-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A46mB+0smtYLpEUt/L6QF1WIhhzdokIbqae7gXZTj2irLy45kZaZozXbtCxMqIYt db618b5lNS1BP+/LxfPj7g== 0000744126-96-000004.txt : 19960329 0000744126-96-000004.hdr.sgml : 19960329 ACCESSION NUMBER: 0000744126-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST WEST CHESTER CORP CENTRAL INDEX KEY: 0000744126 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232288763 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12870 FILM NUMBER: 96539681 BUSINESS ADDRESS: STREET 1: 9 N HIGH ST STREET 2: PO BOX 523 CITY: WEST CHESTER STATE: PA ZIP: 19381 BUSINESS PHONE: 6106923000 MAIL ADDRESS: STREET 1: 9 NORTH HIGH ST STREET 2: PO BOX 523 CITY: WEST CHESTER STATE: PA ZIP: 19381 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995, OR ----------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to _____________ Commission File No. 0-12870 FIRST WEST CHESTER CORPORATION ------------------------------ (Exact name of Registrant as specified in its charter) Pennsylvania 23-2288763 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9 North High Street, West Chester, Pennsylvania 19380 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 692-3000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share --------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock of the Registrant held by non-affiliates as of March 1, 1996, was approximately $42,889,000. The number of shares outstanding of Common Stock of the Registrant as of March 1, 1996, was 1,712,491. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Annual Report to Shareholders for the year ended December 31, 1995, is incorporated by reference into Parts I and II hereof. The Registrant's definitive Proxy Statement for its 1996 Annual Meeting of Shareholders is incorporated by reference into Part III hereof. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PAGE PART I: Item 1 - Business 1 Item 2 - Properties 16 Item 3 - Legal Proceedings 17 Item 4 - Submission of Matters to a Vote of Security Holders 17 PART II: Item 5 - Market for the Corporation's Common Equity and Related Stockholder Matters 17 Item 6 - Selected Financial Data 18 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation 18 Item 8 - Financial Statements and Supplementary Data 19 Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III: Item 10 - Directors and Executive Officers of the Corporation 19 Item 11 - Executive Compensation 19 Item 12 - Security Ownership of Certain Beneficial Owners and Management 19 Item 13 - Certain Relationships and Related Transactions 19 PART IV: Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 20 SIGNATURES 23
PART I ------ Item 1. Business. - ------- --------- GENERAL First West Chester Corporation (the "Corporation") is a Pennsylvania business corporation and a bank holding company registered under the federal Bank Holding Corporation Act of 1956, as amended (the "BHC Act"). As a bank holding company, the Corporation's operations are confined to the ownership and operation of banks and activities deemed by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") to be so closely related to banking to be a proper incident thereto. The Corporation was incorporated on March 9, 1984, for the principal purpose of becoming a registered bank holding company pursuant to the BHC Act and acquiring The First National Bank of West Chester (the "Bank"), thereby enabling the Bank to operate within a bank holding company structure. On September 13, 1984, the Corporation acquired all of the issued and outstanding shares of common stock of the Bank in a one-for-one exchange of common shares of the Bank for common shares of the Corporation. The principal activities of the Corporation are the owning and supervising of the Bank, which engages in a general banking business in Chester County, Pennsylvania. The Corporation directs the policies and coordinates the financial resources of the Bank. In addition, the Corporation is the sole shareholder of 323 East Gay Street Corp., a Pennsylvania corporation ("EGSC"), which holds a 62% general partnership interest in WCP Partnership, a Pennsylvania general partnership ("WCP") that owns foreclosed real property located in West Chester, Pennsylvania (the "West Chester Property"). At December 31, 1995, the Corporation had consolidated total assets of approximately $389 million, total deposits of approximately $344 million and stockholders' equity of approximately $31 million. BUSINESS OF THE BANK The Bank is engaged in the business of commercial and retail banking and was organized under the banking laws of the United States in December 1863. The Bank currently conducts its business through six banking offices located in Chester County, Pennsylvania, including its main office. In addition, the Bank operates four limited service ATM facilities. The Bank is a member of the Federal Reserve System. At December 31, 1995, the Bank had total assets of approximately $388 million, total loans of approximately $243 million, total deposits of approximately $344 million and employed 182 full-time equivalent persons. The Bank is a full service commercial bank offering a broad range of retail banking, commercial banking and trust services to individuals and businesses. Retail services include checking accounts, savings programs, money-market accounts, certificates of deposit, safe deposit facilities, consumer loan programs, residential mortgages, overdraft checking, automated tellers and extended banking hours. Commercial services include revolving lines of credit, commercial mortgages, equipment leasing and letter of credit services. These retail and commercial banking activities are provided primarily to consumers and small to mid-sized companies within the Bank's market area. Lending services are focused on commercial, consumer and real estate lending to local borrowers. The Bank attempts to establish a total borrowing relationship with its customers which may typically include a commercial real estate loan, a business line of credit for working capital needs, a mortgage loan for a borrower's residence, a consumer loan or a revolving personal credit line. The Bank's Financial Management Services Department (formerly, the Trust Department) provides a broad range of personal and corporate trust services. It administers and provides investment management services for estates, trusts, agency accounts and employee benefit plans. At December 31, 1995, the Bank's -1- Financial Management Services Department administered or provided investment management for 698 accounts, which possessed assets with an aggregate market value of approximately $256 million. For the year ended December 31, 1995, gross income from the Bank's Financial Management Services Department and related activities amounted to approximately $1.8 million and accounted for 5.7% of the total of interest income and other income of the Bank for such period. COMPETITION The Bank's service area consists primarily of greater Chester County, including West Chester and Kennett Square, as well as the fringe of Delaware County, Pennsylvania. The core of the Bank's service area is located within a fifteen-mile radius of the Bank's main office in West Chester, Pennsylvania. The Bank encounters vigorous competition for market share in the communities it serves from community banks, thrift institutions and other non-bank financial organizations. The Bank competes with banking and financial branching systems, some from out of state, which are substantially larger and have greater financial resources than the Bank. There are branches of approximately 23 commercial banks, savings banks and credit unions, including the Bank, in the general market area serviced by the Bank. The largest of these institutions had assets of over $100 billion and the smallest had assets of less than $30 million. The Bank had total assets of approximately $388 million as of December 31, 1995. The Bank competes for deposits with various other commercial banks, savings banks, credit unions, brokerage firms and stock, bond and money market funds. The Bank also faces competition from major retail-oriented firms that offer financial services similar to traditional services available through commercial banks without being subject to the same degree of regulation. Mortgage banking firms, finance companies, insurance companies and leasing companies also compete with the Bank for traditional lending services. Management believes that the Bank is able to effectively compete with its competitors because of its ability to provide responsive personalized services and competitive rates. This ability is a direct result of management's knowledge of the Bank's market area and customer base. Management believes the needs of the small to mid-sized commercial business and retail customers are not adequately met by larger financial institutions, therefore creating a marketing opportunity. BUSINESS OF EGSC EGSC was formed in 1994 to hold the Bank's partnership interest in WCP Partnership. WCP Partnership was formed to facilitate the acquisition, necessary repairs, required environmental remediation and other actions necessary to sell the West Chester property at fair market value. EGSC purchased a 62% interest in the mortgage on the West Chester property in 1995 from the Bank at book value and immediately contributed the interest in the mortgage to WCP Partnership as capital. Another financial institution contributed the remaining 38% interest in the mortgage to WCP Partnership. WCP Partnership foreclosed on West Chester property in 1995 and is progressing towards an eventual sale. SUPERVISION AND REGULATION General The Corporation is a bank holding company subject to supervision and regulation by the Federal Reserve Board. In addition, the Bank is subject to supervision and regulation by the Office of the Comptroller -2- of the Currency ("OCC"), the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking (the "Department"). Government Regulation The Corporation is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the BHC Act. Annual and other periodic reports also are required to be filed with the Department. The Federal Reserve Board also makes examinations of bank holding companies and their subsidiaries. The BHC Act requires each bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or if it would acquire or control more than 5% of the voting shares of such a bank. See "Interstate Banking." Capital adequacy guidelines may impede a bank holding company's ability to consummate acquisitions involving consideration with a cash component. For a description of certain applicable guidelines, see "Capital," "Federal Deposit Insurance Corporation Improvement Act of 1991" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." The BHC Act also restricts the types of businesses and operations in which a bank holding company and its subsidiaries may engage. Generally, permissible activities are limited to banking and activities found by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The business of owning a partnership interest in the West Chester Property (through EGSC) as a result of an underlying foreclosure action is a permissible activity, however, Federal Reserve Board approval is required to hold the West Chester Property beyond March 1997. The operations of the Bank are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the types of services which may be offered and restrictions on the ability to acquire deposits under certain circumstances. Various consumer laws and regulations also affect the operations of the Bank. Approval of the OCC is required for branching by Bank and for bank mergers in which the continuing bank is a national bank. Development and Regulatory Improvement On September 23, 1994, the President signed into law the "Riegle Community Development and Regulatory Improvement Act of 1994" (the "Development Act"). The Development Act established a $382 million fund (the "Fund") to promote economic development and credit availability in underserved communities by providing financial and technical assistance to community development financial institutions ("CDFI's"). CDFI's include banks, savings associations and bank holding companies which have a primary mission of promoting community development. Institutions receiving monies from the Fund will be required to provide matching funds dollar for dollar. Under the Fund, a CDFI may receive up to $5 million over a 3-year period, with affiliates in other states not presently served eligible to receive up to an additional $3.75 million over 3 years. -3- One-third of the Fund will be used to finance the Bank Enterprise Act, an existing but previously unfunded incentive program designed to encourage depository institutions to increase funding in distressed neighborhoods. The Development Act contains provisions relating to small business capital formation, small business loan securitization, consumer protection for "reserve mortgages," paperwork reduction and reform of the national flood insurance program. The foregoing is a summary and general description of certain provisions of the Development Act and does not purport to be complete. Many of the provisions of the Development Act will be implemented through the adoption of regulations by the various federal banking agencies. Moreover, many of the significant provisions of the legislation have not yet become effective. As of the date hereof, the Corporation is continuing to study the legislation and regulations relating to the legislation but cannot yet assess its impact on the Corporation. Interstate Banking The Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") authorizes interstate banking and branching. Effective September 29, 1995, subject to approval by the Federal Reserve Board and other restrictions set forth in the Interstate Act, bank holding companies may engage in interstate acquisitions of banks, without geographic limitations, notwithstanding state law to the contrary. The Interstate Act permits (i) adequately managed bank holding companies to engage in interstate acquisitions of banks, (ii) interstate branching through interstate bank mergers and acquisitions beginning June 1, 1997 (subject to the ability of states to permit or prohibit such mergers and acquisitions earlier) and (iii) other interstate branching through the establishment of de novo branches if authorized by state law. Dividend Restrictions The Corporation is a legal entity separate and distinct from the Bank. Virtually all of the revenue of the Corporation available for payment of dividends on its Common Stock will result from amounts paid to the Corporation from dividends received from the Bank. All such dividends are subject to limitations imposed by federal and state laws and by regulations and policies adopted by federal and state regulatory agencies. The Bank as a national bank is required by federal law to obtain the approval of the OCC for the payment of dividends if the total of all dividends declared by the Board of Directors of the Bank in any calendar year will exceed the total of Bank's net income for that year and the retained net income for the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock. National banks can only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined). Payment of dividends by the Bank will be prohibited under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") in the event that the Bank would become "undercapitalized" under the guidelines described below as a result of such distribution. Under the above-mentioned restrictions, the Bank, without affirmative governmental approvals, could declare aggregate dividends in 1996 of approximately $2.7 million, plus an amount approximately equal to -4- the net income, if any, earned by the Bank for the period from January 1, 1996, through the date of declaration less dividends previously paid in 1996, subject to the limitations described elsewhere herein. If, in the opinion of the applicable regulatory authority, a bank or bank holding company under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank or bank holding company, could include the payment of dividends), such authority may require that such bank or bank holding company cease and desist from such practice, or require the bank or bank holding company to limit dividends in the future. The Federal Reserve Board, the OCC and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Finally, as described elsewhere herein, the regulatory authorities have established guidelines and under FDICIA have adopted regulations (and may in the future adopt additional regulations) with respect to the maintenance of appropriate levels of capital by a bank or bank holding company under their jurisdiction. Compliance with the standards set forth in such policy statements, guidelines and regulations could limit the amount of dividends which the Corporation and the Bank may pay. Borrowings by the Corporation Federal law prevents the Corporation from borrowing from the Bank, unless such borrowings are secured by specified amounts and types of collateral. Additionally, such secured loans are generally limited to 10% of the Bank's capital and surplus. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Capital The Federal Reserve Board measures capital adequacy for bank holding companies on the basis of a risk-based capital framework and a leverage ratio. The minimum ratio of total risk-based capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. At least half of the total capital must be common equity and qualifying perpetual preferred stock, less goodwill ("Tier I capital"). The remainder ("Tier II capital") may consist of mandatory convertible debt securities, a designated amount of qualifying subordinated debt, other preferred stock and a portion of the reserve for possible credit losses. In addition to the Risk Based Capital Standards imposed on bank holding companies, the banking regulators also believe that every institution must maintain an absolute minimum level of equity. The Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines currently provide for a minimum leverage ratio of Tier I capital to adjusted total assets of 3% for bank holding companies that meet certain criteria, including that they maintain the highest regulatory rating. All other bank holding companies are required to maintain a leverage ratio of 3% plus an additional cushion of at least 1 to 2 percentage points. The Federal Reserve Board has not advised the Corporation of any specific minimum leverage ratio under these guidelines which would be applicable to the Corporation. The guidelines also indicate that, when appropriate, including when a bank holding company is undertaking expansion, engaging in new activities or otherwise facing unusual or abnormal risk, the Federal Reserve Board will consider a "tangible Tier I leverage ratio" (deducting all intangibles) in making an overall assessment of capital adequacy. Failure to satisfy regulators that a bank holding company will comply fully with capital adequacy guidelines upon consummation of an acquisition may impede the ability of a bank holding company to consummate such acquisition, particularly if the acquisition involves payment of consideration other than -5- common stock. In many cases, the regulatory agencies will not approve acquisitions by bank holding companies and banks unless their capital ratios are well above regulatory minimums. The Bank is subject to capital requirements which generally are similar to those affecting the Corporation. As described below under "FDICIA," the federal banking agencies have established certain minimum levels of capital which are consistent with statutory requirements. As of December 31, 1995, 1994 and 1993, the Corporation and the Bank had capital in excess of all regulatory minimums. The Federal Reserve Board, the FDIC and the OCC have adopted a rule to implement the requirement under FDICIA that risk-based capital standards take account of interest rate risk. The rule focuses on institutions having relatively high levels of measured interest rate risk, and considers the effect that changing interest rates would have upon the value of an institution's assets, liabilities, and off balance-sheet positions. It is anticipated that this new rule will not have a significant adverse impact on the capital ratios or operations of the Corporation or the Bank. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 Upon its enactment in December 1991, FDICIA substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. FDICIA requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements in order to minimize losses to the FDIC. FDICIA establishes five capital classifications: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized" and imposes significant restrictions on the operations of a bank that is not at least adequately capitalized. A depository institution's capital classification depends upon its capital levels in relation to various relevant capital measures, which include a risk-based capital measure and a leverage ratio capital measure. A depository institution is considered well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below any such measure and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. An institution may be placed in a lower capitalization category if it receives an unsatisfactory examination rating, is deemed to be in an unsafe or unsound condition, or engages in unsafe or unsound practices. Under applicable regulations, for an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at least 5% and not be subject to any specific capital order or directive. As of December 31, 1995, the Corporation and the Bank were "well capitalized" as defined under FDICIA. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition" and "-- Capital Adequacy." FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and prohibitions on the payment of interest rates on deposits in excess of 75 basis points above the average market yields for comparable deposits. Such institutions must submit a capital restoration plan which is acceptable to applicable federal banking agencies and which must include a guarantee from the parent holding company that the institution will comply with such plan. -6- Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets or to cease accepting deposits from correspondent banks and restrictions on senior executive compensation and on inter-affiliate transactions. Critically undercapitalized institutions are subject to a number of additional restrictions, including the appointment of a receiver or conservator. Regulations promulgated under FDICIA also require that an institution monitor its capital levels closely and notify its appropriate federal banking regulators within 15 days of any material events that affect the capital position of the institution. FDICIA also contains a variety of other provisions that affect the operations of the Corporation, including certain reporting requirements, regulatory standards and guidelines for real estate lending, "truth in savings" provisions, the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch, certain restrictions on investments and activities of state-chartered insured banks and their subsidiaries, limitations on credit exposure between banks, restrictions on loans to a bank's insiders, guidelines governing regulatory examinations, and a prohibition on the acceptance or renewal of brokered deposits by depository institutions that are not well capitalized or are adequately capitalized and have not received a waiver from the FDIC. FDICIA directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and quality, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares (if feasible) and such other standards as the agency deems appropriate. Finally, FDICIA limits the discretion of the FDIC with respect to deposit insurance coverage by requiring that, except in very limited circumstances, the FDIC's course of action in resolving a problem bank must constitute the "least costly resolution" for the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF"), as the case me be. The FDIC has interpreted this standard as requiring it not to protect deposits exceeding the $100,000 insurance limit in more situations than was previously the case. FDICIA also prohibits payments by the FDIC on uninsured deposits in foreign branches of U.S. banks, and severely limits the "too big to fail" doctrine under which the FDIC formerly protected deposits exceeding the $100,000 insurance limit in certain failed banking institutions. FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989 Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989, in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to commonly controlled FDIC-insured depository institution in danger of default. The term "default" is defined generally as the appointment of a conservator or receiver and the phrase "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. FIRREA and the Crime Control Act of 1990 (the "Crime Control Act") expand the enforcement powers available to federal banking regulators, including providing greater flexibility to impose enforcement action, expanding the category of persons dealing with a bank who are subject to enforcement action, and increasing the potential civil and criminal penalties. In the event of a holding company insolvency, the Crime Control Act affords a priority in respect of capital commitments made by the holding company on behalf of its subsidiary bank. -7- Annual Insurance Assessments Under FIRREA, the Federal Savings and Loan Insurance Corporation, which insured savings and loan associations and federal savings banks, was replaced by the SAIF, which is administered by the FDIC. A separate fund, the BIF, which was essentially a continuation of the FDIC's then existing fund, was established for banks and state savings banks. The Bank is subject to deposit insurance assessments by the BIF. The FDIC has developed a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to its level of risk. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or undercapitalized and the institution's "supervisory subgroups": Subgroup A, B or C. Subgroup A institutions are financially sound institutions with a few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. Based on its capital and supervisory subgroups, each BIF or SAIF member institution is assigned an annual FDIC assessment rate per $100 of insured deposits varying between 0.00% per annum (for well capitalized Subgroup A institutions) and 0.27% per annum (for undercapitalized Subgroup C institutions). Well capitalized Subgroup B and Subgroup C institutions are assigned assessment rates per $100 of insured deposits ranging from 0.03% per annum to 0.27% per annum. As of January 1, 1996, well capitalized Subgroup A institutions will pay only the statutory annual minimum of $2,000 for FDIC Insurance. These BIF assessment rates represent a significant decrease from rates in effect in prior years. Other Matters The Corporation's Common Stock is registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result, the Corporation is subject to the regulations promulgated under the Exchange Act regarding the filing of public reports, the solicitation of proxies, the disclosure of beneficial ownership of certain securities, short swing profits and the conduct of tender offers. EFFECT OF GOVERNMENTAL POLICIES The earnings of the Bank and, therefore, of the Corporation are affected not only by domestic and foreign economic conditions, but also by the monetary and fiscal policies of the United States and its agencies (particularly the Federal Reserve Board), foreign governments and other official agencies. The Federal Reserve Board can and does implement national monetary policy, such as the curbing of inflation and combating of recession, by its open market operations in United States government securities, control of the discount rate applicable to borrowings from the Federal Reserve and the establishment of reserve requirements against deposits and certain liabilities of depository institutions. The actions of the Federal Reserve Board influence the level of loans, investments and deposits and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary and fiscal policies are not predictable. From time to time, various proposals are made in the United States Congress and the Pennsylvania legislature and before various regulatory authorities which would alter the powers of different types of banking organizations, remove restrictions on such organizations and change the existing regulatory framework for banks, bank holding companies and other financial institutions. It is impossible to predict whether any of such proposals will be adopted and the impact, if any, of such adoption on the business of the Corporation. -8- ACCOUNTING CHANGES Accounting For Income Taxes The Corporation adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1993. See Note A-8 in Notes to Consolidated Financial Statements, included in the Corporation's 1995 Annual Report to Shareholders, incorporated by reference. Accounting For Investment Securities The Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" effective January 1, 1994. See Note A-3 in Notes to Consolidated Financial Statements included in the Corporation's 1995 Annual Report to Shareholders, incorporated by reference. Accounting for Contributions The Corporation adopted SFAS No. 116, "Accounting for Contributions Received and Contributions Made" effective January 1, 1995. See Note A-7 in Notes to Consolidated Financial Statements included in the Corporation's 1995 Annual Report to Shareholders, incorporated by reference. Accounting for Impairment of a Loan The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" effective January 1, 1995. See Note A-4 in Notes to Consolidated Financial Statements included in the Corporation's 1995 Annual Report to Shareholders, incorporated by reference. STATISTICAL DISCLOSURES The following tables set forth certain statistical disclosures concerning the Corporation and the Bank. These tables should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Corporation's 1995 Annual Report to Shareholders, incorporated herein by reference. -9- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES RATE VOLUME ANALYSIS
Increase (decrease) in net interest income due to: ------------------------------------------------------------------------------ Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- (Dollars in thousands) 1995 Compared to 1994 1994 Compared to 1993 ---------------------------------- ---------------------------------- INTEREST INCOME - --------------- Federal funds sold $278 $210 $488 ($231) $36 ($195) Investment securities Taxable (209) 540 331 765 (592) 173 Tax-exempt (18) (41) (59) (30) 39 9 -------- ------- ------- ------- ------ ----- Total investment securities (227) 499 272 735 (553) 182 Loans Taxable 1,342 1,981 3,323 1,064 (79) 985 Tax-exempt (51) 42 (9) (99) 7 (92) -------- ------ -------- -------- -------- -------- Total loans 1,291 2,023 3,314 965 (72) 893 -------- ------ -------- -------- -------- -------- Total interest income 1,342 2,732 4,074 1,469 (589) 880 -------- ------ -------- -------- -------- -------- INTEREST EXPENSE - ---------------- Savings, NOW and money market deposits (431) 780 349 (301) (729) (1,030) Certificates of deposits and other time 1,281 1,039 2,320 878 (568) 310 -------- ------ -------- -------- -------- -------- Total interest bearing deposits 850 1,819 2,669 577 (1,297) (720) Securities sold under repurchase agreements 39 95 134 52 (34) 18 Other borrowings 27 15 42 19 (3) 16 -------- ------ -------- -------- -------- -------- Total Interest expense 916 1,929 2,845 648 (1,334) (686) -------- ------ -------- -------- -------- -------- Net Interest income $426 $803 $1,229 $821 $745 $1,566 ====== ====== ======== ====== ====== ====== NOTES: - ------ (1) The indicated changes are presented on a tax equivalent basis. (2) The changes in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (3) Non-accruing loans have been used in the daily average balances to determine changes in interest due to volume. Loan fees included in the interest income computation are not material. (4) The related average balance sheets can be found on page 12 of the Corporation's 1995 Annual Report to Shareholders.
-10- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES LOAN PORTFOLIO BY TYPE AT DECEMBER 31,
(Dollars in thousands) 1995 1994 1993 1992 1991 -------------- --------------- --------------- ---------------- -------------- Amount % Amount % Amount % Amount % Amount % ------ - ------ - ------ - ------ - ------ - Commercial loans $86,686 36% $87,689 37% $88,632 40% $82,602 39% $80,351 40% Real estate - construction 9,372 4% 4,607 2% 6,327 3% 3,724 2% 5,813 3% Real estate - other 100,814 41% 101,589 42% 87,389 40% 85,555 40% 75,713 38% Consumer loans (1) 33,836 14% 32,984 14% 27,414 12% 29,815 14% 30,513 15% Lease financing receivables 11,879 5% 12,257 5% 11,671 5% 10,879 5% 7,929 4% -------- -------- -------- -------- -------- Total gross loans 242,587 100% 239,126 100% 221,433 100% 212,575 100% 200,319 100% Allowance for possible loan losses (4,506) (3,303) (2,839) (2,300) (1,850) ---------- --------- --------- --------- --------- Total loans $238,081 $235,823 $218,594 $210,275 $198,469 ======== ======== ======== ======== ======== NOTES: - ------ (1) Consumer loans include open-end home equity lines of credit and credit card receivables. (2) At December 31, 1995 there were no concentrations of loans exceeding 10% of total loans which is not otherwise disclosed as a category of loans in the above table. (3) The Corporation does not breakdown the allowance for possible loan losses by area, industry or type of loan because the evaluation process used to determine the adequacy of the reserve is based on the portfolio as a whole. Management believes such an allocation would not be meaningful. See pages 16-18 of the Corporation's 1995 Annual Report to Shareholders for additional information.
-11- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MATURITIES AND RATE SENSITIVITY OF LOANS DUE TO CHANGES IN INTEREST RATES AT DECEMBER 31, 1995
Maturing Maturing After 1 Year Maturing Within And Within After (Dollars in thousands) 1 Year 5 Years 5 Years Total - ---------------------- ------ ------- ------- ----- Commercial loans $67,093 $4,903 $14,690 $86,686 Real Estate - construction 9,372 -- -- 9,372 ------- ------- ------- -------- Total $76,465 $4,903 $14,690 $ 96,058 ======= ====== ======= ======= Loans maturing after 1 year with: - --------------------------------- Fixed interest rates $4,903 $14,690 Variable interest rates -- -- ------ ------- Total $4,903 $14,690 ====== ======= NOTES: - ------ (1) Demand loans and overdrafts are reported maturing "Within 1 Year". Construction real estate loans are reported maturing "Within 1 Year" because of their short term maturity or index to the Bank's prime rate. An immaterial amount of loans has no stated schedule of repayments. (2) Determination of maturities included in the above loan maturity table are based upon contract terms. In situations where a "rollover" is appropriate, the Corporation's policy in this regard is to evaluate the credit for collectability consistent with the normal loan evaluation process. This policy is used primarily in evaluating ongoing customer's use of their lines of credit with the Bank that are at floating interest rates. (3) This data excludes real estate-other loans, consumer loans and lease financing receivables.
-12- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES YIELD BY MATURITY AT DECEMBER 31, 1995
Due over Due over Due 1 year 5 years Due Within Through Through Over (Dollars in thousands) 1 year 5 years 10 years 10 years Total ------ ------- -------- -------- ----- Held-to-Maturity - ---------------- U.S. Treasury -- 1,473 -- -- 1,473 U.S. Government agency 500 1,001 -- -- 1,501 Mortgage-backed securities -- 1,384 1,132 169 2,685 State and municipal 1,055 3,289 390 25 4,759 Corporate securities 7,804 4,002 -- -- 11,806 Asset-backed -- 462 -- 362 824 ----- ------ ----- ------ ------ 9,359 11,611 1,522 556 23,048 ----- ------ ----- ------ ------ Available-for-Sale - ------------------ U.S. Treasury 7,525 5,495 -- -- 13,020 U.S. Government agency -- 12,011 -- -- 12,011 Mortgage-backed securities -- 5,574 7,826 21,259 34,659 State and municipal -- -- -- 254 254 Corporate securities 1,079 -- -- -- 1,079 Mutual Funds -- -- -- 8,000 8,000 Other equity securities -- -- -- 1,540 1,540 ------ -------- ------- ------ ------ 8,604 23,080 7,826 31,053 70,563 ----- ------ ----- ------ ------ Total Investment securities $17,963 $34,691 $9,348 $31,609 $93,611 ======= ======= ====== ======= ======= Percent of portfolio 19.19% 37.06% 9.99% 33.77% 100.00% ====== ====== ===== ====== ======= Weighted average yield 5.96% 6.10% 6.36% 5.37% 5.85% ===== ===== ===== ===== ===== NOTES: - ------ (1) The yield on tax-exempt obligations has been computed on a tax equivalent basis using the Federal marginal rate of 34% adjusted for the 20% interest expense disallowance. (2) Other equity securities having no stated maturity (including the Federated ARMs Fund) have been included in "Due over 10 years." (3) Mortgage-backed and Asset-backed securities are included in the above table based on their contractual maturity. (4) As of December 31, 1995, the Corporation held securities from one issuer, The Federated ARMs Fund, in excess of 10% of stockholders' equity. The Corporation's investment in the Federated ARMs Fund was $8,000,000 with a market value of $7,733,000. This fund concentrates at least 65% of its value in adjustable and floating rate mortgage securities which are issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies.
-13- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES AT DECEMBER 31,
1995 1994 1993 ---------------------- ----------------------- ---------------------- Book Market Book Market Book Market (Dollars in thousands) Value Value Value Value Value Value ----- ----- ----- ----- ----- ----- Held-to-Maturity - ---------------- U.S. Treasury $1,473 $1,485 $1,464 $1,365 $11,491 $11,678 U.S. Government agency 1,501 1,496 1,500 1,416 1,499 1,534 Mortgage-backed securities 2,685 2,689 3,223 3,039 33,049 33,100 State and municipal 4,759 4,862 5,603 5,525 5,387 5,564 Corporate securities 11,806 11,867 15,455 15,130 24,903 25,674 Asset-backed 824 814 2,122 2,053 4,993 5,019 Mutual funds -- -- -- -- 9,901 9,901 Other equity securities -- -- -- -- 1,606 1,649 --------- --------- --------- --------- ------- ------- $23,048 $23,213 $29,367 $28,528 $92,829 $94,119 ======= ======= ======= ======= ======= ======= Available-for-Sale - ------------------ U.S. Treasury $13,091 $13,091 $12,761 $12,761 $ -- $ -- U.S. Government agency 12,176 12,176 -- -- -- -- Mortgage-backed securities 34,475 34,475 23,446 23,446 -- -- State and municipal 281 281 268 268 -- -- Corporate securities 1,079 1,079 3,081 3,081 -- -- Asset-backed -- -- 107 107 -- -- Mutual Funds 7,733 7,733 7,764 7,764 -- -- Other equity securities 1,628 1,628 1,595 1,595 -- -- ------- ------- ------- ------- ---------- ---------- $70,463 $70,463 $49,022 $49,022 $ -- $ -- ======= ======= ======= ======= ========== ==========
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS, $100,000 OR MORE, AT DECEMBER 31, 1995
Due Within Over 3 Months Over 6 Months Due Over (Dollars in thousands) 3 Months Through 6 Months Through 12 Months 12 Months Total ----------- ---------------- ----------------- --------- ----- Certifcates of Deposit $100,000 or more $ 948 $ 3,332 $ 3,109 $ 4,090 $11,479
-14- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES EFFECT OF NONACCRUING LOANS ON INTEREST FOR YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Interest income which would have been recorded $103 $432 $225 $61 $39 Interest income that was received from customer 172 -- -- -- 16 ---- ---- ---- --- ---- ($69) $432 $225 $61 $23 ===== ==== ==== === === NOTES: - ------ (1) Generally the Bank places a loan in nonaccrual status when principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection.
-15- Item 2. Properties. - ------- ----------- The Bank owns seven properties which are not subject to any mortgages. The Corporation owns one property which is not subject to any mortgage, and which is located at 124 West Cypress Street, Kennett Square, Pennsylvania. In addition, the Corporation leases the Westtown-Thornbury and the Exton Offices. EGSC owns a 62% interest in WCP Partnership which owns the West Chester Property described in Item 1 above. Management of the Corporation believes the Corporation's and the Bank's facilities are suitable and adequate for their respective present needs. Set forth below is a listing of each banking office presently operated by the Bank and the Corporation, and other properties owned by the Bank and the Corporation which may serve as future sites for branch offices.
Current Banking Date Acquired Offices Address or Opened - ------- ------- --------- Main Office 9 North High Street December 1863 and Corporate West Chester, Pennsylvania Headquarters Walk-In Facility 17 East Market Street February 1978 West Chester, Pennsylvania Westtown-Thornbury Route 202 and Route 926 May 1994 Westtown, Pennsylvania Goshen 311 North Five Points Road September 1956 West Goshen, Pennsylvania Kennett Square 126 West Cypress Street February 1987 Kennett Square, Pennsylvania Exton Route 100 and Boot Road August 1995 West Chester, Pennsylvania Other Date Acquired Properties Address or Opened - ---------- ------- --------- Operations 202 Carter Drive July 1988 Center West Chester, Pennsylvania Paoli Pike 1104 Paoli Pike July 1963 West Chester, Pennsylvania Kennett Square 124 West Cypress Street July 1986 Kennett Square, Pennsylvania Westtown 1039 Wilmington Pike February 1965 Westtown, Pennsylvania Former Commonwealth High & Market Streets July 1995 Building West Chester, Pennsylvania
-16- Item 3. Legal Proceedings. - ------- ------------------ There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Corporation, the Bank or EGSC is a party or of which any of their respective property is the subject. Item 4. Submission of Matters to a Vote of Security Holders. - ------- ---------------------------------------------------- None. PART II ------- Item 5. Market for the Corporation's Common Equity and Related Stockholder - ------ ------------------------------------------------------------------ Matters. ------- The Corporation's Common Stock is not listed or traded on a recognized securities exchange. There is no established public trading market for the Corporation's Common Stock and trading is sporadic. Information regarding high and low bid quotations is incorporated herein by reference from the Corporation's 1995 Annual Report to Shareholders, attached as an exhibit hereto. As of March 1, 1996, there were approximately 830 shareholders of record of the Corporation's Common Stock. The Corporation instituted a stock bonus plan (the "Stock Bonus Plan") during 1991, the purpose of which is to promote the interests of the Corporation by encouraging and enabling its employees and the employees of the Bank to acquire financial interests in the Corporation through the acquisition of shares of the Corporation's Common Stock. Under the Stock Bonus Plan, the Corporation may grant bonuses to its employees consisting of (i) shares of its Common Stock or (ii) shares of Common Stock and cash. The shares of Common Stock constituting the stock bonuses under the Stock Bonus Plan are purchased by the Corporation on the open market through an independent agent specified by the Corporation's Board of Directors. As of March 1, 1996, approximately $293,000 in cash bonuses were granted under the Stock Bonus Plan for services rendered by the executive officers and other employees of the Bank during 1995. The Corporation instituted a dividend reinvestment and stock purchase plan in 1990 ("DRIP"), the purpose of which is to provide the shareholders of the Corporation with a convenient method of investing cash dividends and optional cash payments in additional shares of the Corporation's Common Stock. As of December 31, 1995, 433 shareholders of the Corporation, representing approximately 53,000 shares of the Corporation's Common Stock, were participants in the DRIP. The DRIP purchased approximately $336,000 worth of the Corporation's Common Stock during the year ended December 31, 1995. The Corporation adopted a stock repurchase plan in 1995 to purchase up to 105,000 shares of the Common Stock of the Corporation through open market or privately negotiated transactions in order to increase shareholder value in the remaining outstanding shares of Common Stock. As of March 1, 1996, the Corporation had repurchased 75,000 shares of Common Stock in two privately negotiated transactions and 12,000 shares in the open market. The Corporation instituted a stock option plan in 1995 (the "1995 Stock Option Plan"), the purpose of which is to provide additional incentive to key employees and directors of the Corporation and the Bank to enter into or remain in the service or employ of the Corporation or the Bank by providing them with an opportunity to acquire or increase their proprietary interest in the Corporation through receipt of options to -17- acquire the Common Stock of the Corporation. Under the 1995 Stock Option Plan, which was ratified by the shareholders of the Corporation on March 19, 1996, 146,250 shares of Common Stock of the Corporation were reserved for issuance to key employees of the Corporation and the Bank, and 41,250 shares of such Common Stock were reserved for issuance to directors of the Corporation and the Bank. On September 18, 1995, pursuant to the 1995 Stock Option Plan, options to purchase 750 shares of Common Stock were granted to each then current Director of the Corporation and the Bank, an option to purchase 3,000 shares of Common Stock was granted to the President of the Corporation and options to purchase 1,500 shares of Common Stock were granted to nine executive officers of the Corporation and the Bank. The grant of such options was subject to and subsequently ratified by the shareholders of the Corporation on March 19, 1996. The Corporation declared cash dividends per share on its Common Stock during each quarter of the fiscal years ended December 31, 1995 and 1994, as set forth in the following table (which have been adjusted for the stock split which occurred in October, 1995):
Dividends --------- Amount Per Share ---------------- 1995 1994 ---- ---- First Quarter............................................. $0.20 $0.18 Second Quarter............................................ 0.20 0.18 Third Quarter............................................. 0.23 0.20 Fourth Quarter............................................ 0.26 0.21 ------ ------- Total................................................... $0.89 $0.77 ===== =====
The holders of the Corporation's Common stock are entitled to receive such dividends as may be legally declared by the Corporation's Board of Directors. The amount, time, and payment of future dividends, however, will depend on the earnings and financial condition of the Corporation, government policies, and other factors. See Part I, Item 1, "Supervision and Regulation" for information concerning limitations on the payment of dividends by the Bank and the Corporation and on the ability of the Corporation to otherwise obtain funds from the Bank. Item 6. Selected Financial Data. - ------- ------------------------ Selected financial data concerning the Corporation and the Bank is incorporated by reference from the Corporation's 1995 Annual Report to Shareholders, attached as an exhibit hereto. See Part II, Item 5, for data concerning the payment of cash dividends on Common Stock. Item 7. Management's Discussion and Analysis of Financial Condition and - ------ --------------------------------------------------------------- Results of Operations. --------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated by reference from the Corporation's 1995 Annual Report to Shareholders, attached as an exhibit hereto. -18- Item 8. Financial Statements and Supplementary Data. - ------- -------------------------------------------- Consolidated financial statements of the Corporation and the Report of Independent Certified Public Accountants thereon are incorporated by reference from the Corporation's 1995 Annual Report to Shareholders, attached as an exhibit hereto. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------ --------------------------------------------------------------- Financial Disclosure. -------------------- None. PART III -------- Item 10. Directors and Executive Officers of the Corporation. - -------- ---------------------------------------------------- The information called for by this item is incorporated herein by reference to the Corporation's Proxy Statement dated February 28, 1996, for its 1996 Annual Meeting of Shareholders. Item 11. Executive Compensation. - -------- ----------------------- The information called for by this item is incorporated herein by reference to the Corporation's Proxy Statement dated February 28, 1996, for its 1996 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- --------------------------------------------------------------- The information called for by this item is incorporated herein by reference to the Corporation's Proxy Statement dated February 28, 1996, for its 1996 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions. - -------- ----------------------------------------------- The information called for by this item is incorporated herein by reference to the Corporation's Proxy Statement dated February 28, 1996, for its 1996 Annual Meeting of Shareholders. -19- PART IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - -------- ----------------------------------------------------------------- (a) 1. Index to Consolidated Financial Statements: ------------------------------------------
Page of Annual Report to Shareholders ---------------------- Consolidated Balance Sheets Page 21 at December 31, 1995 and 1994 Consolidated Statements of Page 22 Income for the years ended December 31, 1995, 1994 and 1993 Consolidated Statement of Page 23 Changes In Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Page 24 Cash Flows for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Pages 25 to 40 Financial Statements Report of Independent Certified Public Accountants Page 41
The Consolidated Financial Statements listed in the above index, together with the report thereon of Grant Thornton LLP dated January 25, 1996, which are included in the Corporation's Annual Report to Shareholders for the year ended December 31, 1995, are hereby incorporated by reference. (a) 2. Financial Statement Schedules: ----------------------------- Financial Statement Schedules are not required under the related instructions of the Securities and Exchange Commission, are inapplicable or are included in the Consolidated Financial Statements or notes thereto. -20- (a) 3. Exhibits: -------- The following is a list of the exhibits filed with, or incorporated by reference into, this Report (those exhibits marked with an asterisk are filed herewith): 3(a). Certificate of Incorporation. ----------------------------- (i) Copy of the Corporation's Certificate of Incorporation, filed on March 9, 1984, is incorporated by reference to Exhibit 3(a)(iii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988. (ii) Copy of the Corporation's Certificate of Amendment to Certificate of Incorporation filed with the Secretary of the Commonwealth of Pennsylvania on March 23, 1984, is incorporated by reference to Exhibit 3(a)(ii) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988. (iii) Copy of the Corporation's Certificate of Amendment to Certificate of Incorporation filed with the Secretary of the Commonwealth of Pennsylvania on April 2, 1986, is incorporated by reference to Exhibit 3(a)(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988. 3(b). Bylaws of the Corporation, as amended. Copy of the Corporation's ----------------------------------------------------------------- Bylaws, as amended, is incorporated by reference to Exhibit 3(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988. 10. Material contracts. ------------------- (a) Copy of Executive Deferred Compensation Plan, adopted by the Bank on December 16, 1988, is incorporated by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988. (b) Copy of Employment Agreement among the Corporation, the Bank and Charles E. Swope dated December 31, 1994, is incorporated by reference to Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994. (c) Copy of the Bank's 401(k) Plan and Trust, dated July 15, 1988, is incorporated by reference to Exhibit 4 to the Corporation's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on January 4, 1989 (Commission File No. 33-26325). (d) Copy of the Corporation's Dividend Reinvestment Plan is incorporated by reference to Exhibit 10(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990. (e) Copy of the Bank's amended and restated 401(k) Plan, effective date July 1, 1989, is incorporated by reference to Exhibit 10(e) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1990. (f) Copy of the Corporation's Stock Bonus Plan, adopted by the Corporation in 1991 and ratified by the shareholders of the Corporation on March 17, 1992, is incorporated by reference to Exhibit 10(f) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991. -21- (g) Copy of the Bank's Supplemental Benefit Retirement Plan, effective date January 1, 1994, is incorporated by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994. (h) Copy of the Corporation's and the Bank's Directors Deferred Compensation Plan, effective December 30, 1994, is incorporated by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994. *(i) Copy of the Corporation's 1995 Stock Option Plan, adopted by the Corporation in 1995 and ratified by the shareholders of the Corporation on March 19, 1996. * 13. Annual report to security holders, Form 10-Q or quarterly report to ------------------------------------------------------------------- security holders. The Corporation's Annual Report to Shareholders for the year - ---------------- ended December 31, 1995. With the exception of the pages listed in the Index to Consolidated Financial Statements and the items referred to in Items 1, 5, 6, 7 and 8 hereof, the Corporation's 1995 Annual Report to Shareholders is not deemed to be filed as part of this Report. 21. Subsidiaries of the Corporation. The First National Bank of West -------------------------------- Chester, a banking institution organized under the banking laws of the United States in December 1863. * 23. Consents of experts and counsel. Consent of Grant Thornton LLP, ------------------------------- dated March 28, 1996. * 27. Financial Data Schedule. A Financial Data Schedule is being ------------------------- submitted with the Corporation's 1995 Annual Report on Form 10-K in the electronic format prescribed by the EDGAR Filer Manual and sets forth the financial information specified by Article 9 of Regulation S-X and Securities Act Industry Guide 3 information and Exchange Act Industry Guide 3 listed in Appendix C to Item 601(c) of Regulation S-K. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Corporation ------------------- during the quarter ended December 31, 1995. -22- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST WEST CHESTER CORPORATION /s/ Charles E. Swope By:___________________________ Charles E. Swope, President Date: March 29, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Corporation and in the capacities indicated on March 29, 1996. Signature Title --------- ----- /s/ Charles E. Swope President, Chief Executive Charles E. Swope Officer and Chairman of the Board of Directors /s/ J. Duncan Smith ______________________________ Treasurer (Principal J. Duncan Smith Accounting and Financial Officer) (Signatures continued on following page) -23- (Signatures continued from previous page) Signature Title --------- ----- /s/ Richard M. Armstrong _________________________________ Director Richard M. Armstrong /s/ John J. Ciccarone _________________________________ Director John J. Ciccarone /s/ M. Robert Clarke _________________________________ Director M. Robert Clarke /s/ Edward J. Cotter _________________________________ Secretary and Director Edward J. Cotter /s/ Clifford E. DeBaptiste _________________________________ Director Clifford E. DeBaptiste /s/ John A. Featherman, III _________________________________ Director John A. Featherman, III /s/ J. Carol Hanson _________________________________ Director J. Carol Hanson /s/ John S. Halsted _________________________________ Director John S. Halsted /s/ Devere Kauffman _________________________________ Director Devere Kauffman /s/ David L. Peirce _________________________________ Director David L. Peirce /s/ John B. Waldron _________________________________ Director John B. Waldron -24- Index to Exhibits Exhibits - -------- 10(i) Copy of the Corporation's 1995 Stock Option Plan, adopted by the Corporation in 1995 and ratified by the shareholders of the Corporation on March 19, 1996. 13 The Corporation's Annual Report to Shareholders for the year ended December 31, 1995. 23 Consent of Grant Thornton LLP. 27 Financial Data Schedule. -25- EX-10 2 FIRST WEST CHESTER CORPORATION 1995 STOCK OPTION PLAN 1. Purpose. (a) Additional Incentive. The Plan is intended as an additional incentive to key employees and members of the Board of Directors (together, the "Optionees") to enter into or remain in the service or employ of First West Chester Corporation, a Pennsylvania corporation (the "Company") or its subsidiary, The First National Bank of West Chester (the "Bank"), and to devote themselves to the Company's success by providing them with an opportunity to acquire or increase their proprietary interest in the Company through receipt of rights (the "Options") to acquire the Company's Common Stock, par value $1.00 per share (the "Common Stock"). (b) Two-Part Plan. The Plan shall be divided into two sub-plans: the "Key Employee Plan" and the "Director Plan". All provisions hereunder which refer to the "Plan" shall apply to each of the Key Employee Plan and the Director Plan. (c) Incentive Stock Option. Each Option granted under the Key Employee Plan is intended to be an incentive stock option ("ISO") within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), for federal income tax purposes, except to the extent (i) any such ISO grant would exceed the limitation of subsection 4(a) below, or (ii) any Option is specifically designated at the time of grant (the "Grant Date") as not being an ISO. No Option granted to a person who is not an employee of the Company or the Bank on the Grant Date shall be an ISO. 2. Option Shares. (a) Aggregate Maximum Number. The aggregate maximum number of shares of the Common Stock for which Options may be granted under the Plan is 125,000 shares (the "Option Shares"), which number is subject to adjustment as provided in Section 7. Option Shares shall be issued from authorized and unissued Common Stock or Common Stock held in or hereafter acquired for the treasury of the Company. If any outstanding Option granted under the Plan expires, lapses or is terminated for any reason, the Option Shares allocable to the unexercised portion of such Option may again be the subject of an Option granted pursuant to the Plan. (b) Allocation of Option Shares. Of the 125,000 Option Shares, 97,500 Option Shares (the "Employee Option Shares") shall be reserved for issuance to key employees of the Company and the Bank under the Key Employee Plan and the remaining 27,500 Option Shares shall be reserved for issuance to non-employee Directors of the Company or the Bank under the Director Plan. (c) Key Employee Plan Options. Options granted under the Key Employee Plan may be either ISOs or Options which are not ISOs ("Nonqualified Options"). Under the Key Employee Plan, Options to purchase up to 42,500 Employee Option Shares (and any Employee Option Shares not required for issuance under Options granted in accordance with the schedule set forth below) shall be granted to key employees at such times in such amounts and on such terms and conditions as determined by the Committee (as defined below), in accordance with the terms of the Plan. Options to purchase up to 55,000 Employee Option Shares shall be granted to key employees in accordance with the following schedule: Grant Dates
September September September September September 18, 30, 30, 30, 30, Key Employee 1995 1996 1997 1998 1999 - ------------ ---- ---- ---- ---- ---- President 2,000 2,000 2,000 2,000 2,000 Option Option Option Option Option Shares Shares Shares Shares Shares Each of 9 Other Executive Officers* 1,000 1,000 1,000 1,000 1,000 Option Option Option Option Option Shares Shares Shares Shares Shares
*Should the number of Executive Officers (other than the President) increase during the Term of the Plan as of any of the foregoing Grant Dates, the Option granted to each Executive Officer as of such Grant Date shall cover that number of Employee Option Shares determined by dividing 9,000 by the number of Executive Officers (not including the President). Should the number of Executive Officers decrease during the Term of the Plan as of any of the foregoing Grant Dates, then the number of Option Shares to be purchased through an Option grant by each remaining Executive Officer shall not change. Any ungranted Options resulting from such decrease shall be granted to key employees as Employee Option Shares at such times in such amounts and on such terms and conditions as determined by the Committee, in accordance with the terms of the Key Employee Plan. (d) Director Plan Options. Options granted under the Director Plan shall be Nonqualified Options. Under the Director Plan, each person serving as a Director of the Company or the Bank on the Grant Date and who is not also a key or other employee of any of such entities shall be awarded an Option to purchase 500 Option Shares at the Option Price (defined below) on September 18, 1995, and then on September 30 of each of the following four years of the Term of the Plan (as defined below). If a Director is serving on the Board of the Company and the Bank at the time of the grant of any Option under the Director Plan, then such Director shall only be eligible for a grant of Options under the Director Plan as a Director of the Company. Should the number of Directors eligible for the Director Plan decrease during the Term of the Plan, the number of Option Shares granted to each remaining Director shall not change. Any ungranted Option Shares resulting from such decrease shall be reserved for future grant under the Director Plan should the number of Directors increase. Should the number of Directors increase during the Term of the Plan, then the Options covering the aggregate number of Option Shares to be distributed on an annual basis shall be divided equally among such increased number of Directors. Options granted under the Director Plan shall be substantially in the form of the Option attached hereto as Exhibit "A". 3. Term of Plan. The Plan shall commence on September 18, 1995, but shall terminate unless the Plan is approved by the shareholders of the Company within twelve months of such date as set forth in Section 422(b)(1) of the Code. Any Options granted pursuant to the Plan prior to Plan approval by the shareholders of the Company shall be subject to such approval and, notwithstanding anything to the contrary herein or in any Option Document (as defined below), shall not be exercisable until such approval is obtained. No Option may be granted under the Plan after September 17, 2005. 4. Terms and Conditions of Options. Options granted pursuant to the Plan shall be evidenced by written documents substantially in the forms attached hereto as Exhibit "A" or, in the case of the Key Employee Plan, as the Committee shall from time to time approve, subject to (a) the following terms and conditions and (b) any other terms and conditions (including vesting schedules for the exercisability of Options) which the Committee shall from time to time provide which are not inconsistent with the terms of the Plan (collectively, the "Option Documents"). (a) Number of Option Shares. Each Option Document shall state the number of Option Shares to which it pertains. In the case of an ISO, in no event shall the aggregate fair market value of the Option Shares (determined as of the date the ISO is granted), and any other options granted under the incentive stock option plans of the Company or the Bank, exceed $100,000. (b) Option Price. Each Option Document shall state the price at which an Option Share may be purchased (the "Option Price"), which shall be at least 100% of the "fair market value" of a share of the Common Stock on the date the Option is granted. If available, the "fair market value" shall be the mean between the highest bid price and lowest asked price last quoted by the then current market maker(s) in the Company's Common Stock (the "Market Maker(s)"), on the Grant Date or the immediately preceding business day if the Grant Date is not a business day. If no such bid and asked price is available, the fair market value shall be determined by the Committee in good faith in the case of the Key Employee Plan or shall be the mean between the most recent highest bid price and lowest asked price last quoted by the Market Maker(s) in the case of the Director Plan. If an ISO is granted to an Optionee who then owns, directly or by attribution under Section 424(d) of the Code, shares possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or the Bank, then the Option Price shall be at least One Hundred and Ten Percent (110%) of the fair market value of the Option Shares on the date the Option is granted. (c) Medium of Payment. An Optionee shall pay for Options Shares (i) in cash, (ii) by bank check payable to the order of the Company or (iii) in the case of the Key Employee Plan, by such other mode of payment as the Committee may approve, including payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board. Furthermore, the Committee may provide in an Option Document that payment may be made in whole or in part in shares of the Common Stock held by the Optionee for more than one year. If payment is made in whole or in part in shares of the Common Stock, then the Optionee shall deliver to the Company certificates registered in the name of such Optionee representing shares of Common Stock legally and beneficially owned by such Optionee, free of all liens, claims and encumbrances of every kind and having a fair market value on the date of delivery of such notice that is not less than the Option Price of the Option Shares with respect to which such Option is to be exercised, accompanied by stock powers duly endorsed in blank by the record holder of the shares represented by such certificates. In the event that certificates for shares of the Company's Common Stock delivered to the Company represent a number of shares in excess of the number of shares required to make payment for the Option Price of the Option Shares (or the relevant portion thereof) with respect to which such Option is to be exercised by payment in shares of Common Stock, the stock certificate issued to the Optionee shall represent the Option Shares in respect of which payment is made and such excess number of shares. Notwithstanding the foregoing, the Board of Directors, in its sole discretion, may refuse to accept shares of Common Stock in payment of the Option Price. In that event, any certificates representing shares of Common Stock which were delivered to the Company shall be returned to the Optionee with notice of the refusal of the Board of Directors to accept such shares in payment of the Option Price. The Board of Directors may impose such limitations or prohibitions on the use of shares of the Common Stock to exercise an Option as it deems appropriate, subject to the provisions of the Plan. (d) Termination of Options. Each Option shall expire on the tenth anniversary of its Grant Date. Notwithstanding the foregoing, no Option shall be exercisable after the first to occur of the following: (i) In the case of an ISO, five years from the date of grant if, on such date the Optionee owns, directly or by attribution under Section 424(d) of the Code, shares possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or the Bank); (ii) The date set by the Board of Directors of the Company to be an accelerated expiration date after a finding by the Board of Directors of the Company that a change in the financial accounting treatment for Options from that in effect on the date the Plan was adopted materially adversely affects or, in the determination of such Board of Directors, may materially adversely affect in the foreseeable future, the Company and/or the Bank, provided such Board of Directors may take whatever other action, including acceleration of any exercise provisions, it deems necessary should it make the determination referred to herein above; (iii) Expiration of three months (or in the case of the Key Employee Plan, such shorter period as the Committee may select) from the date the Optionee's employment or service with the Company or the Bank terminates for any reason other than (A) disability (within the meaning of Section 22(e)(3) of the Code) or death or (B) circumstances described by Subsection (d)(vi), below; (iv) Expiration of one year from the date the Optionee's employment or service with the Company or the Bank terminates by reason of the Optionee's disability (within the meaning of Section 22(e)(3) of the Code) or death; (v) In the case of an Option granted under the Key Employee Plan, the Committee can accelerate the expiration date in the event of a "Change in Control" (as defined in Subsection 4(e) below), provided an Optionee who holds an Option is given written notice at least thirty (30) days before the date so fixed; or (vi) In the case of an Option granted under the Key Employee Plan, a finding by the Committee, after full consideration of the facts presented on behalf of both the Company and the Optionee, that the Optionee has been discharged from employment with the Company or the Bank for Cause. For purposes of this Section, "Cause" shall mean: (A) a breach by Optionee of his employment agreement with the Company or the Bank, (B) a breach of Optionee's duty of loyalty to the Company or the Bank, including without limitation any act of dishonesty, embezzlement or fraud with respect to the Company or the Bank, (C) the commission by Optionee of a felony, a crime involving moral turpitude or other act causing material harm to the Company's or the Bank's standing and reputation, (D) Optionee's continued failure to perform his duties to the Company or the Bank or (E) unauthorized disclosure of trade secrets or other confidential information belonging to the Company or the Bank. In the event of a finding that the Optionee has been discharged for Cause, in addition to immediate termination of the Option, the Optionee shall automatically forfeit all Option Shares for which the Company has not yet delivered the share certificates upon refund of the Option Price. (e) Change of Control. In the event of a Change in Control (as defined below), the Committee may take whatever action with respect to the Options outstanding under the Key Employee Plan it deems necessary or desirable, including, without limitation, accelerating the expiration or termination date in the respective Option Documents to a date no earlier than thirty (30) days after notice of such acceleration is given to the Optionee. A "Change of Control" shall be deemed to have occurred upon the earliest to occur of the following events: (i) The date the shareholders of the Company (or the Board of Directors, if shareholder action is not required) approve a plan or other arrangement pursuant to which the Company will be dissolved or liquidated; (ii) the date the shareholders of the Company (or the Board of Directors, if shareholder action is not required) approve a definitive agreement to sell or otherwise dispose of all or substantially all of the assets of the Company; (iii) the date the shareholders of the Company (or the Board of Directors, if shareholder action is not required) and the shareholders of the other constituent corporation (or its board of directors if shareholder action is not required) have approved a definitive agreement to merge or consolidate the Company with or into such other corporation, other than, in either case, a merger or consolidation of the Company in which holders of shares of the Common Stock immediately prior to the merger or consolidation will hold at least a majority of the ownership of common stock of the surviving corporation (and, if one class of common stock is not the only class of voting securities entitled to vote on the election of directors of the surviving corporation, a majority of the voting power of the surviving corporation's voting securities) immediately after the merger or consolidation, which common stock (and, if applicable, voting securities) is to be held in the same proportion as such holders' ownership of Common Stock immediately before the merger or consolidation; (iv) the date any entity, person or group, (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than (A) the Company or any of its subsidiaries or any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (B) any person who, on the date the Plan is approved by the shareholders, shall have been the beneficial owner of at least twenty percent (20%) of the outstanding Common Stock, shall have become the beneficial owner of, or shall have obtained voting control over, more than fifty percent (50%) of the outstanding shares of the Common Stock; or (v) the first day after the date this Plan is approved by the shareholders when directors are elected so that a majority of the Board of Directors shall have been members of the Board of Directors for less than twenty-four (24) months, unless the nomination for election of each new director who was not a director at the beginning of such twenty-four (24) month period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. (f) Transfers. No ISO granted under the Plan may be transferred, except by will or by the laws of descent and distribution. During the lifetime of the person to whom an ISO is granted, such Option may be exercised only by him. No Nonqualified Option under the Plan may be transferred, except by will or by the laws of descent and distribution or pursuant to qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. (g) Other Provisions. For Options granted pursuant to the Key Employee Plan, the Option Documents shall contain such other provisions including, without limitation, additional restrictions upon the exercise of the Option or additional limitations upon the term of the Option, as the Committee shall deem advisable. (h) Amendment. With respect to Options granted under the Key Employee Plan, and subject to the provisions of the Plan, the Committee shall have the right to amend Option Documents issued to such Optionee, subject to the Optionee's consent if such amendment is not favorable to the Optionee, except that the consent of the Optionee shall not be required for any amendment made under Subsection 4(e) above. With respect to Options granted under the Director Plan, and subject to the provisions of the Plan, the Board of Directors of the Company shall have the right to amend Option Documents issued to such Optionee, subject to the Optionee's consent if such amendment is not favorable to the Optionee, except that the consent of the Optionee shall not be required for any amendment made under Subsection 4(e) above. 5. Administration. (a) Director Plan. It is intended that the grant of Options pursuant to the Director Plan be administered as provided in Rule 16b-3(c)(2)(ii) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Therefore, as set forth in Section 2(d) above, such Options will be awarded pursuant to the formula as set forth therein. (b) Key Employee Plan. With respect to the Key Employee Plan, the Board of Directors shall appoint a Stock Option Committee composed of two or more of its disinterested members (as "disinterested" is defined under Rule 16b-3(c) of the Exchange Act) to operate and administer the Key Employee Plan in its stead. The Stock Option Committee is referred to herein as the "Committee." (c) Meetings. The Committee shall hold meetings at such times and places as it may determine. Acts approved at a meeting by a majority of the members of the Committee or acts approved in writing by the unanimous consent of the members of the Committee shall be the valid acts of the Committee. (d) Discretion of Committee. The Committee shall from time to time at its discretion grant Options pursuant to the terms of the Key Employee Plan, except as otherwise provided in Section 2(c) herein. Except as otherwise provided in Section 2(c) herein, the Committee shall have plenary authority to determine the Optionees to whom and the times at which Options shall be granted, the number of Option Shares to be covered by such Options and the price and other terms and conditions thereof, including a specification with respect to whether an Option is intended to be an ISO, subject, however, to the express provisions of the Key Employee Plan and compliance with Rule 16b-3(c) of the Exchange Act. In making such determinations the Committee may take into account the nature of the Optionee's services and responsibilities, the Optionee's present and potential contribution to the Company's success and such other factors as it may deem relevant. The interpretation and construction by the Committee of any provision of the Key Employee Plan or of any Option granted under it shall be final, binding and conclusive. (e) No Liability. No member of the Board of Directors or the Committee shall be personally liable for any action or determination made in good faith with respect to the Key Employee Plan, the Director Plan or any Option thereunder. No member of the Committee shall be liable for any act or omission of any other member of the Committee or for any act or omission on his own part, including but not limited to the exercise of any power and discretion given to him under the Key Employee Plan, except those resulting from (i) any breach of such member's duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law or (iii) any transaction from which the member derived an improper personal benefit. (f) Indemnification. In addition to such other rights of indemnification as he may have as a member of the Board of Directors or the Committee, and with respect to the administration of the Plan and the granting of Options under it, each member of the Board of Directors and of the Committee shall be entitled without further action on his part to be indemnified by the Company for all expenses (including but not limited to reasonable attorneys' fees and expenses, the amount of judgment and the amount of approved settlements made with a view to the curtailment of costs of litigation, other than amounts paid to the Company itself) reasonably incurred by him in connection with or arising out of any action, suit or proceeding with respect to the administration of the Plan or the granting of Options under it in which he may be involved by reason of his being or having been a member of the Board of Directors or the Committee, whether or not he continues to be such member of the Board of Directors or the Committee at the time of the incurring of such expenses; provided, however, that such indemnity shall not include any expenses incurred by such member of the Board of Directors or Committee: (i) in respect of matters as to which he shall be finally adjudged in such action, suit or proceeding to have been guilty of gross negligence or willful misconduct in the performance of his duties as a member of the Board of Directors or the Committee; or (ii) in respect of any matter in which any settlement is effected in an amount in excess of the amount approved by the Company on the advice of its legal counsel; and provided further that no right of indemnification under the provisions set forth herein shall be available to or accessible by any such member of the Committee or the Board of Directors unless within five (5) days after institution of any such action, suit or proceeding he shall have offered the Company in writing the opportunity to handle and defend such action, suit or proceeding at its own expense. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Board of Directors or the Committee and shall be in addition to all other rights to which such member of the Board of Directors or the Committee would be entitled to as a matter of law, contract or otherwise. 6. Exercise. (a) No Exercise Within Six Months. No Option shall be exercisable prior to the date which is at least six months after the Grant Date. (b) Notice. No Option shall be deemed to have been exercised prior to the receipt by the Company of written notice of such exercise and of payment in full of the Option Price for the Option Shares to be purchased. Each such notice shall specify the number of Option Shares to be purchased and shall satisfy the securities law requirements set forth in this Section 6. (c) Restricted Stock. Each exercise notice shall (unless the Option Shares are covered by a then current registration statement or a Notification under Regulation A under the Securities Act of 1933, as amended (the "Securities Act")), contain the Optionee's acknowledgment in form and substance satisfactory to the Company that (i) such Option Shares are being purchased for investment and not for distribution or resale (other than a distribution or resale which, in the opinion of counsel satisfactory to the Company, may be made without violating the registration provisions of the Securities Act) and, in the case of an ISO, the Option Shares may not be sold within one year of exercise or two years from the Grant Date in order to maintain the ISO status of the Option; (ii) the Optionee has been advised and understands that (A) the Option Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act and are subject to restrictions on transfer and (B) the Company is under no obligation to register the Option Shares under the Securities Act or to take any action which would make available to the Optionee any exemption from such registration, (iii) such Option Shares may not be transferred without compliance with all applicable federal and state securities laws, and (iv) an appropriate legend referring to the foregoing restrictions on transfer and any other restrictions imposed under the Option Documents may be endorsed on the certificates. Notwithstanding the above, should the Company be advised by counsel that the issuance of Option Shares upon the exercise of an Option should be delayed pending (A) registration under federal or state securities laws, (B) the receipt of an opinion that an appropriate exemption therefrom is available, (C) the listing or inclusion of the shares on any securities exchange or in an automated quotation system or (D) the consent or approval of any governmental regulatory body whose consent or approval is necessary in connection with the issuance of such Option Shares, the Company may defer the exercise of any Option granted hereunder until either such event in A, B, C or D has occurred. 7. Adjustments on Changes in Common Stock. The aggregate number of shares of Common Stock as to which Options may be granted under the Director Plan and the Key Employee Plan, the number of Option Shares covered by each outstanding Option and the Option Price per Option Share specified in each outstanding Option shall be appropriately adjusted in the event of a stock dividend, stock split or other increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a subdivision or consolidation of the Common Stock or other capital adjustment (not including the issuance of Common Stock on the conversion of other securities of the Company which are convertible into Common Stock) effected without receipt of consideration by the Company. The Board of Directors shall have the authority to determine the adjustments to be made under this Section and any such determination by the Board of Directors shall be final, binding and conclusive, provided that no adjustment shall be made which will cause an ISO to lose its status as such. 8. Amendment of the Plan. The Board of Directors may amend the Plan from time to time in such manner as it may deem advisable. Notwithstanding the foregoing, (i) with respect to any amendments affecting the Director Plan, the Plan provisions shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder, (ii) any amendment which would change the class of individuals eligible to receive an Option, extend the expiration date of the Plan, decrease the Option Price or increase the maximum number of shares as to which Options may be granted or materially increase the benefits accruing to the Optionees, will only be effective if such action is approved by a majority of the outstanding voting stock of the Company within twelve months before or after such action. 9. Continued Employment. The grant of an Option pursuant to the Plan shall not be construed to imply or to constitute evidence of any agreement, express or implied, on the part of the Company or the Bank to retain the Optionee in the employ of the Company or the Bank, as a member of the Board of Directors or in any other capacity, whichever the case may be. 10. Withholding of Taxes. Whenever the Company proposes or is required to issue or transfer Option Shares, the Company shall have the right to (a) require the recipient or transferee to remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery or transfer of any certificate or certificates for such Option Shares or (b) take whatever action it deems necessary to protect its interests. 11. Effective Date. This Stock Option Plan shall be effective as of the date specified in Section 3 above. EXHIBIT "A" Option Documents FORM OF STOCK OPTION AGREEMENT - DIRECTOR PLAN Mr./Ms. Director Stock Option Agreement Dear : In view of your substantial contributions toward the achievement of the business goals and objectives of First West Chester Corporation (the "Company") and The First National Bank of West Chester (the "Bank") and the expectation of your future contributions, the Board of Directors of the Company is pleased to award you an option to purchase shares of the Common Stock of the Company pursuant to the First West Chester Corporation 1995 Stock Option Plan (the "Plan"). A copy of the Plan is attached to this letter agreement as Exhibit "A" and should be read in conjunction with this letter agreement. [Please be advised that the Plan and any options granted thereunder will not be effective until a majority of the shareholders of the Company approve the Plan. The Company intends to present the Plan for approval at its 1996 Annual Meeting.] This letter will serve as a stock option agreement between you and the Company. The Option awarded to you is subject to the following terms. 1. APPROVAL BY SHAREHOLDERS: The Option granted hereunder has been granted prior to Plan approval by the shareholders of the Company and therefore, shall be subject to such approval. Notwithstanding anything to the contrary herein or in the Plan, this Option shall not be exercisable until such approval is obtained.] 2. NUMBER OF SHARES: You are awarded an option ("Option") to purchase a total of 500 shares of the Common Stock of the Company (the "Option Shares"). 3. TYPE OF OPTIONS: The Option awarded to you is a "Nonqualified Option" as that term is defined in the Plan. 4. EXERCISE PRICE: The shares may be purchased upon your exercise of this Option for the price of $___.__ per share (the "Option Price"). 5. DATE OF GRANT OF AWARD: The grant date of the award of this Option is [Date] (the "Grant Date"). 6. EXERCISE: Your Option may not be exercised for six months following the Grant Date. Your Option expires on the tenth anniversary of the Grant Date (with respect to any number of shares subject to this option not previously exercised), but may expire earlier upon the first to occur of the following: (a) The date set by the Board of Directors of the Company to be an accelerated expiration date after a finding by the Board of Directors of the Company that a change in the financial accounting treatment for Options from that in effect on the date the Plan was adopted materially adversely affects or, in the determination of such Board of Directors, may materially adversely affect in the foreseeable future, the Company and/or the Bank; (b) Expiration of three months from the date your employment with the Company or the Bank terminates for any reason other than disability, death or for Cause (as defined in the Plan); or (c) Expiration of one year from the date the your employment with the Company or the Bank terminates by reason of the your disability or death. 7. NOTICE OF EXERCISE AND PAYMENT: To exercise your Option, you must provide written notice of the exercise marked for the attention of the Secretary of the Company specifying the number of Option Shares to be purchased and satisfying the securities law requirements set forth below. You shall also include payment of the Option Price with such written notice in cash or bank check, payable to the order of the Company. Upon receipt of such notice and payment, the Company will issue you a certificate for the number of Option Shares with respect to which you have exercised the Option. 8. SECURITIES LAW REQUIREMENTS: Each exercise notice shall contain your acknowledgment in a form and substance satisfactory to the Company that (a) such Option Shares are being purchased for investment and not for distribution or resale, (b) you have been advised and understand that (i) the Option Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act and are subject to restrictions on transfer and (ii) the Company is under no obligation to register the Option Shares under the Securities Act or to take any action which would make available to the Optionee any exemption from such registration, (c) such Option Shares may not be transferred without compliance with all applicable federal and state securities laws, and (d) an appropriate legend referring to the foregoing restrictions on transfer and any other restrictions imposed under the Option Documents may be endorsed on the certificates. Notwithstanding the above, should the Company be advised by counsel that the issuance of Option Shares upon the exercise of your Option should be delayed pending (A) registration under federal or state securities laws, (B) the receipt of an opinion that an appropriate exemption therefrom is available, (C) the listing or inclusion of the shares on any securities exchange or in an automated quotation system or (D) the consent or approval of any governmental regulatory body whose consent or approval is necessary in connection with the issuance of such Option Shares, the Company may defer the exercise of your Option until either such event in A, B, C or D has occurred. 9. EXERCISE DATE: The date on which the Company receives the documents specified above in complete and otherwise acceptable form and the payments specified above will be treated as the Exercise Date with respect to your exercise of the stock option. 10. WITHHOLDING OF TAXES: Upon exercise of your Option, the Company shall have the right to (a) require you to remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery or transfer of any certificate or certificates for such Option Shares or (b) take whatever action it deems necessary to protect its interests. 11. NON-ASSIGNABILITY OF OPTION: Except as provided by the Plan, the Option awarded to you is exercisable only by you. The Option may not be transferred, assigned, pledged as security or hypothecated in any way and is not subject to execution, attachment or similar process. Upon any attempt by you to transfer, assign, pledge, hypothecated or otherwise dispose of this Option or of any portion thereof or upon the levy of any execution, attachment or similar process on this Option or on any portion thereof, the Option awarded to you will immediately expire with respect to the number of shares not exercised prior to such event. 12. RIGHTS IN SHARES SUBJECT TO OPTION: You will not be treated as a holder of any of the shares subject to this Option or of any rights of a holder of such shares unless and until the shares are issued to you as evidenced by stock certificates. 13. AFFECT ON EMPLOYMENT RELATIONSHIP: This letter is not an employment agreement or service contract. Therefore, none of the rights awarded to you by this letter affect, in any way, your employment or service relationship with the Company or the Bank. 14. OPTION AWARDED SUBJECT TO PLAN PROVISIONS: The Plan provisions take precedence over the provisions of this letter agreement. Therefore, in the case of any inconsistency between any provision of this letter agreement and any provision of the Plan in effect on the Grant Date, the provision of the Plan will control. 15. COUNTERPARTS: This letter agreement may be executed in one or more counterparts each of which shall be deemed an original and all of which shall be deemed one and the same agreement. If you accept the Option award evidenced by this letter agreement, subject to the terms stated above, you should date and sign the enclosed copy of this letter in the spaces indicated and return it to the Company marked for the attention of the Secretary. First West Chester Corporation By:___________________________ Chairman of the Board I acknowledge that I have read this letter agreement and agree to accept the stock option award evidenced by it according to the terms set forth in such letter agreement. [ Name of Grantee ] - -------------------------------- ------------------ Signature Date FORM OF STOCK OPTION AGREEMENT - KEY EMPLOYEE PLAN Mr./Ms. Key Employee Stock Option Agreement Dear : In view of your substantial contributions toward the achievement of the business goals and objectives of First West Chester Corporation (the "Company") and The First National Bank of West Chester (the "Bank") and the expectation of your future contributions, the Board of Directors of the Company is pleased to award you an option to purchase shares of the Common Stock of the Company pursuant to the First West Chester Corporation 1995 Stock Option Plan (the "Plan"). A copy of the Plan is attached to this letter agreement as Exhibit "A" and should be read in conjunction with this letter agreement. [Please be advised that the Plan and any options granted thereunder will not be effective until a majority of the shareholders of the Company approve the Plan. The Company intends to present the Plan for approval at its 1996 Annual Meeting.] This letter will serve as a stock option agreement between you and the Company. The Option awarded to you is subject to the following terms. [1. APPROVAL BY SHAREHOLDERS: The Option granted hereunder has been granted prior to Plan approval by the shareholders of the Company and therefore, shall be subject to such approval. Notwithstanding anything to the contrary herein or in the Plan, this Option shall not be exercisable until such approval is obtained.] 2. NUMBER OF SHARES: You are awarded an option ("Option") to purchase a total of ____ shares of the Common Stock of the Company (the "Option Shares"). 3. TYPE OF OPTIONS: The Option awarded to you is an Incentive Stock Option or ISO as such terms are defined in the Plan. 4. EXERCISE PRICE: The shares may be purchased upon your exercise of this Option for the price of $___.__ per share (the "Option Price"). 5. DATE OF GRANT OF AWARD: The grant date of the award of this Option is [Date] (the "Grant Date"). 6. EXERCISE: Your Option may not be exercised for six months following the Grant Date. Your Option expires on the tenth anniversary of the Grant Date (with respect to any number of shares subject to this option not previously exercised), but may expire earlier upon the first to occur of the following: (a) Five years from the Grant Date if, on such date the you own, directly or by attribution, shares possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or the Bank); (b) The date set by the Board of Directors of the Company to be an accelerated expiration date after a finding by the Board of Directors of the Company that a change in the financial accounting treatment for Options from that in effect on the date the Plan was adopted materially adversely affects or, in the determination of such Board of Directors, may materially adversely affect in the foreseeable future, the Company and/or the Bank; (c) Expiration of three months from the date your employment with the Company or the Bank terminates for any reason other than disability, death or for Cause (as defined in the Plan). (d) Expiration of one year from the date the your employment with the Company or the Bank terminates by reason of the your disability or death; (e) A finding by the Committee, after full consideration of the facts presented on behalf of both the Company and you, that you have been discharged from employment with the Company or the Bank for Cause (as defined in the Plan). In the event of a finding that you have been discharged for Cause, in addition to immediate termination of the Option, you shall automatically forfeit all Option Shares for which the Company has not yet delivered the share certificates upon refund of the Option Price; or (f) The Committee can accelerate the expiration date in the event of a "Change in Control" (as defined in the Plan), provided an the Committee gives you written notice at least thirty (30) days before the date so fixed. 7. NOTICE OF EXERCISE AND PAYMENT: To exercise your Option, you must provide written notice of the exercise marked for the attention of the Secretary of the Company specifying the number of Option Shares to be purchased and satisfying the securities law requirements set forth below. You shall also include payment of the Option Price with such written notice in cash or bank check, payable to the order of the Company. Upon receipt of such notice and payment, the Company will issue you a certificate for the number of Option Shares with respect to which you have exercised the Option. 8. SECURITIES LAW REQUIREMENTS: Each exercise notice shall contain your acknowledgment in a form and substance satisfactory to the Company that (a) such Option Shares are being purchased for investment and not for distribution or resale, (b) you have been advised and understand that (i) the Option Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act and are subject to restrictions on transfer and (ii) the Company is under no obligation to register the Option Shares under the Securities Act or to take any action which would make available to the Optionee any exemption from such registration, (c) such Option Shares may not be transferred without compliance with all applicable federal and state securities laws, and (d) an appropriate legend referring to the foregoing restrictions on transfer and any other restrictions imposed under the Option Documents may be endorsed on the certificates. Notwithstanding the above, should the Company be advised by counsel that the issuance of Option Shares upon the exercise of your Option should be delayed pending (A) registration under federal or state securities laws, (B) the receipt of an opinion that an appropriate exemption therefrom is available, (C) the listing or inclusion of the shares on any securities exchange or in an automated quotation system or (D) the consent or approval of any governmental regulatory body whose consent or approval is necessary in connection with the issuance of such Option Shares, the Company may defer the exercise of your Option until either such event in A, B, C or D has occurred. 9. EXERCISE DATE: The date on which the Company receives the documents specified above in complete and otherwise acceptable form and the payments specified above will be treated as the Exercise Date with respect to your exercise of the stock option. 10. WITHHOLDING OF TAXES: Upon exercise of your Option, the Company shall have the right to (a) require you to remit to the Company an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery or transfer of any certificate or certificates for such Option Shares or (b) take whatever action it deems necessary to protect its interests. 11. NON-ASSIGNABILITY OF OPTION: Except as provided by the Plan, the Option awarded to you is exercisable only by you. The Option may not be transferred, assigned, pledged as security or hypothecated in any way and is not subject to execution, attachment or similar process. Upon any attempt by you to transfer, assign, pledge, hypothecated or otherwise dispose of this Option or of any portion thereof or upon the levy of any execution, attachment or similar process on this Option or on any portion thereof, the Option awarded to you will immediately expire with respect to the number of shares not exercised prior to such event. 12. RIGHTS IN SHARES SUBJECT TO OPTION: You will not be treated as a holder of any of the shares subject to this Option or of any rights of a holder of such shares unless and until the shares are issued to you as evidenced by stock certificates. 13. AFFECT ON EMPLOYMENT RELATIONSHIP: This letter is not an employment agreement or service contract. Therefore, none of the rights awarded to you by this letter affect, in any way, your employment or service relationship with the Company or the Bank. 14. OPTION AWARDED SUBJECT TO PLAN PROVISIONS: The Plan provisions take precedence over the provisions of this letter agreement. Therefore, in the case of any inconsistency between any provision of this letter agreement and any provision of the Plan in effect on the Grant Date, the provision of the Plan will control. 15. COUNTERPARTS: This letter agreement may be executed in one or more counterparts each of which shall be deemed an original and all of which shall be deemed one and the same agreement. If you accept the Option award evidenced by this letter agreement, subject to the terms stated above, you should date and sign the enclosed copy of this letter in the spaces indicated and return it to the Company marked for the attention of the Secretary. First West Chester Corporation By:___________________________ Chairman of the Board I acknowledge that I have read this letter agreement and agree to accept the stock option award evidenced by it according to the terms set forth in such letter agreement. [ Name of Grantee ] - -------------------------------- ----------------- Signature Date EX-13 3 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES FIVE-YEAR STATISTICAL SUMMARY (Dollars in thousands, except per share)
December 31, -------------------------------------------------------------- STATEMENTS OF CONDITION 1995 1994 1993 1992 1991 - ----------------------- -------- -------- -------- -------- ------ Assets $388,500 $348,099 $351,073 $315,543 $298,167 Loans 242,587 239,126 221,433 212,575 200,319 Investment securities 93,511 78,389 92,829 66,817 54,227 Deposits 343,926 305,465 307,355 274,446 262,938 Stockholders' equity 30,692 28,299 27,767 25,546 23,426 Financial Management Services assets, at market value 255,992 256,998 240,189 229,109 206,623 Year ended December 31, --------------------------------------------------------------- STATEMENTS OF INCOME 1995 1994 1993 1992 1991 - -------------------- --------- -------- -------- -------- ------ Interest income $ 28,466 $ 24,374 $ 23,471 $ 24,293 $ 24,825 Interest expense 11,564 8,719 9,405 10,985 13,297 -------- --------- --------- -------- -------- Net interest income 16,902 15,655 14,066 13,308 11,528 Provision for possible loan losses 1,666 1,790 1,524 1,435 501 --------- --------- --------- --------- ---------- Net interest income after provision for possible loan losses 15,236 13,865 12,542 11,873 11,027 Non-interest income 3,497 3,514 2,929 2,709 2,527 Non-interest expense 12,768 12,216 11,329 10,075 9,459 -------- -------- -------- -------- --------- Income before income taxes and cumulative effect of accounting method change 5,965 5,163 4,142 4,507 4,095 Income taxes 1,865 1,556 1,201 1,253 1,154 --------- --------- --------- --------- --------- Income before cumulative effect of accounting method change 4,100 3,607 2,941 3,254 2,941 Cumulative effect of accounting method change - - 489 - - --------- --------- --------- --------- --------- Net income $ 4,100 $ 3,607 $ 3,430 $ 3,254 $ 2,941 ========= ========= ========= ========= ========= PER SHARE (1) Income before cumulative effect of accounting method change $ 2.34 $ 2.01 $ 1.64 $ 1.81 $ 1.63 Cumulative effect of accounting method change - - 0.27 - - --------- --------- ---------- ---------- --------- Net income $ 2.34 $ 2.01 $ 1.91 $ 1.81 $ 1.63 ========= ========= ========= ========= ========== Cash dividends declared $ 0.89 $ 0.77 $ 0.69 $ 0.64 $ 0.57 Book value 17.92 15.72 15.43 14.25 13.07 Weighted average shares outstanding 1,752,413 1,799,784 1,799,352 1,796,268 1,800,000 (1) Adjusted for 1995 3-for-2 stock split. See Note A11 - Earnings per Share and Stockholders' Equity in the accompanying financial statements for additional information.
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES 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 West Chester Corporation (the "Corporation") and its wholly-owned subsidiaries, The First National Bank of West Chester (the "Bank") and 323 East Gay Street Corp ("EGSC"). It should be read in conjunction with the consolidated financial statements included in this report. EARNINGS AND DIVIDEND SUMMARY 1995 was an outstanding year for the Corporation as net income was $4,100,000, an increase of $493,000 or 13.7% from $3,607,000 for 1994, primarily a result of improved net interest margins, partially offset by increases in other non-interest expenses. Net income for 1994 increased $177,000 or 5.2% from $3,430,000 in 1993. Net earnings in 1993 include a $489,000 benefit related to the cumulative effect of a change in the accounting for income taxes. On a per share basis, 1995 earnings were $2.34, an increase of 16.4% over 1994 earnings of $2.01. On a per share basis, 1994 earnings were 5.0% higher than 1993 earnings of $1.91, which included a $0.27 benefit related to the accounting change. Cash dividends per share in 1995 were $0.89, a 15.6% increase over the 1994 dividend of $0.77. Cash dividends per share in 1994 were 11.6% higher than the 1993 dividend of $0.69. Over the past ten years, the Corporation's practice has been to pay a dividend of at least 35.0% of net income. As shown below, performance ratios for 1995 compared with 1994 were improved due to better net interest margins, partially offset by increases in non-interest expenses. Performance ratios for 1994 compared to 1993 were relatively unchanged. PERFORMANCE RATIOS 1995 1994 1993 - ------------------ -------- -------- ------ Return on Average Assets 1.14% 1.05% 1.04% Return on Average Equity 13.68% 12.83% 12.84% Earnings Retained 62.05% 61.74% 63.97% Dividend Payout Ratio 37.95% 38.26% 36.03% NET INTEREST INCOME Net interest income is the difference between interest income on earning assets and interest expense on interest bearing liabilities. Net interest income, on a tax equivalent basis, increased 7.7% or $1,229,000, from $15,926,000 in 1994 to $17,155,000 in 1995, compared to a 10.9% increase of $1,567,000 from 1993 to 1994. The net yield on interest earning assets, on a tax equivalent basis, was 5.06% for the year ended 1995, compared to 4.96% in 1994 and 4.70% in 1993. The increase in net yield on interest earning assets from 1994 to 1995 is attributable to strong loan growth and lower funding costs during the first six months of 1995. The increase in net yield on interest earning assets from 1993 to 1994 reflects a faster increase in earning asset yields during 1994 than corresponding funding costs. The Corporation anticipates pressure on the net yield on interest earning assets as competition for new loan business remains very strong and incremental deposit growth is rate sensitive. AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS) YIELD ON 1995 1994 1993 -------- ------ ------ ----- Interest Earning Assets 8.46% 7.67% 7.78% Interest Bearing Liabilities 4.18 3.33 3.73 ---- ---- ---- Net Interest Spread 4.28 4.34 4.05 Contribution of Interest Free Funds 0.78 0.62 0.65 ---- ---- ---- Net Yield on Interest Earning Assets 5.06% 4.96% 4.70% ==== ==== ==== FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST INCOME ON FEDERAL FUNDS SOLD AND INVESTMENT SECURITIES Interest income on federal funds increased $488,000 from $160,000 in 1994 to $648,000 in 1995, compared to a $195,000 decrease from 1993 to 1994. The 305.0% increase in 1995 is attributed to a $7.0 million increase in average balances and a 190 basis point (a basis point equals one hundredth of one percent) increase in rates compared to the same period in 1994. The 1995 increase in average federal fund balances of $7.0 million is the result of strong deposit and slow loan growth. The 54.9% decrease in 1994 is attributed to a $7.5 million decrease in average balances offset by an 89 basis point increase in rates compared to the same period in 1993. INTEREST INCOME ON INVESTMENT SECURITIES On a tax equivalent basis, interest income on investment securities increased $272,000, from $4,931,000 in 1994 to $5,203,000 in 1995, compared to a $182,000 increase from 1993 to 1994. The 5.5% increase in investment interest income from 1994 to 1995 is the result of a 59 basis point increase in the yield on investment securities, partially offset by a $4.1 million decrease in average balances. The 3.8% increase in investment interest income from 1993 to 1994 is the result of a $12.0 million increase in average balances, partially offset by a 63 basis point decrease in the yield on investment securities. Changes in investment portfolio balances are related to loan demand and deposit growth levels. INTEREST INCOME ON LOANS Loan interest income, on a tax equivalent basis, generated by the Corporation's loan portfolio increased $3,314,000, from $19,554,000 in 1994 to $22,868,000 in 1995. The 17.0% increase in interest income during 1995 is attributable to a $15.2 million increase in average loans outstanding and an 83 basis point increase in rates earned. Loan interest income, on a tax equivalent basis, increased $893,000, from $18,661,000 in 1993 to $19,554,000 in 1994. The 4.8% increase in interest income during 1994 is attributable to an $11.4 million increase in average loans outstanding offset by a 4 basis point decline in rates earned. Competition for new and existing loan relationships has been very strong throughout 1993, 1994 and 1995. Effective January 16, 1996, William E. Hughes, Sr. was promoted to Executive Vice President in charge of lending. Mr. Hughes has over 38 years of lending experience, including the past 12 years with the Bank. INTEREST EXPENSE ON DEPOSIT ACCOUNTS Interest expense on deposits was $11,102,000 for 1995 compared to $8,433,000 and $9,153,000 in 1994 and 1993, respectively. The 31.6% increase in interest expense on deposits from 1994 to 1995 is the result of an 85 basis point increase in rates paid on interest bearing deposits and a $12.9 million increase in average interest bearing deposits. The 7.9% decrease in interest expense from 1993 to 1994 is the result of a 40 basis point decrease in rates paid, partially offset by a $7.2 million increase in average interest bearing deposits during 1994. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSOLIDATED AVERAGE BALANCE SHEET AND TAX EQUIVALENT INCOME/EXPENSES AND RATES FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993 ---------------------- ----------------------- ---------------------- (Dollars in thousands) Daily Daily Daily Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- ASSETS Federal funds sold $ 11,001 $ 648 5.88% $ 4,024 $ 160 3.98% $ 11,501 $ 355 3.09% Investment securities Taxable 81,098 4,956 6.11 84,927 4,625 5.45 72,468 4,452 6.14 Tax-exempt (1) 3,576 247 6.91 3,801 306 8.06 4,222 297 7.03 ------- ------ ------- ------ -------- ------ Total investment securities 84,674 5,203 6.15 88,728 4,931 5.56 76,690 4,749 6.19 ------- ------ ------- ------ -------- ------ Loans (2) Taxable 236,923 22,187 9.36 221,185 18,864 8.53 208,757 17,879 8.56 Tax-exempt (1) 6,734 681 10.12 7,271 690 9.48 8,329 782 9.38 ------- ------ ------- ------ -------- ------ Total loans 243,657 22,868 9.39 228,456 19,554 8.56 217,086 18,661 8.60 ------- ------ ------- ------ ------- ------ Total interest earning assets 339,332 28,719 8.46 321,208 24,645 7.67 305,277 23,765 7.78 ------ ------ ------ Non-interest earning assets Allowance for possible loan losses (3,796) (3,164) (2,706) Cash and due from banks 16,037 17,654 18,351 Other assets 9,329 9,176 8,650 ------- ------- ------- Total assets $360,902 $344,874 $329,572 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Savings, NOW and money market deposits $162,332 5,431 3.35 $177,414 5,082 2.86 $186,628$ 6,112 3.27 Certificates of deposit and other time 101,197 5,671 5.60 73,238 3,351 4.58 56,823 3,041 5.35 ------- ------ ------- ------ ------- ----- Total interest bearing deposits 263,529 11,102 4.21 250,652 8,433 3.36 243,451 9,153 3.76 Securities sold under repurchase agreements 12,313 403 3.27 10,762 269 2.50 8,914 251 2.82 Other borrowings 949 59 6.22 367 17 4.63 18 1 15.56 ------- ------ ------- ------ -------- ------ Total interest bearing liabilities 276,79 111,564 4.18 261,781 8,719 3.33 252,383 9,405 3.73 ------- ------ ------ Non-interest bearing liabilities Non-interest bearing demand deposits 52,177 50,872 45,084 Other liabilities 1,973 4,116 5,396 ------- ------- ------- Total liabilities 330,941 316,769 302,863 Stockholders' equity 29,961 28,105 26,709 -------- -------- -------- Total liabilities and stockholders'equity $360,902 $344,874 $329,572 ======= ======= ======= Net interest income $17,155 $15,926 $14,360 ====== ====== ====== Net yield on interest earning assets 5.06% 4.96% 4.70% ==== ==== ==== (1)The indicated income and annual rate are presented on a tax equivalent basis using the Federal marginal rate of 34%, adjusted for the 20% interest expense disallowance for 1995, 1994 and 1993. (2)Non-accruing loans are included in the average balance.
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS While total average interest bearing deposits have grown 5.1% and 3.0% in 1995 and 1994, respectively, the components have not grown proportionately. During 1995, average savings, NOW and money market deposits declined $15.1 million or 8.5%, while average certificates of deposit and other time deposits increased $28.0 million or 38.2%. During 1994, average savings, NOW and money market deposits declined $9.2 million or 4.9%, while average certificates of deposit and other time deposits increased $16.4 million or 28.9%. The Corporation's effective rate on interest bearing deposits increased from 3.13%, 3.12%, 3.42%, and 3.65% in the first, second, third and fourth quarters of 1994, respectively, to 3.89%, 4.20%, 4.26%, and 4.34% in the first, second, third and fourth quarters of 1995, respectively. PROVISION FOR POSSIBLE LOAN LOSSES During 1995, the Corporation recorded a provision for possible loan losses of $1,666,000 compared to $1,790,000 and $1,524,000 in 1994 and 1993, respectively. Net charge-offs in 1995 were $463,000, down from $1,326,000 and $985,000 in 1994 and 1993, respectively. Net charge-offs as a percentage of average loans outstanding were 0.19%, 0.58% and 0.45% for 1995, 1994 and 1993, respectively. The 1995 decrease in provision for loan losses and charge-offs relates to the decline of non-performing loans and assets during 1995. See Asset Quality and the Allowance For Possible Loan Losses for additional information. NON-INTEREST INCOME Total non-interest income decreased $17,000 or 0.5%, from $3,514,000 in 1994 to $3,497,000 in 1995, compared to an increase of $585,000 or 20.0% from 1993 to 1994. The primary component of non-interest income is Financial Management Services revenue, which increased $72,000 or 4.1%, from $1,764,000 in 1994 to $1,836,000 in 1995, compared to an increase of $84,000 or 5.0% from 1993 to 1994. Market value of Financial Management Services assets under management declined $1.0 million or 0.4%, from $257.0 million at the end of 1994 to $256.0 million at the end of 1995, and grew $16.8 million or 7.0% from 1993 to 1994. The 1995 decline in market value of assets under management is primarily the result of the distribution of two defined benefit pension plans, totalling $27.1 million, partially offset by increases in new business and market value appreciation. The 1994 increase in market value of assets under management is primarily the result of growth in the trust administration, investment management and estate segments of the business. Service charges on deposit accounts only grew $6,000 or 0.7% in 1995 while average deposits went up 4.7%, a result of increases in the earnings credit paid to commercial checking customers. In 1994, service charges on deposit accounts went up 4.2% and average deposits grew 4.7%. Gains on the termination of the Bank's defined benefit plans of $190,000 and $311,000 are included in other non-interest income in 1995 and 1994, respectively. Other non-interest income, excluding the above pension gains, was $567,000, $547,000 and $532,000 in 1995, 1994 and 1993, respectively. See Note K - Employee Benefit Plans for additional information on pension plan changes. NON-INTEREST EXPENSE Total non-interest expense increased $552,000 or 4.5%, from $12,216,000 in 1994 to $12,768,000 in 1995, compared to an increase of $887,000 or 7.8% from 1993 to 1994. The growth in non-interest expense reflects the increased expense incurred to service the Bank's expanding customer base. The components of non-interest expense changes are discussed below. Salary and employee benefits increased $592,000 or 9.1%, from $6,481,000 in 1994 to $7,073,000 in 1995. The increase in 1995 is a result of a 4.0% salary increase, a 7.7% staff increase, increases in life insurance premiums and increases in bonus payments, partially offset by decreases in pension costs. Salary and employee benefits increased $349,000 or 5.7% from 1993 to 1994, primarily the result of a 4.0% salary increase, a 6.1% staff increase, FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS health insurance premium increases and an increase in pension costs. The Corporation's full-time equivalents were 182, 169 and 165 at the end of 1995, 1994 and 1993, respectively. Occupancy, equipment and data processing expense increased $108,000 or 4.8%, from $2,256,000 in 1994 to $2,364,000 in 1995. Occupancy, equipment and data processing expenses increased $250,000 or 12.5%, from 1993 to 1994. The increases in 1995 and 1994 are primarily a result of increased personal computer acquisition costs and MAC system transaction volume, partially offset by decreased costs associated with maintenance contracts on Bank equipment. Several technological programs, including teller automation, PC networking and check imaging were in process at the end of 1995 with 1996 implementation dates. On August 8, 1995, the Federal Deposit Insurance Corporation ("FDIC") approved a final rule reducing Bank Insurance Fund ("BIF") deposit insurance premiums to $0.04 from $0.23 per year per $1,000 in deposits for the best rated banks. The new premium rate was applied retroactively to June 1, 1995. Effective January 1, 1996, the BIF deposit insurance premium was reduced to the statutory minimum of $500 per quarter for the best rated banks. FDIC insurance was $349,000, $678,000 and $627,000 in 1995, 1994 and 1993, respectively. This represents a decrease of $329,000 or 48.5% from 1994 to 1995 and an increase of $51,000 or 8.1% from 1993 to 1994. FDIC insurance is calculated based on quarter-end deposits and paid quarterly. Bank shares tax was .99%, .81% and 1.15% of average shareholders' equity for 1995, 1994 and 1993, respectively. The Pennsylvania Bank Shares Tax is calculated on year-end Bank stockholders' equity and paid annually. INCOME TAXES Income tax expense was $1,865,000 in 1995 compared to $1,556,000 in 1994 and $1,201,000 in 1993. This represents an effective tax rate of 31.3%, 30.1% and 29.0%, respectively. The primary reason for the increase in the effective tax rates each year is a decrease in tax-exempt instruments as a percentage of total assets. Average tax-exempt assets as a percentage of total average assets was 2.8%, 3.2% and 3.8% in 1995, 1994 and 1993, respectively. During 1993, the Corporation adopted a new accounting standard for income taxes that allows consideration of future projected taxable income in determining the level of deferred tax assets that are recognizable in the Corporation's current tax provision. The cumulative effect of this new standard was to increase 1993 net income by $489,000 or $0.27 per share. LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for business expansion. Liquidity management addresses the Corporation's ability to meet deposit withdrawals either on demand or at contractual maturity, to repay borrowings as they mature and to make new loans and investments as opportunities arise. Liquidity is managed on a daily basis enabling senior management to effectively monitor changes in liquidity and to react accordingly to fluctuations in market conditions. The primary source of liquidity for the Corporation is its available-for-sale portfolio of liquid investment grade securities. Funding sources include NOW, money market, savings and smaller denomination certificates of deposit accounts. The Corporation considers funds from such sources as its "core" deposit base because of the historical stability of such sources of funds. Additional liquidity comes from the Corporation's non-interest bearing demand deposit accounts. Other deposit sources include a three-tiered savings product and certificates of deposit in excess of $100,000. Details of core deposits, non-interest bearing demand deposit accounts and other deposit sources are highlighted in the following table: FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DEPOSIT ANALYSIS
(Dollars in thousands) 1995 1994 1993 ---------------------- ----------------------- ---------------------- Average Effective Average Effective Average Effective DEPOSIT TYPE Balance Yield Balance Yield Balance Yield ------------ ------- --------- ------- --------- ------- --------- NOW Accounts $ 42,974 2.32% $ 41,985 2.30% $ 39,417 2.63% Money Market 29,610 3.23 32,962 2.68 32,360 2.86 Statement Savings 46,347 3.64 51,468 3.06 52,225 3.51 Other Savings 4,657 2.73 5,571 2.60 6,324 3.18 CD's Less than $100,000 89,866 5.67 64,551 4.57 60,327 5.27 -------- -------- -------- Total Core Deposits 213,454 4.15 196,537 3.31 190,653 3.76 Non-Interest Bearing Demand Deposit Accounts 52,177 - 50,872 - 45,084 - -------- -------- -------- Total Core and Non- Interest Bearing Deposits 265,631 - 247,409 - 235,737 - Tiered Savings 38,744 4.29 45,427 3.33 44,903 3.64 CD's Greater than $100,000 11,331 5.11 8,688 4.66 7,895 4.37 -------- -------- ------- Total Deposits $315,706 - $301,524 - $288,535 - ======= ======= =======
The Bank, as a member of the Federal Home Loan Bank, maintains a line of credit secured by the Bank's mortgage-related assets. As of December 31, 1995, this line of credit was in excess of $33 million. 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 $45.6 million or 11.7% of total assets at December 31, 1995 compared with a negative $72.6 million or 20.9% of total assets at the end of 1994. Management is aware of this negative gap position and is taking steps to maintain net interest margins at acceptable levels. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1995
(Dollars in thousands) One Over Within Through Five Non-Rate One Year Five Years Years Sensitive Total -------- ---------- ----- --------- ----- ASSETS Federal funds sold $ 24,700 $ - $ - $ - $ 24,700 Investment securities 49,260 30,192 14,059 - 93,511 Loans and leases 121,793 97,847 22,947 (4,506) 238,081 Cash and cash equivalents - - - 19,944 19,944 Other assets - - - 12,264 12,264 ------- ------- ------- -------- -------- Total assets $195,753 $128,039 $ 37,006 $ 27,702 $ 388,500 ======= ======= ======= ======== ======== LIABILITIES AND CAPITAL Non-interest bearing deposits$ - $ - $ - $ 63,393 $ 63,393 Interest bearing deposits $232,536 40,621 7,376 - 280,533 Borrowed funds 8,858 - - - 8,858 Other liabilities - - - 5,024 5,024 Capital - - - 30,692 30,692 ------- ------- ------- -------- -------- Total liabilities and capital $241,394 $ 40,621 $ 7,376 $ 99,109 $ 388,500 ======= ======== ======== ========= ======== Net interest rate sensitivity gap $ (45,641) $ 87,418 $ 29,630 $ (71,407) $ - ======== ======== ======= ========= ======== Cumulative interest rate sensitivity gap $ (45,641) $ 41,777 $ 71,407 $ - $ - ======== ======== ======= ========= ======== Cumulative interest rate sensitivity gap divided by total assets (11.7)% 10.8% 18.4% - -
ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is an amount that management believes will be adequate to absorb possible loan losses on existing loans that may become uncollectible based on 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 the borrower's ability to pay. The allowance for possible loan losses as a percentage of year-end loans outstanding shows an increase from 1.38% at December 31, 1994 to 1.86% at December 31, 1995. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ANALYSIS OF CHANGES IN THE ALLOWANCE FOR POSSIBLE LOAN LOSSES AND COMPARISON OF LOANS OUTSTANDING
December 31, -------------------------------------------------------------- (Dollars in thousands) 1995 1994 1993 1992 1991 -------- -------- -------- -------- ------ Balance at beginning of year $ 3,303 $ 2,839 $ 2,300 $ 1,850 $ 1,630 --------- --------- --------- --------- --------- Provision charged to operating expense 1,666 1,790 1,524 1,435 501 --------- --------- --------- --------- --------- Recoveries of loans previously charged off Commercial loans 4 19 69 212 22 Real estate - mortgages 46 9 2 77 - Consumer loans 29 10 21 19 22 --------- --------- --------- --------- --------- Total recoveries 79 38 92 308 44 --------- --------- --------- --------- --------- Loan charge-offs Commercial loans (348) (253) (28) (922) (98) Real estate - mortgages (25) (1,042) (975) (192) (133) Consumer loans (108) (69) (71) (179) (73) Lease financing receivables (61) - (3) - (21) --------- --------- --------- --------- --------- Total charge-offs (542) (1,364) (1,077) (1,293) (325) --------- --------- --------- --------- --------- Net loan charge-offs (463) (1,326) (985) (985) (281) --------- --------- --------- --------- --------- Balance at end of year $ 4,506 $ 3,303 $ 2,839 $ 2,300 $ 1,850 ========= ========= ========= ========= ========= Year-end loans outstanding $242,587 $239,126 $221,433 $212,575 $200,319 Allowance for possible loan losses as a percentage of year-end loans outstanding 1.86% 1.38% 1.28% 1.08% 0.92% Ratio of net charge-offs to average loans outstanding 0.19% 0.58% 0.45% 0.46% 0.14%
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Non-performing loans include loans on non-accrual status and loans past due 90 days or more and still accruing. The Bank's policy is to write down all non-performing loans to net realizable value based on updated appraisals. Non-performing loans are generally collateralized by real estate and are in the process of collection. 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. At December 31, 1995, there were no concentrations of loans exceeding 10% of total loans which are not otherwise disclosed. NON-PERFORMING LOANS AND ASSETS
December 31, ------------------------------------------------------------- (Dollars in thousands) 1995 1994 1993 1992 1991 -------- -------- -------- -------- ------- Past due over 90 days and still accruing $ 419 $ 323 $ 1,074 $ 2,111 $ 336 Non-accrual loans 726 2,997 2,804 1,200 522 --------- -------- -------- -------- --------- Total non-performing loans 1,145 3,320 3,878 3,311 858 Other real estate owned 1,447 1,565 - 90 558 -------- -------- -------- -------- --------- Total non-performing assets $ 2,592 $ 4,885 $ 3,878 $ 3,401 $ 1,416 ======== ======== ======== ======== ======== Non-performing loans as a percentage of total loans 0.47% 1.39% 1.75% 1.56% 0.43% Allowance for possible loan losses as a percentage of non-performing loans 393.5% 99.5% 73.2% 69.5% 215.6% Non-performing assets as a percentage of total loans and other real estate owned 1.06% 2.03% 1.75% 1.60% 0.70% Allowance for possible loan losses as a percentage of non-performing assets 173.8% 67.6% 73.2% 67.6% 130.6%
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The allowance for possible loan losses as a percentage of non-performing loans increased to 393.5% at December 31, 1995 from 99.5% at December 31, 1994. This ratio indicates that the allowance for possible loan losses is sufficient to cover the principal of all non-performing loans and other potential losses that might exist in the Corporation's loan portfolio. Other real estate owned ("OREO") represents residential and commercial real estate written down to realizable value (net of estimated disposal costs) based on professional appraisals. As a result of loan recoveries, sales of OREO and an intercompany sale, the Corporation reduced non-performing assets by $2,263,000 or 46.6% to $2,592,000 at December 31, 1995 from $4,855,000 at December 31, 1994. Management intends to liquidate other real estate owned in the most expedient and cost-effective manner. This process could take up to 24 months, although swifter disposition is anticipated. CAPITAL ADEQUACY The Corporation is subject to Risk-Based Capital Guidelines adopted by the Federal Reserve Board for bank holding companies. The Bank 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 December 31, 1995, both the Corporation's and the Bank's capital exceeded all minimum regulatory requirements and were considered "well capitalized" as defined in the regulations issued pursuant to the FDIC Improvement Act of 1992. The Corporation's Risk-Based Capital Ratios, shown below, have been computed in accordance with regulatory accounting policies.
December 31, RISK-BASED --------------------------------------- "Well Capitalized" CAPITAL RATIOS 1995 1994 1993 Requirements - -------------- ------------ ------------ ------------ ---------------- Leverage Ratio 8.47% 8.53% 7.99% 5.00% Tier I Capital Ratio 11.51% 11.09% 10.64% 6.00% Total Risk-Based Capital Ratio 12.77% 12.32% 11.73% 10.00%
The Bank is not under any agreement with the regulatory authorities nor is it aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources or operations of the Corporation. The internal capital growth rate for the Corporation was 2.68%, 1.92% and 8.68% for the years ended December 31, 1995, 1994 and 1993, respectively. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DESCRIPTION OF CAPITAL STOCK AND MARKET INFORMATION The authorized capital stock of the Corporation consists of 5,000,000 shares of common stock, par value $1 per share, of which 1,712,941 shares and 1,799,732 shares were outstanding at the end of 1995 and 1994, respectively. The Corporation's common stock is not listed or traded on a recognized securities exchange. There is no established public trading market for the Corporation's common stock. Trading of the Corporation's common stock is sporadic and information regarding trades is limited. The following table, which shows the range of high and low bid prices for the stock, is based upon transactions reported by the Philadelphia brokerage firm of F. J. Morrissey & Co. Bid Prices (1) ---------- 1995 1994 ---- ---- Quarter Ended High Low High Low ------------- ---- ----- ------ ----- First $21.33 $21.33 $21.33 $21.33 Second $21.33 $21.17 $21.50 $21.33 Third $23.66 $21.33 $21.59 $21.33 Fourth $28.00 $25.00 $21.33 $21.33 (1) Adjusted for 1995 3-for-2 stock split. See Note A11 - Earnings per Share and Stockholders' Equity in the accompanying financial statements for additional information. Other statistical disclosures required by bank holding companies can be found in the Corporation's 10-K filed with the Securities and Exchange Commission on March 30, 1996. Copies of the 10-K can be obtained from the Corporation's Shareholder Relations Representative who can be reached at P.O. Box 523, West Chester, PA 19381 at 610-344-2686. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) December 31, ----------------------------- 1995 1994 ----------- ------------ ASSETS Cash and due from banks $ 19,944 $ 19,981 Federal funds sold 24,700 2,000 ----------- ----------- Total cash and cash equivalents 44,644 21,981 ----------- ----------- Investment securities held-to-maturity (market value of $23,213 and $28,528 in 1995 and 1994, respectively) 23,048 29,367 ----------- ----------- Investment securities available-for-sale at fair value 70,463 49,022 ----------- ----------- Loans 242,587 239,126 Less: Allowance for possible loan losses (4,506) (3,303) ----------- ----------- Net loans 238,081 235,823 Premises and equipment 5,521 4,826 Other assets 6,743 7,080 ----------- ----------- Total assets $ 388,500 $ 348,099 ========== ========== LIABILITIES Deposits Non-interest bearing $ 63,393 $ 57,827 Interest bearing (including certificates of deposit over $100 of $11,479 and $10,116 - 1995 and 1994, respectively) 280,533 247,638 ---------- ---------- Total deposits 343,926 305,465 Securities sold under repurchase agreements 8,858 10,499 Other liabilities 5,024 3,836 ---------- ----------- Total liabilities 357,808 319,800 ---------- ---------- STOCKHOLDERS' EQUITY Common stock, par value $1; authorized, 5,000,000 shares, outstanding, 1995 - 1,712,941 and 1994 - 1,800,000; excluding shares in treasury, 1995 - 87,000 and 1994 - 0 1,800 1,200 Additional paid-in capital 3,301 3,900 Retained earnings 27,542 24,998 Net unrealized loss on securities available-for-sale (65) (1,799) Treasury stock at cost (1,886) - ---------- ----------- Total stockholders' equity 30,692 28,299 ----------- ----------- Total liabilities and stockholders' equity $ 388,500 $ 348,099 ========== ==========
The accompanying notes are an integral part of these statements. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share) December 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ---------- INTEREST INCOME Loans, including fees $ 22,682 $ 19,366 $ 18,448 Investment securities 5,136 4,848 4,668 Federal funds sold 648 160 355 -------- -------- --------- Total interest income 28,466 24,374 23,471 -------- -------- --------- INTEREST EXPENSE Deposits 11,102 8,433 9,153 Securities sold under repurchase agreements 462 286 252 -------- -------- --------- Total interest expense 11,564 8,719 9,405 -------- -------- --------- Net interest income 16,902 15,655 14,066 Provision for possible loan losses 1,666 1,790 1,524 -------- -------- --------- Net interest income after provision for possible loan losses 15,236 13,865 12,542 -------- -------- --------- NON-INTEREST INCOME Financial Management Services 1,836 1,764 1,680 Service charges on deposit accounts 895 889 853 Investment securities gains (losses), net 9 3 (136) Other 757 858 532 -------- -------- --------- Total non-interest income 3,497 3,514 2,929 -------- -------- --------- NON-INTEREST EXPENSE Salaries and employee benefits 7,073 6,481 6,132 Occupancy, equipment and data processing 2,364 2,256 2,006 FDIC insurance 349 678 627 Bank shares tax 297 228 308 Other operating 2,685 2,573 2,256 -------- -------- --------- Total non-interest expense 12,768 12,216 11,329 -------- -------- --------- Income before income taxes and cumulative effect of accounting method change 5,965 5,163 4,142 INCOME TAXES 1,865 1,556 1,201 -------- -------- --------- Income before cumulative effect of accounting method change 4,100 3,607 2,941 CUMULATIVE EFFECT OF ACCOUNTING METHOD CHANGE - - 489 -------- -------- --------- NET INCOME $ 4,100 $ 3,607 $ 3,430 ========= ========= ========== PER SHARE Income before cumulative effect of accounting method change $ 2.34 $ 2.01 $ 1.64 Cumulative effect of accounting method change - - 0.27 -------- -------- --------- Net income $ 2.34 $ 2.01 $ 1.91 ========= ========== ========== Cash dividends declared $ 0.89 $ 0.77 $ 0.69 ========= ========== ========== Weighted average shares outstanding 1,752,413 1,799,784 1,799,352 ========= ========= =========
The accompanying notes are an integral part of these statements. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common stock paid-in Retained Treasury (Dollars in thousands) Shares Par value capital earnings Other stock ----------- ------------- ----------- ---------- -------- ------------ Balance at January 1, 1993 1,195,429 $ 1,200 $ 3,900 $ 20,577$ - $ (131) Net income - - - 3,430 - - Cash dividends declared - - - (1,236) - - Net unrealized loss on equity securities - - - - (99) - Treasury stock transactions 4,392 - - - - 126 ---------- -------- ---------- ----------- ---------- -------- Balance at December 31, 1993 1,199,821 1,200 3,900 22,771 (99) (5) Change in accounting for investments on January 1, 1994 - - - - 236 - Net income - - - 3,607 - - Cash dividends declared - - - (1,380) - - Net unrealized loss on securities available-for-sale - - - - (1,936) - Treasury stock transactions 179 - - - - 5 ---------- -------- ---------- ----------- ---------- -------- Balance at December 31, 1994 1,200,000 1,200 3,900 24,998 (1,799) - Net income - - - 4,100 - - Cash dividends declared - - - (1,556) - - Net unrealized gain on equity securities available-for-sale - - - - 1,734 - 3-for-2 stock split 599,941 600 (600) - - - Treasury stock transactions ( 87,000) - 1 - - (1,886) ---------- -------- ---------- ----------- ---------- -------- Balance at December 31, 1995 1,712,941 $ 1,800 $ 3,301 $ 27,542 $ (65) $ (1,886) ========== ======= ======= ======= =========== ========
The accompanying notes are an integral part of these statements. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) December 31, --------------------------------------- 1995 1994 1993 ------------ ------------ ---------- OPERATING ACTIVITIES Net income $ 4,100 $ 3,607 $ 3,430 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 614 618 600 Provision for loan losses 1,666 1,790 1,524 Amortization of investment security premiums and accretion of discounts 217 392 243 Amortization of deferred fees on loans (5) 46 (42) Provision for deferred income taxes - (165) (324) Investment securities (gains) losses, net (9) (3) 136 Increase in other assets (557) (3,414) (14) Increase (decrease) in other liabilities 1,127 (1,283) 96 -------- --------- --------- Net cash provided by operating activities 7,153 1,588 5,649 -------- --------- --------- INVESTING ACTIVITIES Increase in loans (3,919) (19,064) (9,801) Proceeds from sales of investment securities available-for-sale 301 1,875 - Proceeds from sales of investment securities held-to-maturity - - 1,979 Proceeds from maturities of investment securities available-for-sale 13,367 19,529 - Proceeds from maturities of investment securities held-to-maturity 7,244 8,042 19,524 Purchase of investment securities available-for-sale (32,615) (17,098) - Purchase of investment securities held-to-maturity (999) - (47,894) Purchase of premises and equipment, net (1,309) (830) (318) Other - - (99) -------- --------- --------- Net cash used in investing activities (17,930) (7,546) (36,609) -------- --------- -------- FINANCING ACTIVITIES Increase (decrease) in deposits 38,461 (1,890) 32,909 (Decrease) increase in securities sold under repurchase agreements (1,641) (119) 361 Cash dividends (1,495) (1,321) (1,293) Treasury stock transactions (1,885) 5 126 --------- --------- -------- Net cash provided by (used in) financing activities 33,440 (3,325) 32,103 --------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,663 (9,283) 1,143 Cash and cash equivalents at beginning of year 21,981 31,264 30,121 -------- -------- -------- Cash and cash equivalents at end of year $ 44,644 $ 21,981 $ 31,264 ======== ======== ========
The accompanying notes are an integral part of these statements. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES First West Chester Corporation (the "Corporation") through its wholly-owned subsidiary, The First National Bank of West Chester (the "Bank"), has been serving the residents and businesses of Chester County, Pennsylvania since 1863. The Bank is a locally managed community bank providing loan, deposit and trust services from its five branch locations. The Bank encounters vigorous competition for market share in the communities it serves from bank holding companies, other community banks, thrift institutions and other non-bank financial organizations such as mutual fund companies, insurance companies and brokerage companies. The Corporation and the Bank are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Corporation and the Bank for adherence to laws and regulations. As a consequence, the cost of doing business may be affected. 1. Basis of Financial Statement Presentation ----------------------------------------- The accounting policies followed by the Corporation and its wholly-owned subsidiaries, the Bank and 323 East Gay Street Corp ("EGSC"), conform to generally accepted accounting principles and predominant practice within the banking industry. The accompanying financial statements include the accounts of the Corporation, the Bank and EGSC. All significant intercompany transactions have been eliminated. 2. Financial Instruments --------------------- The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments," which requires all entities to disclose the estimated fair value of their assets and liabilities considered to be financial instruments. Financial instruments requiring disclosure consist primarily of investment securities, loans and deposits. 3. Investment Securities --------------------- The Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1994. This new standard requires investments in securities to be classified in one of three categories: held-to-maturity, trading or available-for-sale. Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. As the Corporation does not engage in security trading, the balance of its debt securities and any equity securities are classified as available-for-sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income. Prior to the adoption of SFAS No. 115, investment securities that were principally debt securities were stated at cost and adjusted for amortization of premiums and accretion of discounts computed by the interest method. Gains or losses on disposition were based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method. 4. Loans and Allowance for Loan Losses ----------------------------------- Loans are stated at the amount of unpaid principal, reduced by unearned discount and an allowance for loan losses. Interest on loans is accrued and credited to operations based upon the principal amount outstanding. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Accrual of interest is discontinued on a loan when management believes that the borrower's financial condition is such that collection of interest and principal is doubtful. Upon such discontinuance, all unpaid accrued interest is reversed. The determination of the allowance for loan losses is based upon the character of the loan portfolio, current economic conditions, loss experience and other relevant factors which, in management's judgment, deserve recognition in estimating possible losses. On January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114 requires loan impairment to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, its observable market price, or the fair value of the collateral if the loan is collateral-dependent. If it is probable that a creditor will foreclose on a property, the creditor must measure impairment based on the fair value of the collateral. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans. 5. Loan Fees and Related Costs --------------------------- Certain origination and commitment fees and related direct loan origination costs are deferred and amortized over the contractual life of the related loans, resulting in an adjustment of the related loan's yield. 6. Premises and Equipment ---------------------- Premises and equipment are stated at cost, less accumulated depreciation. Assets are depreciated over their estimated useful lives principally by the straight-line method. 7. Contributions ------------- The Corporation adopted, effective January 1, 1995, SFAS No. 116, "Accounting for Contributions Received and Contributions Made." SFAS No. 116 specifies that contributions made by the Corporation be recognized as expenses in the period made and as decreases of assets or increases of liabilities depending on the form of the benefits given. In accordance with SFAS No. 116, the Corporation accrued contribution expenses of $136,000 relating to long-term commitments to local not-for-profit organizations during 1995. Financial statements prior to 1995 were not restated. Prior to 1995, the Corporation accounted for contributions made on a cash basis. 8. Income Taxes ------------ The Corporation adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1993. Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 9. Employee Benefit Plans ---------------------- The Bank has certain employee benefit plans covering eligible employees. The Bank accrues such costs as earned. 10. Financial Management Services Assets and Income ----------------------------------------------- Assets held by the Bank in fiduciary or agency capacities for its customers are not included in the accompanying consolidated balance sheets since such items are not assets of the Bank. Operating income and expenses of Financial Management Services are included under their respective captions in the accompanying consolidated statements of income and are recorded on the accrual basis. 11. Earnings per Share and Stockholders' Equity ------------------------------------------- Earnings per share are calculated using the weighted average shares outstanding during the year. On September 18, 1995, the Board of Directors declared a 3-for-2 stock split, payable October 16, 1995, in the form of a 50% stock dividend to stockholders of record on October 3, 1995. Par value remained at $1 per share. The stock split resulted in the issuance of 599,941 additional shares of common stock from authorized but unissued shares. The issuance of authorized but unissued shares resulted in the transfer of $600,000 from additional paid-in capital to common stock, representing the par value of the shares issued. Accordingly, earnings per share, cash dividends per share and weighted average shares of common stock outstanding have been restated to reflect the stock split. 12. Cash Flow Information --------------------- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Cash paid during the years ended December 31, 1995, 1994 and 1993 for interest was $10,901,000, $10,268,000 and $9,760,000, respectively. Cash paid during the years ended December 31, 1995, 1994 and 1993 for income taxes was $2,144,000, $1,891,000 and $1,642,000, respectively. 13. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE B - INVESTMENT SECURITIES On January 1, 1994, the Corporation changed its method of accounting for certain debt and equity securities and recorded an unrealized holding gain, net of taxes, of $236,000 as a separate component of stockholders' equity. At December 31, 1995 and 1994, unrealized holding losses on securities available-for-sale, net of taxes, were $65,000 and $1,799,000, respectively. The amortized cost, gross unrealized gains and losses, and fair market value of the Corporation's available-for-sale and held-to-maturity securities are summarized as follows: FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE B - INVESTMENT SECURITIES - Continued
Held-to-Maturity Available-for-Sale ----------------------------------------- --------------------------------------- (Dollars in thousands) Gross Gross Fair Gross Gross Fair 1995 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market ---- Cost Gains Losses Value Cost Gains Losses Value ---------- --------- --------- ------- ---------- ---------- -------- ------ U.S. Treasury $ 1,473 $ 12 $ - $ 1,485 $ 13,020 $ 89 $ (18) $ 13,091 U.S. Government agency 1,501 4 (9) 1,496 12,011 165 - 12,176 Mortgage-backed securities 2,685 26 (22) 2,689 34,659 141 (325) 34,475 State and municipal 4,759 108 (5) 4,862 254 27 - 281 Corporate securities 11,806 62 (1) 11,867 1,079 - - 1,079 Asset-backed securities 824 2 (12) 814 - - - - Mutual funds - - - - 8,000 - (267) 7,733 Other equity securities - - - - 1,540 224 (136) 1,628 ------- ------ ------ ------ -------- ------ ------ ------- $ 23,048 $ 214 $ (49) $23,213 $ 70,563 $ 646 $ (746) $ 70,463 ======= ===== ====== ====== ======== ===== ====== =======
Held-to-Maturity Available-for-Sale ------------------------------------------ --------------------------------------- (Dollars in thousands) Gross Gross Fair Gross Gross Fair 1994 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market ---- Cost Gains Losses Value Cost Gains Losses Value ---------- ----------- ---------- ------- --------- ---------- ---------- ------ U.S. Treasury $ 1,464 $ - $ (99) $ 1,365 $13,078 $ 11 $ (328) $ 12,761 U.S. Government agency 1,500 2 (86) 1,416 - - - - Mortgage-backed securities 3,223 1 (185) 3,039 25,381 - (1,935) 23,446 State and municipal 5,603 6 (84) 5,525 253 15 - 268 Corporate securities 15,455 3 (328) 15,130 3,084 6 (9) 3,081 Asset-backed securities 2,122 - (69) 2,053 109 - (2) 107 Mutual funds - - - - 8,254 - (490) 7,764 Other equity securities - - - - 1,588 7 - 1,595 ------- ------- ------- -------- ------ ------- ------- ------- $ 29,367 $ 12 $ (851) $28,528 $51,747 $ 39 $(2,764) $ 49,022 ====== ====== ======= ====== ======= ====== ====== =======
The amortized cost and estimated fair value of debt securities classified as available-for-sale and held-to-maturity at December 31, 1995, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE B - INVESTMENT SECURITIES - Continued
Held-to-Maturity Available-for-Sale ------------------------ ---------------------------- Estimated Estimated Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value --------- --------- --------- --------- Due in one year or less $ 9,359 $ 9,377 $ 8,604 $ 8,617 Due after one year through five years 9,765 9,886 17,506 17,729 Due after five years through ten years 390 420 - - Due after ten years 25 27 254 281 -------- -------- --------- -------- 19,539 19,710 26,364 26,627 Mortgage-backed securities 2,685 2,689 34,659 34,475 Asset-backed securities 824 814 - - -------- -------- --------- -------- $ 23,048 $ 23,213 $ 61,023 $ 61,102 ======== ======== ======== =======
Proceeds on sales of securities classified as available-for-sale were $301,000 and $1,875,000 during 1995 and 1994, respectively. Gains of $17,000, $94,000 and $0, and losses of $8,000, $91,000 and $136,000 were realized on sales of securities in 1995, 1994 and 1993, respectively. The Corporation uses the specific identification method to determine the cost of the securities sold. The principal amount of investment securities pledged to secure public deposits and for other purposes required or permitted by law was $28,170,000 and $27,872,000 at December 31, 1995 and 1994, respectively. There were no securities held from a single issuer that represented more than 10% of stockholders' equity. NOTE C - LOANS Major classifications of loans are as follows: (Dollars in thousands) 1995 1994 --------- -------- Commercial loans $ 86,686 $ 87,689 Real estate - construction 9,372 4,607 Real estate - other 100,814 101,589 Consumer loans 33,836 32,984 Lease financing receivables 11,879 12,257 -------- --------- 242,587 239,126 Less: Allowance for loan losses (4,506) (3,303) -------- --------- $ 238,081 $ 235,823 ======== ======== FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE C - LOANS - Continued Loan balances on which the accrual of interest has been discontinued amounted to approximately $726,000 and $2,997,000 at December 31, 1995 and 1994, respectively. Interest on these non-accrual loans would have been approximately $125,000 in 1995 and $432,000 in 1994. Loan balances past due 90 days or more which are not on a non-accrual status, but which management expects will eventually be paid in full, amounted to $419,000 and $323,000 at December 31, 1995 and 1994, respectively. Changes in the allowance for loan losses are summarized as follows:
(Dollars in thousands) 1995 1994 1993 ---------- ---------- ---------- Balance at beginning of year $ 3,303 $ 2,839 $ 2,300 Provision charged to operating expenses 1,666 1,790 1,524 Recoveries of charged-off loans 79 38 92 Loans charged off (542) (1,364) (1,077) ---------- --------- --------- Balance at end of year $ 4,506 $ 3,303 $ 2,839 ========== ========= =========
The Bank identifies a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The accrual of interest is discontinued on impaired loans and no income is recognized until all recorded amounts of interest and principal are recovered in full. Retail loans and residential mortgages have been excluded from these calculations. The balance of impaired loans was $590,000 and $2,819,000 at December 31 and January 1, 1995, respectively. The associated allowance for loan losses for impaired loans was $433,000 and $380,000 at December 31 and January 1, 1995, respectively. During 1995, activity in the allowance for impaired loan losses included a provision of $380,000, write-offs of $369,000 and recoveries of $42,000. Interest income of $172,000 was recorded in 1995 while contractual interest in the same period amounted to $103,000. Cash collected on impaired loans in 1995 was $1,448,000, of which $1,276,000 was applied to principal and $172,000 was applied to interest. During the year ended December 31, 1995, three impaired loans totaling $891,000 were transferred to other real estate owned, and one impaired loan for $500,000 was transferred to EGSC as an equity investment. In the normal course of business, the Bank has made loans to certain officers, directors and their related interests. All loan transactions entered into between the Bank and such related parties were made on the same terms and conditions as transactions with all other parties. In management's opinion, such loans are consistent with sound banking practices and are within applicable regulatory lending limitations. The balance of these loans outstanding at December 31, 1995 and 1994 was approximately $8,600,000 and $7,500,000, respectively. In 1995, new loans and payments amounted to approximately $2,900,000 and $1,800,000, respectively. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE D - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: (Dollars in thousands) 1995 1994 ---------- --------- Premises $ 7,111 $ 6,418 Equipment 4,394 3,778 --------- --------- 11,505 10,196 Less accumulated depreciation (5,984) (5,370) --------- --------- $ 5,521 $ 4,826 ========= ========= The FASB issued a new standard, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement provides guidance on when assets should be reviewed for impairment, how to determine whether an asset or group of assets is impaired, how to measure an impairment loss, and the accounting for long lived-lived assets that a company plans to dispose of. The adoption of this new statement is not expected to have a material impact on the Corporation's consolidated financial position or results of operations. The Corporation is required to adopt this new standard for the year ended December 31, 1996. NOTE E - SHORT-TERM BORROWINGS AND CREDIT FACILITY Securities sold under agreements to repurchase are generally overnight transactions. These borrowings had interest rates of 3.3%, 3.0% and 2.5% and balances of $8,858,000, $10,499,000 and $10,618,000 at December 31, 1995, 1994 and 1993, respectively. Daily average balances and weighted average interest rates for the years ended December 31, 1995, 1994 and 1993 were $12,313,000, $10,762,000 and $8,914,000 and 3.3%, 2.5% and 2.8%, respectively. Maximum amounts outstanding at any month-end were approximately $16,037,000, $13,348,000 and $10,618,000 for the years ended December 31, 1995, 1994 and 1993, respectively. As of December 31, 1995, the Bank had a line of credit with the FHLB of Pittsburgh of approximately $34,500,000. Advances under this credit facility are payable on demand, bear interest at the federal fund's rate plus 25 basis points. Daily average balance and weighted average interest rates for the years ended December 31, 1995 and 1994 were $949,000 and $367,000 and 6.2% and 4.6%, respectively. Maximum amounts outstanding at any month-end in 1995 and 1994 were $10,000,000 and $2,000,000, respectively. There were no advances under this line in 1993 and no amounts outstanding at December 31, 1995 and 1994. FHLB advances are collateralized by a pledge of the Bank's entire portfolio of unencumbered investment securities, certain mortgage loans and a lien on the Bank's FHLB stock. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE F - OTHER NON-INTEREST EXPENSE The components of other non-interest expense are detailed as follows: (Dollars in thousands) 1995 1994 1993 ------- ------- ------ Purchased services $ 647 $ 707 $ 727 Telephone, postage and supplies 516 515 444 Marketing and corporate communications 359 459 191 Loan and deposit supplies 200 353 291 Director costs 281 235 238 Other 682 304 365 ------ ----- ----- $ 2,685 $ 2,573 $ 2,256 ======= ======= ======= NOTE G - INCOME TAXES The components of income taxes are detailed as follows: (Dollars in thousands) 1995 1994 1993 --------- --------- --------- Current $ 2,259 $ 1,721 $ 1,525 Deferred (394) (165) (324) -------- -------- -------- $ 1,865 $ 1,556 $ 1,201 ======= ======= ======= The income tax provision reconciled to the tax computed at the statutory federal rate was as follows: 1995 1994 1993 ------ ------ ------ Tax at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in taxes resulting from Tax-exempt loan and investment income (3.1) (4.8) (6.4) Other, net 0.4 0.9 1.4 ----- ----- ----- Applicable income tax 31.3% 30.1% 29.0% ==== ==== ==== FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE G - INCOME TAXES - Continued The net deferred tax asset consists of the following:
(Dollars in thousands) 1995 1994 1993 ------ ------ ------ Allowance for possible loan losses $ 1,243 $ 871 $ 728 Unrealized loss on securities available-for-sale 34 926 - Deferred loan fees 231 179 179 Accrued pension and deferred compensation 262 359 354 Other 82 50 40 ------ ------ ------ 1,852 2,385 1,301 Valuation allowance - - - ------ ------ ------ Total deferred tax asset 1,852 2,385 1,301 ------- ------ ------ Bond accretion (75) (72) (40) Accumulated depreciation - (38) (74) ------- ------ ------ Total deferred tax liabilities (75) (110) (114) ------- ------ ------ Net deferred tax asset $ 1,777 $ 2,275 $ 1,187 ======= ======= =======
The Corporation's main operating subsidiary, The First National Bank of West Chester, is not subject to Pennsylvania corporate income taxes, but is taxed based on the value of its capital stock. Pennsylvania Bank Shares Tax accrued by the bank amounted to $297,000, $228,000 and $306,000 in 1995, 1994 and 1993, respectively. NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Corporation's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities. Therefore, the Corporation had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. The estimated fair value of cash and cash equivalents, deposits with no stated maturities, short-term borrowings and commitments to extend credit, and outstanding letters of credit has been estimated to equal the carrying amount. Quoted market prices FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued were used to determine the estimated fair value of investment securities held-to-maturity and investment securities available-for-sale. Fair values of net loans and deposits with stated maturities were calculated using estimated discounted cash flows based on the year-end offering rate for instruments with similar characteristics and maturities. The estimated fair values and carrying amounts are summarized as follows:
1995 1994 ----------------------- -------------------------- Estimated Estimated (Dollars in thousands) Fair Carrying Fair Carrying Value Amount Value Amount --------- -------- --------- -------- Financial Assets Cash and cash equivalents $ 44,644 $ 44,644 $ 21,981 $ 21,981 Investment securities held-to-maturity 23,213 23,048 28,528 29,367 Investment securities available-for-sale 70,463 70,463 49,022 49,022 Net loans 242,772 238,081 235,542 235,823 Financial Liabilities Deposits with no stated maturities 229,039 229,039 226,640 226,640 Deposits with stated maturities 115,582 114,887 80,672 78,825 Short-term borrowings 8,858 8,858 10,499 10,499 Off-Balance-Sheet Investments Commitments for extended credit and outstanding letters of credit 78,287 78,287 75,849 75,849
NOTE I - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Bank is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risks in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Bank does not require collateral or other security to support financial instruments with credit risk. The contract amounts are as follows: FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE I - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK - Continued
(Dollars in thousands) 1995 1994 ---------- ---------- Financial instruments whose contract amounts represent credit risk Commitments to extend credit $ 73,087 $ 69,767 Standby letters of credit and financial guarantees written 5,200 6,082
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds residential or commercial real estate, accounts receivable, inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 1995 varies up to 100%; the average amount collateralized is 80%. All of the Bank's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Bank's primary market area, Chester County, Pennsylvania. Investments in state and municipal securities also involve governmental entities within the Bank's market area. The concentrations of credit by type of loan are set forth in Note C - Loans. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic sector. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers. NOTE J - REGULATORY MATTERS The Bank is required to maintain average reserve balances with the Federal Reserve Bank based upon deposit levels and other factors. The average amount of those reserve balances for the years ended December 31, 1995 and 1994 was approximately $2,141,000 and $2,055,000, respectively. Dividends are paid by the Corporation from its assets which are mainly provided by dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. The Bank, without the prior approval of regulators, can declare dividends to the Corporation totaling approximately $2,720,000 plus additional amounts equal to the net earnings of the Bank for the period from January 1, 1996 through the date of declaration, less dividends previously paid in 1996. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE K - EMPLOYEE BENEFIT PLANS 1. Defined Contribution Plans -------------------------- The Bank has a qualified deferred salary savings 401(k) plan (the "401(k) Plan") under which the Bank contributes $0.75 ($0.50 prior to 1994) for each $1.00 that the employees contribute, up to the first 5% of the employees' salary. The Bank's expenses were $123,000, $100,000 and $63,000 in 1995, 1994 and 1993, respectively. The Bank also has a qualified defined contribution pension plan (the "QDCP Plan") which was implemented on January 1, 1995. Under the QDCP Plan, the Bank will make annual contributions into the 401(k) Plan on behalf of each eligible participant, in an amount equal to 3% of salary up to $30,000 in salary, plus 6% in excess of $30,000. Contribution expense in 1995 under the QDCP Plan was $200,000. The Bank may make additional discretionary employer contributions subject to approval of the Board of Directors. 2. Defined Benefit Plans --------------------- In October 1994, the Board of Directors approved the termination of the Bank's qualified defined benefit retirement plan (the "QDB Plan") and the non-qualified supplemental defined benefit pension plan for executive officers (the "NQDB Plan") effective December 31, 1994. Distributions of participants' vested benefits in the QDB Plan took place in the fourth quarter of 1995. Accrued benefits from the terminated NQDB Plan were rolled over into a non-qualified defined contribution pension plan for executive officers (the "NQDCP Plan") effective December 31, 1994. Beginning in 1995, the Bank will make annual contributions to the NQDCP Plan equal to 3% of the participant's salary. The contribution expense under the NQDCP Plan in 1995 was $35,000. The Bank may make additional discretionary employer contributions subject to approval of the Board of Directors. The Bank-sponsored plans' funded status and amounts recognized in the consolidated financial statements for accumulated and projected benefit obligation, plan assets at fair market value and accrued pension cost for 1994 were $5,900,000, $5,689,000 and $407,000, respectively. The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 5.5% in 1994. The expected long-term rate of return on assets used in this calculation was 8.0% and the expected compensation rate change was 5.0% in 1994. Contributions to the QDB Plan, which are limited by federal income tax regulations, amounted to $327,000 in 1994. There were no contributions to the QDB Plan in 1993. Contributions to the NQDB Plan were $60,000 in 1994 and 1993. Net periodic pension cost for both plans was $364,000 and $272,000 in 1994 and 1993, respectively. The termination of the QDB Plan was accounted for at December 31, 1994 as a curtailment under SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." Accordingly, a curtailment gain of approximately $311,000 was recognized in the income statement in 1994. A settlement gain of approximately $190,000 was recorded in 1995 upon distribution of QDB Plan assets to participants. The termination of the NQDB Plan resulted in a loss of approximately $38,000 in 1994. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE L - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY Condensed financial information for First West Chester Corporation (parent corporation only) follows: CONDENSED BALANCE SHEETS December 31, ---------------------- (Dollars in thousands) 1995 1994 --------- -------- ASSETS Cash and cash equivalents $ 467 $ 712 Investment securities 415 373 Investment in subsidiaries, at equity 29,935 29,367 Other assets 452 48 -------- ---------- Total assets $ 31,269 $ 30,500 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 454 $ 398 Stockholders' equity 30,815 30,102 -------- -------- Total liabilities and stockholders' equity $ 31,269 $ 30,500 ======== ======== CONDENSED STATEMENTS OF INCOME
Year ended December 31, -------------------------------------- (Dollars in thousands) 1995 1994 1993 --------- -------- -------- INCOME Dividends from subsidiaries $ 3,609 $ 1,380 $ 1,057 Dividends from investment securities 21 24 23 Investment securities gains (losses), net 17 94 (136) Other income 30 107 106 ------- -------- -------- Total income 3,677 1,605 1,050 ------- -------- -------- EXPENSES Other expenses 145 128 120 ------- --------- -------- Total expenses 145 128 120 ------- --------- -------- Income before equity in undistributed income of subsidiaries 3,532 1,477 930 EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 568 2,130 2,500 ------- -------- -------- NET INCOME $ 4,100 $ 3,607 $ 3,430 ======== ======== ========
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE L - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - Continued CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31, -------------------------------------- (Dollars in thousands) 1995 1994 1993 ---------- ---------- -------- OPERATING ACTIVITIES Net income $ 4,100 $ 3,607 $ 3,430 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiary (568) (2,130) (2,500) Investment securities (gains) losses, net (17) (94) 136 (Increase) decrease in other assets (432) 5 3 (Decrease) increase in other liabilities (5) 13 - -------- -------- -------- Net cash provided by operating activities 3,078 1,401 1,069 -------- -------- -------- INVESTING ACTIVITIES Proceeds from sales and maturities of investment securities 57 219 81 -------- -------- -------- Net cash provided by investing activities 57 219 81 -------- -------- -------- FINANCING ACTIVITIES Dividends paid (1,495) (1,321) (1,293) Effect of treasury stock transactions (1,885) 5 126 --------- -------- -------- Net cash used in financing activities (3,380) (1,316) (1,167) --------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (245) 304 (17) Cash and cash equivalents at beginning of year 712 408 425 -------- -------- -------- Cash and cash equivalents at end of year $ 467 $ 712 $ 408 ========= ========= =========
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1995 and 1994 NOTE M - QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of the unaudited quarterly results of operations is as follows:
1995 ---- (Dollars in thousands, except per share) December 31, September 30, June 30, March 31, ----------- ------------ -------- -------- Interest income $ 7,287 $ 7,211 $ 7,217 $ 6,751 Interest expense 3,075 3,036 2,884 2,569 Net interest income 4,212 4,175 4,333 4,182 Provision for loan losses 482 400 435 349 Investment securities gains, net 9 - - - Income before income taxes 1,478 1,583 1,510 1,394 Net income 1,012 1,085 1,027 976 Per share Net income $ 0.59 $ 0.63 $ 0.58 $ 0.54 Dividends declared 0.26 0.23 0.20 0.20 1994 ---- Interest income $ 6,463 $ 6,164 $ 5,883 $ 5,864 Interest expense 2,384 2,259 2,019 2,057 Net interest income 4,080 3,905 3,864 3,806 Provision for loan losses 545 345 550 350 Investment securities gains, net 3 - - - Income before income taxes 1,509 1,244 1,184 1,226 Net income 1,046 873 829 859 Per share Net income $ 0.58 $ 0.49 $ 0.46 $ 0.48 Dividends declared 0.21 0.20 0.18 0.18
Report of Independent Certified Public Accountants -------------------------------------------------- Board of Directors First West Chester Corporation We have audited the accompanying consolidated balance sheets of First West Chester Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First West Chester Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As described in note A3 to the consolidated financial statements, the Corporation changed its method of accounting for certain investments in debt and equity securities in 1994. As described in note A8 to consolidated financial statements, the Corporation changed its method of accounting for income taxes in 1993. Philadelphia, Pennsylvania January 25, 1996 EX-23 4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 25, 1996 accompanying the consolidated financial statements included in the 1995 Annual Report to Shareholders which is incorporated by reference in the Annual Report of First West Chester Corporation and Subsidiary on Form 10-K for the year ended December 31, 1995. We hereby consent to the incorporation by reference of said report in the Registration Statement of First West Chester Corporation and Subsidiary on Form S-8 (File No.33-26325, effective January 4, 1989; and File No. 33-46575, effective March 23, 1992). GRANT THORNTON LLP /S/ GRANT THORNTON LLP - ---------------------- Philadelphia, Pennsylvania March 28, 1996 EX-27 5
9 This is Exhibit 27 of First West Chester Corporation's Form 10-K for the year ended December 31, 1995. 0000744126 FIRST WEST CHESTER CORP 1,000 12-MOS DEC-31-1995 DEC-31-1995 19,944 0 24,700 0 70,463 23,048 23,213 242,587 4,506 388,500 343,926 8,858 5,024 0 0 0 1,800 28,892 388,500 22,682 5,136 648 28,466 11,102 11,564 16,902 1,666 9 12,768 5,965 5,965 0 0 4,100 2.34 2.34 5.06 726 419 0 0 3,303 542 79 4,506 4,506 0 0
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