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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003, OR
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 0-12870
FIRST CHESTER COUNTY CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2288763
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
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(Address of principal executive offices)
Registrant's telephone number, including area code (484) 881-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( __ )
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: $74,247,305
The number of shares outstanding of Common Stock of the Registrant as of
February 19, 2004, was 4,531,734
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2004 Annual
Meeting of Shareholders, which definitive Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the Registrants
year end at December 31, 2003, are incorporated by reference into Part III.
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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I: Item 1 - Business 3
Item 2 - Properties 16-17
Item 3 - Legal Proceedings 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
PART II: Item 5 - Market for the Corporation's Common Equity and Related
Stockholder Matters 17 - 18
Item 6 - Selected Financial Data 19
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 20-34
Item 7A - Quantitative and Qualitative Disclosures about Market Risk 35-38
Item 8 - Financial Statements and Supplementary Data 39-66
Item 9 - Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 67
Item 9A - Controls and Procedures 67-68
PART III: Item 10 - Directors and Executive Officers of the Corporation 68
Item 11 - Executive Compensation 68
Item 12 - Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 68
Item 13 - Certain Relationships and Related Transactions 68
Item 14 - Principal Accountant Fees and Services 68
PART IV: Item 15 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K 69 - 70
SIGNATURES 71 - 72
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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
PART I
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Item 1. Business.
- ------ --------
First Chester County Corporation (the "Corporation") may from time to time
make written or oral "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements contained
in the Corporation's filings with the Securities and Exchange Commission
(including this Report on Form 10-K), its reports to shareholders and in other
communications by the Corporation. 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. Also, future results may differ materially from
our historic results. The risks and uncertainties noted below, among others,
could cause the Corporation's actual future results to differ materially from
those described in forward-looking statements made in this report, or presented
elsewhere by Management from time to time, or from our historic results.
These risks and uncertainties include, but are not limited to, the
following: (a) loan growth and/or loan margins may be less than expected due to
competitive pressures in the banking industry and/or changes in the interest
rate environment; (b) general economic conditions in the Corporation's market
area may be less favorable than expected resulting in, among other things, a
deterioration in credit quality causing increased loan losses; (c) costs of the
Corporation's planned training initiatives, product development, branch
expansion, new technology and operating systems may exceed expectations; (d)
competition among financial and non-financial institutions in the Corporation's
market area that may result in customer turnover and lower interest rate
margins; (e) changes in the regulatory environment, securities markets, general
business conditions and inflation may adversely affect loan demand, credit
quality, consumer spending and saving habits, and interest rate margins; (f)
impact of changes in interest rates on customer behavior; (g) the impact of
changes in demographics on branch locations; (h) technological changes; (i)
changes in the value of securities and investments managed for others may affect
the growth level of the Corporation's non-interest income; (j) changes in the
credit of our borrowers, the collateral securing assets or other aspects of
credit quality; and (k) our ability to manage the risks involved in the
foregoing. These risks and uncertainties are all difficult to predict and most
are beyond the control of the Corporation's Management.
The Corporation undertakes no obligation to publicly release any revisions
to the forward-looking statements to reflect events or circumstances after the
date of this report.
GENERAL
The Corporation is a Pennsylvania corporation and a bank holding company
registered under the Federal Bank Holding Company Act of 1956, as amended (the
"BHC Act"). As a bank holding company, the Corporation's operations are confined
to the ownership and operation of banks and activities deemed by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") to be so
closely related to banking to be a proper incident thereto. The Corporation was
incorporated on March 9, 1984, for the purpose of becoming a registered bank
holding company pursuant to the BHC Act and acquiring First National Bank of
Chester County, formerly known as The First National Bank of West Chester (the
"Bank"), thereby enabling the Bank to operate within a bank holding company
structure. On September 13, 1984, the Corporation acquired all of the issued and
outstanding shares of common stock of the Bank. The principal activities of the
3
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Corporation are the owning and supervising of the Bank, which engages in a
general banking business based in Chester County, Pennsylvania. The Corporation
directs the policies and coordinates the financial resources of the Bank. In
addition, the Corporation is the sole shareholder of Turks Head Properties,
Inc., a Pennsylvania corporation, which was formed in 1994, and Turks Head II
LLC, which was formed in 2003, each of which serves the purpose of holding the
Bank's interests in and operating foreclosed real property until liquidation of
such properties. First Chester County Capital Trust I, which was formed on July
11, 2002, and First Chester County Capital Trust II, which was formed on
November 13, 2003, are special purpose statutory trusts created expressly for
the issuance of preferred capital securities and investing proceeds in junior
subordinated debentures of the Corporation. The Bank has two wholly-owned
subsidiaries, FNB Insurance Services, LLC, trading as First National Wealth
Advisory Services, and FNB Properties, LLC. First National Wealth Advisory
Services offers insurance, full-service brokerage, financial planning and mutual
fund services. FNB Properties, LLC acts as property manager for the properties
where the Bank's Lionville and New Garden branches are located. On August 5,
2000, the Corporation became a financial holding company pursuant to the
Grahm-Leach-Bliley Act of 1999.
BUSINESS OF THE BANK
The Bank is engaged in the business of commercial and retail banking and
was organized under the banking laws of the United States in December 1863. The
Bank currently conducts its business through seventeen banking offices located
in Chester and Delaware Counties, Pennsylvania, including its main office. In
addition, the Bank operates 24 ATM facilities. The Bank is a member of the
Federal Reserve System. At December 31, 2003, the Bank had total assets of
approximately $689 million, total loans of approximately $511 million, total
deposits of approximately $577 million and employed 288 persons, of which 262
were full-time and 26 were part-time.
In November of 2003, Dr. Charles E. Swope, the Corporation's and Bank's
President and CEO for more than 30 years, passed away. On November 13, 2003, the
Boards of Directors of the Corporation and the Bank elected John A. Featherman
as the new Chairman of the Board and CEO and Kevin C. Quinn as President of both
the Bank and the Corporation.
The Bank is a full service commercial bank offering a broad range of retail
banking, commercial banking, Internet banking, trust and investment management
and insurance services to individuals, businesses, governmental entities,
nonprofit organizations, and community service groups. Retail services include
checking accounts, savings programs, money-market accounts, certificates of
deposit, safe deposit facilities, consumer loan programs, residential mortgages,
overdraft checking, automated tellers and extended banking hours. Commercial
services include revolving lines of credit, commercial mortgages, equipment
leasing and letter of credit services.
These retail and commercial banking activities are provided primarily to
consumers and small to mid-sized companies within the Bank's market area.
Lending services are focused on commercial, consumer, and real estate lending to
local borrowers. The Bank attempts to establish a total borrowing relationship
with its customers that may typically include commercial loans, a mortgage loan
for the borrower's residence, a consumer loan or a revolving personal credit
line.
4
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
The Bank's Trust and Investment Services Division (formerly known as the
Financial Management Services Division), provides a broad range of trust and
investment management services. It administers and provides services for
estates, trusts, agency accounts, and individual and employer sponsored
retirement plans. At December 31, 2003, the Bank's Trust and Investment Services
Division administered or provided investment management services to accounts
that held assets with an aggregate market value of approximately $550 million.
For the year ended December 31, 2003, gross income from the Bank's Trust and
Investment Services Department and related activities amounted to approximately
$3.3 million.
In addition to retail and commercial banking and trust services, the Bank
offers an array of investment opportunities to including mutual funds,
annuities, retirement planning, education planning and insurance through the
Wealth Advisory Services Division.
COMPETITION
The Bank's service area consists primarily of greater Chester County, as
well as the fringe of Delaware County, Pennsylvania. The core of the Bank's
service area is located within a fifteen-mile radius of the Bank's main office
in West Chester, Pennsylvania. The Bank encounters vigorous competition for
market share in the communities it serves from bank holding companies, other
community banks, thrift institutions, credit unions, Internet banks and other
non-bank financial organizations such as mutual fund companies, brokerage firms,
and the financing arms of corporate conglomerates. The Bank also competes with
banking and financial institutions, some from out-of-state that have opened
branches in our market, which are substantially larger and have greater
financial resources than the Bank. As of June 30, 2003, the Bank held an 8.75%
market share of Chester County's $6.4 billion in deposits. The $6.4 billion is
held by 199 branches of 34 banks, thrifts, and Savings and Loans.
The Bank's Trust and Investment Services Division competes with a variety
of companies including private trust companies, banks with trust departments,
private money managers', brokerage firms, mutual fund companies, attorneys,
accountants and insurance companies.
Management believes that the Bank is able to effectively compete with its
competitors because of its ability to provide responsive personalized services
and competitive rates. This ability is a direct result of management's knowledge
of the Bank's market area and customer base. Management believes the needs of
the small to mid-sized commercial business and retail customers are not
adequately met by larger financial institutions, therefore creating a marketing
opportunity for the Bank.
SUPERVISION AND REGULATION
General
The Corporation is a bank holding company subject to supervision and
regulation by the Federal Reserve Board. In addition, the Bank is subject to
supervision, regulation and examination by the Office of the Comptroller of the
Currency (the "OCC") and secondary regulation by the Federal Deposit Insurance
Corporation (the "FDIC"). Federal and state laws impose a number of requirements
and restrictions on the operations of the Bank, including requirements to
maintain reserves against deposits, restrictions on the types and amounts of
loans that may be made and the types of services which may be offered, and
restrictions on the ability to acquire deposits under certain circumstances. The
Bank must also comply with various consumer laws and regulations, and approval
of the OCC is required before establishing new branches and for bank mergers if
the continuing bank would be a national bank. Certain aspects of the Bank's
5
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
operation are also subject to state laws. The following sections discuss more
fully some of the principal elements of the regulatory framework applicable to
the Corporation and the Bank. This discussion is not intended to be an
exhaustive description of the statutes and regulations applicable to the
Corporation and the Bank and is subject to and qualified by reference to the
statutory and regulatory provisions. A change in these statutes, regulations or
regulatory policies, or the adoption of new statutes, regulations or regulatory
policies, may have a material effect on our business.
Bank Holding Company Act
The Corporation is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the BHC Act. Annual and other periodic reports also are
required to be filed with the Federal Reserve Board. The Federal Reserve Board
also makes examinations of bank holding companies and their subsidiaries. The
BHC Act requires each bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire substantially all of the assets of
any bank, or if it would acquire or control more than 5% of the voting shares of
such a bank. The Federal Reserve Board considers numerous factors, including its
capital adequacy guidelines, before approving such acquisitions. For a
description of certain applicable guidelines, see this Item "Capital," Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Capital Adequacy," and Part II, Item 8, "Note I -- Regulatory
Matters" in the consolidated financial statements.
The Community Reinvestment Act
The Community Reinvestment Act of 1977, as amended (the "CRA"), and the
regulations promulgated to implement the CRA are designed to create a system for
bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. The CRA regulations were completely
revised in 1995 to establish performance-based standards for use in examining a
depository institution's compliance with the CRA (the "revised CRA
regulations"). The revised CRA regulations establish new tests for evaluating
both small and large depository institutions' investment in the community. For
the purposes of the revised CRA regulations, the Bank is deemed to be a large
retail institution, based upon financial information as of December 31, 2003.
The Bank has opted to be examined under a three-part test evaluating the Bank's
lending service and investment performance. The Bank received an outstanding
rating at our last regulatory exam.
Dividend Restrictions
The Corporation is a legal entity separate and distinct from the Bank.
Virtually all of the revenue of the Corporation available for payment of
dividends on its Common Stock will result from amounts paid to the Corporation
from dividends received from the Bank. All such dividends are subject to
limitations imposed by federal and state laws and by regulations and policies
adopted by federal and state regulatory agencies.
The Bank, as a national bank, is required by federal law to obtain the
approval of the OCC for the payment of dividends if the total of all dividends
declared by the Board of Directors of the Bank in any calendar year will exceed
the total of the Bank's net income for that year and the retained net income for
the preceding two years, less any required transfers to surplus or a fund for
the retirement of any preferred stock. Under this formula, in 2004, the Bank,
without affirmative governmental approvals, could declare aggregate dividends of
approximately $14.63 million, plus an amount approximately equal to the net
income, if any, earned by the Bank for the period from January 1, 2004, through
6
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
the date of declaration of such dividend less dividends previously paid, subject
to the further limitations that a national bank can pay dividends only to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts and provided that the Bank would not become "undercapitalized"
(as these terms are defined under federal law). Dividends declared in 2003 were
$2.4 million.
If, in the opinion of the applicable regulatory authority, a bank or bank
holding company under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
bank or bank holding company, could include the payment of dividends), such
regulatory authority may require such bank or bank holding company to cease and
desist from such practice, or to limit dividends in the future. Finally, the
several regulatory authorities described herein, may from time to time,
establish guidelines, issue policy statements and adopt regulations with respect
to the maintenance of appropriate levels of capital by a bank or bank holding
company under their jurisdiction. Compliance with the standards set forth in
such policy statements, guidelines and regulations could limit the amount of
dividends which the Corporation and the Bank may pay.
Capital
The Corporation and the Bank are both subject to minimum capital
requirements and guidelines. The Federal Reserve Board measures capital adequacy
for bank holding companies on the basis of a risk-based capital framework and a
leverage ratio. The Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines currently provide for a
minimum leverage ratio of Tier I Capital to average total assets of 3% for bank
holding companies that meet certain criteria, including that they maintain the
highest regulatory rating. All other bank holding companies are required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points. The Federal Reserve Board has not advised the Corporation of
any specific minimum leverage ratio under these guidelines which would be
applicable to the Corporation. Failure to satisfy regulators that a bank holding
company will comply fully with capital adequacy guidelines upon consummation of
an acquisition may impede the ability of a bank holding company to consummate
such acquisition, particularly if the acquisition involves payment of
consideration other than common stock. In many cases, the regulatory agencies
will not approve acquisitions by bank holding companies and banks unless their
capital ratios are well above regulatory minimums.
The Bank is subject to capital requirements which generally are similar to
those affecting the Corporation. The minimum ratio of total Risk-Based Capital
to Risk-Weighted assets (including certain off-balance sheet items, such as
standby letters of credit) is 8%. Capital may consist of equity and qualifying
perpetual preferred stock, less goodwill ("Tier I capital"), and certain
convertible debt securities, qualifying subordinated debt, other preferred stock
and a portion of the reserve for possible credit losses ("Tier II capital").
A depository institution's capital classification depends upon its capital
levels in relation to various relevant capital measures, which include a
Risk-Based Capital measure and a leverage ratio capital measure. A depository
institution is considered well capitalized if it significantly exceeds the
minimum level required by regulation for each relevant capital measure,
adequately capitalized if it meets each such measure, undercapitalized if it
fails to meet any such measure, significantly undercapitalized if it is
significantly below any such measure and critically undercapitalized if it fails
7
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
to meet any critical capital level set forth in the regulations. An institution
may be placed in a lower capitalization category if it receives an
unsatisfactory examination rating, is deemed to be in an unsafe or unsound
condition, or engages in unsafe or unsound practices. Under applicable
regulations, for an institution to be well capitalized it must have a Total
Risk-Based Capital ratio of at least 10%, a Tier I capital ratio of at least 6%
and a Leverage ratio of at least 5% and not be subject to any specific capital
order or directive. As of December 31, 2003, 2002 and 2001, the Corporation and
the Bank had capital in excess of all regulatory minimums and the Bank was "well
capitalized."
Deposit Insurance Assessments
The Bank is subject to deposit insurance assessments by the FDIC's Bank
Insurance Fund ("BIF"). The FDIC has developed a risk-based assessment system,
under which the assessment rate for an insured depository institution varies
according to its level of risk. An institution's risk category is based upon
whether the institution is well capitalized, adequately capitalized or
undercapitalized and the institution's "supervisory subgroups": Subgroup A, B or
C. Subgroup A institutions are financially sound institutions with a few minor
weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration; and Subgroup
C institutions are institutions for which there is a substantial probability
that the FDIC will suffer a loss in connection with the institution unless
effective action is taken to correct the areas of weakness. Based on its capital
and supervisory subgroups, each BIF member institution is assigned an annual
FDIC assessment rate per $100 of insured deposits varying between 0.00% per
annum (for well capitalized Subgroup A institutions) and 0.27% per annum (for
undercapitalized Subgroup C institutions). As of January 1, 2001, well
capitalized Subgroup A institutions paid 0.00%.
In accordance with the Deposit Insurance Act of 1997 an additional
assessment by the Financing Corporation ("FICO") became applicable to all
insured institutions as of January 1, 1998. This assessment is not tied to the
FDIC risk classification. The FICO assessment rates effective for both the
fourth quarter 2003 and the first quarter of 2004 were $0 per $100 of BIF
assessable deposits. FDIC deposit insurance expense was $88, $86 and $86
thousand for the year 2003, 2002, and 2001. Currently, there is proposed
legislation that if passed could increase the Corporation's FDIC deposit
insurance expense in future time periods.
Financial Services Modernization Act of 1999
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act (the "Act") which became effective on March 11, 2000. Among the Act's
various provisions are some changes governing the operations of companies doing
business in the financial services industry. The Act eliminates many of the
restrictions previously placed on the activities of banks and bank holding
companies, and through the creation of two new designations, financial holding
companies and financial subsidiaries, bank holding companies and national banks
may participate in a wider array of financial services and products (referred to
as "financial activities" in the Act), including services and products that had
been reserved only for insurance companies and securities firms. In addition, a
bank holding company can now affiliate with an insurance company and a
securities firm.
A "financial activity" is an activity that does not pose a safety and
soundness risk and is financial in nature, incidental to an activity that is
financial in nature, or complementary to a financial activity. Some examples of
"financial activities" which are permitted under the Act are:
8
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
o Lending, investing or safeguarding money or securities; o Underwriting
insurance or annuities, or acting as an insurance or annuity principal, agent or
broker; o Providing financial or investment advice; o Underwriting, dealing in
or making markets in securities; and o Insurance company portfolio investments.
The Corporation meets the qualifications set forth under the Act to elect
to become a financial holding company, and the Bank, as a national bank, is
authorized by the Act to use "financial subsidiaries" to engage in financial
activities, subject to the limitations imposed by the Act. On August 5, 2001,
the Bank became a financial holding company pursuant to the Act. During 2000,
First National Wealth Advisory Services was formed as a wholly-owned subsidiary
of the Bank for the purpose of offering insurance, full service brokerage,
financial planning and mutual fund services. First National Wealth Advisory
Services has elected to become a financial subsidiary under the Act.
Control Acquisitions
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company, unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of ten
percent or more of a class of voting stock of a bank holding company with a
class of securities registered under Section 12 of the Exchange Act, such as the
Corporation, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the bank holding company.
In addition, as described above, under the Bank Holding Company Act, the
Federal Reserve Board must give its prior approval of any transaction pursuant
to which any person or persons may acquire 25 percent (five percent in the case
of an acquirer that is a bank holding company) or more of any class of
outstanding common stock of a bank holding company, such as the Corporation, or
otherwise obtaining control or a "controlling influence" over that bank holding
company. See this Item, "Bank Holding Company Act".
Other Matters
Federal and state law also contains a variety of other provisions that
affect the operations of the Corporation and the Bank including certain
reporting requirements, regulatory standards and guidelines for real estate
lending, "truth in savings" provisions, the requirement that a depository
institution give 90 days prior notice to customers and regulatory authorities
before closing any branch, certain restrictions on investments and activities of
nationally-chartered insured banks and their subsidiaries, limitations on credit
exposure between banks, restrictions on loans to a bank's insiders, guidelines
governing regulatory examinations, and a prohibition on the acceptance or
renewal of brokered deposits by depository institutions that are not well
capitalized or are adequately capitalized and have not received a waiver from
the FDIC.
EFFECT OF GOVERNMENTAL POLICIES
The earnings of the Bank and, therefore, of the Corporation are affected
not only by domestic and foreign economic conditions, but also by the monetary
and fiscal policies of the United States and its agencies (particularly the
Federal Reserve Board), foreign governments and other official agencies. The
Federal Reserve Board can and does implement national monetary policy, such as
the curbing of inflation and combating of recession, by its open market
9
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
operations in United States government securities, control of the discount rate
applicable to borrowings from the Federal Reserve and the establishment of
reserve requirements against deposits and certain liabilities of depository
institutions. The actions of the Federal Reserve Board influence the level of
loans, investments and deposits and also affect interest rates charged on loans
or paid on deposits. The nature and impact of future changes in monetary and
fiscal policies are not predictable.
From time to time, various proposals are made in the United States Congress
and the Pennsylvania legislature and before various regulatory authorities, who
would alter the powers of different types of banking organizations, remove
restrictions on such organizations and change the existing regulatory framework
for banks, bank holding companies and other financial institutions. It is
impossible to predict whether any of such proposals will be adopted and the
impact, if any, of such adoption on the business of the Corporation.
STATISTICAL DISCLOSURES
The following tables set forth certain statistical disclosures concerning
the Corporation and the Bank. These tables should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations set forth below in Item 7 of this Report.
10
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
RATE VOLUME ANALYSIS (1)
Increase (decrease) in net interest income due to:
-------------------------------------------------------------------------
Volume (2) Rate (2) Total Volume (2) Rate (2) Total
------ ---- ----- ------ ---- -----
(Dollars in thousands) 2003 Compared to 2002 2002 Compared to 2001
---------------------------------- -----------------------------
INTEREST INCOME
Federal funds sold $ (63) $ (104) $ (167) $ 431 $ (309) $ 122
Interest bearing deposits in banks 8 (10) (2) (1) 1 -
------ ------ ------- ------ ------- -------
Total Interest Income (55) (114) (169) 430 (308) 122
Investment securities
Taxable 861 (1,504) (639) 804 (987) (183)
Tax-exempt(3) 927 (394) 533 (6) (1) (7)
------ ------ ------- ------ ------- -------
Total investment securities 1,788 (1,898) (106) 798 (988) (190)
Loans
Taxable 1,638 (4,906) (3,288) 1,845 (3,474) (1,629)
Tax-exempt(3) 402 (137) 264 (24) (50) (74)
------ ------ ------- ------ ------- -------
Total loans(4) 2,040 (5,043) (3,024) 1,821 (3,524) (1,703)
------ ------ ------- ------ ------- -------
Total interest income 3,773 (7,055) (3,299) 3,049 (4,820) (1,771)
------ ------ ------- ------ ------- -------
INTEREST EXPENSE
Savings, NOW and money market
deposits 610 (1,996) (1,374) 1,268 (3,262) (1,994)
Certificates of deposits and other time (642) (1,442) (2,087) (674) (2,166) (2,840)
------ ------ ------- ------ ------- -------
Total interest bearing deposits (32) (3,438) (3,461) 594 (5,428) (4,834)
Securities sold under repurchase
Agreements (19) (1) (20) (70) (3) (73)
Guaranteed preferred
beneficial interest in Corp.'s
subordinated debentures 233 (53) 176 136 - 136
Other borrowings 444 (657) (214) (12) (130) (142)
------ ------ ------- ------ ------- -------
Total Interest expense 626 (4,149) (3,579) 648 (5,561) (4,913)
------ ------ ------- ------ ------- -------
Net Interest income $ 3,147 $(2,907) $ 220 $ 2,401 $ 741 $ 3,142
====== ====== ======= ====== ======= =======
NOTES:
- ------
(1) The related average balance sheets can be found on page 23 of this
Report.
(2) The changes in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(3) The indicated changes are presented on a tax equivalent basis.
(4) Non-accruing loans have been used in the daily average balances to
determine changes in interest due to volume. Loan fees included in the
interest income computation are not material.
11
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
LOAN PORTFOLIO BY TYPE AT DECEMBER
(Dollars in thousands) 2003 2002 2001 1999 1998
--------------- ---------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
Commercial loans $142,144 28% $122,005 27% $118,420 26% $ 105,125 26% $ 95,820 27%
Real estate - construction 56,340 11% 47,601 11% 40,065 9% 30,134 7% 15,266 4%
Real estate - other 202,898 40% 175,846 39% 199,398 45% 181,129 45% 152,174 43%
Consumer loans (1) 77,113 15% 62,646 14% 48,323 11% 54,692 13% 55,520 16%
Lease financing receivables 32,754 6% 39,584 9% 41,904 9% 35,809 9% 35,558 10%
------- ------- ------- -------- --------
Total gross loans
and lease $511,249 100% $447,682 100% $448,110 100% $ 406,889 100% $ 354,338 100%
Allowance for possible
loan and lease losses(2) $ (5,864) $ (6,230) $ (6,344) $ (6,609) $ (6,261)
------- ------- ------- -------- --------
Total net loans (3) $503,385 $441,452 $441,766 $ 400,280 $ 348,077
======= ======= ======= ======= ========
NOTES:
- ------
(1) Consumer loans include open-end home equity lines of credit and credit
card receivables. (As of February 21, 2003, the $2.7 million credit
card portfolio was sold).
(2) See pages 24 - 27 this Report for additional information.
(3) At December 31, 2003 there were no concentrations of loans exceeding
10% of total loans which is not otherwise disclosed as a category of
loans in the above table.
12
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
MATURITIES AND RATE SENSITIVITY OF LOANS DUE TO CHANGES IN
INTEREST RATES AT DECEMBER 31, 2003 (1) (2)
Maturing
Maturing After 1 Year Maturing
Within And Within After
(Dollars in thousands) 1 Year (3) 5 Years 5 Years Total
---------- ------------ -------- ----------
Commercial loans $ 19,862 $ 40,319 $ 81,963 $ 142,144
Real Estate - construction 31,850 13,684 10,806 56,340
--------- ------- ------- --------
Total $ 51,712 $ 54,003 $ 92,769 $ 198,484
========= ======= ======= ========
Loans maturing after 1 year with:
Fixed interest rates
Commercial Loans $ 32,362 $ 43,798
Commercial real estate - construction 9,021 8,900
Variable interest rates
Commercial Loans 7,957 38,165
Commercial Real Estate - construction 4,663 1,906
------- -------
Total $ 54,003 $ 92,769
======= =======
NOTES:
- ------
(1) Determination of maturities included in the loan maturity table are
based upon contract terms. In situations where a "rollover" is
appropriate, the Corporation's policy in this regard is to evaluate the
credit for collectability consistent with the normal loan evaluation
process. This policy is used primarily in evaluating ongoing customer's
use of their lines of credit with the Bank that are at floating
interest rates.
(2) This data excludes real estate-other loans, consumer loans and lease
financing receivables.
(3) Demand loans and overdrafts are reported maturing "Within 1 Year". Most
construction real estate loans are reported maturing "Within 1 Year"
because of their short term maturity or index to the Bank's prime rate.
An immaterial amount of loans has no stated schedule of repayments.
13
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INVESTMENT SECURITIES YIELD BY MATURITY AT DECEMBER 31, 2003
Due over Due over
Due 1 year 5 years Due
Within Through Through Over
(Dollars in thousands) 1 year 5 years 10 years 10 years Total
------ ------- -------- -------- -----
Held-to-Maturity
U.S. Treasury -- -- -- -- --
U.S. Government agency -- -- -- -- --
Mortgage-backed securities (1) -- -- 4 -- 4
State and municipal (2) -- 15 -- -- 15
Corporate securities -- -- -- -- --
Asset-backed (1) -- -- -- -- --
-------- --------- -------- -------- --------
-- 15 4 -- 19
-------- --------- -------- -------- --------
Available-for-Sale
U.S. Treasury 1,502 1,059 -- -- 2,561
U.S. Government agency -- -- 6 10,708 10,714
Mortgage-backed securities (1) -- -- 6,720 63,315 70,035
State and municipal (2) -- 4,706 21,135 -- 25,841
Corporate securities -- 2,180 11,001 118 13,299
Asset-backed (1) -- -- 539 2,127 2,666
Mutual Funds -- -- -- 801 801
Other equity securities (3) -- -- -- 4,793 4,793
-------- --------- -------- -------- --------
1,502 7,945 39,401 81,862 130,710
-------- --------- -------- -------- --------
Total Investment securities $ 1,502 $ 7,960 $ 39,405 $ 81,862 $ 130,729
======== ========= ======== ======== ========
Percent of portfolio 1.15% 6.09% 30.14% 62.62% 100.00%
======== ========= ======== ======= ========
Weighted average yield 2.96% 2.50% 4.52% 4.22% 4.19%
======== ========= ======== ======= ========
NOTES:
- ------
(1) Mortgage-backed and Asset-backed securities are included in the above
table based on their contractual maturity.
(2) The yield on tax-exempt obligations has been computed on a tax
equivalent basis using the Federal marginal rate of 34% adjusted for
the 20% interest expense disallowance.
(3) Other equity securities having no stated maturity have been included in
"Due over 10 years".
14
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INVESTMENT SECURITIES AT DECEMBER 31,
2003 2002 2001
---------------------- ---------------------- ---------------------
(Dollars in thousands) Book Market Book Market Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- ------
Held-to-Maturity
U.S. Treasury $ -- $ -- $ -- $ -- $ -- $ --
U.S. Government agency -- -- -- -- -- --
Mortgage-backed securities 4 4 16 17 27 29
State and municipal 15 16 15 17 504 518
Corporate securities -- -- -- -- -- --
Asset-backed -- -- -- -- -- --
Mutual funds -- -- -- -- -- --
Other equity securities -- -- -- -- -- --
------- ------- ------- ------- ------- -------
$ 19 $ 20 $ 31 $ 34 $ 531 $ 547
======= ======= ======= ======= ======= =======
Available-for-Sale
U.S. Treasury $ 2,498 $ 2,561 $ 4,498 $ 4,630 $ 4,010 $ 4,069
U.S. Government agency 10,821 10,715 32,262 32,268 -- --
Mortgage-backed securities 69,821 70,035 69,821 64,953 66,267 63,175
State and municipal 25,815 25,840 2,179 2,223 1,279 1,315
Corporate securities 12,893 13,181 13,083 13,650 2,966 2,803
Corporate CMO's 119 118 1,446 1,444 3,652 3,693
Asset-backed 2,692 2,666 2,661 2,699 37 37
Mutual Funds 863 801 863 815 863 825
Other equity securities 4,724 4,793 4,311 4,348 4,100 4,137
------- ------- ------- ------- ------- -------
$130,246 $130,710 $126,256 $128,344 $ 80,082 $ 80,210
======= ======= ======= ======= ======= =======
15
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Item 2. Properties.
- ------- ----------
The Bank owns ten properties which are not subject to any mortgages, and
the Corporation leases the Westtown-Thornbury, Exton, Frazer, Kendal,
Crosslands, Lima, Granite Farms, Hershey's Mill, Coatesville, and Giunta's
offices. Management of the Corporation believes the Corporation's and the Bank's
facilities are suitable and adequate for their respective present needs. Set
forth below is a listing of each banking office presently operated by the Bank,
and other properties owned or leased by the Bank and the Corporation which may
serve as future sites for branch offices. Management is currently evaluating all
of its properties for future use.
Current Date
Banking Acquired
Offices / Use Address or Opened
- ------------- ------- ---------
Main Office / Branch 9 North High Street December 1863
and Corporate West Chester, Pennsylvania
Headquarters
Walk-In Facility / Branch 17 East Market Street February 1978
West Chester, Pennsylvania
Westtown-Thornbury / Route 202 and Route 926 May 1994
Branch Westtown, Pennsylvania
Goshen / Branch 311 North Five Points Road September 1956
West Goshen, Pennsylvania
Kennett Square / Branch 126 West Cypress Street February 1987
Kennett Square, Pennsylvania
Exton / Branch Route 100 and Boot Road August 1995
West Chester, Pennsylvania
Frazer / Branch 309 Lancaster Avenue August 1999
Frazer, Pennsylvania
Swope Building (formerly High & Market Streets July 1995
known as the Commonwealth Building) West Chester, Pennsylvania
Kendal at Longwood / Branch 1109 E. Baltimore Pike December 1999
Kennett Square, Pennsylvania
Crosslands / Branch 1660 E. Street Road December 1999
Kennett Square, Pennsylvania
Lima Estates / Branch 411 North Middletown Road December 1999
Media, Pennsylvania
Granite Farms Estates / Branch 1343 West Baltimore Pike December 1999
Wawa, Pennsylvania
Lionville / Branch Route 114 & Sheree Boulevard December 2000
Uwchlan Township, Pennsylvania
New Garden / Branch 741 West Cypress Street August 2001
Kennett Square, Pennsylvania
16
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Hershey's Mill / Branch 1371 Boot Road December 2001
West Chester, Pennsylvania
Coatesville Branch 258A East Lincoln Highway
Coatesville, PA 19320 June 2003
Giunta's Branch 700 Downingtown Pike
West Chester, PA 19380 September 2003
Other Date Acquired
Properties / Use Address or Opened
- ---------------- ------- ---------
Operations 202 Carter Drive July 1988
Center / Operations West Chester, Pennsylvania
Matlack Street / 887 South Matlack Street September 1999
Operations West Chester, Pennsylvania
Paoli Pike / Parking 1104 Paoli Pike July 1963
West Chester, Pennsylvania
Item 3. Legal Proceedings.
- ------- ------------------
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Corporation, or any
of its subsidiaries, is a party or of which any of their respective property is
the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
None.
PART II
-------
Item 5. Market for the Corporation's Common Equity and Related Stockholder
- ------- Matters.
------------------------------------------------------------------
The Corporation's Common Stock is publicly traded over the counter under
the symbol "FCEC". Information regarding high and low bid quotations is set
forth in Item 7 on page 32 of this Report. As of January 31, 2004, there were
approximately 980 shareholders of record of the Corporation's Common Stock. The
closing stock price as of January 31, 2004 was $27.30.
The Corporation declared cash dividends per share on its Common Stock
during each quarter of the fiscal years ended December 31, 2003 and 2002, as set
forth in the following table:
Dividends
---------
Amount Per Share
-----------------------
2003 2002
---- ----
First Quarter....................................... $ 0.1350 $ 0.1300
Second Quarter...................................... 0.1350 0.1300
Third Quarter....................................... 0.1350 0.1300
Fourth Quarter...................................... 0.1375 0.1350
-------- --------
Total............................................. $ 0.5425 $ 0.5250
======== ========
The holders of the Corporation's Common Stock are entitled to receive such
dividends as may be legally declared by the Corporation's Board of Directors.
See "Item 1. Business: SUPERVISION AND REGULATION - Dividend Restrictions". The
amount, time, and payment of future dividends, however, will depend on the
earnings and financial condition of the Corporation, government policies and
other factors.
17
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Equity Compensation Plan Information Form
Number of
securities
remaining
Number of securities Weighted-average available for
to be issued upon exercise price future
exercise of of outstanding issuance under
outstanding options, options, equity
warrants and warrants and compensation
rights rights* plans*
------------------- ---------------- --------------
Equity compensation plans approved by security holders 564,164** $15.20 11,494
Equity compensation plans not approved by security holders -- -- --
Total 564,164** $15.20 11,494
* The securities referred to in this table are shares of the Corporation's
common stock issuable upon exercise of options issued pursuant to the 1995 Stock
Option Plan.
** Number of options issued and outstanding that were exercisable as December
31, 2003.
18
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Item 6. Selected Financial Data
- ------- -----------------------
(Dollars in thousands, except per share data)
STATEMENTS OF CONDITION
- -----------------------
December 31
----------------------------------------------------------------
2003 2002 2001 2000 1999
-------- --------- -------- -------- -------
Assets $ 689,210 $ 640,010 $ 584,332 $ 550,689 $ 511,902
Loans 511,249 447,682 448,110 406,889 354,338
Investment securities 130,729 128,375 80,741 94,195 113,040
Deposits 577,314 558,738 498,825 471,490 448,433
Stockholders' equity 51,750 48,612 43,839 43,012 38,182
Trust and Investment Services
assets under management and
custody (1) 550,217 531,756 497,120 445,150 429,597
STATEMENTS OF INCOME
Year Ended December 31
----------------------------------------------------------------
2003 2002 2001 2000 1999
-------- --------- -------- -------- -------
Interest income $ 33,533 $ 37,101 $ 38,985 $ 39,728 $ 35,107
Interest expense 7,154 10,673 15,586 16,983 14,543
---------- --------- --------- ---------- ---------
Net interest income 26,379 26,428 23,399 22,745 20,564
Provision for possible loan losses 2,519 2,231 2,929 876 799
---------- --------- --------- ---------- ---------
Net interest income after
provision for possible loan
losses 23,860 24,197 20,470 21,869 19,765
Non-interest income 11,506 9,154 6,638 6,112 5,008
Non-interest expense 27,400 25,205 22,415 19,724 17,506
---------- --------- --------- ---------- ---------
Income before income taxes 7,966 8,146 4,693 8,257 7,267
Income taxes 2,161 2,444 1,361 2,255 2,050
---------- --------- --------- ---------- ---------
Net income $ 5,805 $ 5,702 $ 3,332 $ 6,002 $ 5,217
========== ========= ========= ========== =========
PER SHARE DATA (2)
- --------------
Net income per share (Basic) $ 1.30 $ 1.29 $ 0.75 $ 1.33 $ 1.14
Net income per share (Diluted) $ 1.26 $ 1.28 $ 0.74 $ 1.31 $ 1.13
Cash dividends declared $ 0.5425 $ 0.5250 $ 0.5200 $ 0.5100 $ 0.4900
Book value $ 11.46 $ 10.97 $ 9.91 $ 9.61 $ 8.40
Basic weighted average shares
outstanding 4,477,108 4,423,113 4,451,351 4,511,761 4,571,929
========= ========= ========= ========= =========
Diluted weighted average shares
outstanding 4,620,151 4,456,152 4,495,357 4,531,145 4,624,370
========= ========= ========= ========= =========
(1) These assets are managed by the Trust and Investment Services Division
of the Bank and are not assets of the Bank or the Corporation.
(2) All per share data has been retroactively adjusted for stock splits and
stock dividends.
19
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION
AND RESULTS OF OPERATIONS
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- of Operations.
-----------------------------------------------------------------------
EARNINGS AND DIVIDEND SUMMARY
In 2003, net income increased $103 thousand or 1.8% from $5.7 million to
$5.8 million. Net income for 2003 includes gains of $306 thousand from the sale
of the Bank's $2.7 million credit card portfolio, $1.0 million from the sale of
residential mortgages, $1.0 million on the gain on the sale of Other Real Estate
Owned ("OREO"), and $422 thousand from the collection of life insurance proceeds
upon the death of the Corporation's former CEO and President. These gains were
partially offset by a decrease in net interest income resulting from the current
interest rate environment, increased provision for loan and lease losses,
pricing competition, and increased operating costs.
In 2002, net income increased $2.4 million or 71.1% from $3.3 million to
$5.7 million. Several factors contributed to this large percentage increase,
including an increase in net interest income, increases in non-interest income
and a reduction in the provision for loan loss expense when compared to the same
period last year. The increase in net interest income was primarily the result
of a decrease in interest expense as the rates paid on deposit accounts and the
cost of borrowings decreased. The growth in non-interest income in 2002 can be
attributed to gains and fees earned on the sale of residential mortgage assets
of $722 thousand, gains from the sale of real estate assets of $438 thousand,
and investment securities of $212 thousand as well as increased revenue from our
Trust and Investment Services ("TIS") Division, (formerly know as Financial
Management Services Division). The provision for loan loss expense was reduced
in 2002 as compared to 2001 due to better performance of the Corporation's loan
portfolio and generally lower loan losses. In 2002, the Corporation restructured
its banking divisions and established a new credit administration department to
enhance its ability to focus on credit issues and improve overall credit
quality.
On a basic per share basis, 2003 earnings were $1.30, an increase of 0.8%
over 2002 earnings of $1.29. On a per share basis, 2002 earnings were 72.0%
higher than 2001 earnings of $0.75. Cash dividends per share in 2003 were
$0.5425, a 3.3% increase over the 2002 dividend of $0.5250. Cash dividends per
share in 2002 were 1.0% higher than the 2001 dividend of $0.52. In the past, the
Corporation's practice has been to pay a dividend of at least 35.0% of net
income.
PERFORMANCE RATIOS 2003 2002 2001 2000
- ------------------ -------- -------- -------- -------
Return on Average Assets 0.88% 0.94% 0.60% 1.15%
Return on Average Equity 11.48% 12.25% 7.75% 15.03%
Earnings Retained 58.07% 59.26% 30.43% 61.63%
Dividend Payout Ratio 41.93% 40.74% 69.57% 38.37%
The "Consolidated Average Balance Sheet" on page 27 may assist the reader in the
following discussion.
20
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATES
The accounting and reporting policies of the Corporation conform with
accounting principles generally accepted in the United States of America and
general practices within the financial services industry. The preparation of
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.
The Corporation considers that the determination of the allowance for loan
and lease losses involves a higher degree of judgment and complexity than its
other significant accounting policies. The allowance for loan and lease losses
is calculated with the objective of maintaining a reserve level believed by
Management to be sufficient to absorb estimated credit losses. Management's
determination of the adequacy of the allowance is based on periodic evaluations
of the loan and lease portfolio and other relevant factors. However, this
evaluation is inherently subjective as it requires material estimates,
including, among others, expected default probabilities, leases, loss given
default, expected commitment usage, the amounts and timing of expected future
cash flows on impaired loans, mortgages, and general amounts for historical loss
experience. The process also considers economic conditions, uncertainties in
estimating losses and inherent risks in the loan and lease portfolio. 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 could adversely impact earnings in future
periods. The Corporation recognizes deferred tax assets and liabilities for the
future tax effects of temporary differences, net operating loss carryforwards
and tax credits. 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 Company may be unable to realize all or part of
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.
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, on a tax equivalent basis, increased 0.8% or $220 thousand
from $26.5 million in 2002 to $26.8 million in 2003, compared to a 13.4%
increase or $3.1 million from 2001 to 2002. The increase in tax equivalent net
interest income for both periods was the result of an increase in average
interest-earning assets and lower yields paid on interest-bearing liabilities,
partially offset by an increase in average interest-bearing liabilities and a
decrease in the average yield earned on average interest earning-assets.
Average interest-earning assets for 2003 were $618.3 million, an increase
of $54.8 million or 9.7% when compared to 2002. In 2002, average
interest-earning assets were $563.5 million, an increase of $49.2 million or
9.6% compared to 2001. The increase in average interest-earning assets for 2003
was a result of increases in average loans outstanding and investment
securities, partially offset by a decrease in funds invested in federal funds
and other overnight investments. The increase in 2002 was the result of
increases in average loans outstanding and funds invested in federal funds,
other overnight investments, and average securities. 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 to 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 periods.
21
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Net yields on interest-earning assets, on a tax equivalent basis, were
4.33% and 4.71% for 2003 and 2002, respectively, a decrease of 38 basis points
for 2003 and an increase of 16 basis points for 2002. The decrease in the
average net-yield on interest-earning assets for 2003 was primarily the result
of a decrease in the average yield on interest-bearing liabilities and the
decrease in the yield earned on interest-earning assets. The yield in 2002 was
positively impacted as the result of a decrease in the average yield on interest
bearing liabilities that outpaced the decrease in the yield earned on interest
earning assets. The average yield earned on interest-earning assets decreased
16.8% or 111 basis points to 5.49% from 2002 to 2003, and 12.9% or 98 basis
points to 6.60% from 2001 to 2002. The average yield paid on interest-bearing
liabilities decreased 38.7% or 91 basis points to 1.44% from 2002 to 2003, and
37.5% or 141 basis points to 2.35% from 2001 to 2002.
In 2003, average interest-bearing liabilities increased $42.6 million or
9.4% to $497.2 million when compared to $454.5 million in 2002. In 2002, average
interest-bearing liabilities increased 9.7% or $40.4 million. The increase in
2003 was the result of a 7.0% or $30.1 million increase in average
interest-bearing deposits and a 38.1% or $9.2 million increase in FHLB advances
and other borrowings. The increase in 2002 was the result of a 10.4% or $40.4
million increase in average interest-bearing deposits. The increase for both
periods in average interest-bearing liabilities supported average
interest-earning assets.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
YIELD ON 2003 2002 2001
- -------- ------ ------ -----
Interest-Earning Assets 5.49% 6.60% 7.58%
Interest-Bearing Liabilities 1.44 2.35 3.76
---- ---- ----
Net Interest Spread 4.05 4.25 3.82
Contribution of Interest-Free Funds 0.28 0.46 0.73
---- ---- ----
Net Yield on Interest-Earning Assets 4.33% 4.71% 4.55%
==== ==== ====
INTEREST INCOME ON FEDERAL FUNDS SOLD AND OTHER OVERNIGHT INVESTMENTS
Interest income on federal funds sold and other overnight investments
decreased 44.2% to $211 thousand from $378 thousand in 2002. The decrease in
interest income on federal funds sold and other overnight investments is the
direct result of decreases in the average federal fund balances of $3.5 million
to $17.4 million in 2003 from $20.9 million in 2002. The decrease in interest
income earned on federal funds sold in 2003 was also affected by a 33.2% or 60
basis point decrease in rates earned on such investments. During 2003, the
Corporation reduced average federal funds sold and other overnight investments
to support loan growth and to invest in investment securities to produce higher
yields. During 2002, the Corporation's deposit growth out paced its loan growth
resulting in excess cash that was invested in federal funds and other overnight
investments and investment securities.
22
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
decreased $106 thousand or 2.2% from $4.9 million in 2002 to $4.8 million in
2003, compared to a $190 thousand or 3.7% decrease from 2001 to 2002. The
decrease in investment interest income in 2003 was the direct result of a 24.8%
or 122 basis point decrease in the yield earned on investment securities
partially offset by a 30.2% or $30.2 million increase in average investment
securities. The increase in average investment securities was the result of the
Corporation's increased cash position due to increased deposits generated by our
new and existing branch locations and Management's decision to invest excess
funds in higher yielding securities.
INTEREST INCOME ON LOANS AND LEASES
During 2003, interest income on loans and leases, on a tax equivalent
basis, generated by the Corporation's loan and lease portfolio decreased 9.5%
from $31.9 million in 2002 to $28.9 million in 2003. The decrease in interest
income on loans and leases was the direct result of a 14.8% or 107 basis point
decrease in the yield earned on the portfolio, partially offset by an increase
in the average balance of $27.8 million or 6.3% from $442.6 million in 2002 to
$470.4 million in 2003. 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 current low rate environment may continue to bring yields
down further.
Interest income on loans and leases, on a tax equivalent basis, generated
by the Corporation's loan and lease portfolio decreased 5.1% from $33.6 million
in 2001 to $31.9 million in 2002. The decrease in interest income on loans and
leases was the direct result of a 9.9% or 79 basis point decrease in the yield
earned on the portfolio, partially offset by an increase in the average balance
of $22.7 million or 5.4% from $420.0 million in 2001 to $442.6 million in 2002.
A $225 thousand recovery of past due accrued interest and late charges related
to the restructuring of a large commercial loan relationship in 2002 partially
offset the decrease in the interest income earned.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts decreased 37.0% from $9.3 million in
2002 to $5.9 million in 2003. The decrease in interest expense on deposit
accounts was the direct result of a 41.1% or 90 basis point decrease on rates
paid on interest bearing deposits, partially offset by a 7.0% or $30.1 million
increase in the average interest-bearing deposit balance. Interest expense on
deposits decreased 34.1% from $14.2 million in 2001 to $9.3 in 2002. The
decrease in interest expense on deposits from 2001 to 2002 was the result of a
40.2% or 147 basis point decrease on rates paid on interest-bearing deposits,
partially offset by a 10.4% or $40.4 million increase in the average
interest-bearing deposit balance.
The Corporation's effective rate paid on interest-bearing deposits changed
from 2.52%, 2.34%, 2.12%, and 1.79% in the first, second, third, and fourth
quarters of 2002, respectively, to 1.50%, 1.38%, 1.20%, and 1.07% in the first,
second, third, and fourth quarters of 2003, respectively. 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 at our new branches as well as at our
existing sites. The Corporation continually explores for new branch sites to
expand its core deposit base. PROVISION FOR LOAN AND LEASE LOSSES
23
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
During 2003, the Corporation recorded a provision for loan and lease losses
of $2.5 million, compared to $2.2 million and $2.9 million in 2002 and 2001,
respectively. Net charge-offs in 2003 were $2.9 million, compared to $2.3
million and $3.2 million in 2002 and 2001, respectively. Net charge-offs as a
percentage of average loans outstanding were 0.61%, 0.53% and 0.76% for 2003,
2002 and 2001, respectively. The provision expense in 2003 and 2001 was
increased to provide for increased loan write-downs and charge offs taken during
those years. Management believes that the allowance for loan and leases losses
is adequate based on its current assessment of probable and estimated losses. In
2002, the Corporation restructured its banking divisions and established a new
credit administration department to enhance its ability to focus on credit
issues and improve overall credit quality. The allowance for loan and leases
losses as a percentage of loans outstanding was 1.15% and 1.39% for 2003 and
2002, respectively. For more information on the gains on the sale of OREO, see
the following Non-Interest Income section.
NON-INTEREST INCOME
Total non-interest income increased $2.4 million or 25.7%, from $9.2
million in 2002 to $11.5 million in 2003, compared to an increase of $2.5
million or 37.9% from 2001 to 2002. The various components of non-interest
income are discussed below.
The largest component of non-interest income is Trust and Investment
Services revenue, which increased $98 thousand or 3.1%, from $3.2 million in
2002 to $3.3 million in 2003, compared to an increase of $260 thousand or 8.9%,
from $2.9 million in 2001 to $3.2 million in 2002. The market value of TIS
assets under management and custody grew 3.5% from $531.8 million at December
31, 2002, to $550.2 million at December 31, 2003. TIS assets under management
and custody grew 7.0% or $34.7 million in 2002.
Service charges on deposit accounts increased $135 thousand or 7.2% from
$1.9 million in 2002 to $2.0 million in 2003, and increased $412 thousand or
28.0% in 2002 from 2001. The increases in service charge revenue are primarily
the result of an increase in the number of deposit accounts, the implementation
of a new fee schedule which became effective February 15, 2003, and new service
offerings in 2002. Management expects this component of non-interest income to
continue to grow as the number of deposits grow.
Gains on the sale of investment securities also contributed to the increase
in non-interest income. Gains on the sale of investment securities increased
$198 thousand or 93.4% from $212 thousand in 2002 to $410 thousand in 2003.
Gains on the sale of investment securities increased $32 thousand in 2002 from
$120 thousand in 2001. The gains realized on the sale of investment securities
in 2003 are the result of normal portfolio management.
The Corporation has operating lease agreements with several customers. The
income on these agreements is classified as "Rental Income". Rental Income on
operating lease agreements increased $117 thousand from $750 thousand in 2002 to
$867 thousand in 2003, compared to a $538 thousand increase in 2002. See
discussion of related depreciation expense in the non-interest expense section.
Gains on the sale of fixed assets and OREO (other real estate owned)
increased $574 thousand from $438 thousand in 2002 to $1.0 million in 2003,
compared to an increase of $345 thousand in 2002. The gain in 2003 was the
result of a loan that was written down to net-realizable value and subsequently
transferred to OREO and disposed of in 2003.
24
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Gains and fee income generated in the sale of residential mortgage loans
increased $297 thousand from $722 thousand in 2002 to $1.0 million in 2003,
compared to a $457 thousand increase in 2002. As a result of the low mortgage
interest rate environment, residential mortgage refinancing and real estate
purchases have been strong. This activity has resulted in a high volume of
mortgage originations and sales. When a mortgage is sold, all unamortized fees
collected are recognized as income for that period and any gain or loss based on
the current market value is recorded at the time of the sale. The Corporation
retains the servicing on a portion of the loans sold and earns a servicing fee.
In 2003, the Corporation received proceeds of $422 thousand from key person
life insurance upon the death of its former CEO and President.
In 2003, the Corporation sold its $2.7 million credit card portfolio to
Elan Financial Services. The gain on the sale of the credit card portfolio in
2003 was $306 thousand. The simultaneous establishment of an agency arrangement
with Elan enables us to offer enhanced service to our credit card holders. Elan
processes card transactions for more than 1,200 financial institutions.
Other non-interest income increased $205 thousand or 10.4% from $2.0
million in 2002 to $2.2 million in 2003 compared to a $472 thousand increase in
2002. The primary component of other non-interest income in 2003 were electronic
banking revenue of $760.2 thousand in 2003, compared to $689.7 thousand in 2002
and miscellaneous loan fee income of $376.5 thousand in 2003, compared to $406.9
thousand in 2002.
NON-INTEREST EXPENSE
Total non-interest expense increased $2.2 million or 8.7% from $25.2
million in 2002 to $27.4 million in 2003, compared to an increase of $2.8
million or 12.4% from 2001 to 2002. The growth in non-interest expense reflects
the increased costs incurred to service the Corporation's expanding customer
base. The various components of non-interest expense changes are discussed
below.
Employee salaries and benefits increased $1.1 million or 7.7% from $13.9
million in 2002 to $15.0 million in 2003, compared to $1.6 million or 13.2%
increase from 2001 to 2002. Increased staff, annual employee raises, promotions
and a proportional increase in employee benefits are primarily responsible for
the increases in both years.
Net occupancy, equipment and data processing expense increased $540
thousand or 10.9% from $4.9 million in 2002 to $5.5 million in 2003, compared to
$694 thousand or 16.4% increase from 2001 to 2002. The increases are the direct
result of the opening of two full service branches during 2003 as well as
increased computer and related equipment costs associated with the expansion,
upgrading and maintenance of the Corporation's computers and networking
infrastructure.
Depreciation on operating leases increased $24 thousand or 3.6% from $667
thousand in 2002 to $691 thousand in 2003 compared to a $505 thousand or 311.7%
increase from 2001 to 2002. This depreciation expense is the result of operating
lease agreements the Corporation has with several of its customers. The income
associated with this operating lease is classified as Rental Income. See related
discussion of Rental Income in the Non-Interest Income section, above.
Professional services increased $20 thousand or 1.8% from $1.1 million in
2002 to $1.2 million in 2003 compared to a decrease of $11 thousand or 1.0% from
2001 to 2002. The increase in 2003 is the result of an increase in audit and
consultant fees. The decrease in 2002 is the result of decreased audit,
accounting, and consultant fees, generally, and legal fees related to loan
work-out activities.
25
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
FDIC deposit insurance expense was $88, $86 and $86 thousand for the year's
2003, 2002 and 2001, respectively. Bank shares tax was $493 thousand in 2003,
$480 thousand in 2002 and $482 thousand in 2001. Bank Shares Tax was 0.93%,
0.92% and 1.10% of average stockholder's equity for 2003, 2002, and 2001,
respectively. The Pennsylvania Bank Shares Tax is based primarily on Bank
stockholder's equity and paid annually.
Total other non-interest expense increased $522 thousand or 13.1% from $4.0
million in 2002 to $4.5 million in 2003. The increase in 2003 in other
non-interest expense can be primarily attributed to increased cost of supplies
to support the Bank's growing infrastructure. Total other non-interest expense
decreased $12 thousand or 0.3% from 2001 to 2002.
INCOME TAXES
Income tax expense was $2.2 million in 2003 compared to $2.4 million in
2002 and $1.4 million in 2001, representing an effective tax rate of 26.5%,
30.0% and 29.0%, respectively. The effective tax rate in 2003 decreased due to
changes in the tax exempt components of the Corporation's balance sheet and
income statement, such as tax exempt investment securities, tax exempt loans,
and the gain on the proceeds of life insurance.
26
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND TAX EQUIVALENT INCOME/EXPENSES
AND RATES FOR THE YEAR ENDED DECEMBER 31, 2003
2003 2002 2001
----------------------- ----------------------- ------------------------
(Dollars in thousands) Daily Daily Daily
Average Average Average
Balance Interest Rate% Balance Interest Rate% Balance Interest Rate%
------- -------- ----- ------- -------- ----- ------- -------- -----
ASSETS
Federal funds sold and other $ 17,368 $ 211 1.21 $ 20,861 $ 378 1.81 $ 7,774 $ 256 3.29
overnight investments
Interest bearing deposits in banks 543 3 0.55 210 5 2.38 238 5 2.10
Investment securities
Taxable 115,689 4,158 3.59 98,092 4,797 4.89 84,466 4,980 5.90
Tax-exempt (1) 14,280 660 4.62 1,718 127 7.38 1,814 134 7.40
------- ------ ------- ------ -------- --------
Total investment securities 129,969 4,818 3.71 99,810 4,924 4.93 86,280 5,114 5.93
------- ------ ------- ------ -------- -------
Loans and leases (2)
Taxable 462,806 28,414 6.14 440,054 31,702 7.20 417,183 33,331 7.99
Tax-exempt (1) 7,607 468 6.16 2,559 204 7.97 2,801 278 9.91
------- ------ ------- ------ -------- -------
Total loans 470,413 28,882 6.14 442,613 31,906 7.21 419,984 33,609 8.00
------- ------ ------- ------ --------- -------
Total interest-earning assets 618,293 33,914 5.49 563,494 37,213 6.60 514,276 38,984 7.58
Non-interest-earning assets
Allowance for possible loan and
lease losses (6,253) (6,542) (6,579)
Cash and due from banks 25,209 24,064 23,782
Other assets 22,981 22,660 20,394
------- ------- --------
Total assets $660,230 $603,676 $ 551,873
======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Savings, NOW, and money market
deposits $338,343 $ 2,501 0.74 $292,446 $ 3,875 1.33 $ 240,000 $ 5,869 2.45
Certificates of deposit and other time 119,162 3,386 2.84 135,006 5,473 4.05 147,016 8,313 5.65
------- ------ ------- ------ -------- ------
Total interest-bearing deposits 457,505 5,887 1.29 427,452 9,348 2.19 387,016 14,182 3.66
Securities sold under repurchase
agreements 133 3 2.26 779 23 2.95 2,912 96 3.30
Guaranteed preferred beneficial interest
in Corporation's subordinated
debentures 6,342 312 4.92 2,288 136 5.75 - - -
Federal Home Loan Bank advances
and other borrowings 33,176 952 2.87 24,027 1,166 4.85 24,254 1,308 5.39
------- ------ ------- ------ -------- ------
Total interest-bearing liabilities 497,156 7,154 1.44 454,546 10,673 2.35 414,182 15,586 3.76
Non-interest-bearing liabilities
Non-interest-bearing demand deposits 107,310 97,266 88,923
Other liabilities 5,203 5,327 5,759
------- ------- --------
Total liabilities 609,669 557,139 508,864
Stockholders' equity 50,561 46,537 43,009
------- ------- --------
Total liabilities and stockholders'
Equity $660,230 $603,676 $ 551,873
======= ======= ========
Net interest income $26,760 $26,540 $23,398
====== ====== ======
Net yield on interest-earning assets 4.33 4.71 4.55
==== ==== ====
(1) The indicated income and annual rate are presented on a tax equivalent
basis using the federal marginal rate of 34%, adjusted for the TEFRA
20% penalty for 2003, 2002, and 2001.
(2) Nonaccruing loans are included in the average balance.
27
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
ASSET QUALITY AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is an amount that management
believes will be adequate to absorb loan and lease losses on existing loans and
leases that may become uncollectible based on Management's evaluations of the
collectibility of loans and leases. These evaluations take into consideration
such factors as changes in the nature and volume of the loan and lease
portfolio, overall portfolio quality, adequacy of collateral, review of specific
problem loans and leases, and current economic conditions that may affect the
borrower's ability to pay.
Management evaluates the adequacy of the allowance on a quarterly basis to
ensure the provision for loan and lease losses has been charged against earnings
in an amount necessary to maintain the allowance at a level that is appropriate
based on management's assessment of probable estimated losses. The Corporation's
methodology for assessing the appropriateness of the allowance for loan and
lease losses consists of several key elements. These elements include a specific
allowance for loan and lease classified list loans and an allowance based on
historical trends. The Corporation consistently applies the following
comprehensive methodology.
The allowance for loan and lease losses addresses those loans and leases
maintained on the Corporation's loan and lease classified list, which are
assigned a rating of substandard, doubtful, or loss. Substandard loans and
leases are those with a well-defined weakness, which jeopardizes the repayment
of the debt. A loan or lease may be classified as substandard as a result of
impairment of the borrower's financial condition and repayment capacity. Loans
and leases for which repayment plans have not been met or collateral equity
margins do not protect the Corporation may also be classified as substandard.
Doubtful loans and leases have the characteristics of substandard loans and
leases with the added characteristic that collection or liquidation in full, on
the basis of presently existing facts and conditions, is highly improbable.
Although the possibility of loss is extremely high for doubtful loans and
leases, the classification of loss is deferred until pending factors, which
might improve the loan or lease, have been determined. Loans and leases rated as
doubtful in whole or in part are placed on nonaccrual status. Loans and leases,
which are classified as loss, are considered uncollectible and are charged to
the allowance for loan and lease losses.
Loans and leases on the loan and lease classified list may also be impaired
loans, which are defined as nonaccrual loans and leases or troubled debt
restructurings, which are not in compliance with the restructured terms. Each of
the classified loans and leases on the watch list is individually analyzed to
determine the level of the potential loss under the current circumstances. The
specific reserve established for these criticized by management and impaired
loans and leases is based on careful analysis of the loan's and leases
performance, the related collateral value, cash flow considerations and the
financial capability of any guarantor. The allowance for classified list loans
and leases is equal to the total amount of potential unconfirmed losses for the
individual classified loans and leases on the classified list. Classified loans
and leases are managed and monitored by management.
The allowance is based on historical trends and uses charge-off experience
of the Corporation to estimate potential unconfirmed losses in the balances of
the loan and lease portfolios. The historical loss experience percentage is
based on the charge-off history. Historical loss experience percentages are
applied to all non-classified loans and leases to obtain the portion of the
allowance for loan and lease losses which is based on historical trends. Before
applying the historical loss experience percentages, loan and lease balances are
reduced by amounts of government agency guarantees. Installment loan balances
are also adjusted for unearned discounts.
28
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
The Corporation also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions, which may cause a
potential loan and lease loss but are not specifically identifiable. It is
prudent to maintain an unallocated portion of the allowance because no matter
how detailed an analysis of potential loan and lease losses may be, the analysis
produces only estimates, which, by definition lack precision.
Since all identified losses are immediately charged off, no portion of the
allowance for loan and lease losses is restricted to any individual loan or
groups of loans, or lease or groups of leases, and the entire allowance is
available to absorb any and all loan and lease losses.
The following table's present information regarding the Corporation's total
allowance for loan and lease losses as well as the allocation of such amounts to
the various categories of loans at the dates indicated:
December 31, 2003
--------------------------------------------------------
Allowance
for Loan Percent of Percent of
(Dollars in thousands) Losses Allowance Total Loans
------------ --------- -----------
Commercial loans $ 3,760 64.1% 0.74%
Residential real estate 199 3.4% 0.04%
Consumer loans 1,187 20.2% 0.23%
Leases 115 2.0% 0.02%
General allowance 603 10.3% 0.12%
------- ------- ------
Total allowance for loan and lease losses $ 5,864 100.0% 1.15%
======= ======= ======
December 31, 2002
--------------------------------------------------------
Allowance
for Loan Percent of Percent of
(Dollars in thousands) Losses Allowance Total Loans
------------ --------- -----------
Commercial loans $ 4,454 71.5% 1.00%
Residential real estate 105 1.7% 0.02%
Consumer loans 1,403 22.5% 0.31%
Leases 185 3.0% 0.04%
General allowance 83 1.3% 0.02%
------- ------- ------
Total allowance for loan and lease losses $ 6,230 100.0% 1.39%
======= ======= ======
29
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
December 31
(Dollars in thousands) -----------------------------------------------------
2003 2002 2001 2000 1999
------- ------- -------- -------- --------
Balance at beginning of year $ 6,230 $ 6,344 $ 6,609 $ 6,261 $ 5,877
------- ------- ------- ------- -------
Provision charged to operating expense 2,519 2,231 2,929 876 799
------- ------- ------- ------- -------
Recoveries of loans previously charged off
Commercial loans 175 274 76 26 81
Real estate - mortgages 9 - - 59 -
Consumer loans 28 51 114 49 97
Lease financing receivables 2 - 8 - -
------- --------- ------- ------- -------
Total recoveries 214 325 198 134 178
------- ------- ------- ------- -------
Loan charge-offs
Commercial loans (1,044) (841) (2,173) (37) (38)
Real estate - mortgages (545) (1,265) (955) (161) (67)
Consumer loans (261) (216) (256) (440) (488)
Lease financing receivables (1,248) (348) (8) (24) -
------- ------- ------- -------- -------
Total charge-offs (3,099) (2,670) (3,392) (662) (593)
======= ======= ======= ======= =======
Net loan charge-offs (2,885) (2,345) (3,194) (528) (415)
------- ------- ------- ------- -------
Balance at end of year $ 5,864 $ 6,230 $ 6,344 $ 6,609 $ 6,261
======= ======= ======= ======= =======
Year-end loans outstanding $511,249 $447,682 $448,110 $406,889 $354,338
Average loans outstanding $470,413 $442,613 $419,984 $378,211 $331,966
Allowance for possible loan losses as
a percentage of year-end loans
outstanding 1.15% 1.39% 1.42% 1.62% 1.77%
Ratio of net charge-offs to average
loans outstanding 0.61% 0.53% 0.76% 0.14% 0.13%
Non-performing loans and leases include those on non-accrual status and
loans past due 90 days or more and still accruing. The Corporation's policy is
to write down all non-performing loans to net realizable value based on updated
appraisals. Non-performing loans are generally collateralized and are in the
process of collection. Non-performing loans reduce the Corporation's earnings
because interest income is not earned on such assets. Management continues to
take steps to reduce levels and correct and control current and future credit
quality issues. The Credit Administration Department assists Management in
improving the components of the allowance of loans and lease losses including
the provision for loan and lease losses, recoveries, and charged-off loans.
Please see the "Non-Interest Income" section for information regarding gains on
the sale of OREO. The following chart represents detailed information regarding
non-performing loans:
30
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NON-PERFORMING LOANS AND ASSETS
December 31
-----------------------------------------------------------------
(Dollars in thousands) 2003 2002 2001 2000 1999
-------- --------- -------- -------- --------
Past due over 90 days and still accruing $ 597 $ 321 $ 174 $ 134 $ 175
Non-accrual loans and leases 3,093 5,216 7,630 1,364 1,207
-------- -------- -------- -------- -------
Total non-performing loans and leases 3,690 5,537 7,804 1,498 1,382
Other real estate owned ("OREO") 965 368 831 803 470
-------- -------- -------- -------- --------
Total non-performing assets $ 4,655 $ 5,905 $ 8,635 $ 2,301 $ 1,852
======== ======== ======== ======== =======
Interest income which would
have been recorded $ 348 $ 448 $ 308 $ 76 $ 89
Interest income that was
received from customer (46) (234) -- (17) --
-------- -------- -------- -------- --------
Total contractual interest
for nonaccruing loans
and leases not collected $ 302 $ 214 $ 308 $ 59 $ 89
======== ======== ======== ======== ========
Non-performing loans as a
percentage of total loans and leases 0.72% 1.24% 1.74% 0.37% 0.39%
Allowance for loan losses
as a percentage of non-performing
loans and leases 158.92% 112.52% 81.29% 441.19% 453.04%
Non-performing assets as a percentage
of total loans and leases and other real
estate owned 0.91% 1.32% 1.92% 0.56% 0.52%
Allowance for loan and lease losses as a
percentage of non-performing
assets 125.97% 105.50% 73.47% 287.22% 338.07%
(1) Generally the Bank places a loan in nonaccrual status when principal or
interest has been in default for a period of 90 days or more unless the
loan is both well secured and in the process of collection.
The above ratios indicate the allowance for loan losses as a percentage of
non-performing loans and assets exceeds the principal balances of all
non-performing loans and leases at December 31, 2003. Management believes that
the allowance for loan and lease losses is adequate based on its current
assessment of probable estimated losses. OREO represents residential and
commercial real estate owned by the Corporation following default by borrowers
that has been written down to estimated realizable value (net of estimated
disposal costs) based on professional appraisals. The Credit Administration
Department has assisted in reducing loans past due over 90 days and still
accruing, non-accrual loans, and OREO.
Management is not aware of any loans or leases other than those included in
these tables and mentioned in this section as well as the Asset Quality and
Allowance for Loan and Lease Losses section 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.
31
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by the
Federal Reserve Board ("FRB") for bank holding companies. The Bank is also
subject to similar capital requirements adopted by the Office of the Comptroller
of the Currency ("OCC"). Under these requirements, the regulatory agencies have
set minimum thresholds for Tier I Capital, Total Capital, and Leverage ratios.
At December 31, 2003, both the Corporation's and the Bank's capital exceeded all
minimum regulatory requirements and were considered "well capitalized", as
defined in the regulations issued pursuant to the FDIC Improvement Act of 1994.
The Corporation's and Bank's Risk-Based Capital Ratios, shown below, have been
computed in accordance with regulatory accounting policies.
December 31
RISK-BASED -------------------------------------- "Well Capitalized"
CAPITAL RATIOS 2003 2002 2001 Requirements
- -------------- ------------ ------------ ----------- -----------------
Corporation
-----------
Leverage Ratio 9.71% 8.29% 7.65% N/A
Tier I Capital Ratio 12.01% 10.83% 9.50% N/A
Total Risk-Based Capital Ratio 13.07% 12.08% 10.75% N/A
Bank
----
Leverage Ratio 8.68% 8.05% 7.42% 5.00%
Tier I Capital Ratio 10.72% 10.53% 9.22% 6.00%
Total Risk-Based Capital Ratio 11.79% 11.78% 10.47% 10.00%
The Bank is not under any agreement with the regulatory authorities nor is
it aware of any current recommendations by the regulatory authorities that, if
they were to be implemented, would have a material effect on liquidity, capital
resources or operations of the Corporation.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The following table sets forth contractual obligations and other
commitments representing required and potential cash outflows as of December 31,
2003:
(Dollars in thousands) 2008 2007 2006 2005 2004
-------- --------- -------- -------- ---------
Minimum annual rentals on noncancellable $ 348 $ 348 $ 348 $ 328 $ 328
operating leases
Remaining contractual maturities of time
deposits 11,751 3,107 5,049 16,385 74,860
Loan commitments - - - - 122,853
Long-term borrowed funds 19,566 16,966 316 297 278
Guaranteed preferred beneficial interests in
Corporation's subordinated debentures - - - - -
Standby letter of credit - - - - 15,548
------- ------- ------ ------- -------
Total $ 31,665 $ 20,151 $ 5,713 $ 17,010 $199,867
======= ======= ====== ======= =======
The Corporation had no capital leases at December 31, 2003
BRANCHING AND TECHNOLOGY PROJECTS
The Corporation is reviewing its branch expansion options including
development of new branch locations and / or the purchase of branches or
deposits from other financial institutions. During 2003, the Corporation opened
its sixteenth and seventeenth branch locations, along with a new Customer
Contact Center. The Corporation continues to utilize technology as a means to
improve service, remain competitive and to reduce operating costs.
32
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
DESCRIPTION OF CAPITAL STOCK AND MARKET INFORMATION
The authorized capital stock of the Corporation consists of 10,000,000
shares of common stock, par value $1.00 per share, of which 4,516,552 and
4,429,464 shares were outstanding (net of shares held in Treasury) at the end of
2003 and 2002, respectively. The Corporation's common stock is publicly traded
over the counter under the symbol "FCEC". Trading is sporadic. The following
table shows the range of high and low bid prices for the stock based upon
transactions reported for each quarter respectively.
Bid Prices
----------
2003 2002
---- ----
Quarter Ended High Low High Low
------------- ---- --- ---- ---
First $18.75 $16.65 $15.15 $14.61
Second $19.10 $18.25 $15.96 $14.98
Third $21.50 $20.25 $15.02 $13.45
Fourth $25.05 $24.55 $17.50 $14.18
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
The FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions: An amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No 9", which removes acquisitions of financial institutions from
the scope of SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions. The provisions of the SFAS No. 147 related to unidentifiable
intangible assets and the acquisition of a less-than-whole financial institution
are effective for acquisitions for which the date of acquisition is on or after
October 1, 2002. The adoption of SFAS No. 147 did not have a material impact on
the Corporation's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure". SFAS No. 148 amends SFAS 123
Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 was adopted by the Corporation for the fiscal year ending
December 31, 2002 and for the interim periods beginning March 31, 2003. The
adoption of SFAS No. 148 did not have a material impact on the Corporation's
financial position or results of operations.
The Corporation adopted FASB 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", on July 1, 2003. FASB 149 clarifies and
amends FASB 133 for implementation issues raised by constituents or includes the
conclusions reached by the FASB on certain FASB Staff Implementation Issues.
Statement 149 also amends FASB 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. The adoption of SFAS No. 149 did not
have a material impact on the Corporation's financial position or results of
operations.
33
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (SFAS 150). SFAS 150 modifies the accounting for
certain financial instruments that issuers previously could account for as
equity. Under SFAS 150, certain instruments with characteristics of both
liabilities and equity must be classified as liabilities in the balance sheets,
with the corresponding payment to holders of the instruments recognized as a
component of interest expense. The adoption of this standard had no impact on
the financial position or results of operations of the Corporation as the
Corporation's Trust Preferred Securities (referred to as "guaranteed preferred
beneficial interests in subordinated debentures") were previously classified as
liabilities within the balance sheets and recorded as interest expense within
the statements of income.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 requires certain guarantees to be
recorded at fair value and applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes related to an underlying asset, liability or equity security of
the guaranteed party. The recognition requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified subsequent to December 31, 2002.
FIN 45 also expands the disclosures to be made by guarantors, effective as of
December 31, 2002, to include the nature of the guarantee, the maximum potential
amount of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligation under the guarantee. The disclosure requirements of FIN 45 are
included in the notes to the financial statements.
The Corporation adopted EITF 03-1, "The Meaning of Other than Temporary
Impairment and Its Application to Certain Investments", as of December 31, 2003.
EITF 03-1 includes certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under FAS 115, Accounting
for Certain Investments in Debt and Equity Securities, that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in the
notes to the financial statements.
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
the evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Corporation will be unable to collect all contractually required payments
receivable. SOP 03-3 requires that the Corporation recognize the excess of all
cash flows expected at acquisition over the investor's initial investment 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 excepted 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.
34
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 sources of
liquidity for the Corporation are funding available from growth to our existing
deposit base, new deposits, Federal Home Loan Bank ("FHLB"), and cash flow from
the investment and loan portfolios. The Corporation considers funds from such
sources to comprise its "core" deposit base because of the historical stability
of such sources of funds. Additional liquidity comes from the Corporation's
non-interest bearing demand deposit accounts and credit facilities. Other
deposit sources include a tiered savings product and certificates of deposit in
excess of $100,000. Details of core deposits, non-interest-bearing demand
deposit accounts and other deposit sources are highlighted in the following
table:
DEPOSIT ANALYSIS
(Dollars in thousands)
2003 2002 2001
--------------------- ---------------------- ---------------------
Average Effective Average Effective Average Effective
DEPOSIT TYPE Balance Yield Balance Yield Balance Yield
------------ ------- --------- ------- --------- ------- ---------
NOW $ 88,518 0.19% $ 79,587 0.38% $ 71,034 1.13%
Money Market 26,051 0.70% 25,430 1.37% 22,490 2.37%
Statement Savings 63,032 0.77% 53,754 1.44% 47,077 2.53%
Other Savings 1,522 0.79% 1,567 1.34% 1,758 2.39%
CD's Less than $100,000 96,773 2.93% 109,362 4.18% 117,282 5.73%
------- ------- -------
Total Core Deposits 275,896 1.33% 269,700 2.23% 259,641 3.58%
Non-Interest-Bearing
Demand Deposits 107,334 -- 97,266 -- 88,923 --
------- -------- --------
Subtotal 383,230 0.96% 366,966 1.64% 348,564 2.67%
Tiered Savings 159,220 1.04% 132,108 1.84% 97,641 3.38%
CD's Greater than $100,000 22,365 2.48% 25,644 3.52% 29,734 5.36%
-------- -------- ------
Total Deposits $564,815 $524,718 $475,939
======= ======= =======
35
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS,
$100,000 OR MORE, AT DECEMBER 31, 2003
Due Within Over 3 Months Over 6 Months Due Over
(Dollars in thousands) 3 Months Through 6 Months Through 12 Months 12 Months Total
----------- ---------------- ----------------- --------- -----
Certificates of Deposit
$100,000 or more $ 2,886 $ 3,050 $ 4,607 $10,803 $ 21,346
The Corporation utilizes borrowings from the FHLB and collateralized
repurchase agreements in managing its interest rate risk and as a tool to
augment deposits and in funding asset growth. The Corporation may utilize these
funding sources to better match its assets that are subject to longer term
repricing (i.e., between one and five years). The Bank, as a member of the FHLB,
maintains several credit facilities (overnight lines of credit, amortizing and
non-amortizing fixed rate term and variable rate term advances with FHLB). As of
December 31, 2003, the amount outstanding under the Bank's line of credit with
the FHLB was $0.
FHLB borrowings totaled $40.5 million compared to $22.7 million at December
31, 2002. During 2003 and 2002, average FHLB advances were approximately $33.2
million and $24.0 million, respectively and consisted of short and long term
advances representing a combination of maturities. The average interest rate for
2003 and 2002 on these advances was approximately 2.9% and 4.9%, respectively.
The Bank currently has a maximum borrowing capacity with the FHLB of
approximately $139.8 million.
36
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
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 of its "gap position" within one year is a negative
$228,727 million or 33.2% of total assets at December 31, 2003, compared with a
negative $143,494 million or 22.4% of total assets at the end of 2002. The
Corporation's gap position is just one tool used to evaluate interest rate risk
and the stability of net interest margins. The data in the following chart
represents the gap position at a specific point in time and may not be
indicative of future gap positions. 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. Management
monitors interest rate risk as a regular part of corporate operations with the
intention of maintaining a stable net interest margin.
INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 2003
(Dollars in thousands) Within Through Five Non-Rate
One Year Five Years Years Sensitive Total
--------- ---------- ---------- ---------- ----------
ASSETS
Federal funds sold $ 2,500 $ - $ - $ - $ 2,500
Investment securities 25,448 40,434 64,847 - 130,729
Interest bearing deposits in banks 374 - - - 374
Loans and leases 188,115 241,771 81,363 (5,864) 505,385
Cash and due from banks - - - 28,509 28,509
Premises & equipment - - - 13,168 13,168
Other assets - - - 8,545 8,545
-------- -------- -------- -------- ---------
Total assets $ 216,437 $ 282,205 $ 146,210 $ 44,358 $ 689,210
======== ======== ======== ======== =========
LIABILITIES AND CAPITAL
Non-interest-bearing deposits$ - $ - $ - $ 114,307 $ 114,307
Interest bearing deposits 428,268 27,860 6,879 - 463,007
Guaranteed Preferred Securities 15,000 - - - 15,000
FHLB advances and other
borrowings 1,810 36,925 1,808 - 40,543
Other liabilities 86 - 4,517 - 4,603
Capital - - - 51,750 51,750
-------- -------- -------- -------- ---------
Total liabilities and capital $ 445,164 $ 64,785 $ 13,204 $ 166,057 $ 689,210
======== ======== ======== ======== =========
Net interest rate sensitivity gap $(228,727) $ 217,420 $ 133,006 $(121,699)$ -
======== ======== ======== ======== ==========
Cumulative interest rate
sensitivity gap $(228,727) $ (11,307) $ 121,699 $ - $ -
======== ======== ======== ======== ==========
Cumulative interest rate
sensitivity gap divided
by total assets (33.2%) (1.6%) 17.7%
======== ======== ========
The Corporation's gap position is one factor used to evaluate interest rate
risk and the stability of net interest margins. Other factors include computer
simulations of what might happen to net interest income under various interest
rate forecasts and scenarios. The Corporation's Asset Liability Management
Policy requires quarterly calculation of the effects of changes in interest
rates on net interest income. The table below summarizes estimated changes in
net interest income over the twelve-month period ending December 31, 2004 under
alternative interest rate scenarios. The change in interest rates was modeled to
simulate the affect of a proportional shift in asset and liability ratios (rate
ramp). The prime rate as reported in the Wall Street Journal as of December 31,
2003 of 4.00% is used as the "driver rate" in these simulations.
37
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
(Dollars in thousands)
Change in Net Dollar Percent
Interest Rates Interest Income Change Change
-------------- --------------- ------ ------
+200 Basis Points $ 32,011 $ 1,622 5.34%
+100 Basis Points 31,196 807 2.66
Flat Rate 30,389 - -
-100 Basis Points 29,787 (602) (1.98)
-200 Basis Points 29,212 (1,777) (3.87)
Management believes that the assumptions utilized in evaluating the
vulnerability of the Corporation's net interest income to changes in interest
rates approximate actual experience; however, the interest rate sensitivity of
the Corporation's assets and liabilities, as well as the estimated effect of
changes in interest rates on net interest income, could vary substantially if
different assumptions are used or actual experience differs from the experience
on which the assumptions were based.
In the event the Corporation should experience a mismatch in its desired
gap position or an excessive decline in its net interest income subsequent to an
immediate and sustained change in interest rates, it has a number of options
which it could utilize to remedy such a mismatch. The Corporation could
restructure its investment portfolio through sale or purchase of securities with
more favorable repricing attributes. It could also promote loan products with
appropriate maturities or repricing attributes. The Corporation could also
solicit deposits or search for borrowings with more desirable maturities.
However, market circumstances might make execution of these strategies cost
prohibitive or unattainable.
The nature of the Corporation's current operation is such that it is not
subject to foreign currency exchange or commodity price risk. Additionally,
neither the Corporation nor the Bank owns trading assets. At December 31, 2003,
the Corporation did not have any hedging transactions in place such as interest
rate swaps, caps or floors.
38
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
First Chester County Corporation
We have audited the accompanying consolidated balance sheets of First
Chester County Corporation and subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of earnings, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Chester
County Corporation as of December 31, 2003 and 2002, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
Grant Thornton LLP
Philadelphia, Pennsylvania
January 26, 2004
39
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) December 31
----------------------------
2003 2002
---------- ----------
ASSETS
Cash and due from banks $ 28,509 $ 31,777
Federal funds sold and other overnight investments 2,500 17,000
Interest bearing deposits 374 90
-------- --------
Total cash and cash equivalents 31,383 48,867
-------- --------
Investment securities held-to-maturity (fair value of $20
and $34 in 2003 and 2002, respectively) 19 31
Investment securities available-for-sale, at fair value 130,710 128,344
Loans and leases 511,249 447,682
Less allowance for possible loan and lease losses (5,864) (6,230)
-------- --------
Net loans 505,385 441,452
Premises and equipment, net 13,168 13,944
Other assets 8,545 7,372
-------- --------
Total assets $ 689,210 $ 640,010
======== ========
LIABILITIES
Deposits
Non-interest-bearing $ 114,307 $ 109,012
Interest-bearing (including certificates of deposit over $100 of
$21,346 and $22,845 - 2003 and 2002, respectively) 463,007 449,726
-------- --------
Total deposits 577,314 558,738
Federal Home Loan Bank advances and other borrowings 40,543 22,678
Guaranteed preferred beneficial interest in Corporation's subordinated
debentures 15,000 5,000
Other liabilities 4,603 4,982
-------- --------
Total liabilities 637,460 591,398
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
Outstanding 4,799,666 at December 31, 2003 and December 31, 2002 4,800 4,800
Additional paid-in capital 1,877 860
Retained earnings 50,116 46,746
Accumulated other comprehensive income 307 1,378
Treasury stock, at cost: 2003 - 283,144 and 2002 - 370,202 (5,350) (5,172)
-------- --------
Total stockholders' equity 51,750 48,612
-------- --------
Total liabilities and stockholders' equity $ 689,210 $ 640,010
======== ========
The accompanying notes are an integral part of these statements.
40
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share) Years ended December 31
---------------------------------------
2003 2002 2001
---------- --------- ---------
INTEREST INCOME
Loans and leases, including fees $ 28,724 $ 31,837 $ 33,609
Investment securities 4,595 4,881 5,114
Federal funds sold and other overnight investments 211 378 257
Deposits in banks 3 5 5
--------- -------- --------
Total interest income 33,533 37,101 38,985
--------- -------- --------
INTEREST EXPENSE
Deposits 5,887 9,348 14,182
Securities sold under repurchase agreements 3 23 96
Guaranteed preferred beneficial interest in Corporation's subordinated
Debentures 312 136 -
Federal Home Loan Bank advances and other borrowings 952 1,166 1,308
--------- -------- --------
Total interest expense 7,154 10,673 15,586
--------- -------- --------
Net interest income 26,379 26,428 23,399
PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES 2,519 2,231 2,929
--------- -------- --------
Net interest income after provision for possible loan and lease losses 23,860 24,197 20,470
--------- -------- --------
NON-INTEREST INCOME
Trust and Investment Services 3,277 3,179 2,919
Service charges on deposit accounts 2,021 1,886 1,474
Investment securities gains, net 410 212 180
Operating lease rental income 867 750 212
Gains on the sale of fixed assets and OREO 1,012 438 93
Gains and fees on the sale of residential mortgages 1,019 722 265
Gains on the sale of credit card portfolio 306 - -
Proceeds from life insurance 422 - -
Other 2,172 1,967 1,495
--------- -------- --------
Total non-interest income 11,506 9,154 6,638
--------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 14,971 13,897 12,281
Occupancy, equipment, and data processing 5,476 4,936 4,242
Depreciation expense on operating leases 691 667 162
FDIC deposit insurance 88 86 86
Bank shares tax 493 480 482
Professional services 1,162 1,142 1,153
Other 4,519 3,997 4,009
--------- -------- --------
Total non-interest expense 27,400 25,205 22,415
--------- -------- --------
Income before income taxes 7,966 8,146 4,693
INCOME TAXES 2,161 2,444 1,361
--------- --------
NET INCOME $ 5,805 $ 5,702 $ 3,332
========= ========
PER SHARE
Basic earnings per common share $ 1.30 $ 1.29 $ 0.75
======== ======== ========
Diluted earnings per common share $ 1.26 $ 1.28 $ 0.74
======== ======== ========
Dividends declared $ 0.5425 $ 0.5250 $ 0.5200
======== ======== ========
The accompanying notes are an integral part of these statements.
41
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Treasury Comprehensive Stockholders'
(Dollars in thousands) Shares Par Value Capital Earnings Income Stock Income Equity
- ---------------------- ------ --------- ---------- -------- ------------- -- ----- ------------- -------------
Balance at January 1, 2001 4,799,666 $ 4,800 $ 610 $ 42,353 $ (759) $ (3,992) $ - $ 43,012
Net income - - - 3,332 - - 3,332 3,332
Cash dividends declared - - - (2,318) - - - (2,318)
Other Comprehensive Income
Net unrealized gains on
investment securities
available-for-sale - - - - 843 - 843 843
Treasury stock transactions - - 163 - - (1,193) - (1,030)
--------- ------ ----- ------- --------- -------- ------ -------
Comprehensive Income $ 4,175
========
Balance at December 31, 2001 4,799,666 $ 4,800 $ 773 $ 43,367 $ 84 $ (5,185) $ - $ 43,839
Net income - - - 5,702 - - 5,702 5,702
Cash dividends declared - - - (2,323) - - - (2,323)
Other Comprehensive Income
Net unrealized gains on
investment securities
available-for-sale - - - - 1,294 - 1,294 1,294
Treasury stock transactions - - 87 - - 13 - 100
--------- ------ ----- ------- --------- -------- ------ -------
Comprehensive Income 6,996
======
Balance at December 31, 2002 4,799,666 $ 4,800 $ 860 $ 46,746 $ 1,378 $ (5,172) $ - $ 48,612
Net income - - - 5,805 - - 5,805 5,805
Cash dividends declared - - - (2,434) - - - (2,434)
Other Comprehensive Income
Net unrealized(losses)
gains oninvestment
securities available-
for-sale - - - - (1,072) - (1,072) (1,072)
Treasury stock transactions - - 1,017 - - (178) - 839
--------- ------ ----- ------- --------- -------- ------ -------
Comprehensive Income $ 4,733
======
Balance at December 31, 2003 4,799,666 $ 4,800 $ 1,877 $ 50,117 $ 306 $ (5,350) $ - $ 51,750
========= ======= ====== ======== ======== ====== ======= =======
The accompanying notes are an integral part of these statements
42
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Years ended December 31
--------------------------------------
2003 2002 2001
---------- ---------- --------
OPERATING ACTIVITIES
Net income $ 5,805 $ 5,702 $ 3,332
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 2,744 2,629 1,851
Provision for loan losses 2,519 2,231 2,929
Amortization of investment security
premiums and accretion of discounts, net 1,812 697 361
Amortization of deferred loan fees (234) 298 (379)
Investment securities (gains) losses, net (410) (212) (180)
(Increase) decrease in other assets (620) (31) 233
Increase (decrease) in other liabilities (379) (166) (1,130)
-------- --------- --------
Net cash provided by operating activities 11,237 11,148 7,017
-------- --------- --------
INVESTING ACTIVITIES
Net increase in loans (64,668) (109) (44,036)
Proceeds from sales of investment securities available-for-sale 17,736 17,863 39,981
Proceeds from maturities of investment securities available-for-sale 71,242 37,579 21,031
Proceeds from maturities of investment securities held-to-maturity 1 510 1,679
Purchase of investment securities available-for-sale (95,909) (104,217) (48,139)
Purchase of premises and equipment, net (1,968) (989) (7,871)
-------- --------- --------
Net cash used in investing activities (73,566) (49,363) (37,355)
-------- --------- --------
FINANCING ACTIVITIES
Proceeds (repayments) from FHLB advances and
other short term borrowings 849 (22,500) 22,500
Proceeds (repayments) from FHLB
advances and other long term borrowings 17,015 13,427 (17,906)
Increase in deposits 18,576 59,913 27,335
(Decrease) increase in securities sold under repurchase agreements - (4,769) 2,017
Cash dividends paid (2,434) (2,323) (2,318)
Proceeds from issuance of guaranteed preferred beneficial interest
in Corporation's subordinated debentures 10,000 5,000 -
Net increase (decrease) in Treasury Stock 839 101 (1,030)
-------- --------- --------
Net cash provided by financing activities 44,845 48,849 30,598
-------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (17,484) 10,634 260
Cash and cash equivalents at beginning of year 48,867 38,233 37,973
-------- --------- --------
Cash and cash equivalents at end of year $ 31,383 $ 48,867 $ 38,233
======== ========= ========
The accompanying notes are an integral part of these statements.
43
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Chester County Corporation (the "Corporation"), through its
wholly-owned subsidiary, First National Bank of Chester County (the
"Bank"), has been serving the residents and businesses of Chester County,
Pennsylvania, since 1863. The Bank is a locally managed community bank
providing loan, deposit, cash management and trust services from its
seventeen branch locations. The Bank encounters vigorous competition for
market share in the communities it serves from bank holding companies,
other community banks, Internet banks, thrift institutions, credit unions
and other non-bank financial organizations such as mutual fund insurance
and brokerage companies.
The Corporation and the Bank, and their wholly-owned subsidiaries FNB
Property Management, LLC, First National Insurance Services, LLC, and Turks
Head Properties, Inc., First Chester County Capital Trust I, and First
Chester County Capital Trust II are subject to regulations of certain state
and federal agencies. These regulatory agencies periodically examine the
Corporation and the Bank for adherence to laws and regulations.
1. Basis of Financial Statement Presentation
The accounting policies followed by the Corporation and its wholly-owned
subsidiaries conform to generally accepted accounting principles (GAAP) and
predominant practices within the banking industry. The accompanying
consolidated financial statements include the accounts of the Corporation,
the Bank, Turks Head Properties, Turks Head II, First National Bank
Investment Services, and FNB Properties. All significant intercompany
transactions have been eliminated.
In preparing the financial statements, Management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the balance sheets, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The principal estimate that is susceptible to significant change in the
near term relates to the allowance for loan and lease losses. The
evaluation of the adequacy of the allowance for loan and lease losses
includes an analysis of the individual loans and leases and overall risk
characteristics and size of the different loan and lease portfolios, and
takes into consideration current economic and market conditions, the
capability of specific borrowers to pay specific loan and lease
obligations, as well as current loan collateral values. However, actual
losses on specific loans and leases, which also are encompassed in the
analysis, may vary from estimated losses.
Statement of Financial Accounting Standards (SFAS) 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
subsequent interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and assess performance. The statement also requires
that public enterprises report a measure of a segment profit or loss,
certain specific revenue and expense items and segment assets. It also
requires that information be reported about revenues derived from the
enterprises' products or services, or about the countries in which the
enterprises earn revenues and hold assets, and about major customers,
regardless of whether that information is used in making operating
decisions.
44
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The Corporation has one reportable segment, "Community Banking." All of the
Corporation's activities are interrelated, and each activity is dependent
and assessed based on how each of the activities of the Corporation
supports the others. For example, commercial lending is dependent upon the
ability of the Bank to fund itself with retail deposits and other
borrowings and to manage interest rate and credit risk. This situation is
also similar for consumer and residential mortgage lending. Accordingly,
all significant operating decisions are based upon analysis of the
Corporation as one operating segment or unit.
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, to certain entities in which voting rights are not effective in
identifying the investor with the controlling financial interest. An entity
is subject to consolidation under FIN 46 if the investors either do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support, are unable to direct the
entity's activities, or are not exposed to the entity's losses or entitled
to its residual returns ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated
with 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.
Management has determined that First Chester County Capital Trust I ("Trust
I") and First Chester County Capital Trust II ("Trust II"; Trust I and
Trust II, collectively, the "Trusts") each qualify as variable interest
entities under FIN 46. Each of the Trusts issued mandatory redeemable
preferred stock to investors and loaned the proceeds to the Corporation.
Trust I holds, as its sole asset, subordinated debentures issued by the
Corporation in 2002. Trust II holds, as its sole asset, subordinated
debentures issued by the Corporation in 2003. Trust I is included in the
Corporation's consolidated balance sheet and statements of income for 2002
and 2003, and Trust II is included in the Corporation's consolidated
balance sheet and statement of income for 2003. The Corporation has
evaluated the impact of FIN 46 and concluded it should continue to
consolidate the Trusts' financial statements with the Corporation's
financial statements as of December 31, 2003, in part, due to its ability
to call the preferred stock prior to the mandatory redemption date and
thereby benefit from a decline in required dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to
certain variable interest entities by March 31, 2004. The Corporation plans
to adopt the provisions under the revised interpretation in the first
quarter of 2004. FIN 46(R) will require the Corporation to deconsolidate
the Trusts. FIN 46(R) precludes consideration of the call option embedded
in the preferred stock when determining if the Corporation has the right to
a majority of the Trusts' expected residual returns. Accordingly, the
Corporation will deconsolidate the Trusts at the end of the first quarter,
which will result in an increase in outstanding debt by $15.10 million. The
banking regulatory agencies have not issued any guidance that would change
the regulatory capital treatment for the trust-preferred securities issued
by the Trusts based on the adoption of FIN 46(R). However, as additional
interpretations from the banking regulators related to entities such as the
Trusts become available, Management will reevaluate its potential impact to
its Tier I capital calculation under such interpretations.
2. Financial Instruments
The Corporation follows SFAS 107, "Disclosures about Fair Value of
Financial Instruments," which requires all entities to disclose the
estimated fair value of their assets and liabilities considered to be
financial instruments. Financial instruments requiring disclosure consist
primarily of investment securities, loans, and deposits and borrowings.
45
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
3. Investment Securities
The Corporation follows SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires investments in securities to be
classified in one of three categories: held-to-maturity, trading, or
available-for-sale. Debt securities that the Corporation has the positive
intent and ability to hold to maturity are classified as held-to-maturity
and are reported at amortized cost. As the Corporation does not engage in
security trading, the balance of its debt securities and any equity
securities are classified as available-for-sale. Net unrealized gains and
losses for such securities, net of tax effect, are required to be
recognized as a separate component of stockholders' equity and excluded
from the determination of net income.
The Corporation adopted Emerging Issues Task Force (EITF) 03-1, "The
Meaning of Other than Temporary Impairment and Its Application to Certain
Investments as December 31, 2003. EITF 03-1 includes certain disclosures
regarding quantitative and qualitative disclosures for investment
securities accounted for under FAS 115, Accounting for Certain Investments
in Debt and Equity Securities that is impaired at the balance sheet date,
but an other-than-temporary impairment has not been recognized. The
disclosure under EITF 03-1 are required for financial statements for years
ending after December 15, 2003 and are included in these financial
statements.
The Corporation adopted the provisions of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activity," as amended by SFAS 138 on
January 1, 2001. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. It requires that
an entity recognizes all derivatives either as assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The Corporation did not have any derivative instruments at December
31, 2003, 2002, and 2001.
4. Loans and Leases and Allowance for Loan and Lease Losses
Loans and leases that Management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, reduced by unearned discount and an allowance for loan
and lease losses. The allowance for loan and lease losses is established
through a provision for loan and lease losses charged to expense. Loan and
lease principal considered to be uncollectible by management is charged
against the allowance for loan and lease losses. The allowance is an amount
that management believes will be adequate to absorb possible losses on
existing loans and leases that may become uncollectible based upon an
evaluation of known and inherent risks in the loan and lease portfolio, the
evaluation takes into consideration such factors as changes in the nature
and size of the loan and lease portfolio, overall portfolio quality,
specific problem loans, and current and future economic conditions which
may affect the borrowers' ability to pay. The evaluation also details
historical losses by loan category, the resulting loss rates for which are
projected at current loan and lease total amounts. Loss estimates for
specified problem loans and leases are also detailed. Interest on loans and
leases is accrued and credited to operations based upon the principal
amount outstanding. Certain origination and commitment fees and related
direct loan or lease origination costs are deferred and amortized over the
contractual life of the related loans and leases, resulting in an
adjustment of the related loan's yield. Accrual of interest is discontinued
on a loan when management believes that the borrower's financial condition
is such that collection of interest and principal is doubtful. Upon such
discontinuance, all unpaid accrued interest is reversed. The determination
of the allowance for loan and lease losses is based upon the character of
the loan and lease portfolio, current economic conditions, loss experience,
and other relevant factors, which, in management's judgment, deserve
recognition in estimating possible losses.
46
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The Corporation accounts for impairment in accordance with SFAS 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." SFAS 114 requires loan impairment to be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, its observable market price or the fair value of
the collateral if the loan is collateral dependent. If it is probable that
a creditor will foreclose on a property, the creditor must measure
impairment based on the fair value of the collateral. SFAS 118 allows
creditors to use existing methods for recognizing interest income on
impaired loans.
Residential mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated
fair value. Gains and losses and unamortized fees on sales of residential
mortgage loans are included in non-interest income.
The Corporation accounts for its transfers and servicing of financial
assets in accordance with SFAS 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". SFAS 140 revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral.
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 of 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 underlying 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 December 31, 2003 were $10.7 million, and they expire through March 31,
2019. 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.
The Corporation follows the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) 102, SAB 102 provides guidance on the
development, documentation, and application of a systematic methodology for
determining the allowance for loans and leases in accordance with United
States GAAP. The adoption of SAB 102 did not to have a material impact on
the Company's financial position or results of operations.
47
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
5. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Assets are depreciated over their estimated useful lives, principally by
the straight-line method.
The Corporation adopted SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" on January 1, 2002. SFAS 144 retains the
existing requirements to recognize and measure the impairment of long-lived
assets to be held and used or to be disposed of by sale. However, SFAS 144
makes changes to the scope and certain measurement requirements of existing
accounting guidance. SFAS 144 also changes the requirements relating to
reporting the effects of a disposal or discontinuation of a segment of a
business. The adoption of this statement did not have a material impact on
the financial condition or results of operations of the Company.
6. Contributions
The Corporation accounts for contributions in accordance with SFAS 116,
"Accounting for Contributions Received and Contributions Made." SFAS 116
specifies that contributions made by the Corporation be recognized as
expenses in the period made and as decreases of assets or increases of
liabilities depending on the form of the benefits given. In accordance with
SFAS 116, the Corporation incurred contribution expenses relating to
long-term commitments to local not-for-profit organizations of $94
thousand, $90 thousand and $78 thousand during 2003, 2002 and 2001,
respectively.
7. Income Taxes
The Corporation accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes." Under the liability method specified by SFAS
109, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense and benefits are the
result of changes in deferred tax assets and liabilities.
8. Employee Benefit Plans
The Corporation has certain employee benefit plans covering eligible
employees. The Bank accrues such costs as earned by the employee.
9. Stock Based Compensation Plan
At December 31, 2003, the Corporation had one stock-based compensation
plan. See Note M for additional disclosures regarding this 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.
48
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The Financial Accounting Standards Board issued Statement of Financial
Accounting Statement No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("FAS 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.
2003 2002 2001
--------- --------- --------
Net income (in thousands) As reported $ 5,805 $ 5,702 $ 3,332
Stock-based compensation
costs determined under fair
value method for all awards 132 300 310
------- -------- -------
Pro forma $ 5,673 $ 5,402 $ 3,023
======= ======== =======
Earnings per share (Basic) As reported $ 1.30 $ 1.29 $ 0.75
Pro forma $ 1.27 $ 1.22 $ 0.68
Earnings per share (Diluted) As reported $ 1.26 $ 1.28 $ 0.74
Pro forma $ 1.23 $ 1.21 $ 0.67
The fair value of the options granted in 2003, 2002 and 2001 was $0, $595,
and $576 thousand, respectively. There were no grants in 2003.
The fair value of an option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002 and 2001, respectively: dividend yield
of 2.73% and 3.50%; expected volatility of 0.93 and 0.91; risk-free
interest rate of 2.22% and 3.50%; and an expected life of 2.83 years for
2002 and 2.84 years for 2001.
10. Trust and Investment Services Division Assets and Income
Assets held by the Corporation in fiduciary or agency capacities for its
customers are not included in the accompanying consolidated balance sheets
since such items are not assets of the Bank or Corporation. Operating income
and expenses of the Trust and Investment Services Division are included
under their respective captions in the accompanying consolidated statements
of income and are recorded on the accrual basis.
49
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
11. Earnings per Share and Stockholders' Equity
The Corporation follows the provisions of SFAS 128, "Earnings Per Share,"
which eliminates primary and fully diluted earnings per share (EPS) and
requires presentations of basic and diluted EPS in conjunction with the
disclosure of the methodology used in computing such EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the
period. All per share data has been retroactively adjusted for stock splits
and stock dividends.
12. Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold and overnight
investments. Generally, federal funds are purchased and sold for one-day
periods. Cash paid during the years ended December 31, 2003, 2002, and 2001
for interest was $7.6 million, $11.7 million, and $16.1 million,
respectively. Cash paid during the years ended December 31, 2003, 2002, and
2001 for income taxes was $1.9 million, $2.6 million, and $1.8 million,
respectively.
13. Reporting Comprehensive Income
The Corporation follows the provisions of SFAS 130, "Reporting of
Comprehensive Income", which establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of financial statements. This statement
also requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement. Total comprehensive income is the sum of other
comprehensive income (loss) and net income.
50
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
December 31, 2003
-----------------
(Dollars in thousands) Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
------ --------------- ----------
Unrealized holding gains (losses) arising during
the period $ (1,214) $ 413 $ (801)
Reclassification adjustment
for gains realized in net income 410 (139) 271
------- ------- --------
Other comprehensive loss $ (1,624) $ 552 $ (1,072)
======= ======= ========
December 31, 2002
-----------------
(Dollars in thousands) Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
------ ------- ------
Unrealized holding gains arising during the period $ 2,172 $ (738) $ 1,434
Reclassification adjustment
for gains realized in net income 212 (72) 140
------- ------- -------
Other comprehensive income $ 1,960 $ (666) $ 1,294
======= ======= =======
December 31, 2001
-----------------
(Dollars in thousands) Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
------ ------- ------
Unrealized holding gains arising during the period $ 1,459 $ (496) $ 963
Reclassification adjustment
for losses realized in net income 180 (60) 120
------- ------ -------
Other comprehensive income $ 1,279 $ (436) $ 843
======= ====== =======
14. Advertising Costs
The Bank expenses advertising costs as incurred.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
51
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and fair market
value of the Corporation's available-for-sale and held-to-maturity
securities at December 31, 2003 and 2002 are summarized as follows:
Held-to-Maturity Available-for-Sale
------------------------------------------ -------------------------------------------
(Dollars in thousands) Gross Gross Gross Gross
2003 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
---- Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
U.S. Treasury $ - $ - $ - $ - $ 2,498 $ 63 $ - $ 2,561
U.S. Government agency - - - - 10,821 5 (112) 10,714
Mortgage-backed securities 4 - - 4 69,821 636 (422) 70,035
State and municipal 15 1 - 16 25,815 178 (152) 25,841
Corporate securities - - - - 12,893 476 (188) 13,181
Corporate CMO's - - - - 119 - (1) 118
Asset-backed securities - - - - 2,692 3 (29) 2,666
Mutual funds - - - - 863 - (62) 801
Other equity securities - - - - 4,724 69 - 4,793
------- ------- -------- ------- ------- ------- ------ -------
$ 19 $ 1 $ - $ 20 $130,246 $ 1,430 $ (966) $130,710
======= ======= ======== ======= ======= ======= ====== =======
(Dollars in thousands) Gross Gross Gross Gross
2003 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
---- Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
U.S. Treasury $ - $ - $ - $ - $ 4,498 $ 132 $ - $ 4,630
U.S. Government agency - - - - 32,262 212 (206) 32,268
Mortgage-backed securities 16 1 - 17 64,953 1,336 (23) 66,266
State and municipal 15 2 - 17 2,179 44 - 2,223
Corporate securities - - - - 13,083 632 (65) 13,650
Corporate CMO's - - - - 1,446 - (2) 1,444
Asset-backed securities - - - - 2,661 40 (2) 2,699
Mutual funds - - - - 863 - (48) 815
Other equity securities - - - - 4,311 38 - 4,349
------- -------- --------- ------- ------- ------- ------- -------
$ 31 $ 3 $ - $ 34 $126,256 $ 2,434 $ (346) $128,344
======= ======== ========= ======= ======= ======= ======= =======
The amortized cost and estimated fair value of debt securities classified
as available-for-sale and held-to-maturity at December 31, 2003, by
contractual maturity, are shown in the following table. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
52
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - INVESTMENT SECURITIES - continued
Held-to-Maturity Available-for-Sale
----------------------------- ----------------------------
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ----------- --------- ----------
Due in one year or less $ - $ - $ 1,500 $ 1,502
Due after one year through five years - - 7,671 7,945
Due after five years through ten years 15 16 32,042 32,142
Due after ten years - - 10,993 10,826
--------- ---------- -------- --------
15 17 52,146 52,415
Mortgage-backed securities 4 4 69,821 70,035
Asset-backed securities - - 2,692 2,666
Mutual Funds - - 863 801
Other equity securities - - 4,724 4,793
--------- ---------- -------- --------
$ 19 $ 20 $ 130,246 $ 130,710
========= ========== ======== ========
Proceeds from the sale of investment securities available for sale during
2003 were $96.3 million. Gains of $550 thousand, $276 thousand, and $233
thousand, and losses of $140 thousand, $64 thousand, and $53 thousand were
realized on sales of securities in 2003, 2002, and 2001, respectively. The
Corporation uses the specific identification method to determine the cost
of the securities sold. The principal amount of investment securities
pledged to secure public deposits and for other purposes required or
permitted by law was $68.7 million and $47 million at December 31, 2003 and
2002, respectively. There were no securities held from a single issuer that
represented more than 10% of stockholders' equity.
The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at December 31, 2003 (Dollars
in thousands).
Description of Number of
Securities Securities Less than 12 months 12 months or longer Total
----------------- ------------ --------------------------- --------------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------------ ----- ------------ ----- -----------
U.S. Government
treasury - $ - $ - $ - $ - $ - $ -
U.S. Government
agency 9 10,625 (112) - - 10,625 (112)
Mortgage backed 13 37,067 (422) - - 37,067 (422)
Municipal securities 27 8,982 (152) - - 8,982 (152)
Corporate bonds 6 5,675 (188) - - 5,675 (188)
Corporate CMO's 1 118 (1) - - 118 (1)
Asset-backed 3 1,250 (6) 1,077 (24) 2,327 (29)
------ ------ ---- ----- ----- ------ -----
Subtotal 59 63,717 (880) 1,077 (24) 64,794 (904)
Marketable equity
securities 1 - - 801 (62) 801 (62)
------ ------ ---- ----- ----- ------ -----
Total temporarily
impaired investment
securities 60 $63,717 $(880) $1,878 $ (86) $65,595 $(966)
====== ====== ==== ===== ===== ====== =====
Management has considered factors regarding other than temporarily impaired
securities and believes that there are no securities that are impaired as
of December 31, 2003.
53
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - LOANS AND LEASES
Major classifications of loans are as follows:
(Dollars in thousands) 2003 2002
------------ ------------
Commercial loans $ 142,144 $ 122,005
Real estate - construction 56,340 47,601
Real estate - other 202,898 175,846
Consumer loans 77,113 62,646
Lease financing receivables 32,754 39,584
--------- --------
511,249 447,682
Less: Allowance for loan and lease losses (5,864) (6,230)
--------- --------
$ 505,385 $ 441,452
========= ========
Loan and lease balances on which the accrual of interest has been
discontinued amounted to approximately $3.1 million and $5.2 million at
December 31, 2003 and 2002, respectively. Interest on these non-accrual
loans and leases would have been approximately $348 thousand and $448
thousand in 2003 and 2002, respectively. Loan and lease balances past due
90 days or more, which are not on a non-accrual status, but which
management expects will eventually be paid in full, amounted to $599
thousand and $321 thousand at December 31, 2003 and 2002, respectively.
Changes in the allowance for loan and lease losses are summarized as
follows:
(Dollars in thousands) 2003 2002 2001
----------- ---------- ----------
Balance at beginning of year $ 6,230 $ 6,344 $ 6,609
Provision charged to operating expenses 2,519 2,231 2,929
Recoveries of charged-off loans 214 325 198
Loans charged-off (3,099) (2,670) (3,392)
-------- -------- --------
Balance at end of year $ 5,864 $ 6,230 $ 6,344
======== ======== ========
The Bank identifies a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of
the loan agreement. The accrual of interest is discontinued on impaired
loans and no income is recognized until all recorded amounts of interest
and principal are recovered in full. Retail impaired loans in the amount of
$106.6 thousand and impaired residential mortgages of $54.4 thousand have
been excluded from these calculations.
The balance of impaired loans was $3.1 million, $4.9 million, and $7.4
million at December 31, 2003, 2002, and 2001, respectively. The associated
allowance for loan and lease losses for impaired loans was $309 thousand,
$492 thousand, and $820 thousand at December 31, 2003, 2002, and 2001,
respectively.
During 2003, activity in the allowance for impaired loan and lease losses
included a provision of $836 thousand, write offs of $267 thousand,
recoveries of $32 thousand and loans paid off or returned to performing of
$784 thousand. Interest income of $46 was recorded in 2003, while
contractual interest in the same period amounted to $348 thousand. Cash
collected on impaired loans in 2003 was $3.7 million, $3.4 million thousand
was applied to principal and $46 thousand was applied to past due interest.
54
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - LOANS AND LEASES - continued
During 2002, activity in the allowance for impaired loan and lease losses
included a provision of $328 thousand, write offs of $315 thousand,
recoveries of $1 thousand and loans paid off or returned to performing of
$342 thousand. Interest income of $0 was recorded in 2002, while
contractual interest in the same period amounted to $448 thousand. Cash
collected on impaired loans in 2002 was $794 thousand, $569 thousand was
applied to principal and $234 thousand was applied to past due interest.
In the normal course of business, the Bank makes loans to certain officers,
directors, and their related interests. All loan transactions entered into
between the Bank and such related parties were made on the same terms and
conditions as transactions with all other parties. In management's opinion,
such loans are consistent with sound banking practices and are within
applicable regulatory lending limitations. The balance of these loans at
December 31, 2003 and 2002, was approximately $18.5 million and $16.7
million, respectively. In 2003, new loans to these individuals and
principal payments on these loans amounted to approximately $4.1 million
and $2.3 million, respectively.
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
(Dollars in thousands) 2003 2002
------------ ---------
Premises $ 15,233 $ 14,896
Equipment 16,614 14,983
--------- ---------
31,847 29,879
Less Accumulated depreciation (18,679) (15,935)
--------- ---------
$ 13,168 $ 13,944
========= =========
For 2003, included in the above equipment and accumulated depreciation are
$3.3 million and $691 thousand of leveraged leased assets, respectively.
Equipment was $2.9 million in 2002 while accumulated depreciation was $667
thousand for the same period for leveraged leased assets.
NOTE E - DEPOSITS
At December 31, 2003, the scheduled maturities of certificates of deposit
are as follows:
(Dollars in thousands)
2004 $ 74,860
2005 16,385
2006 5,049
2007 3,107
2008 and thereafter 11,751
---------
$ 111,152
55
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - FHLB BORROWINGS AND OTHER CREDIT FACILITIES
The Bank, as a member of the FHLB, maintains several credit facilities
secured by the Bank's mortgage-related assets. FHLB borrowings provide
additional funds to meet the Bank's liquidity needs. The Bank currently has
a maximum borrowing capacity with the FHLB of approximately $139.8 million.
FHLB advances are collateralized by a pledge on the Bank's entire portfolio
of unencumbered investment securities, certain mortgage loans and a lien on
the Bank's FHLB stock.
Short Term
Short term FHLB advances generally have maturities of less than one year.
The details of these short term advances are as follows:
(Dollars in thousands) 2003 2002 2001
--------- --------- --------
Average balance outstanding $ 3,994 $ 13,068 $ 4,329
Maximum amount outstanding at any month-end during the period $ 15,351 $ 22,500 $ 22,500
Balance outstanding at period end $ 850 $ - $ 22,500
Weighted-average interest rate during the period 2.65% 5.44% 0.67%
Weighted-average interest rate at period end 3.58% 3.03% 2.66%
Long Term
At December 31, 2003, long term advances from the FHLB totaled $39,693.
Long term advances consist of fixed-rate advances that will mature within
one to eight years. These advances had a weighted average interest rate
4.28%. As of December 31, 2003, Long term FHLB advances mature as follows:
(Dollars in thousands)
2004 $ 278
2005 297
2006 316
2007 16,696
2008 19,566
Thereafter 2,540
--------
$ 39,693
NOTE G - OTHER NON-INTEREST EXPENSE
The components of other non-interest expense are detailed as follows:
(Dollars in thousands) 2003 2002 2001
-------- -------- --------
Telephone, postage, and supplies $ 1,083 $ 906 $ 996
Marketing and corporate communications 881 888 777
Loan and deposit supplies 634 625 523
Director costs 201 215 228
Travel and mileage 274 256 212
Dues and subscription 101 103 97
Trust processing 278 268 237
General expenses 527 346 270
Other 540 390 669
------- ------- -------
$ 4,519 $ 3,997 $ 4,009
======= ======= =======
56
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES
The components of income tax expense are detailed as follows:
(Dollars in thousands) 2003 2002 2001
---------- ------------ ---------
Current expense $ 2,282 $ 2,468 $ 1,510
Deferred expense (121) (24) (149)
------- ------- -------
Total tax expense $ 2,161 $ 2,444 $ 1,361
======= ======= =======
The income tax provision reconciled to the statutory federal rate follows:
2003 2002 2001
---------- ---------- --------
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax rate from
Tax-exempt loan and investment income (3.3) (1.2) (2.7)
Tax credits (2.7) (3.2) (4.8)
Other, net (1.5) 0.4 2.5
---- ----- ------
Applicable income tax rate 26.5% 30.0% 29.0%
==== ==== ====
The net deferred tax asset consists of the following:
(Dollars in thousands) 2003 2002
--------- --------
Allowance for possible loan losses $ 1,992 $ 1,995
Unrealized (gain) loss on securities available-for-sale (158) (710)
Deferred loan fees - -
Accrued pension and deferred compensation 636 580
Depreciation 686 634
Bond accretion 71 60
Other 18 17
------- -------
Total net deferred tax asset $ 3,245 $ 2,576
======= =======
NOTE I - REGULATORY MATTERS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank based upon deposit levels and other factors. The average
amount of those reserve balances for the years ended December 31, 2003 and
2002, was $0 for both periods.
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Corporation in
the form of cash dividends, loans or advances. The Bank, without the prior
approval of regulators, can declare dividends to the Corporation totaling
approximately $14.6 million plus additional amounts equal to the net
earnings of the Bank for the period from January 1, 2004, through the date
of declaration of such a dividend, less dividends previously paid subject
to the further limitations that dividends may be paid only to the extent
the retained net profits (including the portion transferred to surplus)
exceed bad debts and provided that the Bank would not become
"undercapitalized" (as defined by Federal law).
57
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - REGULATORY MATTERS - continued
The Corporation and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of Total and
Tier I capital to risk-weighted assets, and Tier I capital to average
quarterly assets (Total Risk Based Capital ratio, Tier I Capital ratio, and
Leverage ratio, respectively). Management believes that the Corporation and
the Bank meet all capital adequacy requirements to which it is subject, as
of December 31, 2003.
Federal banking agencies categorized the Corporation and the Bank as well
capitalized under the regulatory framework for corrective action. To be
categorized as adequately capitalized the Corporation and the Bank must
maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since
the notification that management believes have changed the institutions
category. The Banks Risk Based Capital ratios were positively impacted by
the issuance of preferred capital securities (see note K for more details).
The Corporation's and Bank's actual capital amounts and ratios are
presented below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2003:
Leverage Ratio
Corporation $ 66,448 9.71% $ 27,359 >4.00% $34,199 N/A
-
Bank $ 59,157 8.68% $ 27,257 >4.00% $34,071 >5.00%
- -
Tier I Capital Ratio
Corporation $ 66,448 12.01% $ 22,125 >4.00% $ 33,188 N/A
-
Bank $ 59,157 10.72% $ 22,065 >4.00% $ 33,098 >6.00%
- -
Total Risk Based Capital Ratio
Corporation $ 72,312 13.07% $ 44,250 >8.00% $ 55,313 N/A
-
Bank $ 65,021 11.79% $ 44,131 >8.00% $ 55,164 >10.00%
- -
58
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - REGULATORY MATTERS - continued
To Be Well
Capitalized Under
For Capital Prompt Corrective
(Dollars in thousands) Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2002:
Leverage Ratio
Corporation $ 52,223 8.29% $ 25,213 >4.00% $ 31,516 N/A
-
Bank $ 50,674 8.05% $ 25,166 >4.00% $ 31,458 >5.00%
- -
Tier I Capital Ratio
Corporation $ 52,223 10.83% $ 19,259 >4.00% $ 28,889 N/A
-
Bank $ 50,674 10.53% $ 19,250 >4.00% $ 28,875 >6.00%
- -
Total Risk Based Capital Ratio
Corporation $ 58,219 12.08% $ 38,518 >8.00% $ 48,148 N/A
-
Bank $ 56,670 11.78% $ 38,501 >8.00% $ 48,126 >10.00%
- -
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of the estimated fair value of an entity's assets and
liabilities considered to be financial instruments. For the Corporation, as
for most financial institutions, the majority of its assets and liabilities
are considered financial instruments as defined in SFAS 107. However, many
such instruments lack an available trading market, as characterized by a
willing buyer and seller engaging in an exchange transaction. Also, it is
the Corporation's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, the Corporation had to use significant estimations and present
value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned
that there may not be reasonable comparability between institutions due to
the wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimated fair value of
cash and cash equivalents, deposits with no stated maturities, repurchase
agreements and FHLB advances and commitments to extend credit, and
outstanding letters of credit has been estimated to equal the carrying
amount. Quoted market prices were used to determine the estimated fair
value of investment securities held-to-maturity and available-for-sale.
Fair values of net loans and deposits with stated maturities were
calculated using estimated discounted cash flows based on the year-end
offering rate for instruments with similar characteristics and maturities.
59
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
The estimated fair values and carrying amounts are summarized as follows:
2003 2002
------------------------ ------------------------
(Dollars in thousands) Fair Carrying Fair Carrying
Value Amount Value Amount
------------- ---------- ------------ ----------
Financial Assets
Cash and cash equivalents $ 31,383 $ 31,383 $ 48,867 $ 48,867
Investment securities held-to-maturity 20 19 34 31
Investment securities available-for-sale 130,710 130,710 128,344 128,344
Net loans 513,463 505,385 459,235 441,452
Financial Liabilities
Deposits with no stated maturities 466,162 466,162 432,945 432,945
Deposits with stated maturities 105,224 111,152 119,592 125,793
FHLB advances 40,543 40,543 22,678 22,678
Guaranteed preferred beneficial interest in
the Corporations subordinated debentures 15,000 15,000 5,000 5,000
Off-Balance-Sheet Investments
Commitments for extended credit
and outstanding letters of credit $ 124,401 $ 124,401 $ 143,475 $ 143,475
NOTE K - GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION'S
SUBORDINATED DEBENTURES
For 2003, interest expense for all preferred capital securities was $312
thousand with an average interest rate of 4.92%. For 2002, interest expense
for preferred capital securities was $136 thousand with an average interest
rate of 5.75%. The Corporation participates in two pooled institutional
placement of trust preferred securities arranged by a third party.
In 2003, the Corporation issued $10.0 million (net proceeds of $9.79
million) of preferred capital securities for the purpose of raising
additional capital for general corporate purposes. These securities were
issued through First Chester County Capital Trust I, a special purpose
statutory trust created expressly for the issuance of these securities and
investing the proceeds in junior subordinated debentures of the
Corporation. Funding of the securities took place on November 13, 2003.
These subordinated debentures will be redeemed in the year 2033. The
debentures and securities will each be callable by the Corporation or the
Trust, as applicable, at its option after five years of the date of
issuance. At December 31, 2003, the rate paid on these subordinated
debentures is based on three-month London Inter-bank offering rate
("LIBOR") plus 295 basis points was 4.12%.
In 2002, the Corporation issued $5.0 million (net proceeds of $4.82
million) of preferred capital securities for the purpose of raising
additional capital for general corporate purposes. These securities were
issued through First Chester County Capital Trust II, a special purpose
statutory trust created expressly for the issuance of these securities and
investing the proceeds in junior subordinated debentures of the
Corporation. Funding of the securities took place on July 11, 2002. These
subordinated debentures will be redeemed in the year 2032. The debentures
and securities will each be callable by the Corporation or the Trust, as
applicable, at its option after five years of the date of issuance. At
December 31, 2003, the rate paid on these subordinated debentures is based
on three-month London Inter-bank offering rate ("LIBOR") plus 365 basis
points was 4.77%.
60
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk to meet the financing needs of its customers and reduce its own
exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they
become payable. Those instruments involve, to varying degrees, elements of
credit and interest rate risks in excess of the amount recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual or
notional amount of those instruments. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Corporation does not require collateral or
other security to support financial instruments with credit risk. The
contract amounts are as follows:
(Dollars in thousands) 2003 2002
------------ ----------
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $ 122,853 $ 139,405
Standby letters of credit and financial guarantees written 1,548 4,070
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and
similar transactions. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Corporation holds residential or commercial real estate,
accounts receivable, inventory and equipment as collateral supporting those
commitments for which collateral is deemed necessary. The extent of
collateral held for those commitments at December 31, 2003, varies up to
100%. Standby letters of credit are collaterized within management
policies.
Substantially all of the Corporation's loans, commitments, and commercial
and standby letters of credit have been granted to customers in the
Corporation's primary market area, Chester County, Pennsylvania.
Investments in state and municipal securities also involve governmental
entities within the Corporation's market area. The concentrations of credit
by type of loan are set forth in Note C - Loans. Although the Corporation
has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon Chester County's
economy. The distribution of commitments to extend credit approximates the
distribution of loans outstanding.
Commercial and standby letters of credit were granted primarily to
commercial borrowers.
61
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Corporation's stock option plan allows the Corporation to grant up to
807,500 fixed stock options to key employees and directors. The options
have a term of ten years and become exercisable six months after grant. The
exercise price of each option equals the average between the bid and ask
price of the Corporation's stock on the date of grant. The Corporation has
elected to account for its stock option plan under APB Opinion 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for its stock option plan.
Information about stock options outstanding at December 31, 2003, is
summarized as follows:
Weighted-Average
Outstanding Exercise Price
---------------- --------------
Balance January 1, 2001 590,701 $ 15.07
Granted 78,850 15.30
Exercised (16,000) 9.89
Cancelled (21,312) 15.62
-------- ---------
Balance January 1, 2002 632,239 $ 15.22
-------- ---------
Granted 82,750 14.81
Exercised (916) 14.39
Cancelled (6,652) 15.10
-------- ---------
Balance January 1, 2003 707,412 $ 15.16
-------- ---------
Granted -- --
Exercised (132,398) 15.03
Cancelled (1,731) 14.90
-------- ---------
Balance December 31, 2003 573,362 $ 15.19
======== =========
The weighted average fair value of options granted during 2003, 2002 and
2001 was $0, $14.81 and $15.30, respectively.
Options Outstanding Options Exercisable
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise-Price Outstanding Contractual Life Exercisable Price Exercisable Exercisable Price
---------------- ----------- ---------------- ------------------- ----------- -----------------
$ 8.66 - $11.11 50,200 2.33 years $10.12 50,200 $10.12
$13.81 - $15.81 376,992 6.60 years $14.87 367,794 $14.87
$15.81 - $21.13 146,200 4.77 years $17.76 146,200 $17.76
-------- ------- -----
573,362 564,164 $15.20
======== ======= =====
62
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - EARNINGS PER SHARE
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Year Ended December 31, 2003
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS:
Net income available to common stockholders $5,805,066 4,477,108 $ 1.30
Effect of Dilutive Securities
Add options to purchase common stock - 143,043 (0.04)
--------- --------- -----
Diluted EPS: $5,805,066 4,620,151 $ 1.26
========= ========= =====
17,000 anti-dilutive weighted shares have been excluded in the computation
of 2003 diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
For the Year Ended December 31, 2002
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS: $ 5,701,520 4,423,113 $ 1.29
Net income available to common stockholders
Effect of Dilutive Securities
Add options to purchase common stock - 33,040 (0.01)
---------- --------- --------
Diluted EPS: $ 5,701,520 4,456,152 $ 1.28
========== ========= ========
186,075 anti-dilutive weighted shares have been excluded in the computation
of 2002 diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
For the Year Ended December 31, 2001
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS:
Net income available to common stockholders $ 3,332,364 4,451,351 $ 0.75
Effect of Dilutive Securities
Add options to purchase common stock - 44,006 (.01)
---------- --------- -------
Diluted EPS: $ 3,332,364 4,495,357 $ 0.74
========== ========= =======
143,904 anti-dilutive weighted shares have been excluded in the computation
of 2001 diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
63
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O - EMPLOYEE BENEFIT PLANS
1. Qualified
The Corporation has a qualified deferred salary savings 401(k) plan (the
"401(k) Plan") under which the Corporation contributes $0.75 for each $1.00
that an employee contributes, up to the first 5% of the employee's salary.
The Corporation's expenses were $348 thousand, $297 thousand, and $262
thousand in 2003, 2002, and 2001, respectively. The Corporation also has a
qualified defined contribution pension plan (the "QDCP Plan"). Under the
QDCP Plan, the Corporation makes annual contributions into the 401(k) Plan
on behalf of each eligible participant in an amount equal to 3% of salary
up to $30 thousand in salary plus 6% in excess of $30 thousand up to $200
thousand. Contribution expense in 2003, 2002 and 2001 under the QDCP Plan
was $386 thousand, $334 thousand and $255 thousand, respectively. The
Corporation may make additional discretionary employer contributions
subject to approval of the Board of Directors.
2. Non-Qualified
The Corporation makes annual contributions to a non-qualified defined
contribution Plan ("the NQDCP Plan ") equal to 3% of the participant's
salary up to $200 thousand plus 9% in excess of $200 thousand. Contribution
expense for 2003, 2002 and 2001 under the NQDCP Plan was $67 thousand, $67
thousand and $58 thousand, respectively. The Corporation may make additional
discretionary employer contributions subject to approval of the Board of
Directors.
NOTE P - COMMITMENTS AND CONTINGENCIES
The Corporation has employment agreements with several of the Corporation's
Officers. These agreements provide for severance payments upon termination
of employment under certain circumstances or a change of control as
defined.
The Corporation is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the outcome of this
litigation will not have a significant effect on the accompanying financial
statements.
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY
Condensed financial information for First Chester County Corporation
(Parent Corporation only) follows:
CONDENSED BALANCE SHEETS
(Dollars in thousands) December 31
---------------------------
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 4,283 $ 368
Investment securities available for sale, at market value 417 420
Investment in subsidiaries, at equity 60,903 52,816
Intercompany loan 1,471 234
Other assets 348 109
-------- --------
Total assets $ 67,422 $ 53,947
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Guaranteed preferred beneficial interest in the
Corporation's subordinated debentures $ 15,465 $ 5,555
Other liabilities 207 180
Stockholders' equity 51,750 48,612
-------- --------
Total liabilities and stockholders' equity $ 67,422 $ 53,947
======== ========
64
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands) Year ended December 31
--------------------------------------------
2003 2002 2001
---------- ---------- ---------
INCOME
Dividends from subsidiaries $ 3,978 $ 2,070 $ 4,913
Dividends from investment securities 20 31 35
Investment securities gains, net - - -
Other income 93 90 145
-------- --------- --------
Total income 4,091 2,191 5,093
-------- --------- --------
EXPENSES
Other expenses 454 277 176
-------- --------- --------
Total expenses 454 277 176
-------- --------- --------
Income before equity in undistributed
income of subsidiaries 3,637 1,914 4,917
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES 2,168 3,788 (1,585)
-------- --------- --------
NET INCOME $ 5,805 $ 5,702 $ 3,332
======== ========= ========
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31
-------------------------------------
(Dollars in thousands) 2003 2002 2001
---------- --------- ---------
OPERATING ACTIVITIES
Net income $ 5,805 $ 5,702 $ 3,332
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiary (759) (3,778) 1,585
Investment securities gains, net - - -
(Increase) decrease in other assets (259) 7 (96)
Increase in other liabilities 27 209 26
-------- -------- --------
Net cash provided by operating activities 4,834 2,140 4,847
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from sales and maturities of investment securities - - -
Purchases of investment securities available for sale - - -
Additional investment in subsidiaries (8,087) (4,500) -
-------- -------- ---------
Net cash (used in) provided by investing activities (8,087) (4,500) -
-------- -------- ---------
FINANCING ACTIVITIES
(Repayments) of Inter-company loans (1,237) (378) (1,237)
Dividends paid (2,434) (2,323) (2,318)
Proceeds from issuance of guaranteed preferred
beneficial interest in Corporation's subordinated debentures 10,000 5,000 -
Purchase of treasury stock 839 100 (1,030)
-------- -------- --------
Net cash used in financing activities 7,168 2,399 (4,585)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,915 39 262
Cash and cash equivalents at beginning of year 368 329 67
-------- -------- --------
Cash and cash equivalents at end of year $ 4,283 $ 368 $ 329
======== ======== ========
65
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the unaudited quarterly results of operations is as follows:
2003
----
(Dollars in thousands, except per share) December 31 September 30 June 30 March 31
----------- ------------ ----------- ----------
Interest income $ 8,592 $ 8,379 $ 8,239 $ 8,323
Interest expense 1,674 1,721 1,818 1,941
Net interest income 6,918 6,658 6,421 6,382
Provision for loan losses 892 860 373 394
Investment securities gains (loss), net 21 131 200 58
Income before income taxes 2,377 1,440 1,932 2,217
Net income 1,893 1,009 1,350 1,553
Per share
Net income (Basic) 0.42 0.22 0.30 0.35
Net Income (Diluted) 0.40 0.22 0.30 0.34
Dividends declared 0.1375 0.1350 0.1350 0.1350
2002
----
(Dollars in thousands, except per share)
Interest income $ 8,992 $ 9,273 $ 9,341 $ 9,495
Interest expense 2,328 2,634 2,772 2,939
Net interest income 6,664 6,639 6,569 6,556
Provision for loan losses 576 875 310 470
Investment securities gains (loss), net 91 - 121 -
Income before income taxes 2,202 1,971 1,792 2,181
Net income 1,477 1,402 1,283 1,540
Per share
Net income (Basic) $ 0.33 $ 0.32 $ 0.29 $ 0.35
Net Income (Diluted) 0.32 0.32 0.29 0.35
Dividends declared 0.135 0.130 0.130 0.130
66
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ------ ----------------------------------------------------------------
None.
Item 9A. Controls and Procedures
Appearing as Exhibits 31.1, 31.2, 31.3 and 31.4 (the "302 Certifications")
to this Annual Report are four certifications, one by each of our Chief
Executive Officer (CEO), President, Treasurer (our principal accounting and
financial officer), and our Assistant Treasurer (the "Principal Officers"). This
Item 9A contains information concerning the evaluation of the Corporation's
disclosure controls and procedures and matters regarding our internal controls
that are referred to in the Section 302 Certifications. This information should
be read in conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented in the 302 Certifications.
The Securities and Exchange Commission (the "SEC") requires that as of the
end of the period covered by this Annual Report on Form 10-K, our CEO and our
Treasurer evaluate the effectiveness of the design and operation of the
Corporation's "disclosure controls and procedures" and report their conclusions
on the effectiveness of the design and operation of the Corporation's disclosure
controls and procedures in this Annual Report.
"Disclosure controls and procedures" mean the controls and other procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act"), such as this Annual Report, is recorded, processed, summarized
and reported within the time periods specified in the rules and forms
promulgated by the Securities and Exchange Commission (the "SEC"). Our
disclosure controls and procedures are also designed with the objective of
ensuring that such information is accumulated and communicated to our
management, including the CEO and Treasurer, as appropriate to allow timely
decisions regarding required disclosure.
The SEC also requires that the CEO and Treasurer, certify certain matters
regarding the company's "internal controls." "Internal controls" mean our
procedures which are designed with the objective of providing reasonable
assurance that (1) our transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles. The
Corporation evaluates its internal controls annually as banking regulations
dictate.
Among the matters our Principal Officers certify in the Section 302
Certifications are whether all "significant deficiencies" or "material
weaknesses" in the Corporation's internal controls have been disclosed to the
Corporation's auditors and the audit committee of the Corporation's Board of
Directors. In the professional auditing literature, "significant deficiencies"
are referred to as "reportable conditions"; these are control issues that could
have a significant adverse effect on the ability to record, process, summarize
and report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions.
67
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
The Corporation's Management, including the CEO and Treasurer, does not
expect that our disclosure controls and procedures or our internal controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Corporation have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Based upon their evaluation of the disclosure controls and procedures, the
Principal Officers have concluded that, subject to the limitations noted above,
our disclosure controls and procedures are effective to provide reasonable
assurance that material information relating to the Corporation and its
consolidated subsidiaries is made known to Management, including the CEO and
Treasurer, on a timely basis.
There were no significant changes to our internal controls or in other
factors that could significantly affect our internal controls, subsequent to the
date of our last evaluation of our internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART III
Item 10. Directors and Executive Officers of the Corporation.
The information called for by this Item is incorporated herein by reference
to the Corporation's Proxy Statement for its 2004 Annual Meeting of Shareholders
that will be filed not later than March 30, 2004.
Item 11. Executive Compensation.
The information called for by this Item is incorporated herein by reference
to the Corporation's Proxy Statement for its 2004 Annual Meeting of Shareholders
that will be filed not later than March 30, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information called for in Item 201(d) of Regulation S-K is included in
Item 5 of this Report. The other information called for by this item is
incorporated herein by reference to the Corporation's Proxy Statement for its
2004 Annual Meeting of Shareholders that will be filed not later than March 30,
2004.
Item 13. Certain Relationships and Related Transactions.
The information called for by this item is incorporated herein by reference
to the Corporation's Proxy Statement for its 2004 Annual Meeting of Shareholders
that will be filed not later than March 30, 2004.
Item 14. Principal Accountant Fees and Services
The information called for by this Item is incorporated herein by reference
to the Corporation's Proxy Statement for its 2004 Annual Meeting of Shareholders
that will be filed not later than March 30, 2004.
68
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- -----------------------------------------------------------------
1. Financial Statements
- -- --------------------
The Consolidated Financial Statements, for the years ending December 31,
2003 and 2002, together with the report thereon of Grant Thornton LLP dated
January 23, 2004, are filed as part of this Report under Item 8.
2. Financial Statement Schedules
- -- -----------------------------
Financial Statement Schedules are not required under the related
instructions of the Securities and Exchange Commission, are inapplicable or are
included in the Consolidated Financial Statements or notes thereto.
3. Exhibits
- -- --------
The following is a list of the exhibits filed with, or incorporated by
reference into, this Report (those exhibits marked with an asterisk are filed
herewith):
3(i). Articles of Incorporation. Copy of the Articles of Incorporation of
the Corporation, as amended, filed as Exhibit 3 (i) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1999 is incorporated by
reference.
3(ii). By-Laws of the Corporation. By-Laws of the Corporation, filed as
Exhibit 3 (ii) to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997 is incorporated by reference.
10. Material contracts.
* (a) Copy of Employment Agreement among the Corporation, the Bank and John
A. Featherman, III, dated as of November 13, 2003. Kevin C. Quinn is also party
to an employment agreement with the Bank and the Corporation that is
substantially similar to Mr. Featherman's.
(b) Copy of the Corporation's Dividend Reinvestment and Stock Purchase
Plan, filed as an exhibit to the Corporation's registration statement on Form
S-3 filed August 7, 2003 (File no. 333-107739) is incorporated herein by
reference.
(c) Copy of the Corporation's Amended and Restated Stock Bonus Plan, filed
as an exhibit to the Corporation's registration statement on Form S-8 filed
August 8, 2003 (File no. 333-107763) is incorporated herein by reference.
(d) Copy of the Bank's Amended and Restated Supplemental Benefit Retirement
Plan, effective date January 1, 1995, is incorporated herein by reference to
Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994, SEC File number 00012870.
(e) Copy of the Corporation's and the Bank's Directors Deferred
Compensation Plan, effective December 30, 1994, is incorporated herein by
reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994, SEC File number 00012870.
(f) Copy of the Corporation's Amended and Restated 1995 Stock Option Plan,
filed as an appendix to the Corporation's Proxy statement for the 2003 Annual
Meeting of Shareholders as filed with the SEC via EDGAR is incorporated herein
by reference.
(g) Copy of Employment Agreement between the Bank and J. Duncan Smith
(EVP), dated December 1, 1999 is incorporated by reference to Exhibit 10 (g) to
the Corporation's Annual Report on Form 10-K for the year ended December 31,
1999. Peter J. D'Angelo, EVP, is also party to an employment agreement with the
Bank which is substantially identical to Mr. Smith's.
69
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
* 14. Code of Conduct (Ethics)
------------------------
* 21. Subsidiaries of the Corporation. First National Bank of Chester County,
formerly known as The First National Bank of West Chester, is a banking
institution organized under the banking laws of the United States in December
1863. Turks Head Properties, Inc., formerly known as 323 East Gay Street
Corporation, was incorporated in 1996 in the State of Pennsylvania. Turks Head
II, was incorporated in 2003 in the State of Pennsylvania. FNB Insurance
Services, LLC, t/a First National Wealth Advisory Services, a wholly-owned
subsidiary of the Bank, is a limited liability company formed in 2000 under the
laws of Pennsylvania. FNB Properties, LLC, a wholly-owned subsidiary of the
Bank, is a limited liability company formed in 2000 under the laws of
Pennsylvania. First Chester County Capital Trust I was formed on July 11, 2002.
First Chester County Capital Trust II was formed on November 13, 2003.
* 23. Consents. Consent of Grant Thornton LLP, dated March 15, 2003
--------
* 31.1 Certification of Chief Executive Officer
* 31.2 Certifications of President
* 31.3 Certification of Treasurer
* 31.4 Certification of Assistant Treasurer
* 32.1 Certification of Chief Executive Officer
* 32.2 Certification of President
* 32.3 Certification of Treasurer
* 32.4 Certification of Assistant Treasurer
70
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST CHESTER COUNTY CORPORATION
By: /s/ John A. Featherman, III
---------------------------
John A. Featherman, III,
Chief Executive Officer and
Chairman of the Board
Date: February 24, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Corporation and in the capacities indicated as of February 24, 2004.
Signature Title
--------- -----
/s/ John A. Featherman, III Chief Executive Officer and
__________________________ Chairman of the Board
John A. Featherman, III
/s/ J. Duncan Smith Treasurer
__________________________ Principal Accounting and Financial Officer)
J. Duncan Smith
(Signatures continued on following page)
71
(Signatures continued from previous page)
Signature Title
--------- -----
/s/ John A. Featherman, III Director
- ----------------------------------
John A. Featherman, III
/s/ John J. Ciccarone Director
- ----------------------------------
John J. Ciccarone
/s/ M. Robert Clarke Director
- ----------------------------------
M. Robert Clarke
/s/ Clifford E. DeBaptiste Director
- ----------------------------------
Clifford E. DeBaptiste
/s/ John S. Halsted Director
- ----------------------------------
John S. Halsted
/s/ J. Carol Hanson Director
- ----------------------------------
J. Carol Hanson
/s/ David L. Peirce Director
- ----------------------------------
David L. Peirce
/s/ John B. Waldron Director
- ----------------------------------
John B. Waldron
/s/ Kevin C. Quinn Director
- ----------------------------------
Kevin C. Quinn
72
INDEX TO EXHIBITS
The following is a list of the exhibits filed with, or incorporated by
reference into, this Report (those exhibits marked with an asterisk are filed
herewith):
3(i). Articles of Incorporation. Copy of the Articles of Incorporation of
the Corporation, as amended, filed as Exhibit 3 (i) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1999 is incorporated by
reference.
3(ii). By-Laws of the Corporation. By-Laws of the Corporation, filed as
Exhibit 3 (ii) to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997 is incorporated by reference.
10. Material contracts.
* (a) Copy of Employment Agreement among the Corporation, the Bank and John
A. Featherman, III, dated as of November 13, 2003. Kevin C. Quinn is also party
to an employment agreement with the Bank and the Corporation that is
substantially similar to Mr. Featherman's.
(b) Copy of the Corporation's Dividend Reinvestment and Stock Purchase
Plan, filed as an exhibit to the Corporation's registration statement on Form
S-3 filed August 7, 2003 (File no. 333-107739) is incorporated herein by
reference.
(c) Copy of the Corporation's Amended and Restated Stock Bonus Plan, filed
as an exhibit to the Corporation's registration statement on Form S-8 filed
August 8, 2003 (File no. 333-107763) is incorporated herein by reference.
(d) Copy of the Bank's Amended and Restated Supplemental Benefit Retirement
Plan, effective date January 1, 1995, is incorporated herein by reference to
Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994, SEC File number 00012870.
(e) Copy of the Corporation's and the Bank's Directors Deferred
Compensation Plan, effective December 30, 1994, is incorporated herein by
reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1994, SEC File number 00012870.
(f) Copy of the Corporation's Amended and Restated 1995 Stock Option Plan,
filed as an appendix to the Corporation's Proxy statement for the 2003 Annual
Meeting of Shareholders as filed with the SEC via EDGAR is incorporated herein
by reference.
(g) Copy of Employment Agreement between the Bank and James Duncan Smith
(EVP), dated December 1, 1999 is incorporated by reference to Exhibit 10 (g) to
the Corporation's Annual Report on Form 10-K for the year ended December 31,
1999. Peter J. D'Angelo, EVP, and others are also parties to employment
agreements with the Bank which are substantially identical to Mr. Smith's.
* 14. Code of Conduct (Ethics)
* 21. Subsidiaries of the Corporation. First National Bank of Chester County,
formerly known as The First National Bank of West Chester, is a banking
institution organized under the banking laws of the United States in December
1863. Turks Head Properties, Inc., formerly known as 323 East Gay Street
Corporation, was incorporated in 1996 in the State of Pennsylvania. Turks Head
II, was incorporated in 2003 in the State of Pennsylvania. FNB Insurance
Services, LLC, t/a First National Wealth Advisory Services, a wholly-owned
subsidiary of the Bank, is a limited liability company formed in 2000 under the
laws of Pennsylvania. FNB Properties, LLC, a wholly-owned subsidiary of the
Bank, is a limited liability company formed in 2000 under the laws of
Pennsylvania. First Chester County Capital Trust I was formed on July 11, 2002.
First Chester County Capital Trust II was formed on November 13, 2003.
* 23. Consents. Consent of Grant Thornton LLP, dated March 15, 2003
--------
73
INDEX TO EXHIBITS (Continued)
* 31.1 Certification of Chief Executive Officer
* 31.2 Certification of President
* 31.3 Certification of Treasurer (our principal accounting and financial
officer)
* 31.4 Certification of Assistant Treasurer
* 32.1 Certification of Chief Executive Officer
* 32.2 Certification of President
* 32.3 Certification of Treasurer (our principal accounting and financial
officer)
* 32.4 Certification of Assistant Treasurer
74