-----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, UZ/rWb4DhCCILfJPiTJQI9hkS9SCTd6iknhs2v12NTKmStMnA1UZrKK0VqYrekcg RKdQR+qJ0SF9UjKE2Ck3Yg== 0000744126-97-000003.txt : 19970329 0000744126-97-000003.hdr.sgml : 19970329 ACCESSION NUMBER: 0000744126-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 97566653 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996, 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. [ ] The aggregate market value of the Common Stock of the Registrant held by non-affiliates as of March 1, 1997, was approximately $44,585,000. The number of shares outstanding of Common Stock of the Registrant as of March 1, 1997, was 1,715,941. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Annual Report to Shareholders for the year ended December 31, 1996, is incorporated by reference into Parts I and II hereof. The Registrant's definitive Proxy Statement for its 1997 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 13 Item 3 - Legal Proceedings 14 Item 4 - Submission of Matters to a Vote of Security Holders 14 PART II: Item 5 - Market for the Corporation's Common Equity and Related Stockholder Matters 14 Item 6 - Selected Financial Data 15 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation 15 Item 8 - Financial Statements and Supplementary Data 15 Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 15 PART III: Item 10 - Directors and Executive Officers of the Corporation 15 Item 11 - Executive Compensation 16 Item 12 - Security Ownership of Certain Beneficial Owners and Management 16 Item 13 - Certain Relationships and Related Transactions 16 PART IV: Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 SIGNATURES 19
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 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. 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 was formed in 1995 for the purpose of holding the Bank's interest in and operating foreclosed real property until liquidation of such property. 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, 1996, the Bank had total assets of approximately $397 million, total loans of approximately $265 million, total deposits of approximately $352 million and employed 190 full-time equivalent persons. The Bank is a full service commercial bank offering a broad range of retail banking, commercial banking, trust and financial management 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 trust services. It administers and provides investment management services for estates, trusts, agency accounts and employee benefit plans. At December 31, 1996, the Bank's Financial Management Services Department administered or provided investment management for 726 accounts, which possessed assets with an aggregate market value of approximately $271 million. For the year ended December 31, 1996, gross income from the Bank's Financial Management Services Department and related activities amounted to approximately $1.9 million and accounted for 5.6% of the total of interest income and other income of the Bank for such period. -1- 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 also 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 $397 million as of December 31, 1996. 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 for the Bank. BUSINESS OF EGSC EGSC was formed in 1995 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 real property located in West Chester, Pennsylvania (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. During 1996, the property was liquidated. The proceeds from the liquidation were in excess of the transferred loan amount resulting in a gain which was included in noninterest income. 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 of the Currency ("OCC"), and the Federal Deposit Insurance Corporation ("FDIC"). Certain aspects of the Bank's operation are also subject to state laws. 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 -2- control more than 5% of the voting shares of such a bank. The Federal Reserve Board will consider numerous factors, including its capital adequacy guidelines before approving such acquisitions. For a description of certain applicable guidelines, see "Capital," Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Adequacy," and Part II, Item 8, "Note H - Capital Requirements" in the consolidated financial statements. 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. 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. 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 the Bank and for bank mergers in which the continuing bank is a national bank. 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. Under this formula, in 1997, the Bank, without affirmative governmental approvals, could declare aggregate dividends in 1997 of approximately $3.1 million, plus an amount approximately equal to the net income, if any, earned by the Bank for the period from January 1, 1997, through the date of declaration of such dividend less dividends previously paid in 1997, subject to the further limitations that a national bank can pay dividends only to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts and provided that the Bank would not become "undercapitalized" (as defined under federal law). If, in the opinion of the applicable regulatory authority, a bank or bank holding company under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank or bank holding company, could include the payment of dividends), such regulatory authority may require such bank or bank holding company to cease and desist from such practice, or to limit dividends in the future. Finally, the several regulatory authorities described herein, may from time to time, establish guidelines, issue policy statements and adopt regulations with respect to the maintenance of appropriate levels of capital by a bank or bank holding company under their jurisdiction. Compliance with the standards set forth in such policy statements, guidelines and regulations could limit the amount of dividends which the Corporation and the Bank may pay. Capital The Corporation and the Bank are both subject to minimum capital requirements and guidelines. The Federal Reserve Board measures capital adequacy for bank holding companies on the basis of a risk-based capital framework and a leverage ratio. The Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines currently provide for a minimum leverage ratio of Tier I capital to adjusted total assets of 3% for bank holding companies that meet certain criteria, including that they maintain the highest regulatory rating. -3- All other bank holding companies are required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The Federal Reserve Board has not advised the Corporation of any specific minimum leverage ratio under these guidelines which would be applicable to the Corporation. Failure to satisfy regulators that a bank holding company will comply fully with capital adequacy guidelines upon consummation of an acquisition may impede the ability of a bank holding company to consummate such acquisition, particularly if the acquisition involves payment of consideration other than common stock. In many cases, the regulatory agencies will not approve acquisitions by bank holding companies and banks unless their capital ratios are well above regulatory minimums. The Bank is subject to capital requirements which generally are similar to those affecting the Corporation. The minimum ratio of total risk-based capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. Capital may consist of equity and qualifying perpetual preferred stock, less goodwill ("Tier I capital"), and certain convertible debt securities, qualifying subordinated debt, other preferred stock and a portion of the reserve for possible credit losses ("Tier II capital"). A depository institution's capital classification depends upon its capital levels in relation to various relevant capital measures, which include a risk-based capital measure and a leverage ratio capital measure. A depository institution is considered well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below any such measure and critically undercapitalized if it fails 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, 1996, 1995 and 1994, the Corporation and the Bank had capital in excess of all regulatory minimums and the Bank was "well capitalized." See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition" and "-- Capital Adequacy" and Part II, Item 8, "Note H - Capital Requirements" in the consolidated financial statements. Deposit Insurance Assessments The Bank is subject to deposit insurance assessments by the FDIC's Bank Insurance Fund ("BIF"). The FDIC has developed a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to its level of risk. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or undercapitalized and the institution's "supervisory subgroups": Subgroup A, B or C. Subgroup A institutions are financially sound institutions with a few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. Based on its capital and supervisory subgroups, each BIF 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). As of January 1, 1997, well capitalized Subgroup A institutions will pay between 0.00% and 0.10% per annum. In accordance with the Deposit Insurance Act of 1996 an additional assessment by the Financing Corporation ("FICO") will become applicable to all insured institutions as of January 1, 1997. This assessment is not tied to the FDIC risk classification. The BIF FICO assessment will be 1.296 basis points for 1997. For the first quarter of 1997, the Bank's assessments for BIF and BIF FICO are $0.00 and $10,163, respectively. -4- Other Matters Federal and state law also contains a variety of other provisions that affect the operations of the Corporation and the Bank including certain reporting requirements, regulatory standards and guidelines for real estate lending, "truth in savings" provisions, the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch, certain restrictions on investments and activities of 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. 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. ACCOUNTING CHANGES Impairment of Long-Lived Assets The Corporation adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed of" on January 1, 1996. See Note A-7 in Notes to Consolidated Financial Statements included in the Corporation's 1996 Annual Report to Shareholders, incorporated by reference. Mortgage Servicing Rights The Coporation adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" on January 1, 1996. See Note A-6 in Notes to Consolidated Financial Statements included in the Corporation's 1996 Annual Report to Shareholders, incorporated by reference. -5- Stock Based Compensation Plans The Corporation adopted SFAS No. 123, "Accounting for Stock Based Compensation Plans" on September 1, 1996. See Note A-11 in Notes to Consolidated Financial Statements included in the Corporation's 1996 Annual Report to Shareholders, incorporated by reference. Accounting for Transfer and Services of Financial Assets and Establishment of Liability The Corporation will adopt the Financial Accounting Standards Board ("FASB") No. 125, "Accounting for Transfer and Services of Financial Assets and Establishment of Liability." as of January 1, 1997. See Note A-15 in Notes to Consolidated Financial Statements included in the Corporation's 1996 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 1996 Annual Report to Shareholders, incorporated herein by reference. -6- 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) 1996 Compared to 1995 1995 Compared to 1994 --------------------------------- ------------------------------ INTEREST INCOME - --------------- Federal funds sold $ 153 $ (67) $ 86 $ 278 $ 210 $ 488 Investment securities Taxable 777 130 907 (209) 540 331 Tax-exempt (73) -- (73) (18) (41) (59) ----- ----- ----- ----- ----- ----- Total investment securities 704 130 834 (227) 499 272 Loans Taxable 556 (423) 133 1,342 1,981 3,323 Tax-exempt 10 44 54 (51) 42 (9) ----- ----- ----- ----- ----- ----- Total loans 566 (379) 187 1,291 2,023 3,314 ----- ----- ----- ----- ----- ----- Total interest income 1,423 (316) 1,107 1,342 2,732 4,074 ----- ----- ----- ----- ----- ----- INTEREST EXPENSE Savings, NOW and money market deposits 207 (407) (200) (431) 780 349 Certificates of deposits and other time 787 126 913 1,281 1,039 2,320 ----- ----- ----- ----- ----- ----- Total interest bearing deposits 994 (281) 713 850 1,819 2,669 Securities sold under repurchase agreements (85) 2 (83) 39 95 134 Other borrowings (59) -- (59) 27 15 42 ----- ----- ----- ----- ----- ----- Total Interest expense 850 (279) 571 916 1,929 2,845 ----- ----- ----- ----- ----- ----- Net Interest income $ 573 $ (37) $ 536 $ 426 $ 803 $1,229 ===== ===== ===== ===== ===== ===== 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 13 of the Corporation's 1996 Annual Report to Shareholders.
-7- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES LOAN PORTFOLIO BY TYPE AT DECEMBER 31,
(Dollars in thousands) 1996 1995 1994 1993 1992 ----------------- ----------------- ----------------- ---------------- -------------- Amount % Amount % Amount % Amount % Amount % ------ - ------ - ------ - ------ - ------ - Commercial loans $ 87,932 34% $ 86,686 36% $ 87,689 37% $ 88,632 40% $ 82,602 39% Real estate - construction 11,447 4% 9,372 4% 4,607 2% 6,327 3% 3,724 2% Real estate - other 109,179 41% 100,814 41% 101,589 42% 87,389 40% 85,555 40% Consumer loans (1) 39,803 15% 33,836 14% 32,984 14% 27,414 12% 29,815 14% Lease financing receivables 16,221 6% 11,879 5% 12,257 5% 11,671 5% 10,879 5% ------- ------- ------- -------- ------- Total gross loans 264,582 100% 242,587 100% 239,126 100% 221,433 100% 212,575 100% Allowance for possible loan losses (5,218) (4,506) (3,303) (2,839) (2,300) ------- ------- ------- --------- ------- Total loans $259,364 $238,081 $235,823 $218,594 $210,275 ======= ======= ======= ======= ======= NOTES: (1) Consumer loans include open-end home equity lines of credit and credit card receivables. (2) At December 31, 1996 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 17-20 of the Corporation's 1996 Annual Report to Shareholders for additional information.
-8- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MATURITIES AND RATE SENSITIVITY OF LOANS DUE TO CHANGES IN INTEREST RATES AT DECEMBER 31, 1996
Maturing Maturing After 1 Year Maturing Within And Within After (Dollars in thousands) 1 Year 5 Years 5 Years Total ------ ------- ------- ----- Commercial loans $67,166 $5,924 $14,842 $87,932 Real Estate - construction 11,447 -- -- 11,447 ------ ----- ------ ------ Total $78,613 $5,924 $14,842 $99,379 ====== ===== ====== ====== Loans maturing after 1 year with: - --------------------------------- Fixed interest rates $5,924 $14,842 Variable interest rates -- -- ----- ------ Total $5,924 $14,842 ===== ====== 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.
-9- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES YIELD BY MATURITY AT DECEMBER 31, 1996
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 -- 1,483 -- -- 1,483 U.S. Government agency -- -- -- -- -- Mortgage-backed securities -- 1,213 806 126 2,145 State and municipal 1,812 1,495 2,410 25 5,742 Corporate securities 1,001 4,121 -- -- 5,122 Asset-backed -- -- 1,000 175 1,175 ----- ------ ------ ------ ------ 2,813 8,312 4,216 326 15,667 ----- ------ ------ ------ ------ Available-for-Sale - ------------------ U.S. Treasury 5,498 3,998 -- -- 9,496 U.S. Government agency -- 10,993 3,486 -- 14,479 Mortgage-backed securities 237 6,551 10,386 30,245 47,419 State and municipal -- -- -- 254 254 Asset-backed -- -- -- 1,268 1,268 Mutual Funds -- -- -- 7,793 7,793 Other equity securities -- -- -- 1,666 1,666 ----- ------ ------ ------ ------ 5,735 21,542 13,872 41,226 82,375 ----- ------ ------ ------ ------ Total Investment securities $8,548 $29,854 $18,088 $41,552 $98,042 ===== ====== ====== ====== ====== Percent of portfolio 8.72% 30.45% 18.45% 42.38% 100.00% ==== ===== ===== ===== ====== Weighted average yield 5.73% 6.32% 6.57% 5.99% 6.17% ==== ==== ==== ==== ==== 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, 1996, 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 $7,793,000 with a market value of $7,535,000. 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.
-10- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES AT DECEMBER 31,
1996 1995 1994 ------------------------ ------------------------- ------------------------- Book Market Book Market Book Market (Dollars in thousands) Value Value Value Value Value Value ----- ----- ----- ----- ----- ----- Held-to-Maturity - ---------------- U.S. Treasury $ 1,483 $ 1,482 $ 1,473 $ 1,485 $ 1,464 $ 1,365 U.S. Government agency -- -- 1,501 1,496 1,500 1,416 Mortgage-backed securities 2,145 2,130 2,685 2,689 3,223 3,039 State and municipal 5,742 5,834 4,759 4,862 5,603 5,525 Corporate securities 5,121 5,123 11,806 11,867 15,455 15,130 Asset-backed 1,176 1,180 824 814 2,122 2,053 Mutual funds -- -- -- -- -- -- Other equity securities -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ $15,667 $15,749 $23,048 $23,213 $29,367 $28,528 ====== ====== ====== ====== ====== ====== Available-for-Sale - ------------------ U.S. Treasury $ 9,529 $ 9,529 $13,091 $13,091 $12,761 $12,761 U.S. Government agency 14,503 14,503 12,176 12,176 -- -- Mortgage-backed securities 47,031 47,031 34,475 34,475 25,446 23,446 State and municipal 278 278 281 281 268 268 Corporate securities -- -- 1,079 1,079 3,081 3,081 Asset-backed 1,268 1,268 -- -- 107 107 Mutual Funds 7,735 7,735 7,733 7,733 7,764 7,764 Other equity securities 1,864 1,864 1,628 1,628 1,595 1,595 ------ ------ ------ ------ ------ ------ $82,008 $82,008 $70,463 $70,463 $49,022 $49,022 ====== ====== ====== ====== ====== ======
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS, $100,000 OR MORE, AT DECEMBER 31, 1996
Due Within Over 3 Months Over 6 Months Due Over (Dollars in thousands) 3 Months Through 6 Months Through 12 Months 12 Months Total ----------- ---------------- ----------------- --------- ----- Certificates of Deposit $100,000 or more $ 1,363 $ 3,115 $ 3,098 $ 4,403 $11,979
-11- FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES EFFECT OF NONACCRUING LOANS ON INTEREST FOR YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Interest income which would have been recorded $ 42 $ 103 $432 $225 $ 61 Interest income that was received from customer 1 172 -- -- -- ----- ----- --- --- ---- $ 41 $ (69) $432 $225 $ 61 ===== ===== === === ==== 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.
-12- 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. 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 Date Banking 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
-13- 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 publicly traded over the counter. Trading is sporadic. Information regarding high and low bid quotations is incorporated herein by reference from the Corporation's 1996 Annual Report to Shareholders, attached as an exhibit hereto. As of March 1, 1997, there were approximately 833 shareholders of record of the Corporation's Common Stock. 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, 1996, 430 shareholders of the Corporation, representing approximately 68,000 shares of the Corporation's Common Stock, were participants in the DRIP. The DRIP purchased approximately $297,000 worth of the Corporation's Common Stock for the accounts of the participating shareholders during the year ended December 31, 1996. 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, (ii) shares of Common Stock and cash, or (iii) cash, as determined by the Board of Directors. Historically, the shares of Common Stock constituting the stock bonuses under the Stock Bonus Plan have been purchased by the Corporation on the open market through an independent agent specified by the Corporation's Board of Directors. At the annual meeting of shareholders on March 18, 1997, the shareholders approved an amendment of the stock bonus plan to permit the award of stock bonuses with newly issued shares or shares held in the Corporation's treasury. Approximately $262,000 in cash bonuses were paid in 1997 under the Stock Bonus Plan for services rendered by the executive officers and other employees of the Bank during 1996. 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 acquire the Common Stock of the Corporation. Under the 1995 Stock Option Plan, 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. To date the Corporation has awarded options to purchase 31,500 shares to key employees and 16,500 shares to directors pursuant to the 1995 Stock Option Plan. -14- The Corporation declared cash dividends per share on its Common Stock during each quarter of the fiscal years ended December 31, 1996 and 1995, as set forth in the following table (which have been adjusted for the stock split which occurred in October, 1996): Dividends --------- Amount Per Share ---------------- 1996 1995 ---- ---- First Quarter........................................ $ 0.23 $ 0.20 Second Quarter....................................... 0.23 0.20 Third Quarter........................................ 0.25 0.23 Fourth Quarter....................................... 0.29 0.26 ----- ----- Total.............................................. $ 1.00 $ 0.89 ===== ===== 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 1996 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 1996 Annual Report to Shareholders, attached as an exhibit hereto. 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 1996 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 21, 1997, for its 1997 Annual Meeting of Shareholders. -15- Item 11. Executive Compensation. - -------- ----------------------- The information called for by this item is incorporated herein by reference to the Corporation's Proxy Statement dated February 21, 1997, for its 1997 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 21, 1997, for its 1997 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 21, 1997, for its 1997 Annual Meeting of Shareholders. 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 22 at December 31, 1996 and 1995 Consolidated Statements of Page 23 Income for the years ended December 31, 1996, 1995 and 1994 Consolidated Statement of Page 24 Changes In Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Page 25 Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Pages 26 to 42 Financial Statements Report of Independent Certified Public Accountants Page 43 -16- The Consolidated Financial Statements listed in the above index, together with the report thereon of Grant Thornton LLP dated January 24, 1997, which are included in the Corporation's Annual Report to Shareholders for the year ended December 31, 1996, 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. (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 Decem ber 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 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. (d) Copy of the Corporation's Amended and Restated Stock Bonus Plan, is incorporated by reference to the appendix to the Corporation's Proxy Statement for the 1997 annual meeting of shareholders as filed with the SEC via EDGAR. -17- (e) 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. (f) 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. (g) Copy of the Corporation's Amended and Restated 1995 Stock Option Plan, is incorporated by reference to the appendix to the Corporation's Proxy Statement for the 1997 annual meeting of shareholders as filed with the SEC via EDGAR. * 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, 1996. 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 1996 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, 1997. * 27. Financial Data Schedule. A Financial Data Schedule is being ------------------------- submitted with the Corporation's 1996 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 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, 1996. -18- 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 28, 1997 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 28, 1997. 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) -19- (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 -20- Index to Exhibits Exhibits - -------- 13 The Corporation's Annual Report to Shareholders for the year ended December 31, 1996. 23 Consent of Grant Thornton LLP. 27 Financial Data Schedule. -21- EX-13 2 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES FIVE-YEAR STATISTICAL SUMMARY (Dollars in thousands, except per share)
December 31 -------------------------------------------------------------- STATEMENTS OF CONDITION 1996 1995 1994 1993 1992 - ----------------------- -------- -------- -------- -------- ------ Assets $397,684 $388,500 $348,099 $351,073 $315,543 Loans 264,582 242,587 239,126 221,433 212,575 Investment securities 97,675 93,511 78,389 92,829 66,817 Deposits 351,266 343,926 305,465 307,355 274,446 Stockholders' equity 33,175 30,692 28,299 27,767 25,546 Financial Management Services assets, at market value 271,212 255,992 256,998 240,189 229,109
Year Ended December 31 --------------------------------------------------------------
STATEMENTS OF INCOME 1996 1995 1994 1993 1992 - -------------------- -------- -------- -------- -------- ------ Interest income $ 29,627 $ 28,466 $ 24,374 $ 23,471 $ 24,293 Interest expense 12,135 11,564 8,719 9,405 10,985 ------- ------- ------- ------- ------- Net interest income 17,492 16,902 15,655 14,066 13,308 Provision for possible loan losses 1,079 1,666 1,790 1,524 1,435 ------- ------- ------- ------- ------- Net interest income after provision for possible loan losses 16,413 15,236 13,865 12,542 11,873 Noninterest income 3,562 3,497 3,514 2,929 2,709 Noninterest expense 13,632 12,768 12,216 11,329 10,075 ------- ------- ------- ------- ------- Income before income taxes and cumulative effect of accounting method change 6,343 5,965 5,163 4,142 4,507 Income taxes 2,038 1,865 1,556 1,201 1,253 ------- ------- ------- ------- ------- Income before cumulative effect of accounting method change 4,305 4,100 3,607 2,941 3,254 Cumulative effect of accounting method change - - - 489 - Net income $ 4,305 $ 4,100 $ 3,607 $ 3,430 $ 3,254 ======= ======= ======= ======= ======= PER SHARE (1) Income before cumulative effect of accounting method change $ 2.51 $ 2.34 $ 2.01 $ 1.64 $ 1.81 Cumulative effect of accounting method change - - - 0.27 - ------- ------- ------- ------- ------- Net income $ 2.51 $ 2.34 $ 2.01 $ 1.91 $ 1.81 ======= ======= ======= ======= ======= Cash dividends declared $ 1.00 $ 0.89 $ 0.77 $ 0.69 $ 0.64 Book value 19.33 17.92 15.72 15.43 14.25 Weighted average shares outstanding 1,718,025 1,752,413 1,799,784 1,799,352 1,796,268 (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 1996 was another profitable year for the Corporation as net income increased $205,000 or 5.0% to $4,305,000 from $4,100,000 in 1995. The improvement was primarily the result of an industry-wide reduction in Federal Deposit Insurance Corporation ("FDIC") insurance premiums, a gain from the sale of property owned by EGSC, and a lower provision for loan losses, partially offset by tighter net interest margins and increased operating expenses. Net income for 1995 increased $493,000 or 13.7% from $3,607,000 in 1994, primarily the result of improved net interest margins offset by increased operating expenses. On a per share basis, 1996 earnings were $2.51, an increase of 7.3% over 1995 earnings of $2.34. On a per share basis, 1995 earnings were 16.4% higher than 1994 earnings of $2.01. Cash dividends per share in 1996 were $1.00, a 12.4% increase over the 1995 dividend of $0.89. Cash dividends per share in 1995 were 15.6% higher than the 1994 dividend of $0.77. Over the past ten years, the Corporation's practice has been to pay a dividend of at least 35.0% of net income. Performance ratios for 1996 were down slightly from 1995, reflecting a reduction in net income growth, while remaining favorable compared with 1994 numbers. PERFORMANCE RATIOS 1996 1995 1994 - ------------------ -------- -------- ------ Return on Average Assets 1.12% 1.14% 1.05% Return on Average Equity 13.59% 13.68% 12.83% Earnings Retained 60.19% 62.05% 61.74% Dividend Payout Ratio 39.81% 37.95% 38.26% 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 3.1% or $536,000, from $17,155,000 in 1995 to $17,691,000 in 1996, compared to a 7.7% increase of $1,229,000 from 1994 to 1995. The net yield on interest-earning assets, on a tax equivalent basis, was 4.92% for the year ended 1996 compared to 5.06% in 1995, and 4.96% in 1994. The decrease in net yield on interest-earning assets from 1995 to 1996 was attributable to reduced loan demand during the first three quarters of 1996. The increase in net yield on interest-earning assets from 1994 to 1995 reflected a faster increase in earning asset yields during 1995 than corresponding funding costs. The Corporation anticipates continued pressure on the net yield on interest-earning assets as competition for new loan business remains very strong and incremental deposit growth remains rate sensitive. AVERAGE INTEREST RATES (ON A TAX EQUIVALENT BASIS) YIELD ON 1996 1995 1994 - -------- ------- ------- ------ Interest-Earning Assets 8.29% 8.46% 7.67% Interest-Bearing Liabilities 4.13 4.18 3.33 ---- ---- ---- Net Interest Spread 4.16 4.28 4.34 Contribution of Interest-Free Funds 0.76 0.78 0.62 ---- ---- ---- Net Yield on Interest-Earning Assets 4.92% 5.06% 4.96% ==== ==== ==== 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 $86,000, from $648,000 in 1995 to $734,000 in 1996. The 13.3% increase in 1996 was attributed to a $2.6 million increase in average balances, partially offset by a 49 basis point (a basis point equals one hundredth of one percent) decrease in rates compared to the same period in 1995. The 1996 increase in average federal fund balances of $2.6 million was the result of reduced loan demand during the first three quarters of 1996. The 305.0% increase in 1995 was attributed to a $ 7.0 million increase in average balances and a 191 basis point increase in rates compared to the same period in 1994. INTEREST INCOME ON INVESTMENT SECURITIES On a tax equivalent basis, interest income on investment securities increased $834,000, from $5,203,000 in 1995 to $6,037,000 in 1996, compared to a $272,000 increase from 1994 to 1995. The 16.0% increase in investment interest income from 1995 to 1996 was the result of a 13 basis point increase in the yield on investment securities, and an $11.7 million increase in average balances. The 5.5% increase in investment interest income from 1994 to 1995 was the result of a 58 basis point increase in yield investment securities, partially offset by a $4.1 million decrease in average balances. 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 $187,000, from $22,868,000 in 1995 to $23,055,000 in 1996. The 0.8% increase in interest income during 1996 was attributable to a $6.0 million increase in average loans outstanding, offset by a 16 basis point decrease in rates earned. Loan interest income, on a tax equivalent basis, increased $3,314,000, from $19,554,000 in 1994 to $22,868,000 in 1995. The 16.9% increase in interest income during 1995 was attributable to a $15.2 million increase in average loans outstanding and an 83 basis point increase in rates earned. Competition for new and existing loan relationships has been very strong the last three years, especially 1996. Price and fee competition on loans over $500,000 has been especially strong. The Corporation expects that this pricing pressure will continue, therefore reducing overall loan yields and the net interest yield on interest earnings assets. INTEREST EXPENSE ON DEPOSIT ACCOUNTS Interest expense on deposits was $11,815,000 for 1996 compared to $11,102,000 and $8,433,000 in 1995 and 1994, respectively. The 6.4% increase in interest expense on deposits from 1995 to 1996 was the result of a $20.2 million increase in average interest-bearing deposits, partially offset by a 5 basis point decrease in rates paid. The 31.6% increase in interest expense for deposits from 1994 to 1995 was the result of an 85 basis point increase in rates paid on interest-bearing deposits and a $12.9 million increase in average balances during 1995. 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,
1996 1995 1994 ---------------------- ------------------------ ------------------------ (Dollars in thousands) Daily Daily Daily Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- ASSETS Federal funds sold $ 13,603 $ 734 5.40% $ 11,001 $ 648 5.89% $ 4,024 $ 160 3.98% Investment securities Taxable 93,809 5,863 6.25 81,098 4,956 6.11 84,927 4,625 5.45 Tax-exempt (1) 2,519 174 6.91 3,576 247 6.91 3,801 306 8.05 ------- ------ ------- ------ ------- ------ Total investment securities 96,328 6,037 6.27 84,674 5,203 6.14 88,728 4,931 5.56 ------- ------ ------- ------ ------- ------ Loans (2) Taxable 242,862 22,320 9.19 236,923 22,187 9.36 221,185 18,864 8.53 Tax-exempt (1) 6,835 735 10.75 6,734 681 10.11 7,271 690 9.49 ------- ------ ------- ------ ------- ------ Total loans 249,697 23,055 9.23 243,657 22,868 9.39 228,456 19,554 8.56 ------- ------ ------- ------ ------- ------ Total interest-earning assets 359,628 29,826 8.29 339,332 28,719 8.46 321,208 24,645 7.67 ------ ------ ------ Noninterest-earning assets Allowance for possible loan losses (4,848) (3,796) (3,164) Cash and due from banks 17,153 16,037 17,654 Other assets 13,814 11,827 9,176 ------- ------- ------- Total assets $385,747 $363,400 $344,874 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Savings, NOW, and money market deposits $168,528 5,231 3.10 $162,332 5,431 3.35 $177,414 5,082 2.86 Certificates of deposit and other time 115,243 6,584 5.71 101,197 5,671 5.60 73,238 3,351 4.58 ------- ------ ------- ------ ------- ------ Total interest-bearing deposits 283,771 11,815 4.16 263,529 11,102 4.21 250,652 8,433 3.36 Securities sold under repurchase agreements 9,713 320 3.29 12,313 403 3.27 10,762 269 2.50 Other borrowings -- -- 949 59 6.22 367 17 4.63 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 293,484 12,135 4.13 276,791 11,564 4.18 261,781 8,719 3.33 ------ ------ ------ Noninterest-bearing liabilities Noninterest-bearing demand deposits 55,018 52,177 50,872 Other liabilities 5,574 4,471 4,116 ------- ------- ------- Total liabilities 354,076 333,439 316,769 Stockholders' equity 31,671 29,961 28,105 ------- ------- ------- Total liabilities and stockholders' equity $385,747 $363,400 $344,874 ======= ======= ======= Net interest income $17,691 $17,155 $15,926 ====== ====== ====== Net yield on interest-earning assets 4.92% 5.06% 4.96% ===== ===== ==== (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 1996, 1995, and 1994. (2) Nonaccruing 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 7.7% and 5.1% in 1996 and 1995, respectively, the components have not grown proportionately. During 1996, average savings, NOW, and money market deposits increased $6.2 million or 3.8%, while average certificates of deposit and other time deposits increased $14.0 million or 13.9%. 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%. The Corporation's effective rate on interest-bearing deposits changed from 3.89%, 4.20%, 4.26%, and 4.34% in the first, second, third, and fourth quarters of 1995, respectively, to 4.18%, 4.12%, 4.10%, and 4.15% in the first, second, third, and fourth quarters of 1996, respectively. PROVISION FOR POSSIBLE LOAN LOSSES During 1996, the Corporation recorded a provision for possible loan losses of $1,079,000, compared to $1,666,000 and $1,790,000 in 1995 and 1994, respectively. Net charge-offs in 1996 were $367,000, down from $463,000 and $1,326,000 in 1995 and 1994, respectively. Net charge-offs as a percentage of average loans outstanding were 0.15%, 0.19%, and 0.58% for 1996, 1995, and 1994, respectively. The 1996 decrease in provision for loan losses related to the total allowance level of over $5.2 million (1.97% of loans) and the decline in non-accrual loans from 1994 levels. See "Asset Quality and the Allowance For Possible Loan Losses" for additional information. NONINTEREST INCOME Total noninterest income increased $65,000 or 1.9%, from $3,497,000 in 1995 to $3,562,000 in 1996, compared to a decrease of $17,000 or 0.5% from 1994 to 1995. The primary component of noninterest income was Financial Management Services (formerly known as the Trust Department) revenue, which increased $25,000 or 1.4%, from $1,836,000 in 1995 to $1,861,000 in 1996, compared to an increase of $72,000 or 4.1% from 1994 to 1995. Market value of Financial Management Services assets under management increased $15.2 million or 5.9%, from $256.0 million at the end of 1995 to $271.2 million at the end of 1996, and declined $1.0 million or 0.4% from 1994 to 1995. The 1996 increase in market value of assets under management was attributable to new business development and market value appreciation. The 1995 decline in market value of assets under management was primarily the result of the distribution of two defined benefit pension plans totaling $27.1 million, partially offset by increases in new business and market value appreciation. Service charges on deposit accounts decreased $44,000 or 4.9% in 1996, while average deposits went up 7.3%. This decrease relates to 1996 changes in the Bank's service charge structure. In 1995, service charges on deposit accounts increased 0.7%, while average deposits grew 4.7%, a result of increases in the earnings credit paid to commercial checking customers. Other noninterest income included a gain of $135,000 relating to the sale of a property by EGSC in 1996 and a $190,000 and $273,000 gain relating to the termination of the Corporation's defined benefit pension plans in 1995 and 1994, respectively. Other noninterest income, excluding the above gains, was $710,000, $567,000, and $585,000 in 1996, 1995, and 1994, respectively. See Note M - Employee Benefit Plans - for additional information on pension plan changes. NONINTEREST EXPENSE Total noninterest expense increased $864,000 or 6.8%, from $12,768,000 in 1995 to $13,632,000 in 1996, compared to an increase of $552,000 or 4.5% from 1994 to 1995. The growth in noninterest expense reflects the increased costs incurred to service the Corporation's expanding customer base. The components of noninterest expense changes are discussed below. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Salary and employee benefits increased $662,000 or 9.4%, from $7,073,000 in 1995 to $7,735,000 in 1996. The increase in 1996 was a result of an overall 4.0% salary increase and a 4.4% increase in staff, partially offset by decreases in pension costs. Salary and employee benefits increased $592,000 or 9.1% from 1994 to 1995, primarily the result of an overall 4.0% salary increase, a 7.7% increase in staff and bonus payment increases, partially offset by decreases in life insurance premiums and pension costs. The Corporation's full-time equivalents were 190, 182, and 169 at the end of 1996, 1995, and 1994, respectively. Occupancy, equipment and data processing expense increased $283,000 or 12.0%, from $2,364,000 in 1995 to $2,647,000 in 1996. Occupancy, equipment and data processing expense increased $108,000 or 4.8% from 1994 to 1995. The increases in 1996 from 1995 were primarily a result of building renovations and costs related to the teller on-line system and check imaging projects. The increases in 1995 from 1994 were primarily the result of increased personal computer costs and MAC system transaction volume, partially offset by decreased costs associated with maintenance on equipment. During 1996, the Federal Deposit Insurance Corporation ("FDIC") reduced the Bank Insurance Fund ("BIF") deposit insurance premiums to the statutory minimum of $500 per quarter for the best rated banks. The 1995 rate paid was $2.30 per $1,000 in deposits for the first six months and $.040 per $1,000 in deposits for the balance of the year. FDIC insurance was $2,000, $349,000, and $678,000 in 1996, 1995, and 1994, respectively. This represents a decrease of $347,000 or 99.4% from 1995 to 1996 and a decrease of $329,000 or 48.5% from 1994 to 1995. FDIC insurance is calculated based on quarter-end deposits and paid quarterly. Effective January 1, 1997, the BIF insurance premiums have been set at $0.13 per $1,000 in deposits for the best rated banks. This rate is effective through June 30, 1997. Bank shares tax was 0.97%, 0.99%, and 0.81% of average stockholders' equity for 1996, 1995, and 1994, respectively. The Pennsylvania Bank Shares Tax is based primarily on Bank stockholders' equity and paid annually. INCOME TAXES Income tax expense was $2,038,000 in 1996 compared to $1,865,000 in 1995 and $1,556,000 in 1994. This represented an effective tax rate of 32.1%, 31.3%, and 30.1%, respectively. The primary reason for the increase in the effective tax rates each year was a decrease in tax-exempt assets as a percentage of total assets. Average tax-exempt assets as a percentage of total average assets was 2.4%, 2.8%, and 3.2% in 1996, 1995, and 1994, respectively. LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for business expansion. Liquidity management addresses the Corporation's ability to meet deposit withdrawals either on demand or at contractual maturity, to repay borrowings as they mature, and to make new loans and investments as opportunities arise. Liquidity is monitored as a regular part of Bank operations, enabling management 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 noninterest-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, noninterest-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) 1996 1995 1994 ----------------------- ------------------------ --------------------- Average Effective Average Effective Average Effective DEPOSIT TYPE Balance Yield Balance Yield Balance Yield ------------ ------- --------- ------- --------- ------- --------- NOW $ 47,984 2.20% $ 42,974 2.32% $ 41,985 2.30% Money Market 28,974 3.09 29,610 3.23 32,962 2.68 Statement Savings 48,834 3.24 46,347 3.64 51,468 3.06 Other Savings 4,222 2.75 4,657 2.73 5,571 2.60 CDS Less than $100,000 102,566 5.76 89,866 5.67 64,551 4.57 ------- -------- -------- Total Core Deposits 232,580 4.11 213,454 4.15 196,537 3.31 Noninterest-Bearing Demand Deposits 55,018 - 52,177 - 50,872 - -------- -------- -------- Subtotal 287,598 - 265,631 - 247,409 - Tiered Savings 38,514 4.11 38,744 4.29 45,427 3.33 CDS Greater than $100,000 12,677 5.36 11,331 5.11 8,688 4.66 -------- -------- --------- Total Deposits $338,789 - $315,706 - $301,524 - ======= ======= =======
The Bank, as a member of the Federal Home Loan Bank ("FHLB"), maintains a line of credit secured by the Bank's mortgage-related assets. This line of credit was approximately $8 million as of December 31, 1996. The line of credit at the FHLB at December 31, 1995 was approximately $34 million. The reduction in the line of credit available was the result of a system wide policy change by the FHLB. However, the Bank's overall borrowing capacity at the FHLB remains over $90 million. The goal of interest rate sensitivity management is to avoid fluctuating net interest margins and 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 ($109.5) million or 27.5% of total assets at December 31, 1996, compared with ($45.6) million or 11.7% of total assets at the end of 1995. The Corporation's gap position is one factor used to evaluate interest rate risk and the stability of net interest margins. Other factors include computer simulations of what might happen to net interest income under various interest rate forecasts and scenarios. Management monitors interest rate risk as a regular part of bank operations with the intention of maintaining a stable net interest margin. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1996
(Dollars in thousands) One Over Within Through Five Non-Rate One Year Five Years Years Sensitive Total ASSETS Federal funds sold $ 4,800 $ - $ - $ - $ 4,800 Investment securities 19,782 45,820 32,073 - 97,675 Loans and leases 124,332 124,524 15,726 (5,218) 259,364 Cash and cash equivalents - - - 21,956 21,956 Other assets - - - 13,889 13,889 -------- --------- ------- ------- -------- Total assets $ 148,914 $ 170,344 $ 47,799 $ 30,627 $ 397,684 ======== ======= ======= ======= ======== LIABILITIES AND CAPITAL Noninterest-bearing deposits $ - $ - $ - $ 63,591 $ 63,591 Interest bearing deposits 250,518 37,157 - - 287,675 Borrowed funds 7,943 - - - 7,943 Other liabilities - - - 5,300 5,300 Capital - - - 33,175 33,175 -------- --------- ------- ------- -------- Total liabilities and capital $ 258,461 $ 37,157 $ - $102,066 $ 397,684 ======== ========= ======= ======= ======== Net interest rate sensitivity gap $(109,547) $ 133,187 $ 47,799 $(71,439) $ - ======== ======= ======= ======= ======== Cumulative interest rate sensitivity gap $(109,547) $ 23,640 $ 71,439 $ - $ - ======== ======= ======= ======= ======== Cumulative interest rate sensitivity gap divided by total assets (27.5)% 5.9% 18.0% - -
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 collectible 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 increased from 1.86% at December 31, 1995, to 1.97% at December 31, 1996. 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) 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------ Balance at beginning of year $ 4,506 $ 3,303 $ 2,839 $ 2,300 $ 1,850 --------- --------- --------- --------- --------- Provision charged to operating expense 1,079 1,666 1,790 1,524 1,435 --------- --------- --------- --------- --------- Recoveries of loans previously charged off Commercial loans 36 4 19 69 212 Real estate - mortgages - 46 9 2 77 Consumer loans 8 29 10 21 19 --------- --------- --------- --------- --------- Total recoveries 44 79 38 92 308 --------- --------- --------- --------- --------- Loan charge-offs Commercial loans (118) (348) (253) (28) (922) Real estate - mortgages (218) (25) (1,042) (975) (192) Consumer loans (62) (108) (69) (71) (179) Lease financing receivables (13) (61) - (3) - --------- --------- --------- --------- --------- Total charge-offs (411) (542) (1,364) (1,077) (1,293) --------- --------- --------- --------- --------- Net loan charge-offs (367) (463) (1,326) (985) (985) --------- --------- --------- --------- --------- Balance at end of year $ 5,218 $ 4,506 $ 3,303 $ 2,839 $ 2,300 ========= ========= ========= ========= ========= Year-end loans outstanding $ 264,582 $ 242,587 $ 239,126 $ 221,433 $ 212,575 Average loans outstanding $ 249,697 $ 243,657 $ 228,456 $ 217,086 $ 212,394 Allowance for possible loan losses as a percentage of year-end loans outstanding 1.97% 1.86% 1.38% 1.28% 1.08% Ratio of net charge-offs to average loans outstanding 0.15% 0.19% 0.58% 0.45% 0.46%
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nonperforming 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 nonperforming loans to net realizable value based on updated appraisals. Nonperforming loans are generally collateralized by real estate and are in the process of collection. The increase in loans past due 90 days and still accruing at December 31, 1996, was primarily related to three different loan customers. In all instances, the Bank has adequate collateral as to principal and interest and is in the process of collection. One loan in the amount of $1.2 million is expected to be brought current and assumed by a new borrower during the first quarter of 1997. 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, 1996, there were no concentrations of loans exceeding 10% of total loans which are not otherwise disclosed. NONPERFORMING LOANS AND ASSETS
December 31 --------------------------------------------------------------- (Dollars in thousands) 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- Past due over 90 days and still accruing $ 2,772 $ 419 $ 323 $ 1,074 $ 2,111 Nonaccrual loans 713 726 2,997 2,804 1,200 -------- --------- -------- -------- -------- Total nonperforming loans 3,485 1,145 3,320 3,878 3,311 Other real estate owned 1,274 1,447 1,565 - 90 -------- --------- -------- -------- -------- Total nonperforming assets $ 4,759 $ 2,592 $ 4,885 $ 3,878 $ 3,401 ======== ======== ======== ======== ======== Nonperforming loans as a percentage of total loans 1.32% 0.47% 1.39% 1.75% 1.56% Allowance for possible loan losses as a percentage of nonperforming loans 149.7% 393.5% 99.5% 73.2% 69.5% Nonperforming assets as a percentage of total loans and other real estate owned 1.79% 1.06% 2.03% 1.75% 1.60% Allowance for possible loan losses as a percentage of nonperforming assets 109.6% 173.8% 67.6% 73.2% 67.6%
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Although the allowance for possible loan losses as a percentage of nonperforming loans decreased to 149.7% at December 31, 1996, from 393.5% at December 31, 1995, this ratio still indicates that the allowance for possible loan losses is sufficient to cover the principal of all nonperforming loans at December 31, 1996. 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. Management intends to liquidate OREO 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, 1996, 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. See Note H - Capital Requirements - for additional information.
December 31 RISK-BASED -------------------------------------- "Well Capitalized" CAPITAL RATIOS 1996 1995 1994 Requirements - -------------- ------------ ------------ ----------- ---------------- Leverage Ratio 8.58% 8.19% 8.53% 5.00% Tier I Capital Ratio 12.05% 11.51% 11.09% 6.00% Total Risk-Based Capital Ratio 13.31% 12.77% 12.32% 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 8.09%, 2.68%, and 1.92% for the years ended December 31, 1996, 1995, and 1994, 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 $1.00 per share, of which 1,715,941 shares and 1,712,941 shares were outstanding at the end of 1996 and 1995, respectively. The Corporation's common stock is publicly traded over the counter. Trading is sporadic. The following table, which shows the range of high and low month-end bid prices for the stock, is based upon transactions reported by the Philadelphia brokerage firm of F. J. Morrissey & Co., Inc. Bid Prices (1) 1996 1995 ---- ---- Quarter Ended High Low High Low First $31.25 $29.00 $21.33 $21.33 Second $30.00 $29.25 $21.33 $21.17 Third $30.00 $29.25 $23.66 $21.33 Fourth $30.50 $30.25 $28.00 $25.00 (1) Adjusted for 1995 3-for-2 stock split. See Note A11 - Earnings per Share and Stockholders' Equity - in the accompanying financialstatements for additional information. Other statistical disclosures required by bank holding companies can be found in the Corporation's 10-K, to be filed with the Securities and Exchange Commission on March 30, 1997. Copies of the 10-K can be obtained from the Corporation's Shareholder Relations Representative, P.O. Box 523, West Chester, PA 19381-0523, at 610-344- 2686. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) December 31 ---------------------------- 1996 1995 ------------- ------------- ASSETS Cash and due from banks $ 21,956 $ 19,944 Federal funds sold 3,800 24,700 ---------- -------- Total cash and cash equivalents 25,756 44,644 ---------- -------- Interest-bearing deposits with banks 1,000 -- Investment securities held-to-maturity (market value of $15,749 and $23,213 in 1996 and 1995, respectively) 15,667 23,048 Investment securities available-for-sale, at fair value 82,008 70,463 Loans 264,582 242,587 Less: Allowance for possible loan losses (5,218) (4,506) ---------- -------- Net loans 259,364 238,081 Premises and equipment 6,752 5,521 Other assets 7,137 6,743 ---------- -------- Total assets $ 397,684 $ 388,500 ======== ======== LIABILITIES Deposits Noninterest-bearing $ 63,591 $ 63,393 Interest-bearing (including certificates of deposit over $100 of $11,978 and $11,479 - 1996 and 1995, respectively) 287,675 280,533 -------- -------- Total deposits 351,266 343,926 Securities sold under repurchase agreements 7,943 8,858 Other liabilities 5,300 5,024 -------- -------- Total liabilities 364,509 357,808 -------- -------- STOCKHOLDERS' EQUITY Common stock, par value $1.00; authorized, 5,000,000 shares; outstanding, 1996 - 1,715,941 and 1995 - 1,712,941; excluding shares in treasury, 1996 - 84,000 and 1995 - 87,000 1,800 1,800 Additional paid-in capital 3,305 3,301 Retained earnings 30,133 27,542 Net unrealized loss on securities available-for-sale (242) (65) Treasury stock, at cost (1,821) (1,886) -------- -------- Total stockholders' equity 33,175 30,692 -------- -------- Total liabilities and stockholders' equity $ 397,684 $ 388,500 ======== ========
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 ------------------------------------- 1996 1995 1994 ---------- ---------- -------- INTEREST INCOME Loans, including fees $ 22,856 $ 22,682 $ 19,366 Investment securities 5,990 5,136 4,848 Federal funds sold 734 648 160 Deposits in banks 47 -- -- Total interest income 29,627 28,466 24,374 -------- -------- -------- INTEREST EXPENSE Deposits 11,815 11,102 8,433 Securities sold under repurchase agreements 320 462 286 -------- -------- -------- Total interest expense 12,135 11,564 8,719 -------- -------- -------- Net interest income 17,492 16,902 15,655 PROVISION FOR POSSIBLE LOAN LOSSES 1,079 1,666 1,790 -------- -------- -------- Net interest income after provision for possible loan losses 16,413 15,236 13,865 -------- -------- -------- NONINTEREST INCOME Financial Management Services 1,861 1,836 1,764 Service charges on deposit accounts 851 895 889 Investment securities gains, net 5 9 3 Other 845 757 858 -------- -------- -------- Total noninterest income 3,562 3,497 3,514 -------- -------- -------- NONINTEREST EXPENSE Salaries and employee benefits 7,735 7,073 6,481 Occupancy, equipment, and data processing 2,647 2,364 2,256 FDIC insurance 2 349 678 Bank shares tax 308 297 228 Other operating 2,940 2,685 2,573 -------- -------- -------- Total noninterest expense 13,632 12,768 12,216 -------- -------- -------- Income before income taxes 6,343 5,965 5,163 INCOME TAXES 2,038 1,865 1,556 -------- -------- -------- NET INCOME $ 4,305 $ 4,100 $ 3,607 ======== ======== ======== PER SHARE Net income $ 2.51 $ 2.34 $ 2.01 ======== ======== ======== Cash dividends declared $ 1.00 $ 0.89 $ 0.77 ======== ======== ======== Weighted average shares outstanding 1,718,025 1,752,413 1,799,784 ========= ========= =========
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 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) Net income - - - 4,305 - - Cash dividends declared - - - (1,714) - - Net unrealized loss on equity securities available-for-sale - - - - (177) - Treasury stock transactions 3,000 - 4 - - 65 --------- ------ ------- -------- ------- ------- Balance at December 31, 1996 1,715,941 $ 1,800 $ 3,305 $ 30,133 $ (242) $ (1,821) ========= ====== ======= ======== ======= =======
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 --------------------------------------- 1996 1995 1994 ------------ ------------ ---------- OPERATING ACTIVITIES Net income $ 4,305 $ 4,100 $ 3,607 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 786 614 618 Provision for loan losses 1,079 1,666 1,790 Amortization of investment security premiums and accretion of discounts 141 217 392 Amortization of deferred fees on loans (57) (5) 46 Provision for deferred income taxes (331) (394) (165) Investment securities (gains) losses, net (5) (9) (3) (Decrease) increase in other assets 29 (163) (3,414) Increase (decrease) in other liabilities 222 1,127 (1,283) -------- -------- -------- Net cash provided by operating activities 6,169 7,153 1,588 -------- -------- -------- INVESTING ACTIVITIES Increase in interest-bearing deposits with banks (1,000) -- -- Increase in loans (22,309) (3,919) (19,064) Proceeds from sales of investment securities available-for-sale 4,172 301 1,875 Proceeds from maturities of investment securities available-for-sale 17,826 13,367 19,529 Proceeds from maturities of investment securities held-to-maturity 11,477 7,244 8,042 Purchase of investment securities available-for-sale (33,919) (32,615) (17,098) Purchase of investment securities held-to-maturity (4,120) (999) -- Purchase of premises and equipment, net (2,017) (1,309) (830) -------- -------- -------- Net cash used in investing activities (29,890) (17,930) (7,546) -------- -------- --------- FINANCING ACTIVITIES Increase (decrease) in deposits 7,340 38,461 (1,890) (Decrease) in securities sold under repurchase agreements (915) (1,641) (119) Cash dividends (1,661) (1,495) (1,321) Treasury stock transactions 69 (1,885) 5 -------- -------- -------- Net cash provided by (used in) financing activities 4,833 33,440 (3,325) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (18,888) 22,663 (9,283) Cash and cash equivalents at beginning of year 44,644 21,981 31,264 -------- -------- -------- Cash and cash equivalents at end of year $ 25,756 $ 44,644 $ 21,981 ======== ======== ========
The accompanying notes are an integral part of these statements. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 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 practices 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. 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. 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, FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 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. Mortgage Servicing Rights ------------------------- On January 1, 1996, the Corporation adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65," which requires that the Corporation recognize as a separate asset rights to service mortgage loans for others, however those servicing rights are acquired. In circumstances where mortgage loans are originated, separate asset rights to service mortgage loans are only recorded when the Corporation intends to sell such loans. The adoption of this new statement did not have a material impact on the Corporation's financial position or results of operations. 7. 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. On January 1, 1996, the Corporation adopted 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 did not have a material impact on the Corporation's consolidated financial position or results of operations. 8. Contributions ------------- On January 1, 1995, the Corporation adopted 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 $137,000 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. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 9. Income Taxes ------------ The Corporation accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." 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. 10. Employee Benefit Plans ---------------------- The Corporation has certain employee benefit plans covering eligible employees. The Bank accrues such costs as earned. 11. Stock Based Compensation Plan ----------------------------- On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternately, the standard permits entities to continue accounting for employee stock options and similar instruments under "Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair-value based method of accounting defined in SFAS No. 123 had been applied. The Corporation's stock option plan is accounted for under APB Opinion No. 25. 12. Financial Management Services Assets and Income ----------------------------------------------- Assets held by the Corporation in fiduciary or agency capacities for its customers are not included in the accompanying consolidated balance sheets since such items are not assets of the Corporation. 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. 13. 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 $1.00 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. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 14. 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, 1996, 1995, and 1994 for interest was $11,718,000, $10,901,000, and $10,268,000, respectively. Cash paid during the years ended December 31, 1996, 1995, and 1994 for income taxes was $2,100,000, $2,144,000, and $1,891,000, respectively. 15. Accounting for Transfers and Servicing of Financial Assets and ---------------------------------------------------------------------- Extinguishments of Liabilities ------------------------------ The Financial Accounting Standards Board (FASB) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No. 127, which provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishments of liabilities occurring after December 31, 1996. Adoption of this new statement is not expected to have a material impact on the Company's consolidated financial position or results of operations. 16. 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, 1996 and 1995, unrealized holding losses on securities available-for-sale, net of taxes, were $242,000 and $65,000, 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:
Held-to-Maturity Available-for-Sale ---------------- ------------------ (Dollars in thousands) Gross Gross Fair Gross Gross Fair Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ---- ----- ------ ----- ---- ----- ------ ----- U.S. Treasury $ 1,483 $ 1 $ (2) $ 1,482 $ 9,496 $ 34 $ (1) $ 9,529 U.S. Government agency - - - - 14,479 53 (29) 14,503 Mortgage-backed securities 2,145 5 (20) 2,130 47,419 173 (561) 47,031 State and municipal 5,742 103 (11) 5,834 254 24 - 278 Corporate securities 5,121 11 (9) 5,123 1,268 - - 1,268 Asset-backed securities 1,176 5 (1) 1,180 - - - - Mutual funds - - - - 7,793 - (258) 7,535 Other equity securities - - - - 1,666 198 - 1,864 ------- ----- --- ------ ------- ----- ----- ------- $15,667 $ 125 $(43) $15,749 $ 82,375 $ 482 $ (849) $ 82,008 ====== ===== === ====== ======= ===== ====== =======
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 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 ====== ==== ===== ======= ====== ==== ===== ======
The amortized cost and estimated fair value of debt securities classified as available-for-sale and held-to-maturity at December 31, 1996, 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.
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 $ 2,813 $ 2,818 $ 5,498 $ 5,509 Due after one year through five years 7,098 7,132 14,991 15,033 Due after five years through ten years 2,411 2,463 3,486 3,491 Due after ten years 25 27 254 278 -------- --------- --------- --------- 12,347 12,440 24,229 24,311 Mortgage-backed securities 2,145 2,130 47,419 47,030 Asset-backed securities 1,175 1,179 1,268 1,268 -------- --------- --------- --------- $ 15,667 $ 15,749 $ 72,916 $ 72,609 ======== ========= ========= =========
Proceeds on sales of securities classified as available-for-sale were $4,172,000 and $301,000 during 1996 and 1995, respectively. Gains of $31,000, $17,000, and $94,000, and losses of $26,000, $8,000, and $91,000 were realized on sales of securities in 1996, 1995, and 1994, 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 $25,402,000 and $28,170,000 at December 31, 1996 and 1995, respectively. There were no securities held from a single issuer that represented more than 10% of stockholders' equity. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE C - LOANS Major classifications of loans are as follows: (Dollars in thousands) 1996 1995 ---------- ----------- Commercial loans $ 87,932 $ 86,686 Real estate - construction 11,447 9,372 Real estate - other 109,179 100,814 Consumer loans 39,803 33,836 Lease financing receivables 16,221 11,879 --------- --------- 264,582 242,587 Less: Allowance for loan losses (5,218) (4,506) --------- --------- $ 259,364 $ 238,081 ========= ======== Loan balances on which the accrual of interest has been discontinued amounted to approximately $713,000 and $726,000 at December 31, 1996 and 1995, respectively. Interest on these nonaccrual loans would have been approximately $62,000 and $51,000 in 1996 and 1995, respectively. Loan balances past due 90 days or more which are not on a nonaccrual status, but which management expects will eventually be paid in full, amounted to $2,772,000 and $419,000 at December 31, 1996 and 1995, respectively. Changes in the allowance for loan losses are summarized as follows:
(Dollars in thousands) 1996 1995 1994 ----------- ----------- ---------- Balance at beginning of year $ 4,506 $ 3,303 $ 2,839 Provision charged to operating expenses 1,079 1,666 1,790 Recoveries of charged-off loans 44 79 38 Loans charged-off (411) (542) (1,364) --------- ----------- --------- Balance at end of year $ 5,218 $ 4,506 $ 3,303 ========== ========== =========
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 $443,000, $590,000, and $2,819,000 at December 31, 1996, December 31, 1995, and January 1, 1995, respectively. The associated allowance for loan losses for impaired loans was $419,000, $433,000, and $380,000 at December 31, 1996, December 31, 1995, and January 1, 1995, respectively. During 1996, activity in the allowance for impaired loan losses included a provision of $110,000, write-offs of $159,000, and recoveries of $34,000. Interest income of $1,000 was recorded in 1996, while contractual interest in the same period amounted to $42,000. Cash collected on impaired loans in 1996 was $172,000, of which $171,000 was applied to principal and $1,000 was applied to interest. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE C - LOANS - continued 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, two impaired loans totaling $699,000 were transferred to OREO, and one impaired loan for approximately $500,000 was transferred to EGSC as an equity investment. The $500,000 impaired loan that was transferred to EGSC in 1995 was liquidated in 1996. The proceeds from the liquidation were in excess of $600,000, resulting in a gain of $135,000 which was included in other noninterest income in 1996. 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 at December 31, 1996 and 1995, was approximately $8,625,000 and $8,069,000, respectively. In 1996, new loans and payments amounted to approximately $2,337,000 and $1,781,000, respectively. NOTE D - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: (Dollars in thousands) 1996 1995 ---------- ---------- Premises $ 7,990 $ 7,111 Equipment 5,532 4,394 --------- --------- 13,522 11,505 Less Accumulated depreciation (6,770) (5,984) --------- --------- $ 6,752 $ 5,521 ========= ========= 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%, 3.3% and 3.0% and balances of $7,943,000, $8,858,000 and $10,499,000 at December 31, 1996, 1995 and 1994, respectively. Daily average balances and weighted average interest rates for the years ended December 31, 1996, 1995 and 1994 were $9,713,000, $12,313,000 and $10,762,000 and 3.3%, 3.3% and 2.5%, respectively. Maximum amounts outstanding at any month-end were approximately $11,715,000, $16,037,000 and $13,348,000 for the years ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, the Bank had a line of credit with the FHLB of approximately $8 million. The line of credit at December 31,1995 was approximately $34 million. The reduction in the line of credit available is the result of a system wide policy change by the FHLB. However, the Bank's overall borrowing capacity at the FHLB remains over $80 million. Advances under this line of credit are payable on demand, bear interest at the FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE E - SHORT-TERM BORROWINGS AND CREDIT FACILITY - continued federal fund's rate plus 25 basis points. The Bank had no borrowings under this line of credit during 1996 and 1994. Daily average balance and weighted average interest rate for the year ended December 31, 1995 was $949,000 and 6.2%, respectively. Maximum amounts outstanding at any month-end in 1995 were $10,000,000. There were no amounts outstanding at December 31, 1996 and 1995. 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. NOTE F - OTHER NONINTEREST EXPENSE The components of other noninterest expense are detailed as follows: (Dollars in thousands) 1996 1995 1994 --------- --------- -------- Purchased services $ 664 $ 647 $ 707 Telephone, postage, and supplies 633 516 515 Marketing and corporate communications 340 359 459 Loan and deposit supplies 406 200 353 Director costs 260 281 235 Other 637 682 304 ------- ------ ------ $ 2,940 $ 2,685 $ 2,573 ====== ====== ====== NOTE G - INCOME TAXES The components of income taxes are detailed as follows: (Dollars in thousands) 1996 1995 1994 ---------- ---------- --------- Current $ 2,369 $ 2,259 $ 1,721 Deferred (331) (394) (165) -------- -------- ------- $ 2,038 $ 1,865 $ 1,556 ======== ======== ======= The income tax provision reconciled to the tax computed at the statutory federal rate was as follows:
1996 1995 1994 ------ ------ ------ Tax at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in taxes resulting from Tax-exempt loan and investment income (3.3) (3.1) (4.8) Other, net 1.4 0.4 0.9 ----- ----- ----- Applicable income tax 32.1% 31.3% 30.1% ==== ==== ====
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE G - INCOME TAXES - continued The net deferred tax asset consists of the following:
(Dollars in thousands) 1996 1995 1994 ---------- -------- ----------- Allowance for possible loan losses $ 1,489 $ 1,243 $ 871 Unrealized loss on securities available-for-sale 125 34 926 Deferred loan fees 249 231 179 Accrued pension and deferred compensation 305 262 359 Depreciation accumulated 29 - - Other 91 82 50 ------- ------- ------ 2,288 1,852 2,385 Valuation allowance - - - ------- ------- ------ Total deferred tax asset 2,288 1,852 2,385 ------- ------- ------ Bond accretion (89) (75) (72) Accumulated depreciation - - (38) ------- ------- ------ Total deferred tax liabilities (89) (75) (110) ------- ------- ------- Net deferred tax asset $ 2,199 $ 1,777 $ 2,275 ======= ======= =======
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 $308,000, $297,000, and $228,000 in 1996, 1995, and 1994, respectively. NOTE H - CAPITAL REQUIREMENTS The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, and Tier I capital to average quarterly assets. Management believes that the Corporation and the Bank meet all capital adequacy requirements to which it is subject, as of December 31, 1996. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE H - CAPITAL REQUIREMENTS - continued As of December 31, 1996, the most recent notification from the federal banking agencies categorized the Corporation and the Bank as well capitalized under the regulatory framework for corrective action. To be categorized as adequately capitalized the Corporation and the Bank must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since the notification that management believes have changed the institution's category. The Corporation's actual capital amounts and ratios are presented below:
To Be Well Capitalized Under For Capital Prompt Corrective (Dollars in thousands) Actual Adequacy Purposes Action Provisions ---------------------- ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1996: Total Capital (to Risk Weighted Assets) $ 36,839 13.31% $ 22,145 less than or = 8.00% $ 27,681 less than or = 10.00% Tier I Capital (to Risk Weighted Assets) $ 33,357 12.05% $ 11,073 less than or = 4.0% $ 16,609 less than or = 6.00% Tier I Capital (to Average Assets) $ 33,357 8.58% $ 15,544 less than or = 4.00% $ 19,430 less than or = 5.00% As of December 31, 1995: Total Capital (to Risk Weighted Assets) $ 33,911 12.77% $ 21,247 less than or = 8.00% $ 26,558 less than or = 10.00% Tier I Capital (to Risk Weighted Assets) $ 30,578 11.51% $ 10,623 less than or = 4.00% $ 15,935 less than or = 6.00% Tier I Capital (to Average Assets) $ 30,578 8.19% $ 14,936 less than or = 4.00% $ 18,670 less than or = 5.00% 1996 1995 ---- ---- Risk Weighted Assets $276,814 $265,584 Average Assets (Current Quarter) $388,603 $373,405
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS 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 were used to determine the estimated fair value of investment securities held-to-maturity and available-for-sale. Fair values of net loans and deposits with stated maturities were calculated using estimated discounted cash flows based on the year-end offering rate for instruments with similar characteristics and maturities. The estimated fair values and carrying amounts are summarized as follows:
1996 1995 -------------------------- --------------------------- Estimated Estimated (Dollars in thousands) Fair Carrying Fair Carrying Value Amount Value Amount ----- ------ ----- ------ Financial Assets Cash and cash equivalents $ 25,756 $ 25,756 $ 44,644 $ 44,644 Investment securities held-to-maturity 16,749 15,667 23,213 23,048 Investment securities available-for-sale 82,008 82,008 70,463 70,463 Interest-bearing deposits with banks 1,000 1,000 - - Net loans 263,703 259,364 242,772 238,081 Financial Liabilities Deposits with no stated maturities 236,585 236,585 229,039 229,039 Deposits with stated maturities 115,310 115,260 115,582 114,887 Short-term borrowings 7,943 7,943 8,858 8,858 Off-Balance-Sheet Investments Commitments for extended credit and outstanding letters of credit 102,651 102,651 78,287 78,287
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Corporation is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risks in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Corporation does not require collateral or other security to support financial instruments with credit risk. The contract amounts are as follows:
(Dollars in thousands) 1996 1995 -------- -------- Financial instruments whose contract amounts represent credit risk Commitments to extend credit $97,954 $ 73,087 Standby letters of credit and financial guarantees written 4,697 5,200
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation holds residential or commercial real estate, accounts receivable, inventory and equipment as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for those commitments at December 31, 1996, varies up to 100%; the average amount collateralized is 80%. All of the Corporation's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Corporation's primary market area, Chester County, Pennsylvania. Investments in state and municipal securities also involve governmental entities within the Corporation's market area. The concentrations of credit by type of loan are set forth in Note C - Loans. Although the Corporation has a FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK 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 K - ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS The Corporation instituted the 1995 Stock Option Plan on September 18, 1995, which was subsequently ratified at the March 19, 1996, annual meeting of shareholders. This plan allows the Corporation to grant up to 187,500 fixed stock options to key employees and directors. The options have a term of ten years and become exercisable six months after grant. The exercise price of each option equals the average between the high and low bid price of the Corporation's stock on the date of grant. The Corporation has elected to account for its stock option plan under Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Corporation's net income and earnings per share would have been:
1996 1995 1994 -------- -------- -------- Net income (in thousands) As reported $ 4,305 $ 4,100 $ 3,607 Pro forma $ 4,005 $ 4,100 $ 3,607 Earnings per share As reported 2.51 $ 2.34 $ 2.01 Pro forma $ 2.34 $ 2.34 $ 2.01
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996: dividend yield of 3.8%; expected volatility of 0.47; risk-free interest rate of 6.13%; and an expected life of 5 years. There were no options outstanding at the beginning of 1996. During 1996, 48,000 options were granted at a weighted average exercise price of $26.25 and 3,000 options were exercised at a price of $23.08. The 48,000 options granted in 1996 included 24,750 options at an exercise price of $23.08 that were granted in 1995 subject to shareholder approval. This approval was obtained at the March 1996 shareholders meeting. At December 31, 1996, there were 45,000 options outstanding with a weighted average option price of $26.46, an exercise price range of $23.08 to $29.63, and a weighted average contractual life of 9.25 years. At December 31, 1996 there were 21,750 options exercisable at an average exercise price of $23.08. The weighted average fair value of options granted during the year was $9.46. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE L - 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, 1996 and 1995, was approximately $2,756,000 and $2,141,000, 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 $3,135,000 plus additional amounts equal to the net earnings of the Bank for the period from January 1, 1997, through the date of declaration, less dividends previously paid in 1997. NOTE M - 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 Corporation contributes $0.75 ($0.50 prior to 1995) for each $1.00 that an employee contributes, up to the first 5% of the employee's salary. The Corporation's expenses were $136,000, $123,000, and $100,000 in 1996, 1995, and 1994, respectively. The Corporation also has a qualified defined contribution pension plan (the "QDCP Plan") which was implemented on January 1, 1995. Under the QDCP Plan, the Corporation 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 1996 and 1995 under the QDCP Plan was $220,000 and $200,000, respectively. The Corporation 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 Corporation'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 Corporation makes annual contributions to the NQDCP Plan equal to 3% of the participant's salary up to $160,000 plus 9% in excess of $160,000. Contribution expense in 1996 and 1995 under the NQDCP Plan was $38,000 and $35,000, respectively. The Corporation may make additional discretionary employer contributions subject to approval of the Board of Directors. Contributions to the QDB Plan, which are limited by federal income tax regulations, amounted to $327,000 in 1994. Contributions to the NQDB Plan were $60,000 in 1994. Net periodic pension cost for both plans was $364,000 in 1994. 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 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE M - EMPLOYEE BENEFIT PLANS - continued 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. NOTE N - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY Condensed financial information for First West Chester Corporation (parent corporation only) follows: CONDENSED BALANCE SHEETS
(Dollars in thousands) December 31 ------------------------ 1996 1995 ---------- ---------- ASSETS Cash and cash equivalents $ 460 $ 467 Investment in subsidiaries, at equity 32,589 29,935 Other assets 516 867 --------- --------- Total assets $ 33,565 $ 31,269 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 17 $ 454 Stockholders' equity 33,548 30,815 -------- -------- Total liabilities and stockholders' equity $ 33,565 $ 31,269 ======== ========
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands) Year ended December 31 --------------------------------- 1996 1995 1994 ---- ---- ---- INCOME Dividends from subsidiaries $ 1,814 $ 3,609 $ 1,380 Dividends from investment securities 12 21 24 Investment securities gains, net - 17 94 Other income 23 30 107 ------ ------ ------ Total income 1,849 3,677 1,605 ------ ------ ------ EXPENSES Other expenses 196 145 128 ------ ------ ------ Total expenses 196 145 128 ------ ------ ------ Income before equity in undistributed income of subsidiaries 1,653 3,532 1,477 EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 2,652 568 2,130 ------ ------ ------ NET INCOME $ 4,305 $ 4,100 $ 3,607 ====== ====== ======
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE N - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - continued CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31 -------------------------------------- (Dollars in thousands) 1996 1995 1994 --------- --------- --------- OPERATING ACTIVITIES Net income $ 4,305 $ 4,100 $ 3,607 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiary (2,652) (568) (2,130) Investment securities (gains), net - (17) (94) Decrease (increase) in other assets 423 (432) 5 (Decrease) increase in other liabilities (491) (5) 13 -------- -------- -------- Net cash provided by operating activities 1,585 3,078 1,401 -------- -------- -------- INVESTING ACTIVITIES Proceeds from sales and maturities of investment securities - 57 219 -------- -------- -------- Net cash provided by investing activities - 57 219 -------- -------- -------- FINANCING ACTIVITIES Dividends paid (1,661) (1,495) (1,321) Effect of treasury stock transactions 69 (1,885) 5 -------- -------- -------- Net cash used in financing activities (1,592) (3,380) (1,316) -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7) (245) 304 Cash and cash equivalents at beginning of year 467 712 408 -------- -------- -------- Cash and cash equivalents at end of year $ 460 $ 467 $ 712 ======== ======== ========
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1995 NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of the unaudited quarterly results of operations is as follows:
1996 ---- (Dollars in thousands, except per share) December 31 September 30 June 30 March 31 ----------- ------------ ----------- ----------- Interest income $ 7,609 $ 7,444 $ 7,356 $ 7,218 Interest expense 3,029 3,029 3,035 3,042 Net interest income 4,580 4,415 4,321 4,176 Provision for loan losses 278 249 276 276 Investment securities gains (losses), net 9 (4) - - Income before income taxes 1,686 1,555 1,628 1,474 Net income 1,152 1,057 1,096 1,000 Per share Net income $ 0.68 $ 0.61 $ 0.64 $ 0.58 Dividends declared 0.29 0.25 0.23 0.23 1995 ---- 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
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Philadelphia, Pennsylvania January 24, 1997 EX-23 3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 24, 1997 accompanying the consolidated financial statements included in the 1996 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, 1996. 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; File No. 33-46575, effective March 23,1992; File No. 33-09241, effective July 31, 1996; and File No. 33-15733, effective November 7, 1996). GRANT THORNTON LLP /s/ GRANT THORNTON LLP - ---------------------- Philadelphia, Pennsylvania March 28, 1997 EX-27 4
9 This is Exhibit 27 of First West Chester Corporation's Form 10-K for the year ended December 31, 1996. 0000744126 FIRST WEST CHESTER CORP 1,000 12-MOS DEC-31-1996 DEC-31-1996 21,956 1,000 3,800 0 82,008 15,667 15,749 264,582 5,218 397,684 351,266 7,943 5,300 0 0 0 1,800 31,375 397,684 22,856 5,990 781 29,627 11,815 12,135 17,492 1,079 5 13,632 6,343 6,343 0 0 4,305 2.51 2.51 4.92 713 2,772 0 0 4,506 411 44 5,218 5,218 0 0
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