Back to GetFilings.com
November 14, 2003
VIA: EDGARLINK
OFIS Filer Support
SEC Operations Center
6432 General Green Way
Alexandria, VA 22312
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 September 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, Wachovia 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 September 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
November 10, 2003 was 4,519,405.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Income
Three and Nine-Months Ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows
Nine-Months Ended September 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands) September 30, December 31,
2003 2002*
------------- ------------
ASSETS
Cash and due from banks $ 27,320 $ 31,777
Federal funds sold and other overnight investments - 17,000
Interest Bearing Deposits in banks 550 90
-------- ---------
Total cash and cash equivalents 27,870 48,867
-------- ---------
Investment securities held-to-maturity (market value of $31 at
September 30, 2003 and $34 at December 31, 2002, respectively) 29 31
-------- ---------
Investment securities available-for-sale, at market value 138,785 128,344
-------- ---------
Loans 502,377 447,682
Less: allowance for possible loan and lease losses (5,473) (6,230)
-------- ---------
Net loans 496,904 441,452
-------- ---------
Premises and equipment 13,714 13,944
Other assets 10,568 7,372
-------- ---------
Total assets $ 687,870 $ 640,010
======== =========
LIABILITIES
Deposits
Noninterest-bearing $ 116,468 $ 109,012
Interest-bearing (including certificates of deposit over $100 457,707 449,726
-------- ---------
of $21,956 and $22,845 - September 30, 2003 and
December 31, 2002 respectively)
Total deposits 574,175 558,738
Securities sold under repurchase agreements - -
Federal Home Loan Bank advances and other borrowings 52,958 22,678
Guaranteed preferred beneficial interest in Corporation's subordinated
debentures 5,000 5,000
Other liabilities 4,474 4,982
-------- ---------
Total liabilities 636,607 591,398
-------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
outstanding, 4,799,666 at September 30, 2003 and December 31, 2002. 4,800 4,800
Additional paid-in capital 1,490 860
Retained earnings 48,849 46,746
Accumulated other comprehensive income 618 1,378
Treasury stock, at cost: September 30, 2003 - 281,201 December 31,
2002 - 307,202 (4,494) (5,172)
-------- ---------
Total stockholders' equity 51,263 48,612
-------- ---------
Total liabilities and stockholders' equity $ 687,870 $ 640,010
======== ========
* Derived from audited, consolidated financial statements included in Annual
Report on Form 10-K for the fiscal year ended 12/31/02. The accompanying notes
are an integral part of these statements.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands - except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
----- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 7,270 $ 7,854 $ 21,416 $ 24,276
Investment securities 1,084 1,315 3,318 3,526
Federal funds sold and other overnight investments 24 104 205 304
Deposits in Banks 1 - 2 3
------- ------- ------- --------
Total interest income 8,379 9,273 24,941 28,109
------- ------- ------- --------
INTEREST EXPENSE
Deposits 1,390 2,301 4,659 7,385
Securities sold under repurchase agreements - 6 3 18
Guaranteed preferred beneficial interest in corporations
subordinated debentures 61 65 190 65
Federal Home Loan Bank advances and other borrowings 270 262 628 878
------- ------- ------- --------
Total interest expense 1,721 2,634 5,480 8,346
------- ------- ------- --------
Net interest income 6,658 6,639 19,461 19,763
Provision for possible loan and lease losses 860 875 1,627 1,655
------- ------- ------- --------
Net interest income after provision
for possible loan and lease losses 5,798 5,764 17,834 18,108
------- ------- ------- --------
NON-INTEREST INCOME
Financial management services 825 799 2,477 2,361
Service charges on deposit accounts 495 489 1,540 1,358
Investment securities gains, net 130 - 389 121
Operating lease rental income 221 194 669 563
Gains and fees on the sale of residential mortgages 131 279 935 469
Gain on the sale of credit card portfolio - - 306 -
Other 584 607 1,635 1,717
------- ------- ------- --------
Total non-interest income 2,386 2,368 7,951 6,589
------- ------- ------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,660 3,398 11,161 10,273
Net occupancy, equipment and date processing 1,394 1,225 4,105 3,669
Depreciation expense on operating leases 172 176 511 494
FDIC deposit insurance 23 22 66 65
Bank shares tax 131 126 362 354
Professional services 306 289 816 916
Other 1,058 925 3,175 2,983
------- ------- ------- --------
Total non-interest expense 6,744 6,161 20,196 18,754
------- ------- ------- --------
Income before income taxes and cumulative effect
of change in accounting for income taxes 1,440 1,971 5,589 5,943
INCOME TAXES 431 569 1,677 1,719
------- ------- ------- --------
NET INCOME $ 1,009 $ 1,402 $ 3,912 $ 4,224
======= ======= ======= ========
PER SHARE DATA
Basic earnings per common share $ 0.22 $ 0.32 $ 0.88 $ 0.96
======== ======== ======== =========
Diluted earnings per common share $ 0.22 $ 0.32 $ 0.86 $ 0.95
======== ======== ======== =========
Dividends declared $ 0.135 $ 0.130 $ 0.405 $ 0.390
======= ======= ======= ========
Basic weighted average shares outstanding 4,489,097 4,442,544 4,462,303 4,422,813
========== ========= ========= =========
Diluted weighted average shares outstanding 4,639,712 4,436,555 4,573,152 4,448,101
========== ========= ========= =========
The accompanying notes are an integral part of these statements.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
(Dollars in thousands) 2003 2002
---- ----
OPERATING ACTIVITIES
Net Income $ 3,912 $ 4,224
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,128 1,962
Provision for possible loan and lease losses 1,627 1,655
Amortization of investment security premiums
and accretion of discounts 1,551 367
Amortization of deferred fees on loans 277 (260)
Investment securities gains, net (389) (121)
(Increase) decrease in other assets (3,956) 531
Decrease in other liabilities (508) (608)
-------- --------
Net cash provided by operating activities $ 4,642 $ 7,750
-------- --------
INVESTING ACTIVITIES
(Increase) Decrease in loans (56,717) 4,837
Proceeds from sales of investment securities available-for-sale 15,604 20,066
Proceeds from maturities of investment securities available-for-sale 63,261 8,578
Purchases of investment securities available-for-sale (91,105) (63,783)
Purchase of premises and equipment, net (1,898) (626)
-------- --------
Net cash (used in) investing activities $ (70,855) $ (30,928)
-------- --------
FINANCING ACTIVITIES
Increase (decrease) in Federal Home Loan Bank advances 30,280 (3,766)
Increase in deposits 15,437 33,746
Decrease in securities sold under repurchase agreement - (13,674)
Cash dividends paid (1,809) (1,726)
Proceeds from issuance of guaranteed preferred beneficial interest in Corporation's
subordinated debentures - 5,000
Treasury stock transactions 1,308 24
-------- --------
Net cash provided by financing activities 45,216 19,604
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (20,997) (3,574)
Cash and cash equivalents at beginning of period 48,867 38,233
-------- --------
Cash and cash equivalents at end of period $ 27,870 $ 34,659
======== ========
The accompanying notes are an integral part of these statements.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information. In the opinion of Management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position and the results of
operations for the interim period presented have been included. These
interim financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in
our Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
2. The results of operations for the three- and nine-month periods ended
September 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
September 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 other financial statements. Other comprehensive income (loss) net
of taxes for the three- and nine-month periods ended September 30,
2003 was ($557) thousand and ($761) thousand, compared to $435
thousand and $1.1 million 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 nine-month
periods ended September 30, 2003 was $452 thousand and $3.2 million,
compared to $1.8 million and $5.3 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 September 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.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
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.
7. 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 September 30, 2003 were $9.5 million, and they
expire through May 31, 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.
8. 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 adoption of the
provisions of FIN 46 is not
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
expected to have a material impact on the financial condition or
results of operation of the Corporation.
The Corporation has 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. On November 13, 2003, the Corporation issued an
additional $10.0 million of subordinated debentures. Management
intends to treat this new issuance the same as the one held by First
Chester County Capital Trust I.
9. Stock-based Compensation
At September 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.
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (in thousands) As reported $ 1,009 $ 1,402 $ 3,912 $ 4,224
Stock-based compensation costs determined
under fair value method for all awards $ (35) $ (182) $ (104) $ (313)
------- ------ ----- ------
Pro forma net income $ 974 $ 1,220 $ 3,808 $ 3,911
Earnings per share (Basic) As reported $ 0.22 $ 0.32 $ 0.88 $ 0.96
Pro forma $ 0.21 $ 0.28 $ 0.86 $ 0.89
Earnings per share (Diluted) As reported $ 0.22 $ 0.32 $ 0.86 $ 0.95
Pro forma $ 0.21 $ 0.28 $ 0.84 $ 0.88
Note: There were no options granted during the three-and nine-month
periods ended September 30, 2003.
10. 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.
11. 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 the
guaranteed preferred beneficial interest in the Corporation's
subordinated debt held by the Trust referred to in Note 7 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.
12. In October 2003, the AICPA issued SOP 03-3, "Accounting for Loans or
Certain Debt Securities Acquired in a Transfer." SOP 03-3 applies to
a loan with evidence of deterioration in credit quality subsequent to
its origination that is acquired by completion of a transfer (as
defined in SOP 03-3), for which it is probable at acquisition of such
loan, that the acquirer will be unable to collect all contractually
required payments receivable. SOP 03-3 requires that the acquirer
recognize the excess of all cash flows expected at acquisition over
the investor's initial investment
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
in the loan as interest income on a level-yield basis over the life
of the loan as the accretable yield. The loan's contractual required
payments receivable in excess of the amount of its cash flows
expected at acquisition (nonaccretable difference) should not be
recognized as an adjustment to yield, a loss accrual or a valuation
allowance for credit risk. SOP 03-3 is effective for loans acquired
in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP
03-3.
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 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.
It is with deepest regret that First Chester County Corporation and its
wholly-owned subsidiary, First National Bank of Chester County, announced that
on November 8, 2003, Dr. Charles E. Swope, Chairman, President and Chief
Executive Officer passed away. On November 13, 2003, the Board of Directors
announced the election of John A. Featherman, III, as Chief Executive Officer
and Chairman of the Boards of the Corporation and the Bank and Mr. Kevin C.
Quinn as President of the Corporation and the Bank. Mr. Quinn was also and
elected to the Boards of Directors of the Corporation and the Bank.
Mr. Featherman, former President of the Chester County Bar Association and
former Chairman of the Chester County Community Foundation, is active in many
community organizations. Mr. Featherman was most recently with the law firm of
MacElree Harvey, Ltd., and has served on the Boards of the bank and the
corporation since 1985. Kevin Quinn, a respected banker and community leader in
Chester County, has more than 25 years of banking and financial management
experience and is well known in the banking industry throughout Pennsylvania. He
joined First National Bank of Chester County in 1983 and has held several senior
posts since then. In 1990, Quinn was promoted to Senior Vice President and
managed the bank's Trust and Investment Services Division. In 1997, Quinn was
promoted to Executive Vice President. In 2002, he was promoted to Chief
Operating Officer. Since then, Quinn has been responsible for the day-to-day
operations of the Bank.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The Corporation considers that the determination of the allowance for possible
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 September 30, 2003 was $1.009
million, a decrease of $393 thousand or 28.03% from $1.402 million for the same
period in 2002. Net income for the nine-month period ended September 30, 2003
was $3.912 million, a decrease of $312 thousand or 7.39% from $4.224 million for
the same period in 2002. Earnings for the three-month period ended September 30,
2003 include gains and fees of $131 thousand from the sale of residential
mortgages and gains of $130 thousand on the sale of investment securities.
Earnings for the nine-months ended September 30, 2003 include gains of $306
thousand from the sale of the $2.7 million credit card portfolio to Elan
Financial Services, $389 thousand on the sale of investment securities, and $935
thousand in gains and fees from the sale of residential mortgages. For both the
three- and nine-month periods ended September 30, 2003, gains were offset by a
decrease in net interest income yields resulting from the current interest rate
environment and by increased operating costs. Additionally, net income for both
periods was impacted by additions to the provision for possible loan and lease
losses. The additional provisions were made, in part due, to the recent flooding
and hurricane related weather in Chester County. Subsequent to September 30,
2003, there was a sale of two OREO (Other Real Estate Owned) properties with a
gain of $1.031 million. In addition, $10.0 million in preferred capital
securities were issued for the purpose of raising additional capital for general
corporate purposes. Please see section titled "Post Balance Sheet Events" for
more details.
Basic earnings per share were $0.22 and $0.88 for the three- and nine-month
periods ended September 30, 2003, respectively, compared to $0.32 and $0.96 for
the same periods in 2002. Cash dividends declared during the second quarters of
2003 were $0.135 and $0.405 per share for the three- and nine-month periods
compared to $0.130 per share and $0.390 per share for the three- and nine-month
periods ended September 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
AVERAGE INTEREST RATES
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------
2003 2002 2003 2002
------ ------ ------ ------
SELECTED RATIOS
Return on Average Assets 0.60% 0.92% 0.80% 0.95%
Return on Average Equity 8.01% 11.86% 10.39% 12.26%
Net Interest Margin* 4.32% 4.71% 4.28% 4.76%
Earnings Retained 39.84% 58.92% 53.76% 59.14%
Dividend Payout Ratio 60.16% 41.08% 46.24% 40.86%
Book Value Per Share $11.35 $10.73 $11.35 $10.73
* On a tax equivalent basis
The "Consolidated Average Balance Sheet" on pages 19 and 20 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 nine-month periods ended September 30,
2003, on a tax equivalent basis, was $6.8 million and $19.6 million, compared to
$6.7 million and $19.8 million for the same periods in 2002. This represents an
increase of 1.7% for the three month period, and a decrease of 1.0% for the
nine-month period, ended September 30, 2003 compared to the same periods last
year. The increase in the three-month period can be attributed to an increase in
the average interest-earning asset balances and lower yields paid on
interest-earning liabilities, partially offset by a decrease in the net-yield in
interest-earning assets and an increase in the volume of interest-bearing
liabilities. The decrease in the nine-month period 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 nine-month period ended September 30, 2003 decreased 8.28% or
39 basis points (one basis point is equal to 1/100 of a percent) and 10.08% or
48 basis points to 4.32% and 4.28%, compared to 4.71% and 4.76% for the same
periods in 2002, respectively. The average yield on interest-earning assets for
the three- and nine-month period ended September 30, 2003 decreased 17.6% or 116
basis points and 19.1% or 129 basis points to 5.42% and 5.48% compared to 6.58%
and 6.77% for the same periods in 2002. The average yield paid on
interest-bearing liabilities for the three- and nine-month period ended
September 30, 2003 decreased 40.9% or 94 basis points and 39.7% or 98 basis
points to 1.36% and 1.49% compared to 2.30% and 2.47% for the same periods in
2002, respectively. Yields on interest-earning assets decreased primarily due to
the falling interest rate environment. Additionally, the low interest
environment has resulted in a substantial decrease in yields as loans have been
repriced at current market rates on both contractual and negotiated basis.
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 has put pressure on our net-interest
margin and will continue to adversely impact net-interest income in future time
periods.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Average interest-earning assets for the third quarter of 2003 were $627.4
million an increase of 10.9% compared to $565.7 million of average
interest-earning assets in the same period last year. For the nine-months ended
September 30, 2003, average interest-earning assets increased 10.0% to $610.1
million compared to $554.4 million of average interest-earning assets in the
same period last year.
Average interest-bearing liabilities increased approximately $50.1 million
or 11.0% to $507.4 million for the three-months ended September 30, 2003, from
$457.3 million in the same period last year. For the nine-months ended September
30, 2003, average interest-bearing liabilities increased $40.7 million or 9.0%
to $490.9 million from $450.2 million in the same period last year. The increase
in average interest-bearing liabilities for the three-month period was the
result of a 6.5% or $28.1 million increase in interest-bearing deposits and a
120.9% or $22.1 million increase in FHLB advances and other borrowings. The
increase in average interest-bearing liabilities for the nine-month period was
the result of a 7.9% or $33.4 million increase in interest-bearing deposits,
23.1% or $5.4 million increase in FHLB advances and other borrowings, and the
funds obtained from the issuance of the trust preferred securities.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------
2003 2002 2003 2002
------ ------ ------- ------
YIELD ON
Interest-Earning Assets 5.42% 6.58% 5.48% 6.77%
Interest Bearing Liabilities 1.36% 2.30% 1.49% 2.47%
---- ---- ---- ----
Net Interest Spread 4.06% 4.28% 3.99% 4.30%
Contribution of Interest-Free Funds 0.26% 0.43% 0.29% 0.46%
---- ---- ---- ----
Net Yield on Interest-Earning Assets 4.32% 4.71% 4.28% 4.76%
==== ==== ==== ====
FEDERAL FUNDS SOLD AND OTHER OVERNIGHT INVESTMENTS
Interest income on Federal funds sold and other overnight investments for
the three- and nine-month periods ended September 30, 2003, decreased 76.9% and
32.3% to $24 thousand and $205 thousand, respectively, when compared to the same
periods in 2002. The decrease in interest income on Federal funds sold and other
overnight investments for the three-month period is the direct result of
decreases in the average balance of federal funds sold and other overnight
investments of $13.2 million or 58.5% and an 82 basis point decrease in rates
earned on such investments. The decrease in interest income on Federal funds
sold and other overnight investments for the nine-month period is the direct
result of a 35.5% or 67 basis point decrease in rates earned partially offset by
a 5.2% increase in the average balance. Decreases for both periods can be
attributed to excess funds being used to support loan growth and management's
decision to deploy any excess funds into higher yielding security.
INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities for the
three-month period ended September 30, 2003 decreased 12.3% to $1.2 million and
3.2% to $3.4 million for the nine-month period ended September 30, 2003, when
compared to the same periods in 2002. The decreases in interest income on
investment securities for the three- and nine-month periods ended September 30,
2003 are primarily the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
result of a 30.0% or 152 basis point decrease in the three-month period and a
31.0% or 160 basis point decrease in the yield earned on investment securities,
partially offset by a 25.1% and a 40.2% increase, respectively, in the average
investment security balance when compared to the same period last year. Interest
income on investment securities was also negatively impacted by rapid prepayment
of mortgage backed securities during the period. Increases in the average
investment security balances for the three- and nine-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 and management's decision to
invest excess funds in higher yielding security.
LOANS AND LEASES
Interest income on loans, on a tax equivalent basis, generated by the
Corporation's loan portfolio decreased 7.1% and 11.8% to $7.3 million and $21.4
million for the three- and nine-month periods ending September 30, 2003,
respectively, compared to the same periods last year. The decrease for both
periods is the direct result of 117 and 111 basis point decreases in the yield
earned on the portfolio partially offset by an increase in average balances of
$48.3 million or 11.0% for the three-month period and $17.4 million or 4.0% for
the nine-month period as compared to the same periods in 2002, reflecting in
part, the Bank's continued focus to attract quality loans. Additionally, the low
interest rate environment has resulted in substantial decreases in yields as
loans have been repriced at current market rates on both contractual and
negotiated basis as well as refinancing. The continuation of the low rate
environment will continue to bring the yield down further. These increases
include the effect of the sale of the Bank's credit card portfolio to "Elan"
Financial Services. See "Non-Interest Income" for more details.
DEPOSIT ACCOUNTS
Interest expense on deposit accounts for the three- and nine-month period
ended September 30, 2003 decreased 39.5% and 36.9% to $1.4 million and $4.7
million, respectively, when compared to the same periods in 2002. The decreases
are the result of a 92 and 96 basis point, or 43.4% and 41.4%, decreases,
respectively, in rates paid on interest-bearing deposits, partially offset by
6.5% and 7.9%, respectively, increases in the average interest-bearing deposit
balance to $462.0 million and $457.0 million for the three- and nine-month
period ended September 30, 2003, compared to the same periods last year.
Competition for deposits from local community banks as well as non-banking
institutions such as credit union and mutual fund companies continues to be
strong. Despite this competition, the Corporation's deposit base continues to
grow and is expected to grow as we continue to open new branches and attract new
customers with new services. Total deposits continue to grow in our new branches
as well as at our existing sites. On September 2, 2003, the Corporation
officially opened its 17th Branch Office at the Giunta's Supermarket in West
Chester. This Branch is open seven days a week (9:00 a.m. to 7:00 p.m.),
providing full-service banking and financial services. In June 2003, the
Corporation also opened its 16th Branch Office located at 258 East Lincoln
Highway in Coatesville.
FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Interest expense on Federal Home Loan Bank (FHLB) advances and other
borrowings for the three-month period ended September 30, 2003 increased 3.1% to
$270 thousand from $262 thousand compared to the same period in 2002. This
increase is primarily the result of a 120.9% increase in the average balance on
such borrowings partially offset by a 306 basis point or 53.3% decrease in rates
paid on such
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
borrowings. The interest expense on FHLB advances and other borrowings for the
nine-month period ended September 30, 2003 decreased $252 thousand or 28.7%. The
decrease can be attributed to a 211 basis point or 42.0% decrease in the rates
paid partially offset by a $5.4 million or 23.1% increase in the average balance
of such borrowings. Borrowings have increased during the third quarter of 2003,
as the Corporation has taken advantage of the low interest rates to support
increases in interest-earning assets. 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 POSSIBLE LOAN AND LEASE LOSSES
The Corporation recorded a provision for possible loan and lease losses for
the three- and nine-month periods ended September 30, 2003 of $860 thousand and
$1.6 million, respectively, compared to $875 thousand and $1.7 million for the
same periods in 2002. The allowance for loan losses as a percentage of total
loans was 1.09% at September 30, 2003, 1.44% at September 30, 2002 and 1.39% at
December 31, 2002, respectively. The addition to the provisions were made, in
part due, to the recent flooding and hurricane related weather in Chester
County. Management believes that the allowance for loan losses is adequate based
on its current assessment of probable and estimated losses. See the section
titled "Allowance for Possible Loan and Lease Losses" for additional discussion.
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 SEPTEMBER 30,
(Dollars in thousands)
2003 2002
--------------------------------- ----------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Federal funds sold and other overnight investments $ 9,405 $ 24 1.02% $ 22,651 $ 104 1.84%
Interest bearing deposits in banks 617 1 0.65% 224 1 1.79%
Investment securities
Taxable 109,200 917 3.36% 102,782 1,293 5.03%
Tax-exempt (1) 21,650 245 4.53% 1,796 32 7.18%
------- ------ ------- ------
Total investment securities 130,850 1,162 3.55% 104,578 1,325 5.07%
------- ------ ------- ------
Loans (2)
Taxable 476,879 7,182 6.02% 435,956 7,822 7.18%
Tax-exempt (1) 9,652 130 5.39% 2,254 47 8.39%
------- ------ ------- ------
Total loans 486,531 7,312 6.01% 438,210 7,869 7.18%
------- ------ ------- ------
Total interest-earning assets 627,403 8,499 5.42% 565,663 9,300 6.58%
Non-interest earning assets
Allowance for possible loan losses (6,223) (6,565)
Cash and due from banks 27,562 25,606
Other assets 25,129 22,882
------- -------
Total assets $673,871 $607,586
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $344,644 $ 591 0.69% $301,854 $ 1,033 1.37%
Certificates of deposits and other time 117,394 800 2.73% 132,108 1,268 3.84%
------- ------ ------- ------
Total interest bearing deposits 462,038 1,391 1.20% 433,962 2,301 2.12%
Securities sold under repurchase agreements - - - 591 6 4.06%
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures 5,000 61 4.81% 4,457 65 5.75%
Federal Home Loan Bank advances and
other borrowings 40,335 270 2.68% 18,262 262 5.74%
------- ------ ------- ------
Total interest bearing liabilities 507,373 1,722 1.36% 457,272 2,634 2.30%
------- ------ ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 111,154 97,647
Other liabilities 4,967 5,401
------- -------
Total liabilities 623,494 560,320
Stockholders' equity 50,377 47,266
------- -------
Total liabilities and stockholders' equity $673,871 $607,586
======= =======
Net interest income $ 6,777 $ 6,666
====== ======
Net yield on interest earning assets 4.32% 4.71%
==== ====
(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.
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
NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 2003 2002
------------------------------- -----------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Federal funds sold and other overnight investments $ 22,435 $ 205 1.22% $ 21,320 $ 303 1.89%
Interest bearing deposits in banks 386 2 0.69% 210 3 1.90%
Investment securities
Taxable 118,252 3,069 3.46% 90,182 3,460 5.12%
Tax-exempt (1) 10,698 377 4.70% 1,787 100 7.44%
------- ------ ------- ------
Total investment securities 128,950 3,446 3.56% 91,969 3,560 5.16%
------- ------ ------- ------
Loans (2)
Taxable 451,297 21,078 6.23% 438,541 24,135 7.34%
Tax-exempt (1) 7,009 338 6.42% 2,347 141 7.98%
------- ------ ------- ------
Total loans 458,306 21,416 6.23% 440,888 24,276 7.34%
------- ------ ------- ------
Total interest-earning assets 610,077 25,069 5.48% 554,387 28,142 6.77%
Non-interest earning assets
Allowance for possible loan losses (6,390) (6,605)
Cash and due from banks 25,651 23,963
Other assets 22,886 23,987
------- -------
Total assets $652,224 $594,732
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $335,570 $ 1,990 0.79% $286,529 $ 3,012 1.40%
Certificates of deposits and other time 121,432 2,669 2.93% 137,111 4,373 4.25%
------- ------ ------- ------
Total interest bearing deposits 457,002 4,659 1.36% 423,640 7,385 2.32%
Securities sold under repurchase agreements 178 5 3.75% 835 18 2.87%
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures 5,000 190 5.07% 2,384 65 5.75%
Federal Home Loan Bank advances and 28,724 626 2.91% 23,338 878 5.02%
------- ------ ------- ------
other borrowings
Total interest bearing liabilities 490,904 5,480 1.49% 450,197 8,346 2.47%
------- ------ ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 105,932 94,251
Other liabilities 5,163 4,344
------- -------
Total liabilities 601,999 548,792
Stockholders' equity 50,225 45,940
------- -------
Total liabilities and stockholders' equity $652,224 $594,732
======= =======
Net interest income $19,589 $19,796
====== ======
Net yield on interest earning assets 4.28% 4.76%
==== ====
(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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
NON-INTEREST INCOME
Total non-interest income for the three- and nine-month periods ended is
September 30, 2003, increased 0.8% or $18 thousand and 20.7% or $1.4 million
compared to the same periods in 2002, respectively. The various components of
non-interest income are discussed below.
The largest component of non-interest income is Financial Management
Services ("FMS") revenue, which increased 3.3% and 4.9% to $825 thousand and
$2.5 million for the three- and nine-month periods ending September 30, 2003,
respectively, compared to September 30, 2002. The market value of FMS assets
under management custody grew $22.7 million, or 4.6%, from $495.6 million at
September 30, 2002 to $518.2 million at September 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
through 2003. 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.
Better performance in recent months as well as strong business development
efforts should improve this component.
Service charges on deposit accounts increased approximately 1.2% to $495
thousand for the three-months ended September 30, 2003 compared to $489 thousand
for the same period in 2002. For the nine-month period ended September 30, 2003,
service charges on deposit accounts increased 13.4% to $1.5 million compared to
$1.4 million 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 a new fee schedule which became effective February
15, 2003 also contributed to the increases.
Gains on the sale of investment securities also contributed to the increase
in non-interest income. For the three-month period ended September 30, 2003,
gains on the sale of investment securities were $130 thousand, as compared to
zero for the same period last year. For the nine-month period ended September
30, 2003, gains on sale of investment securities increased 221.5% from $121
thousand to $389 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 customers; this
income is classified as "Rental Income". Rental income on operating lease
agreements for the three-month period ended September 30, 2003 increased $27
thousand or 13.9% from $194 thousand to $221 thousand when compared to the same
period in 2002. For the nine-month period, rental income increased $106 thousand
or 18.8% from $563 thousand to $669 thousand when compared to the same period in
2002. The depreciation associated with these operating leases is classified as
depreciation on operating leases, as other expense.
Gains and fee income generated in the sale of Residential Mortgage loans
for the three-month period ended September 30, 2003 decreased $148 thousand from
$279 thousand to $131 thousand compared to the same period in 2002. For the
nine-month period, gains on sale of residential mortgages increased $466
thousand from $469 thousand to $935 thousand when compared to the same period
last year. The decrease in the three-month period is primarily the result of a
rapid increase in mortgage rates which resulted in a decline in refinancing
activity during the period. The increase in the nine-month period is primarily
the result of a high volume of residential mortgage sales due to higher
originations of residential mortgage resulting from record low mortgage interest
rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Gains on the sale of credit card portfolio also contributed to the increase
in non-interest income. 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.
Other non-interest income decreased $23 thousand and $82 thousand for the
three- and nine-months ended September 30, 2003 when compared to the same
periods in 2002 from $607 thousand and $1.7 million to $584 thousand and $1.6
million, respectively. Other non-interest income decreased as a result of lower
gains on sale of fixed assets and OREO when compared to the previous year and
decreases in miscellaneous loan fee income.
NON-INTEREST EXPENSE
Total non-interest expense for the three- and nine-month periods ended
September 30, 2003 increased 9.5% to $6.7 million and $7.7% to $20.2 million,
compared to the same periods in 2002. The various components of non-interest
expense are discussed below.
Employee salaries and benefits increased 7.7% to $3.7 million and 8.6% to
$11.2 million for the three-month and nine-month periods ended September 30,
2003, respectively, compared to the same periods in 2002. Increased staff for
our Customer Contact Center, Loan Administration department, and our two new
branches, annual employee raises, and a proportional increase in employee
benefits are primarily responsible for the increases. At September 30, 2003, the
Corporation employed 258 full time and 34 part time employees compared to 235
full time and 49 part-time in September 30, 2002.
Net occupancy, equipment, and data processing expense increased 13.8% to
$1.4 million and 11.9% to $4.1 million for the three- and nine-month periods
ended September 30, 2003, respectively, compared to the same periods last year.
The increases are the direct result of the opening of two full service branches
during 2003. The increases are also 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
personal computers and our networking infrastructure contributed to the
increase.
Depreciation on operating leases decreased 2.3% from $176 thousand to $172
thousand for the three-month period ended September 30, 2003. For the nine-month
period, depreciation on operating leases increased 3.4% from $494 thousand to
$511 thousand compared to the same period last year. This depreciation expense
is the result of operating lease agreements the Corporation has with several of
its customers. The income associated with these operating leases is classified
as Rental Income.
Professional Services increased 5.9% to $306 thousand for the three-month
period ended September 30, 2003 compared to the same period in 2002.
Professional services for the nine-month period decreased 10.9% from $916
thousand to $816 thousand compared to the same period last year. The increase in
the three-month period is the result of increased legal fees compared to last
year. The decrease in the nine-month period is the result of a decrease in
consultant and employee recruiting costs compared to the previous year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Total other non-interest expense increased 14.4% and 6.4% to $1.1 million
and $3.2 million for the three- and nine-month period ended September 30, 2003
compared to the same periods last year, respectively. The increase for both
periods is partially attributed to increases in operating supplies, bank
telephone, and general operating expenses related to the opening of our two new
branches.
Planning for additional branch sites continues. The Corporation believes
that the costs associated with the opening of new branch sites will have a
direct impact on all the components of non-interest expense. It is anticipated
that the increase in costs will be offset, over time, by an increase in net
interest and fee income generated by business in the new marketing areas.
INCOME TAXES
Income tax expense for the three- and nine-month periods ended September
30, 2003 was $431 thousand and $1.7 million, compared to $569 thousand and $1.7
million in the same periods last year. This represents effective tax rates of
29.9% and 30.0% for the three- and nine-month periods ended September 30, 2003,
respectively. The effective tax rate for the three- and nine-month periods ended
September 30, 2002 were 28.8% and 28.9%, 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
borrowings, 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 deposits to comprise its "core" deposit base because
of the historical stability of such funds. Additional liquidity comes from the
Corporation's non-interest bearing demand deposit accounts and credit
facilities. Other deposit sources include a 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:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
DEPOSIT ANALYSIS
(Annualized)
(Dollars in thousands) September 30, 2003 December 31, 2002 Average Balance
------------------------- ------------------------- ------------------------
Average Effective Average Effective Dollar Percentage
DEPOSIT TYPE Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- --------- ---------- -------- ----------
NOW Accounts $87,550 0.22% $ 79,587 0.38% $ 7,963 10.01%
Money Market 25,977 0.76% 25,430 1.37% 547 2.15%
Statement Savings 62,535 0.83% 53,754 1.44% 8,781 16.34%
Other Savings 1,597 0.92% 1,567 1.34% 30 1.91%
CD's Less than $100,000 98,709 3.02% 109,362 4.18% (10,653) (9.74%)
------- ------- ------
Total Core Deposits 276,368 1.41% 269,700 2.23% 6,668 2.47%
Non-Interest Bearing
Demand Deposit Accounts 105,932 - 97,266 - 8,666 8.91%
------- ------- ------
Total Core and Non-Interest
Bearing Deposits 382,300 1.02% 366,966 1.64% 15,334 4.18%
------- ------- ------
Tiered Savings 157,911 1.10% 132,108 1.84% 25,803 19.53%
CD's Greater than $100,000 22,723 2.55% 25,644 3.52% (2,921) (11.39%)
------- ------- ------
Total Deposits $562,934 $524,718 $38,216 7.28%
======= ======= ======
The Corporation, as a member of the FHLB, maintains several credit
facilities with the FHLB. As of September 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 $134.7 million. During the three- and nine-month periods
ending September 30, 2003, average FHLB advances were approximately $40.3
million and $28.7 million, respectively, and consisted of term advances
representing a combination of maturities in each period. The average interest
rate on these advances was approximately 2.68% and 2.91% 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 $108.3 million or
15.7% of total assets at September 30, 2003 compared with a negative $80.8
million or 13.3% of total assets at September 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
quarter end, results 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.
INTEREST SENSITIVITY ANALYSIS
AS OF SEPTEMBER 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 $ -- $ -- $ -- $ -- $ --
Investment securities 49,929 27,659 61,226 -- 138,814
Interest bearing deposits in banks 550 -- -- -- 550
Loans and leases 181,711 234,643 86,023 (5,473) 496,904
Cash and due from banks -- -- -- 27,320 27,320
Premises & equipment -- -- -- 13,714 13,714
Other assets -- -- -- 10,568 10,568
----------- ---------- ---------- --------- ----------
Total assets $ 232,190 $ 262,302 $ 147,249 $ 46,129 $ 687,870
=========== =========== ========== ========= ===========
LIABILITIES AND CAPITAL
Interest bearing deposits $ -- $ -- $ -- $ 116,468 $ 116,468
Non-interest bearing deposit 311,903 29,014 116,790 -- 457,707
FHLB advances and other
borrowings 23,604 17,583 11,771 -- 52,958
Guaranteed Preferred Securities 5,000 -- -- -- 5,000
Other liabilities -- -- -- 4,474 4,474
Capital -- -- -- 51,263 51,263
----------- ---------- ---------- ---------- ----------
Total liabilities & capital $ 340,507 $ 46,597 $ 128,561 $ 172,205 $ 687,870
=========== ========== ========== ========== ==========
Net interest rate
sensitivity gap $ (108,317) $ 215,705 $ 18,688 $ ( 126,076) $ --
========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap $ (108,317) $ 107,388 $ 126,076 $ -- $ --
========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap divided
by total assets (15.7%) 15.6% 18.3%
========== ========== =========
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
The allowance for possible loan and lease 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
AND COMPARISON OF LOANS OUTSTANDING
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
(Dollars in thousands) 2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning of period $ 6,156 $ 6,561 $ 6,230 $ 6,344
------- ------
Provision charged to operating expense 860 875 1,627 1,655
------- ------ --------
Recoveries of loans previously charged-off 32 23 176 305
Loans charged-off (1,575) (1,084) (2,560) (1,929)
------- ------ ------- --------
Net loans charged-off (1,543) (1,061) (2,383) (1,624)
------- ------- ------- --------
Balance at end of period $ 5,473 $ 6,375 $ 5,473 $ 6,375
======= ======= =======
Period-end loans outstanding $502,377 $442,504 $502,377 $442,504
Average loans outstanding $486,531 $438,210 $458,306 $440,888
Allowance for loan losses as a
Percentage of period-end loans outstanding 1.09% 1.44% 1.09% 1.44%
Net charge-offs to average loans
Outstanding 0.32% 0.24% 0.52% 0.37%
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 nine-month period the increase in charge-offs is
principally due to management's decision to write-down additional amounts on
loans previously recognized as non-performing. 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
department should assist in improving the components of the allowance of loans
and lease losses such as provision expense, recoveries, and charged-off loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
NON-PERFORMING LOANS AND ASSETS
September 30, December 31,
------------- ------------
(Dollars in thousands) 2003 2002 2002
---- ---- ----
Past due over 90 days and still accruing $ 714 $ 270 $ 321
Non-accrual loans 4,624 5,410 5,216
------ ------ ------
Total non-performing loans 5,338 5,680 5,537
Other real estate owned 3,218 473 368
------ ------ ------
Total non-performing assets $ 8,556 $ 6,153 $ 5,905
====== ====== ======
Non-performing loans as a percentage
of total loans (gross) 1.06% 1.28% 1.24%
Non-performing assets as a
percentage of non-performing loans 102.53% 112.24% 112.52%
Allowance for loan losses as a
percentage of total loans and other real
estate owned 1.69% 1.39% 1.32%
Allowance for loan losses as a
percentage of non-performing assets 63.97% 103.61% 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 September 30, 2003. Other Real Estate
Owned 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 September 30, 2003 is attributable to three loans in the aggregate
principal amount 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. OREO property
with a total book value of $2.3 million was sold subsequent to September 30,
2003. Net proceeds from the sale were $3.3 million resulting in a gain of $1.0
million, which will be recorded in the fourth quarter of 2003.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
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 $4.6
million, $4.9 million, and $5.9 million at September 30, 2003, December 31,
2002, and September 30, 2002 respectively. The associated allowance for impaired
loans was $462 thousand, $834 thousand and $700 thousand at September 30, 2003,
December 31, 2002 and September 30, 2002, respectively.
For the three-month and nine-month period ended September 30, 2003,
activity in the allowance for impaired loan losses include a provision of $237
thousand and $765 thousand, charge offs of $126 thousand and $216 thousand,
recoveries of $2 thousand and $32 thousand, respectively. Contractual interest
amounted to $79 thousand for the three-months ended September 30, 2003 and $277
thousand for the nine-months ended September 30, 2003. Cash collected on loans
for the three-month and nine-month period ended September 30, 2003 was $380
thousand and $2.4 million, respectively. The amount applied to principal was
$364 thousand and $2.1 million for the three- and nine-month period,
respectively, of which $0 thousand and $46 thousand was applied to interest for
the three- and nine-month period ended September 30, 2003, respectively.
For the three-month and nine-month period ended September 30, 2002,
activity in the allowance for impaired loan losses include a provision of $233,
write offs of $103 and $190 thousand, respectively, and recoveries of $0,
respectively. Contractual interest amounted to $95 thousand for the three-
months ended September 30, 2002 and $336 thousand for the nine-months ended
September 30, 2002. Cash collected on loans for the three- and nine-month period
ended September 30, 2002 was $110 thousand and $570 thousand, respectively, all
of which $110 thousand and $345 thousand was applied to principal and no
interest income was recorded.
BRANCHING AND TECHNOLOGY PROJECTS
In September 2003, the Corporation opened its seventeenth branch located in
East Bradford at the Giunta's Supermarket. In June 2003, the Corporation opened
its sixteenth branch located at 258 East Lincoln Highway in Coatesville. 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 September 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
December 31, 2002 to September 30, 2003 are results of an upstream of cash to
the holding company to fund OREO related costs. On November 13, 2003, the
Corporation issued $10.0 million of preferred capital securities. These
securities are structured so that they qualify as Tier 1 Capital of the
Corporation. See "Post Balance Sheet Events" for further discussion.
RISK-BASED September 30, December 31, "Well Capitalized"
CAPITAL RATIOS 2003 2002 2002 Requirements
---- ---- ---- ------------------
Corporation
-----------
Leverage Ratio 8.26% 8.44% 8.29% 5.00%
Tier I Capital Ratio 10.19% 10.79% 10.83% 6.00%
Total Risk-Based Capital Ratio 11.19% 12.04% 12.08% 10.00%
Bank
----
Leverage Ratio 7.62% 8.22% 8.05% 5.00%
Tier I Capital Ratio 9.34% 10.51% 10.53% 6.00%
Total Risk-Based Capital Ratio 10.34% 11.76% 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.
POST BALANCE SHEET EVENTS
On November 13, 2003, the Corporation issued $10.0 million of preferred
capital securities for the purpose of raising additional capital for general
corporate purposes. These securities, which could include the repurchase of
shares as described in the next paragraph, were issued through First Chester
County Capital Trust II (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 2.95%. The capital
securities will be redeemed on 2033; however, the Corporation has the option to
shorten the maturity date to a date not earlier than November 13, 2008. These
securities have been structured so that they qualify as Tier 1 Capital of the
Corporation. Because this transaction did not occur until November of 2003,
these numbers are not reflected in the September 30, 2003 financial statements
or the notes thereof.
On October 16, 2003, the Board of Directors approved the repurchase of up
to an aggregate amount of $10.0 million of the Corporation's outstanding common
stock over the course of the next two years. Such purchases will be made through
open market and private transactions. Stock repurchased could be held as
Treasury Stock, available for reissuance in connection with option exercises,
401-K, employee purchase and other corporate purposes.
Subsequent to September 30, 2003, two OREO properties with a book value of
$2.3 million were sold. Net proceeds from the sale were $3.2 million resulting
in a gain of $1.0 million which will be recorded in the fourth quarter of 2003.
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, operating, 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
weaknesses" in the design or operation of our internal control over
CONTROLS AND PROCEDURES - Continued
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 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, no such change was identified during the quarter
covered by this report.
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 Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of President 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 Chief Executive Officer 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 President 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
PART II - OTHER INFORMATION - Continued
(b) Reports on Form 8-K
A Form 8-K was filed with the SEC on July 25, 2003 pertaining to a
press release announcing the Second Quarter 2003 earnings.
A Form 8-K was filed with the SEC on October 24, 2003 pertaining to a
press release announcing the Third Quarter 2003 earnings and Stock
Repurchase program.
A Form 8-K was filed with the SEC on November 10, 2003 pertaining to
the death of Dr. Charles E. Swope, President and CEO.
A Form 8-K was filed with the SEC on November 13, 2003, pertaining to
the election of John A. Featherman, III, as the new Chief Executive
Officer and Chairman of the Board of the Corporation and the Bank, and
Kevin C. Quinn as President of the Corporation and the Bank. Quinn was
also elected to the Boards of Directors of the Corporation and the
Bank.
A Form 8-K was filed with the SEC on November 13, 2003, pertaining to a
press release announcing the issuance of $10.0 million in trust
preferred securities.
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
November 14, 2003 /s/ John A. Featherman, III
---------------------------
John A. Featherman, III
Chief Executive Officer
November 14, 2003 /s/ J. Duncan Smith
---------------------------
J. Duncan Smith
Treasurer
(Principal Accounting
and Financial Officer)
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 Chief Executive Officer pursuant to Rule
13a-14(a).
31.2 Certification of President 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 Chief Executive Officer 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 President 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
Exhibit 31.1
CERTIFICATION
I, John A. Featherman, III, Chief Executive Officer of the Corporation, certify
-----------------------
that:
1. I have reviewed this quarterly report on Form 10-Q for the period ending
September 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.
November 14, 2003
/s/ John A. Featherman, III
- ---------------------------
John A. Featherman, III
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Kevin C. Quinn, President of the Corporation, certify that:
--------------
1. I have reviewed this quarterly report on Form 10-Q for the period ending
September 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.
November 14, 2003
/s/ Kevin C. Quinn
- ------------------
Kevin C. Quinn
President
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 for the period ending
September 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.
November 14, 2003
/s/ J. Duncan Smith
- -------------------
J. Duncan Smith
Treasurer
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 for the period ending
September 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.
November 14, 2003
/s/ T. Benjamin Marsho
- ----------------------
T. Benjamin Marsho
Assistant Treasurer
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 September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
John A. Featherman, III, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
November 14, 2003 /s/ John A. Featherman, III
---------------------------
John A. Featherman, III
Chief Executive Officer
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 September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Kevin C. Quinn, President 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.
November 14, 2003 /s/ Kevin C. Quinn
------------------
Kevin C. Quinn
President
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 September 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.
November 14, 2003 /s/ J. Duncan Smith
-------------------
J. Duncan Smith
Treasurer
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 September 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.
November 14, 2003 /s/ T. Benjamin Marsho
----------------------
T. Benjamin Marsho
Assistant Treasurer