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August 14, 2003
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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, 2003.
Very truly yours,
/s/ J. Duncan Smith
-------------------
J. Duncan Smith, Treasurer
(Principal Accounting
and Financial Officer)
JDS/wad
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
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, 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.
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
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 August
12, 2002 was 4,481,229.
-1-
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
June 30, 2003 and December 31, 2002 3
Consolidated Statements of Income
Three and Six-Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows
Six-Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 26
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 27
Item 4 - Controls and Procedures 27 - 28
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 29
Item 2 - Changes in Securities 29
Item 3 - Defaults upon Senior Securities 29
Item 4 - Submission of Matters to a Vote of Security Holders 29
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 29 - 30
Signatures 31
Exhibit Index 32
Certifications 33 - 40
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands) June 30, December 31,
2003 2002*
------------ ------------
ASSETS
Cash and due from banks $ 38,220 $ 31,777
Federal funds sold and other overnight investments 22,500 17,000
Interest Bearing Deposits in banks 391 90
----------- ------------
Total cash and cash equivalents 61,111 48,867
----------- ------------
Investment securities held-to-maturity (market value of $32 at
June 30, 2003 and $34 at December 31, 2002, respectively) 30 31
----------- ------------
Investment securities available-for-sale, at market value 123,636 128,344
----------- ------------
Loans 462,438 447,682
Less: Allowance for loan losses (6,156) (6,230)
----------- ------------
Net loans 456,282 441,452
----------- ------------
Premises and equipment 13,645 13,944
Other assets 10,135 7,372
----------- ------------
Total assets $ 664,839 $ 640,010
=========== ============
LIABILITIES
Deposits
Noninterest-bearing $ 118,964 $ 109,012
Interest-bearing (including certificates of deposit over $100
of $23,479 and $22,845 - June 30, 2003 and
December 31, 2002 respectively) 453,647 449,726
----------- ------------
Total deposits 572,611 558,738
Federal Home Loan Bank advances and other borrowings 31,368 22,678
Guaranteed preferred beneficial interest in Corporation's subordinated
debentures 5,000 5,000
Other liabilities 5,038 4,982
----------- ------------
Total liabilities 614,017 591,398
----------- ------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
outstanding, 4,799,666 at June 30, 2003 and December 31, 2002. 4,800 4,800
Additional paid-in capital 1,164 860
Retained earnings 48,446 46,746
Accumulated other comprehensive income 1,305 1,378
Treasury stock, at cost: 330,918 shares and 370,202 shares
at June 30, 2003 and December 31, 2002, respectively. (4,893) (5,172)
----------- ------------
Total stockholders' equity 50,822 48,612
---------- ------------
Total liabilities and stockholders' equity $ 664,839 $ 640,010
=========== ============
The accompanying notes are an integral part of these statements.
* Derived from audited, consolidated financial statements included in Annual
Report on Form 10-K for the fiscal year ended 12/31/02.
-3-
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,
------------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 7,138 $ 8,056 $14,146 $16,423
Investment securities 1,011 1,179 2,233 2,211
Federal funds sold 89 105 181 199
Deposits in Banks 1 1 2 3
------- ------- ------- -------
Total interest income 8,239 9,341 16,562 18,836
------- ------- ------- -------
INTEREST EXPENSE
Deposits 1,574 2,486 3,269 5,084
Securities sold under repurchase agreements - 5 3 12
Interest on Trust preferred securities 66 - 129 -
Federal Home Loan Bank advances and other borrowings 178 281 358 615
------- ------- ------- -------
Total interest expense 1,818 2,772 3,759 5,711
------- ------- ------- -------
Net interest income 6,421 6,569 12,803 13,125
Provision for loan losses 373 310 767 780
------- ------- ------- -------
Net interest income after provision
for possible loan losses 6,048 6,259 12,036 12,345
------- ------- ------- -------
NON-INTEREST INCOME
Financial management services 870 757 1,652 1,562
Service charges on deposit accounts 512 437 1,045 869
Investment securities gains, net 200 121 259 121
Operating lease rental income 196 189 447 369
Gains and fees on the sale of residential mortgages 394 72 804 190
Gain on the sale of credit card portfolio - - 306 -
Other 524 483 1,051 1,134
------- ------- ------- -------
Total non-interest income 2,696 2,059 5,564 4,245
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,823 3,527 7,501 6,875
Net occupancy, equipment and date processing 1,368 1,239 2,711 2,443
Depreciation expense on operating leases 167 117 338 318
FDIC deposit insurance 22 21 44 43
Bank shares tax 122 126 230 228
Professional service 253 455 510 665
Other 1,057 1,041 2,117 2,046
------- ------- ------- -------
Total non-interest expense 6,812 6,526 13,451 12,618
------- ------- ------- -------
Income before income taxes and cumulative effect
of change in accounting for income taxes 1,932 1,792 4,149 3,972
INCOME TAXES 582 509 1,246 1,150
------- ------- ------- -------
NET INCOME $ 1,350 $ 1,283 $ 2,903 $ 2,822
======= ======= ======= =======
PER SHARE DATA
Basic earnings per common share $ 0.300 $ 0.290 $ 0.650 $ 0.640
======= ======= ======= =======
Diluted earnings per common share $ 0.300 $ 0.290 $ 0.640 $ 0.630
======= ======= ======= =======
Dividends declared $ 0.135 $ 0.130 $ 0.270 $ 0.260
======= ======= ======= =======
Basic weighted average shares outstanding 4,459,286 4,422,323 4,448,684 4,422,950
========= ========= ========= =========
Diluted weighted average shares outstanding 4,565,503 4,466,067 4,531,232 4,459,403
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
-4-
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-------------------------
(Dollars in thousands) 2003 2002
------- ------
OPERATING ACTIVITIES
Net Income $ 2,903 $ 2,822
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,416 1,271
Provision for loan losses 767 780
Amortization of investment security premiums
and accretion of discounts 1,084 220
Amortization of deferred fees on loans 187 (168)
Investment securities gains, net (259) (121)
(Increase) decrease in other assets (2,836) 835
Increase (decrease) in other liabilities 56 (373)
---------- ---------
Net cash provided by operating activities $ 3,318 $ 5,266
---------- ---------
INVESTING ACTIVITIES
(Decrease) Increase in loans (15,249) 8,426
Proceeds from sales of investment securities available-for-sale 47,076 12,419
Proceeds from maturities of investment securities available-for-sale 12,913 7,925
Purchases of investment securities available-for-sale (56,640) (34,663)
Purchase of premises and equipment, net (1,117) (1,013)
---------- ---------
Net cash (used in) investing activities $ (13,017) $ (6,906)
---------- ---------
FINANCING ACTIVITIES
Increase (decrease) in Federal Home Loan Bank advances 8,690 (4,209)
Increase in deposits 13,873 28,512
Decrease in securities sold under repurchase agreement - (13,279)
Cash dividends (1,203) (1,150)
Treasury stock transactions 583 27
---------- ---------
Net cash provided by financing activities 21,943 9,901
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,244 8,261
Cash and cash equivalents at beginning of period 48,867 38,233
---------- ---------
Cash and cash equivalents at end of period $ 61,111 $ 46,494
========= =========
The accompanying notes are an integral part of these statements.
-5-
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- and six-month periods ended
June 30, 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
June 30, 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- and six-month periods ended June 30, 2003 was
$139 thousand and ($72) thousand, compared to $880 thousand and $680
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,
2003 was $1.50 million and $2.83 million, compared to $2.16 million
and $3.50 million in the same period last year.
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, 2002. 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 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.
-6-
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
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 June 30, 2003, the effective interest rate was 5.28% and
5.16% for the three- and six-month periods. 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 FASB Interpretation 45 (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 FIN 45, to record a liability
for the fair value of the obligation undertaken in issuing the
guarantee. The Corporation has issued financial and performance
letters of credit. Financial letters of credit require the
Corporation to make payment if the customer's financial condition
deteriorates, as defined in the agreements. Performance letters of
credit require the Corporation to make payments if the customer fails
to perform certain non-financial contractual obligations. The
Corporation previously did not record an initial liability, other
than the fees received for these letters of credit, unless it became
probable that the Corporation would have to perform under the letter
of credit. Under FIN 45, the Corporation will record a liability
equal to the initial fair value of the liability for the letters of
credit. The Corporation defines the initial fair value of these
letters of credit as the fee received from the customer. FIN 45
applies prospectively to letters of credit the Corporation issues or
modifies subsequent to December 31, 2002. The maximum potential
undiscounted amounts of future payments of letters of credit
outstanding as of June 30, 2003 were $6.9 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 letter of credit, which
varies depending on the customer. The adoption of the provisions of
FIN 45 is not expected to have a material impact on the financial
condition or results of operation of the Corporation.
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
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.
-7-
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
The Corporation has also evaluated the impact of FIN 46 on variable
interest entities consolidated by the Corporation prior to the
issuance of FIN 46. Management has determined that First Chester
County Capital Trust I qualifies as a variable interest entity under
FIN 46. First Chester County Capital Trust I issued mandatory
redeemable preferred stock to investors and loaned the proceeds to the
Corporation. First Chester County Capital Trust I holds, as its sole
asset, subordinated debentures issued by the Corporation in 2002. The
timing and amount of payments on the subordinated debentures are the
same as the timing and amount of payments by First Chester County
Capital Trust I on the mandatory redeemable preferred stock. First
Chester County Capital Trust I is currently included in the
Corporation's consolidated balance sheet and statements of income.
Management believes that First Chester County Capital Trust I should
continue to be included in the Corporation's consolidated financial
statements after the effective date of FIN 46. However, as additional
interpretations related to entities similar to First Chester County
Capital Trust I become available, management will reevaluate its
conclusion that First Chester County Capital Trust I should be
included in the consolidated financial statements and its potential
impact to its Tier I capital calculation under such interpretations.
10. Stock-based Compensation
At June 30, 2003, the Corporation had one stock-based compensation
plan. The Corporation 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
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.
6/30/03 6/30/02
------- -------
Net income (in thousands) As reported $ 1,350 $ 1,283
Stock-based compensation costs determined
under fair value method for all awards $ (34) $ (66)
-------- --------
Pro forma net income $ 1,316 $ 1,217
Earnings per share (Basic) As reported $ 0.30 $ 0.29
Pro forma $ 0.29 $ 0.27
Earnings per share (Diluted) As reported $ 0.30 $ 0.29
Pro forma $ 0.29 $ 0.27
Note: There were no options granted during the three- and six-month periods ended June 30, 2003.
-8-
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
11. The Corporation adopted SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", on July 1, 2003. SFAS
No. 149 clarifies and amends SFAS No. 133 for implementation issues
raised by constituents and includes the conclusions reached by the
FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan
commitments related to mortgage loans that will be held for sale as
derivatives. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Corporation periodically enters
into commitments with its customers, which it intends to sell in the
future. Management does not anticipate the adoption of SFAS No. 149
to have a material impact on the Corporation's financial position or
results of operations.
12. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 changes the classification in the statement of
financial position of certain common financial instruments from
either equity or mezzanine presentation to liabilities and requires
an issuer of those financial statements to recognize changes in fair
value or redemption amount, as applicable, in earnings. SFAS No. 150
is effective for public companies for financial instruments entered
into or modified after May 31, 2003 and is effective at the beginning
of the first interim period beginning after June 15, 2003. Management
has not entered into any financial instruments that would qualify
under SFAS No. 150. The Corporation currently classifies its
Guaranteed Preferred Beneficial Interest in the Corporation's
Subordinated Debt as a liability. As a result, management does not
anticipate the adoption of SFAS No. 150 to have a material impact on
the Corporation's financial position or results of operations.
-9-
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., Turks
Head Properties II, LLC, 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.
RISKS AND UNCERTAINTIES
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; (k) our ability to manage the risks involved in the foregoing;
and (l) the accuracy of the assumptions and estimates used in the preparation of
our financial statements. 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 to 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.
-10-
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 and lease 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 and lease 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-month period ended June 30, 2003 was $1.350
million, an increase of $67 thousand or 5.22% from $1.283 million for the same
period in 2002. Net income for the six-month period ended June 30, 2003 was
$2.903 million, an increase of $81 thousand or 2.87% from $2.822 million for the
same period in 2002. Earnings for the three-month period ended June 30, 2003
include gains and fees of $394 thousand from the sale of residential mortgages
and gains of $200 thousand on the sale of investment securities. Earnings for
the six-months ended June 30, 2003 include gains of $306 thousand from the sale
of the $2.7 million credit card portfolio to Elan Financial Services and $804
thousand gains and fees from the sale of residential mortgages. These gains were
offset by a decrease in net interest income resulting from the current interest
rate environment and increased operating costs. Basic earnings per share was
$0.30 and $0.65 for the three- and six-month periods ended June 30, 2003,
respectively, compared to $0.29 and $0.64 for the same periods in 2002. Cash
dividends declared during the second quarters of 2003 were $0.135 and $0.270 per
share for the three- and six-month periods compared to $0.130 per share and
$0.260 per share for the three- and six-month periods ended June 30, 2002. Over
the past ten years, the Corporation's practice has been to pay a dividend of at
least 35.0% of net income.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -----------------------
2003 2002 2003 2002
-------------------------------- -----------------------
SELECTED RATIOS
---------------
Return on Average Assets 0.83% 0.87% 0.91% 0.96%
Return on Average Equity 10.65% 11.25% 11.58% 12.47%
Net Interest Margin 4.28% 4.78% 4.30% 4.80%
Earnings Retained 55.41% 55.19% 58.59% 59.25%
Dividend Payout Ratio 44.59% 44.81% 41.41% 40.75%
Book Value Per Share $11.37 $10.45 $11.37 $10.45
The "Consolidated Average Balance Sheet" on pages 17 and 18 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, 2003 on
a tax equivalent basis, was $6.5 million and $12.9 million, respectively. This
represents a decrease of 1.5% and 2.0% when compared to the three- and six-month
net interest income of $6.6 million and $13.2 million, respectively. The
decrease in tax equivalent net interest income for both periods can be
attributed to a decrease in the net yield on interest-earning assets when
compared to the same period last year, partially 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 for the three- and six-month period ended June 30, 2003 decreased 10.46%
and 10.42% or 50 basis points (one basis point is equal to 1/100 of a percent)
to 4.28% and 4.30%, compared to 4.78% and 4.80% for the same periods in 2002,
respectively. The average yield on interest-earning assets for the three- and
six-month period ended June 30, 2003 decreased 19.3% or 131 basis points and
19.5% or 134 basis points to 5.47% and 5.55% compared to 6.78% and 6.89% for the
same periods in 2002. The average yield paid on interest-bearing liabilities for
the three- and six-month period ended June 30, 2003 decreased 39.5% or 98 basis
points and 39.3% or 101 basis points to 1.50% and 1.56% compared to 2.48% and
2.57% for the same periods in 2002, respectively. 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 decreases in asset yields. 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.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Average interest-earning assets increased approximately $54.9 million
or 9.9% to $607.0 million for the three-months ended June 30, 2003 from $552.1
million in the same period last year. For the six months ended June 30, 2003,
average interest-earning assets increased approximately $52.6 or 9.6% million to
$601.3 million from $548.7 million in the same period last year. The increase in
average interest-earning assets for the three- and six-month periods ended June
30, 2003, was primarily due to increases in the average investment securities,
additionally, increases in average loans outstanding, and excess funds invested
in Federal funds and other overnight investments contributed to the increase.
Average interest-bearing liabilities increased approximately $38.2
million or 8.5% to $484.8 million for the three-months ended June 30, 2003, from
$446.7 million in the same period last year. For the six-month ended June 30,
2003, average interest-bearing liabilities increased $37.3 million or 8.4% to
$482.5 million from $445.3 million in the same period last year. The increase in
average interest-bearing liabilities for the three-month period was the result
of a 7.4% increase in interest-bearing deposits and 10.3% increase in FHLB
advances and other borrowings. The increase in average interest-bearing
liabilities for the six-month period was the result of an 8.6% increase in
interest-bearing deposits and the additional funds from the issuance of a trust
preferred security.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -----------------------
2003 2002 2003 2002
-------------------------------- -----------------------
YIELD ON
--------
Interest-Earning Assets 5.47% 6.78% 5.55% 6.89%
Interest Bearing Liabilities 1.50% 2.48% 1.56% 2.57%
----- ----- ----- -----
Net Interest Spread 3.97% 4.30% 3.99% 4.32%
Contribution of Interest-Free Funds 0.31% 0.48% 0.31% 0.48%
----- ----- ----- -----
Net Yield on Interest-Earning Assets 4.28% 4.78% 4.30% 4.80%
===== ===== ===== =====
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, 2003, decreased 15.2% and
9.0% to $89 thousand and $181 thousand, respectively, when compared to the same
periods in 2002. The decrease in interest income on Federal funds sold and other
overnight investments is the direct result of 35.9% or 69 basis points and 35.2%
or 68 basis points decrease on rates earned partially offset by a 32.6% and
40.8% increase in the average balance of federal funds sold and other overnight
investments for the three- and six- month periods ended June 30, 2003,
respectively. 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 from our new and existing branches and cash flow
from the investment portfolio which includes sales, maturities, pay downs and
pay-offs.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
decreased 12.2% to $1.0 million for the three-month period ended June 30, 2003,
and increased 1.9% to $2.3 million for the six-month period ended June 30, 2003,
respectively, when compared to the same periods in 2002. The decrease for the
three-month period is primarily due to a 206 basis point or 38.9% decrease on
interest rates on such investments partially offset by a 43.7% or $39.2 million
increase in the average investment security balance. The increase for the
six-month period ended June 30, 2003 is the result of a 49.6% or $42.4 million
increase in the average investment security balance partially offset by a 166
basis point or 31.8% decrease in the yield earned compared to the same period
last year. Increases in the average investment security balances for the three-
and six-month period are the result of the Corporation's increased cash position
due to the increased deposits generated by our new and existing branch
locations.
INTEREST INCOME ON LOANS
Interest income on loans, on a tax equivalent basis, generated by the
Corporation's loan portfolio decreased 11.1% and 13.6% to $7.2 million and $14.2
million for the three- and six-month periods ended June 30, 2003, compared to
the same periods in 2002, respectively. The decrease in interest income for
these periods is the direct result of 94 and 104 basis points or 12.8% and 14.0%
decrease in rates earned on the portfolio as compared to last year partially
offset by a 1.9% and 0.4% increase in the average balance of outstanding loans
for the three- and six-month periods ended June 30, 2003, respectively. 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 36.7% and 35.7% for the
three- and six-month periods ended June 30, 2003 to $1.6 million and $3.3
million, compared to $2.5 million and $5.1 million for the same periods in 2002.
The decrease for the three-month period is primarily the result of a 41.0% or 96
basis point decrease on rates paid on interest-bearing deposits partially offset
by a 7.4% or $31.6 million increase in the average interest bearing deposits
balance. The decrease for the six-month period is primarily the result of a
40.7% or 99 basis point decrease on rates paid on interest-bearing deposits
partially offset by a 8.6% or $36.1 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 1.38% for
the three-month period ended June 30, 2003 from 2.34% in 2002. The Corporation's
effective rate on interest bearing deposits decreased to 1.44% for the six-month
period ended June 30, 2003 from 2.43% in 2002.
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 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
opened for business in June 2003. Other new branch sites are currently under
review, which if opened, should continue to expand the Corporation's deposit
base.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
INTEREST EXPENSE ON SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Interest expense on securities sold under repurchase agreements
decreased 100.0% and 75.0% to $0 thousand and $3 thousand for the three- and
six-month periods ended June 30, 2003, respectively, compared to the same
periods in 2002. The decreases are primarily attributable to $584 million and
$691 million decrease in average balance for the three- and six-month period
compared to the same periods in 2002, respectively. The decrease is also
attributable to the popularity of the Bank's overnight cash sweep and tri-party
repo programs totaled were $86.2 million at June 30, 2003 and $57.2 million at
June 30, 2002. 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 Federal Home Loan Bank ("FHLB") and other
borrowings decreased $103 thousand to $178 thousand for the three-month period
ended June 30, 2003 from $281 thousand when compared to the same period in 2002.
The decrease is the direct result of 42.6% or 228 basis point decrease in
average rates paid on borrowings for the three-month period ending June 30, 2003
when compared to the same period last year. Interest expense on borrowings
decreased $257 thousand to $358 thousand for the six-month period ended June 30,
2003 from $615 thousand when compared to the same period in 2002. The decrease
is a direct result of 33.9% or a 161 basis point decrease on rates paid. Average
FHLB borrowings for the three-month period ended June 30, 2003 increased 10.3%
to $23.2 million from $21.0 million when compared to the same period last year.
Average FHLB borrowings for the six-month period decreased 11.9% to $22.8
million from $25.9 million when compared to the same period in 2002. The
decrease in borrowing levels for the six-month period ended June 30, 2003 is the
result of funding demand being met by current deposit growth and cash flow from
other sources. For the three-month period ended June 30, 2003, borrowings
increased in response to increased loan and investment portfolio 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, 2003, the
Corporation recorded a $373 thousand and a $767 thousand provision for loan
losses compared to a $310 thousand and a $780 thousand for the same periods in
2002. The allowance for loan losses as a percentage of total loans was 1.33% at
June 30, 2003, 1.49% at June 30, 2002 and 1.39% at December 31, 2002,
respectively. See the section titled "Allowance For Loan Losses" for additional
discussion.
NON-INTEREST INCOME
Total non-interest income increased 30.9% to $2.7 million for the
three- month period ended June 30, 2003 when compared to the same period in
2002. For the six- month period ended June 30, 2003, total non-interest income
increased 31.1% to $5.6 million when compared to the same period in 2002.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
The primary component of non-interest income is Financial Management
Services ("FMS") revenue, which increased 14.9% and 5.8% to $870 thousand and
$1.7 million for the three- and six-month periods ended June 30, 2003,
respectively, compared to the same periods in 2002. The market value of FMS
assets under management and custody grew $24.3 million or 4.9% from $491.4
million on June 30, 2002 to $515.7 million on June 30, 2003. In spite of a
volatile stock market and the loss of a $38 million relationship early in 2003,
the value of FMS assets under management and custody has continued to grow from
period to period. With the volatility in the financial markets, the portfolio
has not grown as expected, which in turn has led to lower than expected fee
income.
Service charges on deposit accounts increased approximately 17.2% to
$512 thousand for the three-months ended June 30, 2003 compared to $437 thousand
for the same period in 2002. For the six-month period ended June 30, 2003,
service charges on deposit accounts increased 20.3% to $1.05 million compared to
$869 thousand for the same period in 2002. The increase in service charge
revenue for both periods is primarily the result of an increase in the number of
deposit accounts. Implementation of new fee schedule which became effective
February 15, 2003 also contributed to the increases.
Investment securities gains also contributed to the increase in
non-interest income. For the three-month period ended June 30, 2003, investment
security gains increased $79 thousand from $121 thousand to $200 thousand, when
compared to the same period in 2002. For the six-month period ended June 30,
2003, investment security gains increased $138 thousand from $121 thousand to
$259 thousand, when compared to the same period in 2002. These gains were
realized as a result of normal portfolio management.
The Corporation has operating lease agreements with several of our
customers; this income is classified as "Rental Income". Rental income on
operating lease agreements for the three- and six-month period ended June 30,
2003 increased 3.7% and 21.1% to $196 thousand and $447 thousand from $189
thousand and $369 thousand when compared to the same periods in 2002. See
related depreciation expense in the non-interest expense section for more
details.
Gains and fee income generated in the sale of residential mortgages for
the three- and six-month period ended June 30, 2003 increased 447.2% and 323.2%
to $394 thousand and $804 thousand from $72 thousand and $190 thousand compared
to the same periods last year. The increase is primarily due to a higher volume
of originations of residential mortgage resulting from the current mortgage
interest rate environment.
Gains on the sale of credit card portfolio also contributed to the
increase in non-interest income. During the first quarter of 2003, a gain of
$306 thousand on the sale of credit card portfolio to Elan Financial Services.
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.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Other non-interest income increased 8.5% to $524 thousand for the
three-months ended June 30, 2003 compared to $483 thousand for the same period
in 2002. For the six-month period ended June 30, 2003, other non-interest income
decreased 7.3% from $1.13 million to $1.05 million when compared to the same
period in 2002. The increase in other non-interest income for the three-month
period can be attributed to increases in miscellaneous income and fees.
NON-INTEREST EXPENSE
Total non-interest expense for the three- and six-month periods ended
June 30, 2003 increased 4.4% to $6.8 million and 6.6% to $13.5 million, compared
to the same periods in 2002. The various components of non-interest expense are
discussed below.
Employee salaries and benefits increased 8.4% to $3.8 million and 9.1%
to $7.5 million for the three-month and six-month periods ended June 30, 2003
compared to the same periods in 2002. Increased staffs due to the establishment
of our Credit Administration area and the opening of our Customer Contact
Center, annual employee raises, and a proportional increase in employee benefits
are primarily responsible for the increase. At June 30, 2003, the Corporation
employed 253 full time and 46 part time employees compared to 233 full time and
53 part time employees at June 30, 2002.
Net occupancy, equipment, and data processing expense increased 10.4%
and 11.0% to $1.4 million and $2.7 million for the three- and six-month periods
ended June 30, 2003, compared to the same periods last year, respectively. The
increase is the result of increased building maintenance cost and asset
depreciation expense. Additionally, computers and related equipment costs
associated with the expansion, upgrading and maintenance of personnel computers
and our networking infrastructure contributed to the increase.
Depreciation on operating leases increased 42.7% and 6.3% to $167
thousand and $338 thousand for the three- and six-month periods ended June 30,
2003, compared to the same periods last year, respectively. This depreciation
expense is the result of operating lease agreements the Corporation has with
several of our customers. The income associated with these operating leases is
classified as Rental Income.
Professional Services decreased 44.4% and 23.3% to $253 thousand and
$510 thousand for the three- and six-month periods ended June 30, 2003 compared
to the same periods in 2002. The decrease is the result of a decrease in
consultant, employee recruiting, and legal fees compared to the previous year.
Total other non-interest expense increased 1.5% and 3.5% to $1.1
million and $2.1 million for the three- and six-month period ended June 30, 2003
compared to the same periods last year, respectively. The increase can be
attributed to increases in general operating expenses.
The Corporation has entered into a lease agreement to open a new branch
office in East Bradford at a local supermarket during the third quarter of 2003.
This and other 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.
-17-
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 JUNE 30,
(Dollars in thousands) 2003 2002
-------------------------------- ----------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS ------- -------- ---- ------- -------- ----
Federal funds sold and other overnight investments $ 29,009 $ 89 1.23% $ 21,877 $ 105 1.92%
Interest bearing deposits in banks 296 1 1.35% 182 1 2.20%
Investment securities
Taxable 119,763 943 3.15% 87,810 1,156 5.27%
Tax-exempt (1) 9,024 100 4.41% 1,784 32 7.21%
--------- ------- ---------- --------
Total investment securities 128,787 1,043 3.24% 89,594 1,188 5.30%
--------- ------- ---------- --------
Loans (2)
Taxable 442,242 7,061 6.39% 438,170 8,028 7.33%
Tax-exempt (1) 6,699 114 6.81% 2,279 41 7.24%
--------- ------- ---------- --------
Total loans 448,941 7,175 6.39% 440,449 8,069 7.33%
--------- ------- ---------- --------
Total interest-earning assets 607,033 8,308 5.47% 552,102 9,363 6.78%
Non-interest earning assets
Allowance for possible loan losses (6,479) (6,668)
Cash and due from banks 25,030 23,563
Other assets 22,222 22,863
--------- ----------
Total assets $ 647,806 $ 591,860
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $ 333,905 $ 672 0.81% $ 277,114 $ 1,020 1.47%
Certificates of deposits and other time 122,723 902 2.94% 147,943 1,466 3.96%
--------- ------- ---------- --------
Total interest bearing deposits 456,628 1,574 1.38% 425,057 2,486 2.34%
Securities sold under repurchase agreements - - 0.00% 584 5 3.42%
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures 5,000 66 5.28% - -
Federal Home Loan Bank advances and
other borrowings 23,180 178 3.05% 21,011 281 5.35%
--------- ------- ---------- --------
Total interest bearing liabilities 484,808 1,818 1.50% 446,652 2,772 2.48%
--------- ------- ---------- --------
Non-interest bearing liabilities
Non-interest bearing demand deposits 107,095 94,514
Other liabilities 5,181 5,090
--------- ----------
Total liabilities 597,084 546,256
Stockholders' equity 50,722 45,604
--------- ----------
Total liabilities and stockholders' equity $ 647,806 $ 591,860
========= ==========
Net interest income $ 6,491 $ 6,591
======= ========
Net yield on interest earning assets 4.28% 4.78%
===== =====
(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 penalty
for 2003 and 2002.
(2) Non-accruing loans are included in the average balance.
-18-
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
SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 2003 2002
--------------------------------- -----------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS ------- -------- ---- ------- -------- ----
Federal funds sold and other overnight investments $ 29,058 $ 181 1.25% $ 20,644 $ 199 1.93%
Interest bearing deposits in banks 269 2 1.49% 203 3 2.96%
Investment securities
Taxable 122,853 2,151 3.50% 83,777 2,168 5.18%
Tax-exempt (1) 5,131 124 4.83% 1,783 65 7.29%
------- -------- ------- ------
Total investment securities 127,984 2,275 3.56% 85,560 2,233 5.22%
------- -------- ------- ------
Loans (2)
Taxable 438,295 14,011 6.39% 439,856 16,362 7.44%
Tax-exempt (1) 5,665 204 7.20% 2,393 92 7.70%
------- -------- ------- ------
Total loans 443,960 14,215 6.40% 442,249 16,454 7.44%
------- -------- ------- ------
Total interest-earning assets 601,271 16,673 5.55% 548,656 18,889 6.89%
Non-interest earning assets
Allowance for possible loan losses (6,475) (6,626)
Cash and due from banks 24,679 23,128
Other assets 21,747 23,041
------- -------
Total assets $641,222 $588,199
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $330,959 $ 1,399 0.85% $278,739 $ 1,980 1.42%
Certificates of deposits and other time 123,484 1,870 3.03% 139,654 3,104 4.45%
------- -------- ------- ------
Total interest bearing deposits 454,443 3,269 1.44% 418,393 5,084 2.43%
Securities sold under repurchase agreements 268 3 2.24% 959 12 2.50%
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures 5,000 129 5.16% - - 0.00%
Federal Home Loan Bank advances and 22,823 358 3.14% 25,918 615 4.75%
------- -------- ------- ------
other borrowings
Total interest bearing liabilities 482,534 3,759 1.56% 445,270 5,711 2.57%
------- -------- ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 103,277 92,525
Other liabilities 5,263 5,138
------- -------
Total liabilities 591,074 542,933
Stockholders' equity 50,148 45,266
------- -------
Total liabilities and stockholders' equity $641,222 $588,199
======= =======
Net interest income $ 12,914 $13,178
======= =======
Net yield on interest earning assets 4.30% 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 penalty
for 2003 and 2002.
(2) Non-accruing loans are included in the average balance.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
INCOME TAXES
Income tax expense for the three- and six-month periods ended June 30,
2003 was $582 thousand and $1.2 million, compared to $509 thousand and $1.2
million in the same periods last year. This represents effective tax rates of
30.1% and 30.0% for the three- and six-month periods ended June 30, 2003,
respectively. The effective tax rate for the three- and six-month periods ended
June 30, 2002 were 28.4% and 29.0%, 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 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, 2003 December 31, 2002 Average Balance
-------------------------- -------------------------- ------------------------
Average Effective Average Effective Dollar Percentage
DEPOSIT TYPE Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- --------- ---------- -------- ----------
NOW Accounts $ 84,581 0.25% $ 79,587 0.38% $ 4,994 6.27%
Money Market 26,324 0.81% 25,430 1.37% 894 3.52%
Statement Savings 61,781 0.90% 53,754 1.44% 8,027 14.93%
Other Savings 1,513 0.93% 1,567 1.34% (54) (3.45%)
CD's Less than $100,000 100,888 2.86% 109,362 4.18% (8,474) (7.75%)
------- -------- -------
Total Core Deposits 275,087 1.41% 269,700 2.23% 5,387 2.00%
Non-Interest Bearing
Demand Deposit Accounts 103,277 - 97,266 - 6,011 6.18%
------- -------- -------
Total Core and Non-Interest
Bearing Deposits 378,364 1.02% 366,966 1.64% 11,398 3.11%
------- -------- -------
Tiered Savings 156,760 1.15% 132,108 1.84% 24,6520 18.66%
CD's Greater than $100,000 22,596 3.80% 25,644 3.52% (3,048) (11.89%)
------- -------- -------
Total Deposits 557,720 1.17% 524,718 1.78% 33,002 6.29%
======= ======= ======
-20-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
The Corporation, as a member of the FHLB, maintains several credit
facilities. As of June 30, 2003 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 $217.3
million. During the three- and six-month periods ending June 30, 2003, average
FHLB advances were approximately $23.2 million and $22.8 million, respectively,
and consisted of term advances representing a combination of maturities in each
period. The average interest rate on these advances was approximately 3.05% and
3.14% 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
$154.3 million or 23.2% of total assets at June 30, 2003 compared with a
negative $190.7 million or 31.9% of total assets at June 30, 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.
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
INTEREST SENSITIVITY ANALYSIS
AS OF JUNE 30, 2003
(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 $ 22,500 $ -- $ -- $ -- $ 22,500
Investment securities 52,613 22,502 48,551 -- 123,666
Interest bearing deposits in banks 391 -- -- -- 391
Loans and leases 193,210 218,295 50,933 (6,156) 456,282
Cash and cash equivalents -- -- -- 38,220 38,220
Premises & equipment -- -- -- 13,645 13,645
Other assets -- -- -- 10,135 10,135
-------- ------- --------- -------- -------
Total assets 268,714 $240,797 $ 99,484 $ 55,844 $664,839
======== ======= ========= ======== =======
LIABILITIES AND CAPITAL
Interest bearing deposits $ -- $ -- $ -- $ 118,964 $118,964
Non-interest bearing deposit 416,004 37,643 -- -- 453,647
FHLB advances and other
borrowings 1,910 2,820 26,638 -- 31,368
Guaranteed Preferred Securities 5,000 -- -- -- 5,000
Other liabilities 117 -- 4,921 -- 5,038
Capital -- -- -- 50,822 50,822
-------- ------- --------- -------- -------
Total liabilities & capital $ 423,031 $ 40,463 $ 31,559 $ 169,786 $664,839
======== ======= ========= ======== =======
Net interest rate
sensitivity gap $(154,317) $200,334 $ 67,925 $(113,942) $ --
========= ======= ========= ======== =======
Cumulative interest rate
sensitivity gap $(154,317) $ 46,017 $ 113,942 $ -- $ --
======== ======= ========= ======== =======
Cumulative interest rate
sensitivity gap divided
by total assets (23.2%) 6.9% 17.1%
======== ======= =========
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.
-22-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
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) 2003 2002 2003 2002
Balance at beginning of period $ 6,389 $ 6,746 $ 6,230 $ 6,344
------- ------- ------- -------
Provision charged to operating expense 373 310 767 780
------- ------- ------- -------
Recoveries of loans previously charged-off 24 15 144 281
Loans charged-off (630) (510) (985) (844)
------- ------- ------- -------
Net loans charged-off (606) (495) (841) (563)
------- ------- ------- -------
Balance at end of period $ 6,156 $ 6,561 $ 6,156 $ 6,561
======= ======= ======= =======
Period-end loans outstanding $462,438 $439,625 $462,438 $439,625
Average loans outstanding $448,941 $440,449 $443,960 $442,249
Allowance for loan losses as a
Percentage of period-end loans outstanding 1.33% 1.49% 1.33% 1.49%
Net charge-offs to average loans
Outstanding 0.13% 0.11% 0.19% 0.13%
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 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 recognized 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. Our 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.
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
NON-PERFORMING LOANS AND ASSETS
June 30, December 31,
(Dollars in thousands) 2003 2002 2002
---- ---- ----
Past due over 90 days and still accruing $ 600 $ 143 $ 321
Non-accrual loans 3,883 2,771 5,216
----- ----- -----
Total non-performing loans 4,483 2,914 5,537
Other real estate owned 3,218 368 368
----- ----- ------
Total non-performing assets $7,701 $3,282 $5,905
===== ===== =====
Non-performing loans as a percentage
of total loans (gross) 0.97% 0.66% 1.24%
Allowance for loan losses as a
percentage of non-performing loans 137.32% 225.19% 112.52%
Allowance for loan losses as a
percentage of total loans and other real
estate owned 1.65% 0.75% 1.32%
Allowance for loan losses as a
percentage of non-performing assets 79.94% 199.94% 105.50%
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, 2003. Other real estate owned
("OREO") represents residential and commercial real estate that had secured
non-performing loans that the Corporation acquired through foreclosure or other
collection efforts and that is held for sale. The increase in OREO from December
31, 2002 to June 30, 2003 is attributable to two loan in principal amounts of
$3.2 million, which had previously been classified as performing. The value of
all 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 $3.9
million, $4.9 million, and $3.2 million at June 30, 2003, December 31, 2002, and
June 30, 2002 respectively. The associated allowance for impaired loans was $388
thousand, $834 thousand and $733 thousand at June 30, 2003, December 31, 2002
and June 30, 2002, respectively.
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
For the three-month and six-month period ended June 30, 2003, activity
in the allowance for impaired loan losses include a provision of $325 thousand
and $528 thousand, charge offs of $60 thousand and $90 thousand, recoveries of
$20 thousand and $30 thousand, respectively. Contractual interest amounted to
$94 thousand for the three-months ended June 30, 2003 and $198 thousand for the
six-months ended June 30, 2003. Cash collected on loans for the three-month and
six-month period ended June 30, 2003 was $1.3 million and $2.0 million,
respectively. The amount applied to principal was $1.0 million and $1.7 million
for the three- and six- month period, respectively, of which $23 thousand and
$47 thousand was applied to interest for the three- and six-month period ended
June 30, 2003, 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, respectively.
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.
BRANCHING AND TECHNOLOGY PROJECTS
In June 2003, the Corporation opened its sixteenth branch located at
258 East Lincoln Highway in Coatesville. In the third quarter of 2003, the
Corporation will open its seventeenth branch. This branch office will be located
in a local supermarket in East Bradford. The Corporation 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 Corporation'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 installed 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 June 30, 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 been computed in
accordance with regulatory accounting policies. The decreases in the Bank
capital ratios from December 31, 2002 to June 30, 2003 are results of an
upstream of cash to the holding company to fund OREO related costs.
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
June 30, December 31, "Well Capitalized"
RISK-BASED ----------------------- ------------
CAPITAL RATIOS 2003 2002 2002 Requirements
- -------------- ---- ---- ---- ------------------
Corporation
-----------
Leverage Ratio 8.42% 7.68% 8.29% 5.00%
Tier I Capital Ratio 10.67% 9.65% 10.83% 6.00%
Total Risk-Based Capital Ratio 11.87% 10.90% 12.08% 10.00%
Bank
Leverage Ratio 7.71% 7.43% 8.05% 5.00%
Tier I Capital Ratio 9.77% 9.33% 10.53% 6.00%
Total Risk-Based Capital Ratio 10.98% 10.57% 11.78% 10.00%
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.
-26-
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 2002 Annual Report
of the Corporation, filed as an exhibit to its Form 10-K for the fiscal year
ended December 31, 2002 with the SEC via EDGAR. Please refer to the
"Management's Discussion and Analysis" section on pages 24-38 of the
Corporation's 2002 Annual Report for additional information.
ITEM 4. CONTROLS AND PROCEDURES
Certifications. Included with this Quarterly Report as Exhibits 31.1, 31.2, 31.3
and 31.4 are four certifications (the "Section 302 Certifications"), one by each
of our principal executive, financial and accounting officers (the "Principal
Officers"). This section of the Quarterly Report contains information concerning
the evaluations of our disclosure controls and procedures and internal control
over financial reporting 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.
Evaluation of Our Disclosure Controls and Procedures. The Securities and
Exchange Commission (the "SEC") requires that as of the end of the quarter
covered by this Report, the Principal Officers evaluate the effectiveness of the
design and operation of our disclosure controls and procedures and report on the
effectiveness of the design and operation of our disclosure controls and
procedures.
"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 SEC. Disclosure controls and procedures are also designed
with the objective of ensuring that such information is accumulated and
communicated to our management, including the Principal Officers, as
appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Our Internal Control Over Financial Reporting. The SEC also
requires that the Principal Officers certify certain matters regarding our
internal control over financial reporting.
"Internal control over financial reporting" means the process designed by, or
under the supervision of, our Principal Officers, and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that: (i)
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the issuer;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer are
being made only in accordance with authorizations of management and directors of
the issuer; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the issuer's
assets that could have a material effect on the financial statements.
Among the matters our Principal Officers certify in the Section 302
Certifications are whether all "significant deficiencies" or "material weakness"
in the design or operation of our internal control over financial reporting that
are likely to adversely affect our ability to record, process, summarize and
report financial information have been disclosed to our auditors and the Audit
Committee of our Board of Directors. "Significant deficiencies" has the same
meaning as the term "reportable conditions" in auditing literature. Both terms
represent deficiencies in the design or operation of internal control over
-27-
CONTROLS AND PROCEDURES - Continued
financial reporting that could adversely affect a company's ability to record,
process, summarize and report financial data consistent with the assertions of
management in a company's financial statements. A "material weakness" is defined
in the auditing literature as a particularly serious reportable condition where
the design or operation of one or more internal control over financial reporting
components 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. A
"material weakness" constitutes a greater deficiency than a "significant
deficiency, but an aggregation of significant deficiencies may constitute a
material weakness in a company's internal control over financial reporting.
Limitations on the Effectiveness of Controls. Our management, including the
Principal Officers, does not expect that our disclosure controls and procedures
or our internal control over financial reporting will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, as opposed to 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 an entity 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, a system of controls 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.
Conclusions about the Effectiveness of the Disclosure Controls and Procedures.
As required by Rule 13a-15(b), the Corporation's management, including our
Principal Officers, conducted an evaluation as of the end of the period covered
by this report, of the effectiveness of the Corporation's disclosure controls
and procedures. Based on that evaluation, the Principal Officers concluded that,
subject to the limitations noted above, our disclosure controls and procedures
are effective to provide reasonable assurance that the disclosure controls and
procedures will meet their objectives.
Changes in Internal control over financial reporting. As required by Rule
13a-15(d), the Corporation's management, including the Principal Officers
conducted an evaluation of the Corporation's internal control over financial
reporting to determine whether any changes occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
Based on that evaluation, there has been no such change during the quarter
covered by this report.
-28-
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, 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.
31.1 Certification of President pursuant to Rule 13a-14(a).
-------------
31.2 Certification of Assistant Treasurer pursuant to Rule 13a-14(a).
-------------
31.3 Certification of Treasurer pursuant to Rule 13a-14(a).
-------------
31.4 Certification of Assistant Treasurer pursuant to Rule 13a-14(a).
-------------
32.1 Certification of President pursuant to 18 U.S.C. Section 1350,
-------------
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Assistant Treasurer pursuant to 18 U.S.C.
-------------
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification of Treasurer pursuant to 18 U.S.C. Section 1350,
-------------
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.4 Certification of Assistant Treasurer pursuant to 18 U.S.C.
-------------
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Indicates document previously filed
-29-
PART II - OTHER INFORMATION - Continued
(b) Reports on Form 8-K
-------------------
A Form 8-K was filed with the SEC on April 28, 2003 pertaining to a
press release announcing the First Quarter 2003 earnings (the
"First 8-K").
A Form 8-K was filed with the SEC on April 28, 2003 with corrected
financial information (the "Second 8-K").
A Form 8-K/A was filed with the SEC on May 1, 2003 to amend the First
8-K to correct certain financial information consistent with the Second
8-K and to amend and restate Item 9.
-30-
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
August 14, 2003 /s/ Charles E. Swope
--------------------
Charles E. Swope
President and CEO
J. Duncan Smith
August 14, 2003 /s/ J. Duncan Smith
-------------------
J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
-31-
Exhibit Index
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, 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.
31.1 Certification of President pursuant to Rule 13a-14(a).
31.2 Certification of Assistant Treasurer pursuant to Rule 13a-14(a).
31.3 Certification of Treasurer pursuant to Rule 13a-14(a).
31.4 Certification of Assistant Treasurer pursuant to Rule 13a-14(a).
32.1 Certification of President pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Assistant Treasurer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.3 Certification of Treasurer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.4 Certification of Assistant Treasurer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Indicates document previously filed
-32-
Exhibit 31.1
CERTIFICATION
I, Charles E. Swope, President and CEO of the Corporation, certify that:
----------------
1. I have reviewed this quarterly report on Form 10-Q of June 30, 2003 of First
Chester County Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
August 14, 2003
/s/ Charles E. Swope
Charles E. Swope
President and CEO
-33-
Exhibit 31.2
CERTIFICATION
-------------
I, Kevin C. Quinn, Assistant Treasurer of the Corporation, certify that:
--------------
1. I have reviewed this quarterly report on Form 10-Q of June 30, 2003 of First
-------------
Chester County Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
August 14, 2003
/s/ Kevin C. Quinn
- ------------------
Kevin C. Quinn
Assistant Treasurer
-34-
Exhibit 31.3
CERTIFICATION
-------------
I, J. Duncan Smith, Treasurer of the Corporation, certify that:
---------------
1. I have reviewed this quarterly report on Form 10-Q of June 30, 2003 of First
Chester County Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
August 14, 2003
/s/ J. Duncan Smith
- -------------------
J. Duncan Smith
Treasurer
-35-
Exhibit 31.4
CERTIFICATION
-------------
I, T. Benjamin Marsho, Assistant Treasurer of the Corporation, certify that:
------------------
1. I have reviewed this quarterly report on Form 10-Q of June 30, 2003 of First
Chester County Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
August 14, 2003
/s/ T. Benjamin Marsho
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T. Benjamin Marsho
Assistant Treasurer
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EXHIBIT 32.1
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, 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.
August 14, 2003 /s/ Charles E. Swope
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Charles E. Swope
President and CEO
-37-
EXHIBIT 32.2
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, 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.
August 14, 2003 /s/ Kevin C. Quinn
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Kevin C. Quinn
Assistant Treasurer
-38-
EXHIBIT 32.3
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, 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.
August 14, 2003 /s/ J. Duncan Smith
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J. Duncan Smith
Treasurer
-39-
EXHIBIT 32.4
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, 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.
August 14, 2003 /s/ T. Benjamin Marsho
----------------------
T. Benjamin Marsho
Assistant Treasurer
-40-