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.
May 14, 2003 /s/ T. Benjamin Marsho
----------------------
T. Benjamin Marsho
Assistant Treasurer