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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004, OR
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File No. 0-12870.
FIRST CHESTER COUNTY CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2288763
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9 North High Street, West Chester, Pennsylvania 19380
----------------------------------------------- -----
(Address of principal executive office) (Zip code)
(484) 881-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___ No X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No ___
The number of shares outstanding of Common Stock of the Registrant as of August
9, 2004 was 4,512,707.
2
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
June 30, 2004 (unaudited) and December 31, 2003 4
Consolidated Statements of Income
Three and Six-Months Ended June 30, 2004 and 2003 (unaudited) 5
Consolidated Statements of Cash Flows
Six-Months Ended June 30, 2004 and 2003 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 25
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 - Controls and Procedures 26 - 27
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 28
Item 3 - Defaults upon Senior Securities 28
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 5 - Other Information 28
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 30
Exhibit Index 31
Exhibits 32 - 39
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
(Dollars in thousands) June 30, December 31,
2004 2003
---------- ------------
ASSETS
Cash and due from banks $ 23,605 $ 28,509
Federal funds sold and other overnight investments - 2,500
Interest Bearing Deposits in banks 298 374
--------- --------
Total cash and cash equivalents 23,903 31,383
--------- --------
Investment securities held-to-maturity (market value of $14 at
June 30, 2004 and $20 at December 31, 2003, respectively) 14 19
Investment securities available-for-sale, at market value 138,203 130,710
Loans and Leases 579,806 511,249
Less: Allowance for loan losses (6,626) (5,864)
--------- --------
Net loans 573,180 505,385
Premises and equipment 13,105 13,168
Other assets 10,924 8,545
--------- --------
Total assets $ 759,329 $ 689,210
========= ========
LIABILITIES
Deposits
Noninterest-bearing $ 125,686 $ 114,307
Interest-bearing (including certificates of deposit over $100
of $25,755 and $21,346 - June 30, 2004 and
December 31, 2003 respectively) 473,734 463,007
--------- --------
Total deposits 599,420 577,314
Federal Home Loan Bank advances and other borrowings 88,182 40,543
Junior Subordinated Debentures 15,465 -
Guaranteed preferred beneficial interest in Corporation's subordinated
debentures - 15,000
Other liabilities 4,964 4,603
--------- --------
Total liabilities 708,031 637,460
--------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
outstanding, 4,799,666 at June 30, 2004 and December 31, 2003. 4,800 4,800
Additional paid-in capital 2,231 1,877
Retained earnings 53,126 50,116
Accumulated other comprehensive income (loss) (2,383) 307
Treasury stock, at cost: 298,710 shares and 283,144 shares
at June 30, 2004 and December 31, 2003, respectively. (6,476) (5,350)
--------- --------
Total stockholders' equity 51,298 51,750
--------- --------
Total liabilities and stockholders' equity $ 759,329 $ 689,210
========= ========
The accompanying notes are an integral part of these statements.
4
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands - except per share data) Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 7,696 $ 7,138 $ 15,027 $ 14,146
Investment securities 1,348 1,011 2,635 2,233
Federal funds sold 10 89 29 181
Deposits in Banks 1 1 2 2
--------- --------- --------- ----------
Total interest income 9,055 8,239 17,693 16,562
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits 1,197 1,574 2,376 3,269
Interest on Trust preferred securities 172 66 337 129
Federal Home Loan Bank advances and other borrowings 497 178 821 361
--------- --------- --------- ---------
Total interest expense 1,866 1,818 3,534 3,759
--------- --------- --------- ---------
Net interest income 7,189 6,421 14,159 12,803
Provision for loan losses 56 373 356 767
--------- --------- --------- ---------
Net interest income after provision
for possible loan losses 7,133 6,048 13,803 12,036
--------- --------- --------- ---------
NON-INTEREST INCOME
Trust and Investment Services 875 870 1,822 1,652
Service charges on deposit accounts 515 512 1,039 1,045
Investment securities gains, net - 200 53 259
Operating lease rental income 191 196 384 447
Gains on sale of premises and other real estate owned 24 - 48 -
Gains and fees on the sale of residential mortgages 100 394 190 804
Gain on the sale of credit card portfolio - - 34 306
Other 616 524 1,137 1,051
--------- --------- --------- ---------
Total non-interest income 2,321 2,696 4,707 5,564
--------- --------- --------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,985 3,823 7,860 7,501
Net occupancy, equipment and data processing 1,333 1,368 2,663 2,711
Depreciation expense on operating leases 164 167 336 338
Bank shares tax 132 122 257 230
Professional service 286 253 620 510
Other 1,398 1,079 2,475 2,161
--------- --------- --------- ----------
Total non-interest expense 7,298 6,812 14,211 13,451
--------- --------- --------- ----------
Income before income taxes 2,156 1,932 4,299 4,149
INCOME TAXES 647 582 1,289 1,246
--------- --------- ---------- ---------
NET INCOME $ 1,509 $ 1,350 $ 3,010 $ 2,903
========= ========= ========= =========
PER SHARE DATA
Basic earnings per common share $ 0.33 $ 0.30 $ 0.66 $ 0.65
========= ========= ========= =========
Diluted earnings per common share $ 0.32 $ 0.30 $ 0.64 $ 0.64
========= ========= ========= =========
Dividends declared $ 0.1375 $ 0.135 $ 0.275 $ 0.270
========= ========= ========= =========
Basic weighted average shares outstanding 4,530,280 4,459,286 4,545,386 4,448,684
========= ========= ========= =========
Diluted weighted average shares outstanding 4,694,879 4,565,503 4,725,275 4,531,232
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
5
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
---------------------------
(Dollars in thousands) 2004 2003
---- ----
OPERATING ACTIVITIES
Net Income $ 3,010 $ 2,903
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,087 1,416
Provision for loan losses 356 767
Amortization of investment security premiums
and accretion of discounts 432 1,084
Amortization of deferred fees on loans 172 187
Investment securities gains, net (53) (259)
Increase in other assets (2,402) (2,836)
Increase in other liabilities 361 56
------- -------
Net cash provided by operating activities $ 2,963 $ 3,318
------- -------
INVESTING ACTIVITIES
Increase in loans (67,561) (15,249)
Proceeds from sales of investment securities available-for-sale 13,940 47,076
Proceeds from maturities of investment securities available-for-sale 26,050 12,913
Purchases of investment securities available-for-sale (48,566) (56,640)
Purchase of premises and equipment, net (1,024) (1,117)
------- -------
Net cash used in investing activities $(78,161) $(13,017)
------- -------
FINANCING ACTIVITIES
Increase in Federal Home Loan Bank advances 47,639 8,690
Increase in deposits 22,106 13,873
Cash dividends (1,255) (1,203)
Treasury stock transactions (772) 583
------- -------
Net cash provided by financing activities 67,718 21,943
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,480) 12,244
Cash and cash equivalents at beginning of period 31,383 48,867
------- -------
Cash and cash equivalents at end of period $ 23,903 $ 61,111
======= =======
The accompanying notes are an integral part of these statements.
6
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of Management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position and the
results of operations for the interim period presented have been included. These
interim financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2003.
The results of operations for the three and six-month periods ended June
30, 2004 are not necessarily indicative of the results to be expected for the
full year. Information regarding risks and uncertainties that could cause actual
results to vary materially from our prior performance may be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part I, Item 2 of our Quarterly Report on Form 10-Q for the period
ending June 30, 2004.
2. EARNINGS PER SHARE
------------------
Three Months ended June 30, 2004
- --------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $1,509 4,530,280 $0.33
Effect of Dilutive Securities
Options to purchase common stock -- 164,599 (0.01)
Diluted earnings per share
Net income available to common stockholders $1,509 4,694,879 $0.32
===== ========= ====
Year to Date June 30, 2004
- --------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $3,010 4,545,386 $0.66
Effect of Dilutive Securities
Options to purchase common stock -- 179,889 (0.02)
Diluted earnings per share
Net income available to common stockholders $3,010 4,725,275 $0.64
===== ========= ====
Three Months ended June 30, 2003
- --------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $1,350 4,459,286 $0.30
Effect of Dilutive Securities
Options to purchase common stock -- 106,217 --
Diluted earnings per share
Net income available to common stockholders $1,350 4,565,503 $0.30
===== ========= ====
7
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
Year to Date June 30, 2003
- --------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $2,903 4,448,684 $0.65
Effect of Dilutive Securities
Options to purchase common stock -- 82,548 (0.01)
Diluted earnings per share
Net income available to common stockholders $2,903 4,531,232 $0.64
===== ========= ====
3. COMPREHENSIVE INCOME
--------------------
Components of comprehensive income are presented in the following chart:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ------------------------
2004 2003 2004 2003
------- -------- ------- -------
Unrealized gains on securities:
Unrealized gains (losses) arising in period $(2,781) $ (13) $(1,975) $ (356)
Reclassification adjustment -- 200 53 259
Net unrealized gains (losses) (2,781) 187 (1,922) (97)
------ ----- ------ -----
Other comprehensive income before taxes (2,781) 187 (1,922) (97)
Income tax expense 706 (48) 488 25
------ ----- ------ -----
Other comprehensive income (2,075) 139 (1,434) (72)
------ ----- ------ -----
Comprehensive income (losses) $ (566) $1,489 $ 1,576 $2,831
====== ===== ====== =====
4. JUNIOR SUBORDINATED DEBENTURES
------------------------------
Management has determined that First Chester County Capital Trust I & II
qualify as a variable interest entity under FASB Interpretation Number ("FIN")
46, as revised. First Chester County Capital Trust I & II issued mandatory
redeemable preferred stock to investors and loaned the proceeds to the Company.
First Chester County Capital Trust I & II is included in the Company's
consolidated balance sheet and statements of income as of and for the year ended
December 31, 2003. Subsequent to the issuance of FIN 46 in January 2003, the
FASB issued a revised interpretation, FIN 46(R) "Consolidation of Variable
Interest Entities," the provisions of which must be applied to certain variable
interest entities by March 31, 2004. The Corporation adopted the provisions
under the revised interpretation in the first quarter of 2004. Accordingly, as
of June 30, 2004, the Corporation no longer consolidates First Chester County
Capital Trust I & II. The deconsolidation results in the investment in the
common stock of First Chester County Capital Trust I & II entity being included
in other assets as of June 30, 2004 and a corresponding increase in outstanding
debt of $465 thousand. In addition, the income received on the Corporation's
common stock investment is included in other income. The adoption of FIN 46(R)
did not have a material impact on the Corporation's financial position or
results of operations. The Federal Reserve has issued proposed guidance on the
regulatory capital treatment for the trust-preferred securities issued by the
Corporation as a result of the adoption of FIN 46(R). The proposed rule would
retain the current maximum percentage of total capital permitted for trust
preferred securities at 25%, but would enact other changes to the rules
governing trust preferred securities that affect their use as part of the
collection of entities known as "restricted core capital elements". The rule
would take effect March 31, 2007; however, a three-year transition period
starting now and leading up to that date would allow bank holding companies to
continue to count trust preferred securities as Tier 1 Capital after applying
FIN 46(R). Management has evaluated the effects of the proposed rule and does
not anticipate a material impact on its capital ratios when the proposed rule is
finalized.
8
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
5. STOCK-BASED COMPENSATION
------------------------
At June 30, 2004, the Corporation had one stock-based employee compensation
plan. The Corporation accounts for that plan under the recognition and
measurement principles of APB 25, "Accounting for Stock Issued to Employees" and
related interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of grant.
The following table provides the disclosures required by SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" 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, "Accounting
for Stock-Based Compensation" to stock-based employee compensation.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (in thousands) As reported $ 1,509 $ 1,350 $ 3,010 $ 2,903
Stock-based compensation costs determined
under fair value method for all awards $ (17) $ (34) $ (34) $ (66)
------- ------ ------- -------
Pro forma net income $ 1,492 $ 1,316 $ 2,976 $ 2,837
Earnings per share (Basic) As reported $ 0.33 $ 0.33 $ 0.66 $ 0.65
Pro forma $ 0.33 $ 0.29 $ 0.65 $ 0.64
Earnings per share (Diluted) As reported $ 0.32 $ 0.30 $ 0.64 $ 0.64
Pro forma $ 0.32 $ 0.29 $ 0.63 $ 0.63
Note: There were no options granted during the three and six-month
periods ended June 30, 2004.
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, "Share-Based Payment, an Amendment of FASB Statements No.
123 and APB No. 25," that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement,
which would be effective for fiscal years beginning after December 15, 2004,
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25. The Corporation is currently evaluating this proposed
statement and its effects on its results of operations.
9
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
6. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
The SEC recently released Staff Accounting Bulletin No. 105, "Application
of Accounting Principles to Loan Commitments." SAB 105 provides guidance about
the measurement of loan commitments recognized at fair value under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
SAB 105 also requires companies to disclose their accounting policy for those
loan commitments including methods and assumptions used to estimate fair value
and associated hedging strategies. SAB 105 is effective for all loan commitments
accounted for as derivatives that are entered into after March 31, 2004. The
adoption of SAB 105 did not have a material effect on our consolidated financial
statements.
In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued
EITF Abstract 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments," ("EITF 03-1"). The quantitative and
qualitative disclosure provisions of EITF 03-1 were effective for years ending
after December 15, 2003 and were included in the Corporation's financial
statements for the year ended December 31, 2003. In March 2004, the EITF issued
Consensus on Issue 03-1 requiring that the provisions of EITF 03-1 be applied
for reporting periods beginning after June 15, 2004 to investments accounted for
under SFAS No. 115 and 124. EITF 03-1 establishes a three-step approach for
determining whether an investment is considered impaired, whether that
impairment is other-than-temporary, and the measurement of an impairment loss.
The Corporation is in the process of determining the impact that this EITF will
have on its financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is intended to further your understanding of the
consolidated financial condition and results of operations of First Chester
County Corporation and its direct and indirect wholly-owned subsidiaries, The
First National Bank of Chester County (the "Bank"), FNB Property Management,
LLC, First National Insurance Services, LLC, Turks Head Properties, Inc., Turks
Head II, LLC, First Chester County Capital Trust I and First Chester County
Capital Trust II, (collectively, the "Corporation"). It should be read in
conjunction with the consolidated financial statements included in this report.
RISKS AND UNCERTAINTIES
In addition to historical information, this discussion and analysis
contains statements relating to future results of the Corporation that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements can often be
identified by the use of forward-looking terminology such as "believes,"
"expects," "intends," "may," "will," "should" "or anticipates" or similar
terminology. These statements involve risks and uncertainties and are based on
various assumptions. Although the Corporation believes that its expectations are
based on reasonable assumptions, investors and prospective investors are
cautioned that such statements are only projections. The risks and uncertainties
noted below, among others, could cause the Corporation's actual future results
to differ materially from our historic results or the results described in
forward-looking statements made in this report or presented elsewhere by
Management from time to time.
These risks and uncertainties include, but are not limited to, the
following:
o 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;
o 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;
o costs of the Corporation's planned training initiatives, product
development, branch expansion, new technology and operating systems may
exceed expectations;
o competition among financial and non-financial institutions in the
Corporation's market area that may result in customer turnover and lower
interest rate margins;
o 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;
o impact of changes in interest rates on customer behavior;
o the impact of changes in demographics on branch locations;
o technological changes;
o changes in the value of securities and investments managed for others may
affect the growth level of the Corporation's non-interest income;
o changes in the credit of our borrowers, the collateral securing assets or
other aspects of credit quality; and
o 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Corporation conform to the
accounting principals generally accepted in the United States of America and
general practices within the financial services industry. The preparation of the
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
ALLOWANCE FOR CREDIT LOSSES
The Corporation considers that the determination of the allowance for loan
and lease losses involves a higher degree of judgment and complexity than its
other significant accounting policies. The balance in the allowance for loan
losses is determined based on Management's review and evaluation of the loan
portfolio in relation to past loss experience, the size and composition of the
portfolio, current economic events and conditions, and other pertinent factors,
including Management's assumptions as to future delinquencies, recoveries and
losses. All of these factors may be susceptible to significant change. To the
extent actual outcomes differ from Management's estimates, additional provisions
for loan and lease losses may be required that would adversely impact earnings
in future periods.
INCOME TAXES
Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities. Deferred tax assets are subject to Management's
judgment based upon available evidence that future realization is more likely
than not. If Management determines that the Corporation may be unable to realize
all or part of the net deferred tax assets in the future, a direct charge to
income tax expense may be required to reduce the recorded value of the net
deferred tax asset to the expected realizable amount.
EARNINGS AND DIVIDEND SUMMARY
Net income for the three-month period ended June 30, 2004 was $1.51
million, an increase of $159 thousand or 11.78% from $1.35 million for the same
period in 2003. Net income for the six-month period ended June 30, 2004 was
$3.01 million, an increase of $107 thousand or 3.69% from $2.903 million for the
same period in 2003. Basic earnings per share was $0.33 and $0.66 for the three
and six-month periods ended June 30, 2004, respectively, compared to $0.30 and
$0.65 for the same periods in 2003. Cash dividends declared during the second
quarters of 2004 were $0.1375 and $0.275 per share for the three and six-month
periods compared to $0.135 per share and $0.270 per share for the three- and
six-month periods ended June 30, 2003. Over the past ten years, the
Corporation's practice has been to pay a dividend of at least 35.0% of net
income.
Earnings benefited from increases in net interest income as the volume of
interest-earning assets, primarily in loans, increased for both the three and
six-month periods. These increases were partially offset by both an increase in
non-interest expense and a decrease in non-interest income when compared to the
same periods last year. The specific components of net interest income,
non-interest income and expense are discussed on the following pages.
Additionally, earnings for the three and six-month periods ended June 30,
2004 benefited from a lower provision expense for loan and lease losses when
compared to the three and six-month periods ended June 30, 2003. The corporation
was able to charge this lower expense and still maintain the allowance for loan
and lease losses at a level that management believes will be adequate to absorb
loan losses on existing loans because in June of 2004, the corporation recovered
$795 thousand on a commercial loan that was previously charged off.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------
2004 2003 2004 2003
---- ---- ---- ----
SELECTED RATIOS
Return on Average Assets 0.82% 0.83% 0.84% 0.91%
Return on Average Equity 11.48% 10.65% 11.44% 11.58%
Net Interest Margin 4.21% 4.28% 4.28% 4.30%
Earnings Retained 58.65% 55.41% 58.36% 58.59%
Dividend Payout Ratio 41.35% 44.59% 41.64% 41.41%
Book Value Per Share $11.40 $11.37 $11.40 $11.37
The "Consolidated Average Balance Sheet" on pages 18 and 19 may assist the
reader in understanding the following discussion.
NET INTEREST INCOME
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income for the three-months ended June 30, 2004 on a tax equivalent
basis, increased 12.7% to $7.3 million from $6.5 million in the same period last
year. For the six-months ended June 30, 2004, net interest income increased
11.8% to $14.4 million from $12.9 million in the same period last year. The
increase in tax equivalent net interest income for both periods is primarily due
to increases in average interest-earning assets and lower average yields paid on
interest-bearing liabilities, partially offset by decreases in the average
interest rates earned on interest-earning assets and an increase in average
interest-bearing liabilities, as discussed more fully below.
Average interest-earning assets increased approximately $88.0 million or
14.5% to $695.0 million for the three-months ended June 30, 2004 from $607.0
million in the same period last year. For the six months ended June 30, 2004,
average interest-earning assets increased approximately $73.4 million or 12.2%
to $674.7 million from $601.3 million in the same period last year. The increase
in average interest-earning assets for the three-month period ended June 30,
2004 was the result of a 22.8% or $102.3 million increase in average total loans
and an 8.0% or $10.2 million increase in average investment securities,
partially offset by an 86.3% or $25.0 million decrease in average federal funds
sold and other overnight investments. For the six-month period ended June 30,
2004, the increase was the result of a 20.4% or $90.4 million increase in
average total loans and 4.70% or $6.0 million increase in average investment
securities partially offset by an 80.1% or $23.3 million decrease in average
federal funds sold and other overnight investments. Higher volume of
interest-earning assets increases interest income.
Average interest-bearing liabilities increased approximately $69.7 million
or 14.4% to $554.5 million for the three-months ended June 30, 2004, from $484.8
million in the same period last year. For the six-month ended June 30, 2004,
average interest-bearing liabilities increased $56.0 million or 11.6% to $538.5
million from $482.5 million in the same period last year. The increase in
average interest-bearing liabilities for the three-month period was the result
of a $10.3 million or 2.3% increase in interest-bearing deposits and $48.9
million or 211.0% increase in FHLB advances and other borrowings. The increase
in average interest-bearing liabilities for the six-month period was the result
of an $11.5 million or 2.5% increase in interest-bearing deposits and $34.2
million or 149.8% increase in FHLB advances and other borrowings and additional
funds from the issuance of a trust preferred security. Higher volume of
interest-bearing liabilities increases interest expense, thus decreasing net
interest income.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
The average net yield on interest-earning assets, on a tax equivalent basis
for the three-months ended June 30, 2004 decreased 1.64% or 7 basis points (one
basis point is equal to 1/100 of a percent) to 4.21% from 4.28% in the same
period last year. For the six-month period ended June 30, 2004, net yield on
interest earning assets decreased 0.47% or 2 basis points to 4.28% from 4.30% in
the same period in 2003. The average yield on interest-earning assets for the
three-month period ended June 30, 2004 decreased 3.5% or 19 basis points to
5.28% from 5.47% in the same period last year. For the six-month period ended
June 30, 2004, average yield on interest-earning assets decreased 4.0% or 22
basis points to 5.33% compared to 5.66% for the same period in 2003. The average
yield paid on interest-bearing liabilities for the three-month period ended June
30, 2004 decreased 10.0% or 15 basis points to 1.35% compared to 1.50% for the
same period in 2003. For the six-month period ended June 30, 2004, average yield
paid on interest-bearing liabilities decreased 16.0% or 25 basis points to 1.31%
compared to 1.56% for the same period in 2003. The decrease is due to the
lowering of interest rates paid on deposit accounts. Interest rates and pricing
competition may continue to put pressure on our net-interest margin and may
adversely impact net-interest income in future time periods.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------
2004 2003 2004 2003
------- ------ ------ ------
YIELD ON
Interest-Earning Assets 5.28% 5.47% 5.33% 5.55%
Interest Bearing Liabilities 1.35% 1.50% 1.31% 1.56%
----- ----- ----- -----
Net Interest Spread 3.93% 3.97% 4.02% 3.99%
Contribution of Interest-Free Funds 0.28% 0.31% 0.26% 0.31%
----- ----- ----- -----
Net Yield on Interest-Earning Assets 4.21% 4.28% 4.28% 4.30%
===== ===== ===== =====
INTEREST INCOME ON FEDERAL FUNDS SOLD AND OTHER OVERNIGHT INVESTMENTS
Interest income on Federal Funds sold and other overnight investments for
the three and six-month periods ended June 30, 2004, decreased $79 thousand and
$152 thousand to $10 thousand and $29 thousand, respectively, when compared to
the same periods in 2003. The decrease in interest income on Federal Funds sold
and other overnight investments is the direct result of an 86.3% and 80.1%
decrease in the average balance of Federal Funds sold and other overnight
investments for the three and six- month periods ended June 30, 2004,
respectively as well as an 18.7% or 23 basis points and 20.0% or 25 basis points
decrease on rates earned. The decrease in the average balance of Federal Funds
sold and overnight investments can be attributed to strong loan growth in the
latter part of 2003 as well as the first six months of 2004. Loans and
investment securities typically yield higher returns than investments in Federal
Funds.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased 37.5% to $1.4 million for the three-month period ended June 30, 2004,
and increased 24.0% to $2.8 million for the six-month period ended June 30,
2004, respectively, when compared to the same periods in 2003. The increase for
the three-month period is primarily due to a 27.5% or 89 basis point increase on
interest rates on such investments as well as an 8.0% or $10.2 million increase
in average investment balance. The increase for the six-month period ended June
30, 2004 is the result of an 18.3% or 65 basis point increase on interest rates
on such investments compared to the same period last year as well as a 4.7% or
$6.0 million increase in average investment balance.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
INTEREST INCOME ON LOANS AND LEASES
Interest income on loans and leases, on a tax equivalent basis, generated
by the Corporation's loan portfolio increased 7.8% and 6.3% to $7.7 million and
$15.1 million for the three- and six-month periods ended June 30, 2004, compared
to the same periods in 2003, respectively. The increase in interest income for
these periods is the direct result of a $102.3 million or 22.8% and $90.4
million or 20.4% increase in the average balance of loans and leases outstanding
compared to the same period in 2003 partially offset by a 12.2% or 78 basis
point and 11.6% or 76 basis point decrease in rates earned on the portfolio as
compared to last year.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts decreased 24.0% and 27.3% for the
three- and six-month periods ended June 30, 2004 to $1.2 million and $2.4
million, compared to $1.6 million and $3.3 million for the same periods in 2003.
The decrease for the three-month period is primarily the result of a 25.4% or 35
basis point decrease on rates paid on interest-bearing deposits partially offset
by a 2.3% or $10.3 million increase in the average interest-bearing deposits
balance. The decrease for the six-month period is primarily the result of a
29.2% or 42 basis point decrease on rates paid on interest-bearing deposits
partially offset by a 2.5% or $11.5 million increase in the average
interest-bearing deposits balance compared to the same period last year. The
Corporation's effective rate on interest-bearing deposits decreased to 1.03% for
the three-month period ended June 30, 2004 from 1.38% in 2003. The Corporation's
effective rate on interest-bearing deposits decreased to 1.02% for the six-month
period ended June 30, 2004 from 1.44% in 2003. The June 30, and August 10, 2004
Federal Funds rate increases of 25 basis points each may put upward pressure on
this component of interest expense.
Competition for deposits from non-banking institutions such as credit
unions and mutual fund companies continues to be a strong. Despite the
competition, the Corporation's deposit base continues to grow and is expected to
continue to grow as we continue to open new branches and attract new customers
with new services at existing branches. The Corporation continually explores for
new branch sites to expand its core deposit base.
INTEREST EXPENSE ON BORROWINGS
Borrowings consist primarily of Federal Home Loan Bank ("FHLB") borrowings.
Interest expense on borrowings increased $319 thousand to $497 thousand for the
three-month period ended June 30, 2004 from $178 thousand when compared to the
same period in 2003. The increase is the direct result of a $48.9 million
increase in the average balance of such borrowings partially offset by a 10.1%
or 31 basis point decrease in rates paid on these borrowings for the three-month
period ending June 30, 2004 when compared to the same period last year. Interest
expense on borrowings increased $463 thousand to $821 thousand for the six-month
period ended June 30, 2004 from $358 thousand when compared to the same period
in 2003. The increase is a direct result of a $34.2 million or 149.8% increase
in the average balance of borrowings partially offset by an 8.3% or 26 basis
point decrease on rates paid on borrowings for the six-moth period ended June
30, 2004. The increase in the level of borrowings for the three and six-month
periods is the direct result of the strong loan growth the Corporation has
experienced over that period. The borrowings are being used to supplement the
growth in deposits. Borrowing currently is an easy and inexpensive option when
compared to other alternatives. As a long term solution, the Corporation is
pursuing several initiatives to increase its deposit base. Initiatives include
researching and opening new branch sites, introducing new deposit products and
targeted marketing campaigns. Borrowings at any time may consist of one or more
of the following: FHLB Overnight or Term Advances and advances under agreements
with our correspondent banks.
INTEREST EXPENSE ON JUNIOR SUBORDINATED DEBENTURES
Interest expense on trust preferred securities increased $106 thousand to
$172 thousand for the three-month period ended June 30, 2004 from $66 thousand
when compared to the same period last year. For the six-month period
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
ended June 30, 2004, interest expense on trust preferred securities increased
$208 thousand from $129 thousand to $337 thousand when compared to the same
period last year. In accordance with FIN 46, this interest expense was
classified as "Junior Subordinated Debt" in 2004 and "Guaranteed Preferred
Beneficial Interest in Corporation's Subordinated Debentures" in 2003. For more
details on FIN 46, see note #4 of the notes to consolidated financial statements
on page 8. The increase in interest expense on trust preferred securities was
primarily due to the additional issuance of $10.0 million trust preferred
securities in October 2003 to enhance capital.
PROVISION FOR LOAN AND LEASE LOSSES
During the three and six-month periods ended June 30, 2004, the Corporation
recorded a $56 thousand and a $356 thousand provision for loan losses compared
to a $373 thousand and a $767 thousand for the same periods in 2003. The
allowance for loan losses as a percentage of total loans was 1.14% at June 30,
2004, 1.33% at June 30, 2003 and 1.15% at December 31, 2003, respectively. See
the section titled "Allowance For Loan and Lease Losses" for additional
discussion.
NON-INTEREST INCOME
Total non-interest income decreased 13.9% to $2.3 million for the three-
month period ended June 30, 2004 when compared to the same period in 2003. For
the six- month period ended June 30, 2003, total non-interest income decreased
15.4% to $4.7 million when compared to the same period in 2003. The various
components of non-interest income are discussed below.
One of the primary reasons for the decrease in total non-interest income is
that in 2003, the Corporation sold its Credit Card portfolio to Elan Financial
Services and recognized a gain of $306 thousand. This was a one-time transaction
and there was no comparable transaction in 2004 and only a residual portion of
the 2003 gain of $34 thousand. Also, gains and fee income generated on the sale
of residential mortgages for the three and six-month period ended June 30, 2004
decreased $294 thousand and $614 thousand from $394 thousand and $804 thousand
to $100 thousand and $190 thousand compared to the same period last year,
respectively. The decrease is primarily due to higher long term interest rates
which led to a lower volume of originations of residential mortgages in 2004
compared to the same periods in 2003.
The largest component of non-interest income is Trust and Investment
Services revenue, which increased 0.6% and 10.3% to $875 thousand and $1.8
million for the three- and six-month periods ended June 30, 2004, respectively,
compared to the same periods in 2003. The increase in Trust and Investment
Services revenue is the result of new business accounts and a 5.4% increase in
the market value of assets under management, from $515.7 million at June 30,
2003 to $543.5 million at June 30, 2004. Trust and Investment Services revenue
also increased due to an increase in estate revenue recognized during the
six-month period of 2004.
Service charges on deposit accounts increased approximately 0.6% to $515
thousand for the three-months ended June 30, 2004 compared to $512 thousand for
the same period in 2003. For the six-month period ended June 30, 2004, service
charges on deposit accounts decreased 0.6% to $1.04 million compared to $1.05
million for the same period in 2003.
There were no investment security gains for the three-month period ended
June 30, 2004. For the six-month period ended June 30, 2004, investment security
gains decreased $206 thousand from $259 thousand to $53 thousand, when compared
to the same period in 2003. The gains in 2003 were realized as a result of
normal portfolio management.
The Corporation has operating lease agreements with several of our
customers; the income on these leases is classified as "Rental Income". Rental
income on operating lease agreements for the three and six-month period ended
June 30, 2004 decreased 2.6% and 14.1% to $191 thousand and $384 thousand from
$196 thousand and $447 thousand when compared to the same periods in 2003. The
Corporation did not add any significant volume of these types of leases in 2003
or 2004 resulting in lower income. See related depreciation expense in the
non-interest expense section for more details.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
Gains on sale of premises and OREO were $24 thousand and $48 thousand for
the three and six-month periods ended June 30, 2004. There were no gains on sale
of premises and OREO for the same period in 2003.
Other non-interest income increased $92 thousand or 17.6% to $616 thousand
for the three-months ended June 30, 2004 compared to $524 thousand for the same
period in 2003. For the six-month period ended June 30, 2004, other non-interest
income increased $86 thousand or 8.2% when compared to the same period in 2003.
Other non-interest income includes ATM surcharge revenue, merchant income, safe
deposit box income, loan fee income, wealth advisory income, rental income,
management fees, notary fee income, and other miscellaneous income. Increases in
wealth advisory income were the largest component of the increases in
non-interest income for both periods.
NON-INTEREST EXPENSE
Total non-interest expense for the three and six-month periods ended June
30, 2004 increased 7.1% to $7.3 million and 5.7% to $14.2 million, compared to
the same periods in 2003. The various components of non-interest expense are
discussed below.
Employee salaries and benefits increased 4.2% to $4.0 million and 4.8% to
$7.9 million for the three-month and six-month periods ended June 30, 2004
compared to the same periods in 2003, respectively. Higher employment and annual
employee salary increases and proportional increases in employee benefits are
primarily responsible for the three- and six-month increase. At June 30, 2004,
the Corporation employed 268 full time and 24 part time employees compared to
253 full time and 46 part time employees at June 30, 2003.
Net occupancy, equipment, and data processing expense decreased 4.2% and
7.8% to $1.3 million and $2.7 million for the three and six-month periods ended
June 30, 2004, compared to the same periods last year, respectively. The
decreases are primarily the result of decreases in depreciation on core data
processing systems and hardware expense.
Depreciation on operating leases decreased 1.8% and 0.6% to $164 thousand
and $336 thousand for the three- and six-month periods ended June 30, 2004,
compared to the same periods last year, respectively. The decrease is a result
of lower volume of new leases. This depreciation expense is the result of
operating lease agreements the Corporation has with several of our customers.
The income associated with these operating leases is classified as Rental
Income.
Professional services expense increased 13.0% and 21.6% to $286 thousand
and $620 thousand for the three and six-month periods ended June 30, 2004
compared to the same periods in 2003, respectively. The increases are the result
of increased consultant, accounting, and legal fees.
Other non-interest expense increased 30.2% and 14.9% to $1.4 million and
$2.4 million for the three- and six-month period ended June 30, 2004 compared to
the same periods last year, respectively. Other non-interest expense includes
marketing expenses, annual meeting and reports, trust processing, postage,
directors' costs, bank telephone, dues and subscriptions, travel and mileage,
operating supplies and adjusted loan costs. Increases in marketing expenses were
the largest components of the increases in non-interest expense for both
periods.
In June 2004, the Corporation opened its 18th branch at the Freedom Village
at Brandywine retirement community in West Brandywine Township. The Corporation
has bought a property in Southern Chester County area and expects to open a new
branch in the next year. The Corporation anticipates an increase in deposit base
as we open new branches. This and other new branch sites will have a direct
impact on all the components of non-interest expense. It is anticipated that the
increases in costs will be offset over time by an increase in net interest and
fee income generated by business in the new marketing areas.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED JUNE 30,
(Dollars in thousands) 2004 2003
------------------------------ ------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Federal funds sold and other overnight investments $ 3,982 $ 10 1.00% $ 29,009 $ 89 1.23%
Interest bearing deposits in banks 766 1 0.52% 296 1 1.35%
Investment securities
Taxable 114,626 1,164 4.06% 119,763 943 3.15%
Tax-exempt (1) 24,409 270 4.43% 9,024 100 4.41%
------- ------ ------- -----
Total investment securities 139,035 1,434 4.13% 128,787 1,043 3.24%
------- ------ ------- -----
Loans (2)
Taxable 542,573 7,613 5.61% 442,242 7,061 6.39%
Tax-exempt (1) 8,688 123 5.65% 6,699 114 6.81%
------- ------ ------- -----
Total loans 551,261 7,736 5.61% 448,941 7,175 6.39%
------- ------ ------- -----
Total interest-earning assets 695,044 9,181 5.28% 607,033 8,308 5.47%
Non-interest earning assets
Allowance for possible loan losses (6,159) (6,479)
Cash and due from banks 22,380 25,030
Other assets 22,993 22,222
-------- -------
Total assets $ 734,258 $647,806
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOW & money market deposits $ 355,647 $ 518 0.58% $333,905 $ 672 0.81%
Certificates of deposits and other time 111,283 679 2.44% 122,723 902 2.94%
-------- ------ ------- -----
Total interest bearing deposits 466,930 1,197 1.03% 456,628 1,574 1.38%
Securities sold under repurchase agreements -- -- -- -- -- --
Junior subordinated debentures 15,465 172 4.45% -- -- --
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures -- -- 0.00% 5,000 66 5.28%
Federal Home Loan Bank advances and
other borrowings 72,096 497 2.76% 23,180 178 3.05%
-------- ------ ------- -----
Total interest bearing liabilities 554,491 1,866 1.35% 484,808 1,818 1.50%
-------- ------ ------- -----
Non-interest bearing liabilities
Non-interest bearing demand deposits 123,801 107,095
Other liabilities 3,385 5,181
-------- -------
Total liabilities 681,677 597,084
Stockholders' equity 52,581 50,722
-------- -------
Total liabilities and stockholders' equity $ 734,258 $647,806
======== =======
Net interest income $ 7,315 $6,491
====== =====
Net yield on interest earning assets 4.21% 4.28%
==== =====
(1) The indicated income and annual rate are presented on a taxable equivalent
basis using the Federal marginal rate of 34% adjusted for the TEFRA penalty
for 2004 and 2003
(2) Non-accruing loans are included in the average balance.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
THREE MONTHS ENDED JUNE 30,
(Dollars in thousands) 2004 2003
--------------------------------- ---------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
ASSETS
Federal funds sold and other overnight investments $ 5,780 $ 29 1.00% $ 29,058 $ 181 1.25%
Interest bearing deposits in banks 569 2 0.70% 269 2 1.49%
Investment securities
Taxable 109,410 2,268 4.15% 122,853 2,151 3.50%
Tax-exempt (1) 24,618 554 4.50% 5,131 124 4.83%
-------- ------- --------- -------
Total investment securities 134,028 2,822 4.21% 127,984 2,275 3.56%
-------- ------- -------- -------
Loans (2)
Taxable 525,530 14,860 5.66% 438,295 14,011 6.39%
Tax-exempt (1) 8,811 254 5.76% 5,665 204 7.20%
-------- ------- --------- -------
Total loans 534,341 15,114 5.66% 443,960 14,215 6.40%
-------- ------- ------- ------
Total interest-earning assets 674,718 17,967 5.33% 601,271 16,673 5.55%
Non-interest earning assets
Allowance for possible loan losses (6,059) (6,475)
Cash and due from banks 22,164 24,679
Other assets 22,779 21,747
-------- ---------
Total assets $ 713,602 $ 641,222
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $ 355,139 $ 1,015 0.57% $ 330,959 $ 1,399 0.85%
Certificates of deposits and other time 110,877 1,362 2.46% 123,484 1,870 3.03%
-------- ------- -------- -------
Total interest bearing deposits 466,016 2,377 1.02% 454,443 3,269 1.44%
Securities sold under repurchase agreements -- -- -- 268 3 2.24%
Junior subordinated debentures 15,465 337 4.36% -- -- --
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures -- -- -- 5,000 129 5.16%
Federal Home Loan Bank advances and
--
other borrowings 57,013 821 2.88% 22,823 358 3.14%
-------- ------- -------- -------
Total interest bearing liabilities 538,464 3,535 1.31% 482,534 3,759 1.56%
-------- ------- ------- -------
Non-interest bearing liabilities
Non-interest bearing demand deposits 118,604 103,277
Other liabilities 3,842 5,263
-------- ----------
Total liabilities 660,910 591,074
Stockholders' equity 52,692 50,148
-------- ---------
Total liabilities and stockholders' equity $ 713,602 $ 641,222
======== ========
Net interest income $ 14,432 $ 12,914
======= =======
Net yield on interest earning assets 4.28% 4.30%
==== ====
(1) The indicated income and annual rate are presented on a taxable equivalent
basis using the Federal marginal rate of 34% adjusted for the TEFRA penalty
for 2004 and 2003.
(2) Non-accruing loans are included in the average balance.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
INCOME TAXES
Income tax expense for the three and six-month periods ended June 30, 2004
was $647 thousand and $1.3 million, compared to $582 thousand and $1.2 million
in the same periods last year. This represents effective tax rates of 30.0% for
both periods ended June 30, 2004. The effective tax rate for the three and
six-month periods ended June 30, 2003 were 30.1% and 30.0%, respectively.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity management addresses the
Corporation's ability to meet deposit withdrawals either on demand or at
contractual maturity, to repay borrowings as they mature and to make new loans
and investments as opportunities arise. Liquidity is managed on a daily basis
enabling 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 deposit growth, FHLB borrowings and cash
flow from the investment and loan portfolios. Deposits consist of NOW,
money-market, savings, tiered savings, large and small dollar certificates of
deposit and non-interest bearing demand deposit accounts. The Corporation
considers funds from demand, NOW, money market, savings and certificates less
than $100 thousand as "core" deposits because of the historical stability of
such sources of funds. Details of core deposits, non-interest bearing demand
deposit accounts and other deposit sources are highlighted in the following
table:
DEPOSIT ANALYSIS
(Dollars in thousands) June 30, 2004 December 31, 2003 Average Balance
--------------------------- ------------------------- ------------------------
Average Effective Average Effective Dollar Percentage
DEPOSIT TYPE Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- --------- ---------- -------- ----------
NOW Accounts $ 95,200 0.16% $ 88,518 0.19% $ 6,682 7.55%
Money Market 26,973 0.50% 26,051 0.70% 922 3.54%
Statement Savings 65,883 0.54% 63,032 0.77% 2,851 4.52%
Other Savings 1,403 0.43% 1,522 0.79% (119) -7.82%
CD's Less than $100,000 87,998 2.29% 96,773 2.93% (8,775) -9.07%
------- ------- ------
Total Core Deposits 277,457 0.96% 275,896 1.33% 1,561 0.57%
Non-Interest Bearing
Demand Deposit Accounts 118,574 -- 107,334 -- 11,240 10.47%
------- ------- ------
Total Core and Non-Interest
Bearing Deposits 396,031 0.67% 383,230 0.96% 12,801 3.34%
------- ------- ------
Tiered Savings 165,689 0.83% 159,220 1.04% 6,469 4.06%
CD's Greater than $100,000 22,870 3.10% 22,365 2.48% 505 2.26%
------- ------- ------
Total Deposits $584,590 0.81% $564,815 1.04% $19,775 3.50%
------- ------- ------
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
The Bank, as a member of the FHLB, maintains several credit facilities.
During the three and six-month periods ending June 30, 2004, average FHLB
advances were approximately $72.1 million and $57.0 million, respectively, and
consisted of term advances representing a combination of maturities in each
period. The average interest rate on these advances was approximately 2.76% and
2.88%, respectively. The Bank currently has a maximum borrowing capacity with
the FHLB of approximately $135.3 million. FHLB advances are collateralized by a
pledge on the Bank's portfolio of unencumbered investment securities, certain
mortgage loans and a lien on the Bank's FHLB stock. FHLB advances increased
significantly during the first and second quarter of 2004 as they were used to
supplement deposit growth to support strong loan growth.
The goal of interest rate sensitivity management is to avoid fluctuating
net interest margins, and to enhance consistent growth of net interest income
through periods of changing interest rates. Such sensitivity is measured as the
difference in the volume of assets and liabilities in the existing portfolio
that are subject to repricing in a future time period. The Corporation's net
interest rate sensitivity gap within one year is a negative $222.4 million or
29.3% of total assets at June 30, 2004 compared with a negative $154.3 million
or 23.2% of total assets at June 30, 2003. The Corporation's gap position is one
tool used to evaluate interest rate risk and the stability of net interest
margins. Another tool that management uses to evaluate interest rate risk is a
computer simulation model that assesses the impact of changes in interest rates
on net interest income, net-income under various interest rate forecasts and
scenarios. Management has set acceptable limits of risk within its Asset
Liability Committee ("ALCO") policy and monitors the results of the simulations
against these limits quarterly. As of the most recent quarter end, all results
are within policy limits and indicate an acceptable level of interest rate risk.
Management monitors interest rate risk as a regular part of corporate operations
with the intention of maintaining a stable net interest margin.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
INTEREST SENSITIVITY ANALYSIS
AS OF JUNE 30, 2004
(Dollars in thousands)
One Over
Within through five Non-rate
one year five years years sensitive Total
------------ ---------- ------------ --------- -------
ASSETS
Investment securities $ 40,168 $ 50,300 $ 47,749 $ -- $138,217
Interest bearing deposits in banks 298 -- -- -- 298
Loans and leases 225,882 257,328 96,596 (6,626) 573,180
Cash and cash equivalents -- -- -- 23,605 23,605
Premises & equipment -- -- -- 13,105 13,105
Other assets -- -- -- 10,924 10,924
----------- ----------- ---------- --------- ----------
Total assets $ 266,348 $ 307,628 $ 144,345 $ 41,008 $ 759,329
=========== =========== ========== ========== ==========
LIABILITIES AND CAPITAL
Interest bearing deposits $ 440,879 $ 32,855 $ -- $ -- $ 473,734
Non-interest bearing deposit -- -- -- 125,686 125,686
FHLB advances and other
borrowings 32,222 53,760 2,200 -- 88,182
Junior Subordinated Debt 15,465 -- -- -- 15,465
Other liabilities 133 -- 4,831 -- 4,964
Capital -- -- -- 51,298 51,298
----------- --------- --------- -------- ----------
Total liabilities & capital $ 488,699 $ 86,615 $ 7,031 $ 176,984 $ 759,329
=========== ========== ========== ========== ==========
Net interest rate
sensitivity gap $ (222,351) $ 221,013 $ 137,314 $ (135,976) $ --
========== ========== ========== ========= ==========
Cumulative interest rate
sensitivity gap $ (222,351) $ (1,338) $ 135,976 $ -- $ --
========== ========= ========== ========== ==========
Cumulative interest rate
sensitivity gap divided
by total assets -29.3% -0.2% 17.9%
========== ========= =========
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 losses on existing loans that may
become uncollectible based upon Management's periodic evaluations of the
collectibility of loans. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, adequacy of collateral, review of specific problem loans, and current
economic conditions that may affect our borrower's ability to pay.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
AND COMPARISON OF LOANS OUTSTANDING
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------------- ---------------------------
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning of period $ 6,000 $ 6,389 $ 5,864 $ 6,230
--------- --------- --------- ---------
Provision charged to operating expense 56 373 356 767
--------- --------- --------- ---------
Recoveries of loans previously charged-off 857 24 897 144
Loans charged-off (284) (630) (491) (985)
--------- --------- --------- ---------
Net recoveries (loans charged-off) 573 (606) 406 (841)
--------- --------- -------- ---------
Balance at end of period $ 6,626 $ 6,156 $ 6,626 $ 6,156
========= ========= ======== =========
Period-end loans outstanding $ 579,806 $ 462,438 $ 579,806 $ 462,438
Average loans outstanding $ 551,261 $ 448,941 $ 534,341 $ 443,960
Allowance for loan losses as a
Percentage of period-end loans outstanding 1.14% 1.33% 1.14% 1.33%
Net charge-offs to average loans
Outstanding -0.10% 0.13% -0.08% 0.19%
Non-performing loans include loans on non-accrual status and loans past due
90 days or more and still accruing. The Corporation's policy is to write down
all non-performing loans to net realizable value based on current assessments of
the value of collateral securing such loans and leases. Non-performing loans are
primarily collateralized by real estate and are in the process of collection. As
of June 30, 2004, the level of non-performing loans has decreased $2.5 million
from June 30, 2003, and non-performing loans decreased $1.7 million from
December 31, 2003.
Management is not aware of any loans other than those included in the
following table that would be considered potential problem loans and cause
Management to have doubts as to the borrower's ability to comply with loan
repayment terms. Non-performing loans and leases reduce the Corporation's
earnings because interest income is not earned on such assets. Management has
taken aggressive steps to control current and future credit quality issues. The
following chart represents detailed information regarding non-performing loans
and leases.
In June of 2004, the Corporation recovered $795 thousand on a commercial
loan that was previously charged off. This recovery allowed the Corporation to
charge a lower provision expense than prior periods and still maintain the
allowance for loan loss at a level that management believes will be adequate to
absorb loan losses on existing loans.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
NON-PERFORMING LOANS AND ASSETS
June 30, December 31,
------------------------- ------------
(Dollars in thousands) 2004 2003 2003
------ ------ ------
Past due over 90 days and still accruing $ 16 $ 600 $ 597
Non-accrual loans 1,947 3,883 3,093
------- ------- --------
Total non-performing loans 1,963 4,483 3,690
Other real estate owned 1,523 3,218 965
------- ------- --------
Total non-performing assets $ 3,486 $ 7,701 $ 4,655
======= ======= ========
Non-performing loans as a percentage of total loans (gross) 0.34% 0.97% 0.72%
Allowance for loan losses as a
percentage of non-performing loans 337.54% 137.32% 158.92%
Allowance for loan losses as a
percentage of total loans and other real estate owned 1.14% 1.65% 0.91%
Allowance for loan losses as a percentage of non-performing assets 190.07% 79.94% 125.97%
The allowance for loan losses as a percentage of non-performing loans ratio
indicates that the allowance for loan losses is sufficient to cover the
principal of all non-performing loans at June 30, 2004. Other real estate owned
("OREO") represents residential and commercial real estate that had secured
non-performing loans that the Corporation acquired through foreclosure or other
collection efforts and that is held for sale. The value of OREO has been written
down to realizable value (net of estimated disposal costs) based on professional
appraisals.
LOAN IMPAIRMENT
The Corporation identifies a loan as impaired when it is probable that
interest and principal will not be collected according to the contractual terms
of the loan agreement. The accrual of interest is discontinued on impaired loans
and no income is recognized until all recorded amounts of interest and principal
are recovered in full.
The Corporation examines commercial and non-residential mortgage loans on
non-accrual status for impairment. The balance of impaired loans was $1.9
million, $3.1 million, and $3.9 million at June 30, 2004, December 31, 2003, and
June 30, 2003 respectively. The associated allowance for impaired loans was $191
thousand, $309 thousand and $388 thousand at June 30, 2004, December 31, 2003
and June 30, 2003, respectively.
For the three and six-month period ended June 30, 2004, activity in the
allowance for impaired loan losses include a provision of $24 thousand and $43
thousand, charge offs of $17 thousand and $25 thousand, recoveries of $3
thousand and $3 thousand, respectively. Contractual interest amounted to $41
thousand for the three-months ended June 30, 2004 and $93 thousand for the
six-months ended June 30, 2004. Cash collected on loans for the three-month and
six-month period ended June 30, 2004 was $414 thousand and $863 thousand,
respectively. The amount applied to principal was $410 thousand and $836
thousand for the three and six- month period, respectively, of which $4 thousand
and $27 thousand was applied to interest for the three and six-month period
ended June 30, 2004, respectively.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Continued
For the three-month and six-month period ended June 30, 2003, activity in
the allowance for impaired loan losses include a provision of $325 thousand and
$528 thousand, charge offs of $60 thousand and $90 thousand, respectively, and
recoveries of $20 thousand and $30 thousand, respectively. Contractual interest
amounted to $94 thousand for the three months ended June 30, 2003 and $198
thousand for the six-months ended June 30, 2003. Cash collected on loans for the
three-month and six-month period ended June 30, 2004 was $1.3 million and $2.0
million, respectively. The amount applied to principal was $1.0 million and $1.7
million for the three- and six-month period ended June 30, 2003, of which $23
thousand and $47 thousand was applied to interest, respectively.
CAPITAL ADEQUACY
The Corporation is subject to Risk-Based Capital Guidelines adopted by the
Federal Reserve Board ("FRB") for bank holding companies. The Corporation is
also subject to similar capital requirements adopted by the Office of the
Comptroller of the Currency. Under these requirements, the regulatory agencies
have set minimum thresholds for Tier I Capital, Total Capital, and Leverage
ratios. At June 30, 2003, both the Corporation's and the Bank's capital exceeded
all minimum regulatory requirements, and the Bank was considered "well
capitalized" as defined in the regulations issued pursuant to the FDIC
Improvement Act of 1992. The Corporation's Risk-Based Capital Ratios, shown
below, have been computed in accordance with regulatory accounting policies.
The decrease in the Corporation's capital ratio from December 31, 2003 to
June 30, 2004 are due to changes in unrealized gains or losses on securities
held for sale and to the repurchasing of outstanding shares of the Corporation's
common stock.
RISK-BASED June 30, December 31, "Well Capitalized"
CAPITAL RATIOS ------------------------ ------------ Requirements
- -------------- 2004 2003 2003 ------------------
---- ---- ----
Corporation
-----------
Leverage Ratio 9.18% 8.42% 9.71% N/A
Tier I Capital Ratio 10.94% 10.67% 12.01% N/A
Total Risk-Based Capital Ratio 12.02% 11.87% 13.07% N/A
Bank
----
Leverage Ratio 8.57% 7.71% 8.68% 5.00%
Tier I Capital Ratio 10.19% 9.77% 10.72% 6.00%
Total Risk-Based Capital Ratio 11.26% 10.98% 11.79% 10.00%
The Corporation is not under any agreement with the regulatory authorities
nor is it aware of any current recommendations by the regulatory authorities
that, if they were to be implemented, would have a material affect on liquidity,
capital resources or operations of the Corporation.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's assessment of its
sensitivity to market risk since its presentation in the 2003 Annual Report of
the Corporation, filed as an exhibit to its Form 10-K for the fiscal year ended
December 31, 2003 with the SEC via EDGAR. Please refer to the "Management's
Discussion and Analysis" section on pages 18-30 of the Corporation's 2003 Annual
Report for additional information.
ITEM 4. CONTROLS AND PROCEDURES
o Certifications. Included with this Quarterly Report as Exhibits 31.1, 31.2,
31.3 and 31.4 are four certifications (the "Section 302 Certifications"),
one by each of our principal executive and financial officers (the
"Principal Officers") and our President and Assistant Treasurer. This
section of the Quarterly Report contains information concerning the
evaluations of our disclosure controls and procedures and internal control
over financial reporting that are referred to in the Section 302
Certifications. This information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
o Evaluation of Our Disclosure Controls and Procedures. The Securities and
Exchange Commission (the "SEC") requires that as of the end of the quarter
covered by this Report, the Principal Officers evaluate the effectiveness
of the design and operation of our disclosure controls and procedures and
report on the effectiveness of the design and operation of our disclosure
controls and procedures.
"Disclosure controls and procedures" mean the controls and other procedures
that are designed with the objective of ensuring that information required
to be disclosed in our reports filed under the Securities Exchange Act of
1934 (the "Exchange Act"), such as this Quarterly Report, is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms promulgated by the SEC. Disclosure controls and procedures
are also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including the Principal
Officers, as appropriate, to allow timely decisions regarding required
disclosure.
o Evaluation of Our Internal Control Over Financial Reporting. The SEC also
requires that the Principal Officers certify certain matters regarding our
internal control over financial reporting.
"Internal control over financial reporting" means the process designed by,
or under the supervision of, our Principal Officers, and effected by our
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies
and procedures that:
(i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the issuer;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the issuer are being made only
in accordance with authorizations of management and directors of
the issuer; and
(iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
issuer's assets that could have a material effect on the
financial statements.
26
ITEM 4. CONTROLS AND PROCEDURES - Continued
Among the matters our Principal Officers certify in the Section 302
Certifications are whether all "significant deficiencies" or "material
weakness" in the design or operation of our internal control over financial
reporting that are likely to adversely affect our ability to record,
process, summarize and report financial information have been disclosed to
our auditors and the Audit Committee of our Board of Directors.
"Significant deficiencies" has the same meaning as the term "reportable
conditions" in auditing literature. Both terms represent deficiencies in
the design or operation of internal control over financial reporting that
could adversely affect a company's ability to record, process, summarize
and report financial data consistent with the assertions of management in a
company's financial statements. A "material weakness" is defined in the
auditing literature as a particularly serious reportable condition where
the design or operation of one or more internal control over financial
reporting components does not reduce to a relatively low level the risk
that misstatements caused by error or fraud may occur in amounts that would
be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing
their assigned functions. A "material weakness" constitutes a greater
deficiency than a "significant deficiency, but an aggregation of
significant deficiencies may constitute a material weakness in a company's
internal control over financial reporting.
o Limitations on the Effectiveness of Controls. Our management, including the
Principal Officers, does not expect that our disclosure controls and
procedures or our internal control over financial reporting will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, as opposed to absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within an entity have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions; over
time, a system of controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
o Conclusions about the Effectiveness of the Disclosure Controls and
Procedures. As required by Rule 13a-15(b), the Corporation's management,
including our Principal Officers, conducted an evaluation as of the end of
the period covered by this report, of the effectiveness of the
Corporation's disclosure controls and procedures. Based on that evaluation,
the Principal Officers concluded that, subject to the limitations noted
above, our disclosure controls and procedures are effective to provide
reasonable assurance that the disclosure controls and procedures will meet
their objectives.
o Changes in Internal control over financial reporting. As required by Rule
13a-15(d), the Corporation's management, including the Principal Officers
conducted an evaluation of the Corporation's internal control over
financial reporting to determine whether any changes occurred during the
period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Corporation's internal control
over financial reporting. Based on that evaluation, there has been no such
change during the quarter covered by this report.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Various actions and proceedings are presently pending to which
the Corporation is a party. These actions and proceedings
arise out of routine operations and, in Management's opinion,
will not, either individually or in the aggregate, have a
material adverse effect on the consolidated financial position
of the Corporation and its subsidiaries.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
--------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
(a) (b) (c) (d)
Total Average Total Number of Maximum Number (or
Number of Price Shares (or Units) Approximate Dollar Value)
Shares (or Paid Purchased as Part of Shares (or Units) that
Units) Per Share of Publicly Announced May Yet Be Purchased Under
Purchased (or Unit) Plans or Programs the Plans or Programs
April 1 to April 30, 2004 -- -- -- $8,394,706
May 1 to May 31, 2004 12,000 $24.62 12,000 $8,099,303
June 1 to June 30, 2004 30,500 $23.16 30,500 $7,392,893
Total 42,500 $23.89 42,500 $7,392,893
Note: All of the foregoing shares were purchased pursuant to the Corporation's
program to repurchase up to $10.0 million of the Corporation's common stock that
was publicly announced on October 16, 2003.
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
None
Item 5. Other Information
-----------------
None
28
PART II - OTHER INFORMATION - Continued
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3(i).* Certificate of Incorporation. Copy of the Corporation's
Articles of Incorporation, as amended, is incorporated herein by
reference to Exhibit 3(i) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 2000.
3(ii).* Bylaws of the Corporation, as amended. Copy of the
Corporation's Bylaws, as amended, is incorporated herein by reference
to Exhibit 3(ii) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2000.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of President
31.3 Rule 13a-14(a) Certification of Treasurer
31.4 Rule 13a-14(a) Certification of Assistant Treasurer
32.1 Section 906 Certification of the Chief Executive Officer
32.2 Section 906 Certification of the President
32.3 Section 906 Certification of the Treasurer
32.4 Section 906 Certification of the Assistant Treasurer
* Indicates document previously filed
(b) Reports on Form 8-K
A Form 8-K was filed with the SEC on April 19, 2004 pertaining to a
press release announcing the First Quarter 2004 earnings (the "First
8-K").
A Form 8-K was filed with the SEC on April 27, 2004 pertaining to
actions taken at the annual meeting of shareholders.
A Form 8-K/A was filed with the SEC on June 30, 2004 to amend the First
8-K to correctly report the information included in the First 8-K under
Item 12.
A Form 8-K was filed with the SEC on July 26, 2004 pertaining to a
press release announcing the Second Quarter 2004 earnings.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHESTER COUNTY CORPORATION
John A. Featherman III
August 13, 2004 /s/ John A Featherman III
-------------------------
John A. Featherman III
Chief Executive Officer
J. Duncan Smith
August 13, 2004 /s/ J. Duncan Smith
-------------------
J. Duncan Smith
Treasurer
(Principal Accounting and Financial
Officer)
30
Exhibit Index
3(i).* Certificate of Incorporation. Copy of the Corporation's
Articles of Incorporation, as amended, is incorporated
herein by reference to Exhibit 3(i) to the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000.
3(ii).* Bylaws of the Corporation, as amended. Copy of the
Corporation's Bylaws, as amended, is incorporated herein by
reference to Exhibit 3(ii) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2000.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of President
31.3 Rule 13a-14(a) Certification of Treasurer
31.4 Rule 13a-14(a) Certification of Assistant Treasurer
32.1 Section 906 Certification of the Chief Executive Officer
32.2 Section 906 Certification of the President
32.3 Section 906 Certification of the Treasurer
32.4 Section 906 Certification of the Assistant Treasurer
* Indicates document previously filed
31