UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 X No ___ -
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X -
The number of shares outstanding of Common Stock of the Registrant as of
November 9, 2004 was 4,557,478.
2
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Condition
September 30, 2004 (unaudited) and December 31, 2003 4
Consolidated Statements of Income
Three and Nine-Months Ended September 30, 2004 and 2003 (unaudited) 5
Consolidated Statements of Cash Flows
Nine-Months Ended September 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 - Unregistered Sales of Equity Securities and Use of Proceeds 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 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) September 30, December 31,
2004 2003
------------ -----------
ASSETS
Cash and due from banks $ 25,245 $ 28,509
Federal funds sold and other overnight investments 38,000 2,500
Interest bearing deposits in banks 91 374
-------- --------
Total cash and cash equivalents 63,336 31,383
-------- --------
Investment securities held-to-maturity (market value of $11 at
September 30, 2004 and $20 at December 31, 2003, respectively) 10 19
Investment securities available-for-sale, at market value 144,774 130,710
Loans and Leases 603,865 511,249
Less: Allowance for loan losses (6,924) (5,864)
-------- --------
Net loans 596,941 505,385
Premises and equipment 13,382 13,168
Other assets 9,699 8,545
-------- --------
Total assets $ 828,142 $ 689,210
======== ========
LIABILITIES
Deposits
Noninterest-bearing $ 124,877 $ 114,307
Interest-bearing (including certificates of deposit over $100
of $29,613 and $21,346 - September 30, 2004 and
December 31, 2003 respectively) 567,340 463,007
-------- --------
Total deposits 692,217 577,314
Federal Home Loan Bank advances and other borrowings 61,934 40,543
Junior Subordinated Debentures 15,465 -
Guaranteed preferred beneficial interest in Corporation's subordinated
debentures - 15,000
Other liabilities 5,110 4,603
-------- --------
Total liabilities 774,726 637,460
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; authorized, 10,000,000 shares;
outstanding, 4,799,666 at September 30, 2004 and December 31, 2003. 4,800 4,800
Additional paid-in capital 1,479 1,877
Retained earnings 52,680 50,116
Accumulated other comprehensive income (loss) (47) 307
Treasury stock, at cost: 281,874 shares and 283,144 shares
at September 30, 2004 and December 31, 2003, respectively. (5,590) (5,350)
-------- --------
Total stockholders' equity 53,416 51,750
-------- --------
Total liabilities and stockholders' equity $ 828,142 $ 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 Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 8,487 $ 7,270 $ 23,515 $ 21,416
Investment securities 1,265 1,084 3,900 3,318
Federal funds sold and other overnight investments 83 24 113 205
Deposits in Banks - 1 1 2
-------- ------- ------- -------
Total interest income 9,835 8,379 27,529 24,941
-------- ------- ------- -------
INTEREST EXPENSE
Deposits 1,381 1,390 3,757 4,659
Securities sold under repurchase agreements - - - 3
Interest on Trust-Preferred Securities 187 61 524 190
Federal Home Loan Bank advances and other borrowings 489 270 1,310 628
-------- ------- ------- -------
Total interest expense 2,057 1,721 5,591 5,480
-------- ------- --------- -------
Net interest income 7,778 6,658 21,938 19,461
Provision for loan and lease losses 454 860 810 1,627
-------- ------- ------- -------
Net interest income after provision
for loan and lease losses 7,324 5,798 21,128 17,834
-------- ------- ------- -------
NON-INTEREST INCOME
Trust and Investment Services 834 825 2,655 2,477
Service charges on deposit accounts 546 495 1,585 1,540
Investment securities gains, net 17 130 70 389
Operating lease rental income 227 221 610 669
Losses on sale of premises and other real-estate owned (149) - (101) -
Gains and fees on the sale of residential mortgages 93 131 283 935
Gain on the sale of credit card portfolio - - 34 306
Other 530 584 1,669 1,635
-------- ------- ------- -------
Total non-interest income 2,098 2,386 6,805 7,951
-------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 4,040 3,660 11,900 11,161
Net occupancy, equipment and date processing 1,332 1,394 3,995 4,105
Depreciation expense on operating leases 199 172 534 511
FDIC deposit insurance 22 23 65 66
Bank shares tax 131 131 388 362
Professional services 494 306 1,114 816
Other 1,249 1,058 3,682 3,175
-------- ------- ------- -------
Total non-interest expense 7,467 6,744 21,678 20,196
-------- ------- ------- -------
Income before income taxes and cumulative effect
of change in accounting for income taxes 1,955 1,440 6,255 5,589
INCOME TAXES 525 431 1,814 1,677
-------- ------- ------- -------
NET INCOME $ 1,430 $ 1,009 $ 4,441 $ 3,912
======== ======= ======= =======
PER SHARE DATA
Basic earnings per common share $ 0.32 $ 0.22 $ 0.99 $ 0.88
======== ======= ======= =======
Diluted earnings per common share $ 0.31 $ 0.22 $ 0.95 $ 0.86
======== ======= ======= =======
Dividends declared $ 0.1375 $ 0.1350 $ 0.4130 $ 0.4050
======== ====== ======= =======
Basic weighted average shares outstanding 4,511,248 4,489,097 4,507,069 4,462,303
========= ========= ========= =========
Diluted weighted average shares outstanding 4,681,355 4,639,712 4,683,573 4,573,152
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
5
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
(Dollars in thousands) 2004 2003
---- ----
OPERATING ACTIVITIES
Net Income $ 4,441 $ 3,912
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,726 2,128
Provision for possible loan and lease losses 810 1,627
Amortization of investment security premiums
and accretion of discounts 560 1,551
Amortization of deferred fees on loans 56 277
Investment securities gains, net (70) (389)
Increase in other assets (1,414) (3,956)
Increase in other liabilities 972 (508)
--------- ---------
Net cash provided by operating activities 7,081 $ 4,642
--------- --------
INVESTING ACTIVITIES
(Increase) decrease in loans (92,422) (56,717)
Proceeds from sales of investment securities available-for-sale 30,744 15,604
Proceeds from maturities of investment securities available-for-sale 23,302 63,261
Purchases of investment securities available-for-sale (68,591) (91,105)
Purchase of premises and equipment, net (1,940) (1,898)
--------- --------
Net cash (used in) investing activities (108,907) $ (70,855)
--------- --------
FINANCING ACTIVITIES
Increase in Federal Home Loan Bank advances 21,391 30,280
Increase in deposits 114,903 15,437
Cash dividends paid (1,877) (1,809)
Net increase (decrease) in treasury stock (638) 1,308
--------- --------
Net cash provided by financing activities 133,779 45,216
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 31,953 (20,997)
Cash and cash equivalents at beginning of period 31,383 48,867
--------- --------
Cash and cash equivalents at end of period $ 63,336 $ 27,870
========= ========
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 nine-month periods ended
September 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 September 30, 2004.
2. EARNINGS PER SHARE
------------------
Three Months ended September 30, 2004
- ------------------------------------- Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $1,430 4,511,248 $ 0.32
Effect of Dilutive Securities
Options to purchase common stock -- 170,107 (0.01)
----- --------- -----
Diluted earnings per share
Net income available to common stockholders $1,430 4,681,355 $ 0.31
===== ========= =====
Year to Date September 30, 2004
- -------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $4,441 4,507,069 $ 0.99
Effect of Dilutive Securities
Options to purchase common stock -- 176,504 (0.04)
----- --------- -----
Diluted earnings per share
Net income available to common stockholders $4,441 4,683,573 $ 0.95
===== ========= =====
Three Months ended September 30, 2003
- -------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $1,009 4,489,097 $ 0.22
Effect of Dilutive Securities
Options to purchase common stock -- 150,615 --
----- --------- -----
Diluted earnings per share
Net income available to common stockholders $1,009 4,639,712 $ 0.22
===== ========= =====
7
FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
Year to Date September 30, 2003
- -------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ------
Basic earnings per share
Net income available to common stockholders $3,912 4,462,303 $ 0.88
Effect of Dilutive Securities
Options to purchase common stock -- 110,849 (0.02)
----- --------- -----
Diluted earnings per share
Net income available to common stockholders $3,912 4,573,252 $ 0.86
===== ========= =====
3. COMPREHENSIVE INCOME
Components of comprehensive income are presented in the following chart:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------
2004 2003 2004 2003
---- ---- ---- ----
Unrealized gains on securities:
Unrealized gains (losses) arising in period $ 1,558 $ (921) $ 417 $(1,408)
Reclassification adjustment -- -- -- --
Net unrealized gains (losses) 17 130 70 389
------ ----- ----- ------
Other comprehensive income before taxes 1,575 (791) 487 (1,019)
Income tax expense 400 234 88 258
------ ----- ----- ------
Other comprehensive income 1,975 (557) 575 (761)
------ ----- ----- ------
Comprehensive income (losses) $ 3,405 $ 452 $5,016 $ 3,151
====== ===== ===== ======
4. JUNIOR SUBORDINATED DEBENTURES
Management has determined that First Chester County Capital Trust I & II
qualify as variable interest entities under FASB Interpretation Number ("FIN")
46, as revised. First Chester County Capital Trust I & II issued mandatory
redeemable preferred securities to investors and loaned the proceeds to the
Company. First Chester County Capital Trust I & II are included in the
Corporation'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 were required to 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 September 30, 2004, the Corporation no longer
consolidates First Chester County Capital Trust I & II. The deconsolidation
results in the Corporation's investment in the common securities of First
Chester County Capital Trust I & II being included in other assets as of
September 30, 2004 and a corresponding increase in outstanding debt of $465
thousand. In addition, the income received on the Corporation's common
securities 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 September 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 Nine Months Ended
September 30, September 30,
---------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (in thousands) As reported $ 1,430 $ 1,009 $ 4,441 $ 3,912
Stock-based compensation costs determined
under fair value method for all awards (17) (33) $ (51) $ (99)
------- ------ ------ -------
Pro forma net income $ 1,413 $ 976 $ 4,390 $ 3,813
Earnings per share (Basic) As reported $ 0.32 $ 0.22 $ 0.99 $ 0.88
Pro forma $ 0.32 $ 0.21 $ 0.98 $ 0.86
Earnings per share (Diluted) As reported $ 0.31 $ 0.22 $ 0.95 $ 0.86
Pro forma $ 0.31 $ 0.21 $ 0.94 $ 0.84
Note: There were no options granted during the three and nine-month
periods ended September 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. On October 13, 2004, FASB voted to delay the adoption
of this proposed standard by public Companies until their first fiscal quarter
beginning after June 15, 2005. 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 Company's 2003 Form 10-K. In March
2004, the EITF issued a 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. In September 2004, the FASB issued a proposed Staff
Position, EITF Issue 03-1-a, Implementation Guidance for the Application of
Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of EITF 03-1. In September
2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No.
03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments
delays the effective date of certain provisions of EITF Issue 03-1, including
steps two and three of the Issue's three-step approach for determining whether
an investment is other-than-temporarily impaired. However, step one of that
approach must still be initially applied for impairment evaluations in reporting
periods beginning after June 15, 2004. The delay of the effective date for
paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance
of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application
of Paragraph 16 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. 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 (trading as First National Wealth
Advisors), 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 any 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 LOAN AND LEASE 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 September 30, 2004 was $1.430
million, an increase of $421 thousand or 41.7% from $1.009 million for the same
period in 2003. Net income for the nine-month period ended September 30, 2004
was $4.441 million, an increase of $529 thousand or 13.5% from $3.912 million
for the same period in 2003. Basic earnings per share was $0.32 and $0.99 for
the three and nine-month periods ended September 30, 2004, respectively,
compared to $0.22 and $0.88 for the same periods in 2003. Cash dividends
declared during 2004 were $0.1375 and $0.4130 per share for the three and
nine-month periods compared to $0.135 per share and $0.405 per share for the
three and nine-month periods ended September 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 loans, increased for both the three and
nine-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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
The primary component of this increase in earning assets can be attributed
to strong loan growth in all types of loan products for both the three and
nine-month periods. These increases were partially offset by both increases in
non-interest expenses and a decrease in non-interest income when compared to the
same period last year.
Increases in non-interest expense for both periods can be attributed to
several items. Professional services fees related to the Corporations cost of
compliance with the Sarbanes Oxley legislation, marketing and facility costs
resulting from the introduction of a new corporate mark and advertising
campaign, a write-down of an other real estate owned property to its expected
net value, and salary and benefit costs related to the staffing of new and
expected branch sites.
Non-interest income has also decreased for both periods; these decreases
are primarily related to a on-time gain earned on the sale of the Corporations
Credit Card portfolio and higher gains and fees earned on the sale of
residential mortgages in 2003.
Additionally, earnings for the three and nine-month periods ended September
30, 2004 benefited from a lower provision expense for loan and lease losses when
compared to the three and nine-month periods ended September 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.
The specific components of net interest income, non-interest income and
expenses are discussed in detail on the following pages.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
SELECTED RATIOS
Return on Average Assets 0.72% 0.60% 0.80% 0.80%
Return on Average Equity 10.85% 8.01% 11.22% 10.39%
Net Interest Margin 4.16% 4.32% 4.18% 4.28%
Earnings Retained 56.50% 39.84% 57.73% 53.76%
Dividend Payout Ratio 43.50% 60.16% 42.27 46.24%
Book Value Per Share $11.82 $11.35 $11.82 $11.35
The "Consolidated Average Balance Sheet" on pages 19 and 20 may assist
the reader in understanding the following discussion.
NET INTEREST INCOME
Net interest income is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income for the three-months ended September 30, 2004 on a tax
equivalent basis, increased 14.8% to $7.8 million from $6.8 million in the same
period last year. For the nine-months ended September 30, 2004, net interest
income increased 12.0% to $21.9 million from $19.5 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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Average interest-earning assets increased approximately $120.6 million or
19.2% to $748.0 million for the three-months ended September 30, 2004 from
$627.4 million in the same period last year. For the nine-months ended September
30, 2004, average interest-earning assets increased approximately $89.2 million
or 14.6% to $699.3 million from $610.1 million in the same period last year. The
increase in average interest-earning assets for the three-month period ended
September 30, 2004 was the result of a 22.7% or $110.6 million increase in
average total loans and a $14.0 million increase in the average federal funds
and other investments sold, partially offset by a 2.9% or $3.7 million decrease
in average investment security balances. For the nine-month period ended
September 30, 2004, the increase was the result of a 21.2% or $97.1 million
increase in average total loans and 2.1% or $2.8 million increase in average
investment securities partially offset by a 47.9% or $10.7 million decrease in
average federal funds sold and other overnight investments.
Average interest-bearing liabilities increased approximately $102.6 million
or 20.2% to $610.0 million for the three-months ended September 30, 2004, from
$507.4 million in the same period last year. For the nine-months ended September
30, 2004, average interest-bearing liabilities increased $71.6 million or 14.6%
to $562.5 million from $490.9 million in the same period last year. The increase
in average interest-bearing liabilities for the three-month period was the
result of a $65.8 million or 14.2% increase in interest-bearing deposits and a
$26.4 million or 65.4% increase in FHLB advances and other borrowings. The
increase in average interest-bearing liabilities for the nine-month period was
the result of a $29.8 million or 6.5% increase in interest-bearing deposits and
a $31.5 million or 109.8% increase in FHLB advances and other borrowings.
The average net yield on interest-earning assets, on a tax equivalent basis
for the three-months ended September 30, 2004 decreased 3.7% or 16 basis points
(one basis point is equal to 1/100 of a percent) to 4.16% from 4.32% in the same
period last year. For the nine-month period ended September 30, 2004, net yield
on interest earning assets decreased 2.3% or 10 basis points to 4.18% from 4.28%
in the same period in 2003. The average yield on interest-earning assets for the
three-month period ended September 30, 2004 decreased 3.00% or 16 basis points
to 5.26% from 5.42% in the same period last year. For the nine-month period
ended September 30, 2004, average yield on interest-earning assets decreased
4.2% or 23 basis points to 5.25% compared to 5.48% for the same period in 2003.
The average yield paid on interest-bearing liabilities for the three-month
period ended September 30, 2004 decreased 0.7% or 1 basis points to 1.35%
compared to 1.36% for the same period in 2003. For the nine-month period ended
September 30, 2004, average yield paid on interest-bearing liabilities decreased
10.7% or 16 basis points to 1.33% compared to 1.49% for the same period in 2003.
The low and decreasing interest rate environment over the last 24 months
continues to adversely impact the companies' net yield on interest earning
assets. The recent fed funds rate increases over the past quarter, should have a
positive impact on the net yield, but pricing competition for both loans and
deposits remains strong and may continue to affect net-interest income for
future time periods.
AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------
2004 2003 2004 2003
---- ---- ---- ----
YIELD ON
Interest-Earning Assets 5.26% 5.42% 5.25% 5.48%
Interest Bearing Liabilities 1.35% 1.36% 1.33% 1.49%
---- ---- ---- ----
Net Interest Margin 3.91% 4.06% 3.92% 3.99%
Contribution of Interest-Free Funds 0.25% 0.26% 0.26% 0.29%
---- ---- ---- ----
Net Yield on Interest-Earning Assets 4.16% 4.32% 4.18% 4.28%
==== ==== ==== ====
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
INTEREST INCOME ON FEDERAL FUNDS SOLD AND OTHER OVERNIGHT INVESTMENTS
Interest income on Federal Funds sold and other overnight investments for
the three and nine-month periods ended September 30, 2004, increased $59
thousand and decreased $92 thousand to $83 thousand and $112 thousand,
respectively, when compared to the same periods in 2003. For the three-month
period, the increase in Federal Funds sold and overnight investments can be
attributed to a 148.7% or $14.0 million increase in the average balance of
Federal Funds sold and other overnight investments, as well as a 39.2% or 40
basis point increase on the yield earned on these investments. For the
nine-month period, the decrease in Federal Funds sold and other overnight
investments can be attributed to a 47.9% or $10.7 million decrease in the
average balance of Federal Funds sold and other overnight investments, partially
offset by a 4.9% or 6 basis point increase on the yield earned on these
investments.
INTEREST INCOME ON INVESTMENT SECURITIES
On a tax equivalent basis, interest income on investment securities
increased 8.9% to $1.3 million for the three-month period ended September 30,
2004, and 13.2% to $3.9 million for the nine-month period ended September 30,
2004, respectively, when compared to the same periods in 2003. The increase for
the three-month period is primarily due to a 12.1% or 43 basis point increase on
interest rates on such investments, offset by a 2.9% or $3.7 million decrease in
average investment balances. The increase for the nine-month period ended
September 30, 2004 is the result of an 11.0% or 39 basis point increase on
interest rates on such investments compared to the same period last year as well
as a 2.1% or $2.7 million increase in average investment balances.
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 16.1% and 9.8% to $8.5 million and
$23.5 million for the three and nine-month periods ended September 30, 2004,
compared to the same periods in 2003, respectively. The increase in interest
income for the three-month period is the direct result of a 22.7% or $110.6
million increase in the average balance of loans and leases, partially offset by
a 5.3% or 32 basis point decrease on the rates earned on the portfolio. The
increase in interest income for the nine-month period is the direct result of a
21.2% or $97.1 million increase in the average balance of loans and leases,
partially offset by a 9.5% or 59 basis point decrease on the rates earned on the
portfolio. Loan demand continues to be strong through the third quarter, this is
the primary reason for the increase in this component of interest income for
both periods.
INTEREST EXPENSE ON DEPOSIT ACCOUNTS
Interest expense on deposit accounts decreased 0.7% and 19.4% for the three
and nine-month periods ended September 30, 2004 to $1.4 million and $3.8
million, compared to $1.4 million and $4.7 million for the same periods in 2003.
The decrease for the three-month period is primarily the result of a 12.5% or 15
basis point decrease on rates paid on interest-bearing deposits partially offset
by a 14.2% or $65.8 million increase in the average interest-bearing deposits
balance. The decrease for the nine-month period is primarily the result of a
24.3% or 33 basis point decrease on rates paid on interest-bearing deposits
partially offset by a 6.5% or $29.8 million increase in the average
interest-bearing deposits balance compared to the same period last year. The
increases in average interest-bearing deposit balances for both periods, is
primarily related to one municipal customer. The recent increases in the Federal
Funds rate may put upward pressure on this component of interest expense as our
need for deposits increase to fund strong loan demand.
Competition for deposits from banking and 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.
15
MANAGEMENT'S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
INTEREST EXPENSE ON BORROWINGS
Borrowings consist primarily of Federal Home Loan Bank ("FHLB") borrowings.
Interest expense on borrowings increased $219 thousand to $489 thousand for the
three-month period ended September 30, 2004 from $270 thousand for the same
period in 2003. The increase is the direct result of a $65.4 million increase in
the average balance of such borrowings and a 9.3% or 25 basis point increase in
rates paid on these borrowings for the three-month period ending September 30,
2004 when compared to the same period last year. Interest expense on borrowings
increased $684 thousand to $1.3 million for the nine-month period ended
September 30, 2004 from $626 thousand for the same period in 2003. The increase
is a direct result of a $31.5 million or 109.8% increase in the average balance
of borrowings partially offset by an 0.3% or 1 basis point decrease on rates
paid on borrowings for the nine-month period ended September 30, 2004. The
increase in the level of borrowings for the three and nine-month periods is the
direct result of the strong loan growth the Corporation has experienced over
both periods. The borrowings are being used to supplement the growth in
deposits. Borrowing currently is an inexpensive option when compared to other
funding 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 $126 thousand to
$187 thousand for the three-month period ended September 30, 2004 from $61
thousand for the same period last year. For the nine-month period ended
September 30, 2004, interest expense on trust preferred securities increased
$334 thousand from $190 thousand to $524 thousand as 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 nine-month periods ended September 30, 2004, the
Corporation recorded a provision for loan and lease losses of $454 thousand and
an $810 thousand, respectively, compared to an $860 thousand and a $1,627
thousand for the same periods in 2003. The allowance for loan losses as a
percentage of total loans was 1.15% at September 30, 2004, 1.09% at September
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 12.1% to $2.1 million for the
three-month period ended September 30, 2004 when compared to the same period in
2003. For the nine- month period ended September 30, 2004, total non-interest
income decreased 14.4% to $6.8 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 gain of $34
thousand was earned in 2004. Also, gains and fee income generated on the sale of
residential mortgages for the three and nine-month period
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
ended September 30, 2004 decreased $38 thousand and $652 thousand from $283
thousand and $935 thousand to $93 thousand and $131 thousand compared to the
same period last year, respectively. The decrease is primarily due 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 1.1% and 7.2% to $834 thousand and $2.7
million for the three and nine-month periods ended September 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 2.5%
increase in the market value of assets under management, from $518.2 million at
September 30, 2003 to $531.3 million at September 30, 2004. Trust and Investment
Services revenue also increased due to an increase in estate revenue recognized
during the nine-month period of 2004. On October 28, 2004, the Corporation
entered into a strategic alliance with Haverford Financial Services, Inc., an
affiliate of The Haverford Trust Company. Through this alliance, the Corporation
will offer the investment advisory services of Haverford Financial Services on a
sub-advisory basis and enable the Corporation to expand its offerings of
sophisticated investment, trust, and money management services.
Service charges on deposit accounts increased approximately 10.3% to $546
thousand for the three-months ended September 30, 2004 compared to $495 thousand
for the same period in 2003. For the nine-month period ended September 30, 2004,
service charges on deposit accounts increased 2.9% to $1.6 million compared to
$1.5 million for the same period in 2003.
For the three-month period ended September 30, 2004, investment security
gains decreased $113 thousand from $130 thousand to $17 thousand, when compared
to the same period in 2003. For the nine-month period ended September 30, 2004,
investment security gains decreased $319 thousand from $389 thousand to $70
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-month period ended September
30, 2004 increased 2.7% to $227 thousand from $221 thousand when compared to the
same period in2003. Rental income on operating lease agreements for the
nine-month period ended September 30, 2004, decreased 8.8% to $610 thousand from
$669 thousand when compared to the same period in 2003. The Corporation did not
add on any new operating lease customers; current customers can enter into new
lease agreements. There was minimal new volume added during the first half of
the year, resulting in lower income for the nine-month period. Several new
contracts were added in the third quarter resulting in increased income for the
three-month period. See related depreciation expense in the non-interest expense
section for more details.
Other non-interest income decreased $54 thousand or 9.3% to $530 thousand
for the three-months ended September 30, 2004 compared to $584 thousand for the
same period in 2003. For the nine-month period ended September 30, 2004, other
non-interest income increased $34 thousand or 2.1% 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, retail mutual fund
income, rental income, management fees, notary fee income, and other
miscellaneous income. Decreases in the three-month period were mostly affected
by lower loan fees. When compared to the same periods in 2003, refinancings and
restructuring of commercial loans and mortgages in the third quarter of 2003
resulted in higher loan fee income for the period. Increases for the nine-month
period in retail mutual fund largest component of the increases in other
non-interest income.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
NON-INTEREST EXPENSE
Total non-interest expense for the three and nine-month periods ended
September 30, 2004 increased 10.7% to $7.5 million and 7.34% to $21.7 million,
compared to the same periods in 2003. The various components of non-interest
expense are discussed below.
Employee salaries and benefits increased 10.4% to $4.0 million and 6.6% to
$11.9 million for the three and nine-month periods ended September 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 nine-month increase. At September 30,
2004, the Corporation employed 271 full time and 26 part time employees compared
to 258 full time and 34 part time employees at September 30, 2003. Staffing
increases are related to the hiring of employees to staff our new and
anticipated branches as well as the filling of current open positions during the
year.
Net occupancy, equipment, and data processing expense decreased 4.5% and
2.7% to $1.3 million and $4.0 million for the three and nine-month periods ended
September 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 increased 15.7% and 4.5% to $199 thousand
and $534 thousand for the three and nine-month periods ended September 30, 2004,
compared to the same periods last year, respectively. This depreciation expense
is the result of operating lease agreements the Corporation has with several of
our customers. The income associated with these operating leases is classified
as Rental Income.
Professional services expense increased 61.4% and 36.5% to $494 thousand
and $1.1 million for the three and nine-month periods ended September 30, 2004
compared to the same periods in 2003, respectively. The increases are the result
of increased consultant, accounting, and legal fees. Much of the fees are
attributed to the cost of complying with the Sarbanes Oxley legislation. Through
the nine-month period, current and accrued costs were approximately $167
thousand. Management expects the total cost of compliance with Sarbanes Oxley
legislation for 2004 to be approximately $250 thousand.
During the third quarter, one of the Bank's other real estate owned
properties was written down to what management believes is the actual realizable
value. It is anticipated that this property will be disposed if before year end.
No further write-down is expected.
Other non-interest expense increased 18.1% and 16.0% to $1.3 million and
$3.7 million for the three and nine-month periods ended September 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 from the introduction of a new corporate mark tag-line, and advertising
campaign were the largest components of the increases in non-interest expense
for both periods. It is expected that this marketing expense will continue to
increase as more parts of the campaign are rolled out and expanded.
In June 2004, the Corporation opened its 18th branch at the Freedom Village
at Brandywine retirement community in West Brandywine Township. In the fourth
quarter of 2004, the Corporation anticipates opening a temporary modular
facility in the Oxford area. This facility will be equipped to meet all of our
customer's needs and will eventually be replaced by a newly designed full
service branch. 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.
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 SEPTEMBER 30, 2004
(Dollars in thousands) 2004 2003
-------------------------------- ----------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Federal funds sold and other overnight investments $ 23,388 $ 83 1.42% $ 9,405 $ 24 1.02%
Interest bearing deposits in banks 300 - - 617 1 0.65%
Investment securities
Taxable 103,303 1,007 3.90% 109,200 917 3.36%
Tax-exempt (1) 23,805 258 4.34% 21,650 245 4.53%
------- ----- ------- ------
Total investment securities 127,108 1,265 3.98% 130,850 1,162 3.55%
------- ----- ------- ------
Loans (2)
Taxable 585,881 8,320 5.68% 476,879 7,182 6.02%
Tax-exempt (1) 11,285 167 5.93% 9,652 130 5.39%
------- ----- ------- ------
Total loans 597,166 8,487 5.69% 486,531 7,312 6.01%
------- ----- ------- -------
Total interest-earning assets 747,962 9,836 5.26% 627,403 8,499 5.42%
Non-interest earning assets
Allowance for possible loan losses (6,877) (6,223)
Cash and due from banks 26,463 27,562
Other assets 23,878 25,129
------- -------
Total assets $791,426 $673,871
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $415,526 $ 710 0.68% $344,644 $591 0.69%
Certificates of deposits and other time 112,284 671 2.39% 117,394 800 2.73%
------- ----- ------- ------
Total interest bearing deposits 527,810 1,381 1.05% 462,038 1,391 1.20%
Securities sold under repurchase agreements - - - - - -
Junior subordinated debt 15,465 187 4.84%
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures - - - 5,000 61 4.81%
Federal Home Loan Bank advances and
other borrowings 66,713 489 2.93% 40,335 270 2.68%
------- ----- ------- ------
Total interest bearing liabilities 609,988 2,057 1.35% 507,373 1,722 1.36%
------- ----- ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 124,024 111,154
Other liabilities 4,651 4,967
------- -------
Total liabilities 738,663 623,494
Stockholders' equity 52,763 50,377
------- -------
Total liabilities and stockholders' equity $791,426 $673,871
======= =======
Net interest income $7,779 $ 6,777
===== ======
Net yield on interest earning assets 4.16% 4.32%
==== ====
(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
CONSOLIDATED AVERAGE BALANCE SHEET
AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 2004 2003
------------------------------- --------------------------------
Daily Daily
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Federal funds sold and other overnight investments $ 11,692 $ 112 1.28% $ 22,435 $ 205 1.22%
Interest bearing deposits in banks 478 1 0.28% 386 2 0.69%
Investment securities
Taxable 107,360 3,078 3.82% 118,252 3,069 3.46%
Tax-exempt (1) 24,345 822 4.50% 10,698 377 4.70%
------- ------ ------- ------
Total investment securities 131,705 3,900 3.95% 128,950 3,446 3.56%
------- ------ ------- ------
Loans (2)
Taxable 545,795 23,090 5.64% 451,297 21,078 6.23%
Tax-exempt (1) 9,641 425 5.87% 7,009 338 6.42%
------- ------ ------- ------
Total loans 555,436 23,515 5.64% 458,306 21,416 6.23%
------- ------ ------- ------
Total interest-earning assets 699,311 27,527 5.25% 610,077 25,069 5.48%
Non-interest earning assets
Allowance for possible loan losses (6,333) (6,390)
Cash and due from banks 23,608 25,651
Other assets 23,147 22,886
------- -------
Total assets $739,733 $652,224
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings, NOWS & money market deposits $375,414 1,724 0.61% $335,570 $ 1,990 0.79%
Certificates of deposits and other time 111,350 2,033 2.43% 121,432 2,669 2.93%
------- ----- ------- ------
Total interest bearing deposits 486,764 3,757 1.03% 457,002 4,659 1.36%
Securities sold under repurchase agreements - - - 178 5 3.75%
Junior subordinated debt 15,465 524 4.52% - - -
Guaranteed preferred beneficial interest in
Corporation's subordinated debentures - - - 5,000 190 5.07%
Federal Home Loan Bank advances and
other borrowings 60,270 1,310 2.90% 28,724 626 2.91%
------- ----- ------- ------
Total interest bearing liabilities 562,499 5,591 1.33% 490,904 5,480 1.49%
------- ----- ------- ------
Non-interest bearing liabilities
Non-interest bearing demand deposits 120,404 105,932
Other liabilities 4,114 5,163
------- -------
Total liabilities 687,017 601,999
Stockholders' equity 52,716 50,225
------- -------
Total liabilities and stockholders' equity $739,733 $652,224
======= =======
Net interest income $21,936 $19,589
====== ======
Net yield on interest earning assets 4.18% 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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
INCOME TAXES
Income tax expense for the three and nine-month periods ended September 30,
2004 was $535 thousand and $1.8 million, compared to $431 thousand and $1.7
million in the same periods last year. This represents effective tax rates of
26.9% for the three-month period and 29.0% for the nine-month period ended
September 30, 2004. The effective tax rate for the three and nine-month periods
ended September 30, 2003 were 30.0% 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) September 30, 2004 December 31, 2003
-------------------------- ----------------------
Average Effective Average Effective Dollar Percentage
DEPOSIT TYPE Balance Yield Balance Yield Variance Variance
- ------------ ------- ---------- --------- ---------- -------- ----------
NOW Accounts $111,308 0.32% $ 88,518 0.19% $22,790 25.75%
Money Market 26,672 0.49% 26,051 0.70% 621 2.38%
Statement Savings 65,934 0.55% 63,032 0.77% 2,902 4.60%
Other Savings 1,455 0.55% 1,522 0.79% ( 67) (4.40)%
CD's Less than $100,000 86,873 2.47% 96,773 2.93% (9,900) (10.23)%
------- ------- ------
Total Core Deposits 292,242 1.03% 275,896 1.33% 16,346 5.92%
Non-Interest Bearing
Demand Deposit Accounts 120,404 -- 107,334 -- 13,070 12.18%
------- ------- ------
Total Core and Non-Interest
Bearing Deposits 412,646 0.73% 383,230 0.96% 29,416 7.68%
------- ------- ------
Tiered Savings 170,045 0.85% 159,220 1.04% 10,825 6.80%
CD's Greater than $100,000 24,477 2.30% 22,365 2.48% 2,112 9.44%
------- ------- ------
Total Deposits $607,168 0.83% $564,815 1.04% $42,353 7.50%
------- ------- ------
21
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 nine-month periods ending September 30, 2004, average FHLB
advances were approximately $66.7 million and $60.3 million, respectively, and
consisted of term advances representing a combination of maturities in each
period. The average interest rate on these advances was approximately 2.93% and
2.90%, respectively. The Bank currently has a maximum borrowing capacity with
the FHLB of approximately $133.7 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 $117.6 million or
14.2% of total assets at September 30, 2004 compared with a negative $108.3
million or 15.7% of total assets at September 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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
INTEREST SENSITIVITY ANALYSIS
AS OF SEPTEMBER 30, 2004
(Dollars in thousands)
One Over
Within through five Non-rate
one year five years years sensitive Total
------------ ---------- ------------ --------- -------
ASSETS
Federal Funds and other overnight
investments sold $ 38,000 $ -- $ -- $ -- $ 38,000
Investment securities 41,392 57,576 45,806 -- 144,784
Interest bearing deposits in banks 91 -- -- -- 91
Loans and leases 231,185 279,757 92,923 (6,924) 596,941
Cash and due from banks -- -- -- 25,245 25,245
Premises & equipment -- -- -- 13,382 13,382
Other assets -- -- -- 9,699 9,699
----------- ----------- ---------- --------- ----------
Total assets $ 310,668 $ 337,343 $ 138,729 $ 41,402 $ 828,142
=========== =========== ========== ========== ==========
LIABILITIES AND CAPITAL
Interest bearing deposits $ 407,031 $ 39,700 $ 120,609 $ -- $ 567,340
Non-interest bearing deposit -- -- -- 124,877 124,877
FHLB advances and other
borrowings 5,696 53,878 2,360 -- 61,934
Junior Subordinated Debt 15,465 -- -- -- 15,465
Other liabilities 109 -- 5,001 -- 5,110
Capital -- -- -- 53,416 53,416
----------- --------- --------- -------- ----------
Total liabilities & capital $ 428,301 $ 93,578 $ 127,970 $178,293 $ 828,142
=========== ========== ========== ========== ==========
Net interest rate
sensitivity gap $ (117,633) $ 243,765 $ 10,759 $ (136,891) $ --
========== ========== ========== ========= ==========
Cumulative interest rate
sensitivity gap $ (117,633) $ 126,132 $ 136,891 $ -- $ --
========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap divided
by total assets (14.2%) (15.2%) 16.5%
========== ========== ==========
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.
23
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 Nine Months
Ended Ended
September 30, September 30,
------------- -------------
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Balance at beginning of period $ 6,626 $ 6,156 $ 5,864 $ 6,230
--------- --------- --------- -------
Provision charged to operating expense 454 860 810 1,627
--------- --------- --------- -------
Recoveries of loans previously charged-off 127 32 1,024 176
Loans charged-off (283) (1,575) (774) (2,560)
--------- --------- --------- -------
Net recoveries (loans charged-off) (156) (1,543) 250 (2,384)
--------- --------- --------- --------
Balance at end of period $ 6,924 $ 5,473 $ 6,924 $ 5,473
========= ========= ========= ========
Period-end loans outstanding $ 603,865 $ 502,377 $ 603,865 $502,377
Average loans outstanding $ 597,166 $486,531 $ 555,436 $458,306
Allowance for loan losses as a
percentage of period-end loans outstanding 1.15% 1.09% 1.15% 1.09%
Net charge-offs (recoveries) to average loans
outstanding 0.03% 0.32% (0.05%) 0.52%
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. As of September 30,
2004, the level of non-performing loans decreased $1.9 million from September
30, 2003 and $2.1 million from December 31, 2003. In November of 2004, the
Corporation transferred a $5.9 million loan to non-performing loans and reversed
$123.1 thousand in past due interest and late charges as the result of one loan
relationship. This loan is well secured by real estate and the Corporation
expects to collect the loan in full and not incur any losses.
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.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
NON-PERFORMING LOANS AND ASSETS
September 30, December 31,
------------- ------------
(Dollars in thousands) 2004 2003 2003
---- ---- ----
Past due over 90 days and still accruing $ 69 $ 714 $ 597
Non-accrual loans 1,542 4,624 3,093
-------- ------- --------
Total non-performing loans 1,661 5,338 3,690
Other real estate owned 1,365 3,218 965
-------- ------- --------
Total non-performing assets $ 3,026 $ 8,556 $ 4,655
======== ======= ========
Non-performing loans as a percentage of period end loans 0.28% 1.06% 0.72%
Allowance for loan losses as a
percentage of non-performing loans 416.86% 102.53% 158.92%
Non-performing assets as a percentage of
total loans and other real estate owned 0.50% 1.69% 0.91%
Allowance for possible loan losses as a percentage
of non-performing assets 228.82% 63.97% 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 September 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 $1.5
million, $3.1 million, and $5.9 million at September 30, 2004, December 31,
2003, and September 30, 2003 respectively. The associated allowance for impaired
loans was $149 thousand, $309 thousand and $700 thousand at September 30, 2004,
December 31, 2003 and September 30, 2003, respectively.
For the three and nine-month periods ended September 30, 2004, activity in
the allowance for impaired loan losses include a provision of $0 and $43
thousand, charge offs of $40 thousand and $65 thousand, recoveries of $0 and $0,
respectively. Contractual interest amounted to $33 thousand for the three-months
ended September 30, 2004 and $126 thousand for the nine-months ended September
30, 2004. Cash collected on loans for the three and nine-month periods ended
September 30, 2004 was $47 thousand and $910 thousand, respectively. The amount
applied to principal was $47 thousand and $883 thousand for the three and nine-
month periods, respectively, of which $0 and $27 thousand was applied to
interest for the three and nine-month periods ended September 30, 2004,
respectively.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
For the three and nine-month periods ended September 30, 2003, activity in
the allowance for impaired loan losses include a provision of $237 thousand and
$765 thousand, charge offs of $126 thousand and $216 thousand, respectively, and
recoveries of $2 thousand and $32 thousand, respectively. Contractual interest
amounted to $79 thousand for the three-months ended September 30, 2003 and $277
thousand for the nine-months ended September 30, 2003. Cash collected on loans
for the three and nine-month periods ended September 30, 2004 was $380 thousand
and $2.4 million, respectively. The amount applied to principal was $364
thousand and $2.1 million for the three and nine-month periods ended September
30, 2003, of which $0 and $46 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 September 30, 2004, 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
September 30, 2004 is 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 September 30, December 31, "Well Capitalized"
CAPITAL RATIOS ------------------------- ------------ Requirements
2004 2003 2003 ------------------
Corporation
Leverage Ratio 8.64% 8.26% 9.71% N/A
Tier I Capital Ratio 10.68% 10.19% 12.01% N/A
Total Risk-Based Capital Ratio 11.76% 11.19% 13.07% N/A
Bank
Leverage Ratio 8.18% 7.62% 8.68% 5.00%
Tier I Capital Ratio 10.08% 9.34% 10.72% 6.00%
Total Risk-Based Capital Ratio 11.16% 10.34% 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.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's assessment of its
sensitivity to market risk since its presentation in the 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.
27
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.
28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Various actions and proceedings are presently pending to which the
Corporation is a party. These actions and proceedings arise out of
routine operations and, in Management's opinion, will not, either
individually or in the aggregate, have a material adverse effect on
the consolidated financial position of the Corporation and its
subsidiaries.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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
--------- --------- ----------------- ---------------------
July 1 to July 30, 2004 -- -- -- $7,392,893
August 1 to August 31, 2004 11,000 $23.92 11,000 $7,129,783
September 1 to September 30, 2004 6,000 $24.85 6,000 $6,980,678
Total 17,000 $24.25 17,000 $6,980,678
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
29
PART II - OTHER INFORMATION - Continued
Item 6. 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
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHESTER COUNTY CORPORATION
John A. Featherman III
November 15, 2004 /s/ John A Featherman III
-------------------------
John A. Featherman III
Chief Executive Officer
J. Duncan Smith
November 15, 2004 /s/ J. Duncan Smith
-------------------
J. Duncan Smith
Treasurer
(Principal Accounting and
Financial Officer)
31
Exhibit Index
-------------
3(i).* Certificate of Incorporation. Copy of the Corporation's
Articles of Incorporation, as amended, is incorporated herein by
reference to Exhibit 3(i) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2000.
3(ii).* Bylaws of the Corporation, as amended. Copy of the
Corporation's Bylaws, as amended, is incorporated herein by
reference to Exhibit 3(ii) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2000.
31.1 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
32