-----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, R3jjEgXw1En8TkBsGo+rZ6GQhEoEnrBo3rAOV/ux/0coLDMp6Y8z5/tP8o4828Zn vwh/OzajUgVDJKy59QeICg== 0000744126-98-000006.txt : 19980331 0000744126-98-000006.hdr.sgml : 19980331 ACCESSION NUMBER: 0000744126-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 000-12870 FILM NUMBER: 98579153 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 FIRST WEST CHESTER CORPORATIONS FORM 10-K 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, 1997, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File No. 0-12870 FIRST 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) Registrant's telephone number, including area code (610) 692-3000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the Common Stock of the Registrant held by non-affiliates as of March 1, 1998, was approximately $77,590,000. The number of shares outstanding of Common Stock of the Registrant as of March 1, 1998, was 2,296,313. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Annual Report to Shareholders for the year ended December 31, 1997, is incorporated by reference into Parts I and II hereof. The Registrant's definitive Proxy Statement for its 1998 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 12 Item 3 - Legal Proceedings 12 Item 4 - Submission of Matters to a Vote of Security Holders 12 PART II: Item 5 - Market for the Corporation's Common Equity and Related Stockholder Matters 13 Item 6 - Selected Financial Data 13 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation 13 Item 7A - Quantitative and Qualitative Disclosures About Market Risk Item 8 - Financial Statements and Supplementary Data 13 Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III: Item 10 - Directors and Executive Officers of the Corporation 14 Item 11 - Executive Compensation 14 Item 12 - Security Ownership of Certain Beneficial Owners and Management 14 Item 13 - Certain Relationships and Related Transactions 14 PART IV: Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 SIGNATURES 16
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 Company Act of 1956, as amended (the "BHC Act"). As a bank holding company, the Corporation's operations are confined to the ownership and operation of banks and activities deemed by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") to be so closely related to banking to be a proper incident thereto. The Corporation was incorporated on March 9, 1984, for the purpose of becoming a registered bank holding company pursuant to the BHC Act and acquiring 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 1996 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, 1997, the Bank had total assets of approximately $431 million, total loans of approximately $319 million, total deposits of approximately $374 million and employed 194 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, 1997, the Bank's Financial Management Services Department administered or provided investment management for 780 accounts, which possessed assets with an aggregate market value of approximately $348 million. For the year ended December 31, 1997, gross income from the Bank's Financial Management Services Department and related activities amounted to approximately $2.0 million and accounted for 5.6% of the total of interest income and other income of the Bank for such period. COMPETITION The Bank's service area consists primarily of greater Chester County, including West Chester and Kennett Square, as well as the fringe of Delaware County, Pennsylvania. The core of the Bank's service area is located within a fifteen-mile radius of the Bank's main office in West Chester, Pennsylvania. The Bank encounters vigorous competition for market share in the communities it serves from community banks, thrift institutions and other non-bank financial organizations. The Bank 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 $431 million as of December 31, 1997. 1 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 1996 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 1996 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 the West Chester Property in 1996. During 1997, 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 (the "OCC"), and the Federal Deposit Insurance Corporation (the "FDIC"). Certain aspects of the Bank's operation are also subject to state laws. The following is not intended to be an exhaustive description of the stautes and regulations applicable to the Corporation and the Bank. 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 Federal Reserve Board. The Federal Reserve Board also makes examinations of bank holding companies and their subsidiaries. The BHC Act requires each bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or if it would acquire or control more than 5% of the voting shares of such a bank. The Federal Reserve Board considers numerous factors, including its capital adequacy guidelines, before approving such acquisitions. For a description of certain applicable guidelines, see this Item "Capital," Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Adequacy," and Part II, Item 8, "Note I -- 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 generally 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, with a par value of $1.00 (the "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. 2 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 1998, the Bank, without affirmative governmental approvals, could declare aggregate dividends in 1998 of approximately $5.1 million, plus an amount approximately equal to the net income, if any, earned by the Bank for the period from January 1, 1998, through the date of declaration of such dividend less dividends previously paid in 1998, 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. 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, 1997, 1996 and 1995, 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 I -- Capital Requirements" in the consolidated financial statements. 3 Deposit Insurance Assessments The Bank is subject to deposit insurance assessments by the FDIC's Bank Insurance Fund ("BIF"). The FDIC has developed a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to its level of risk. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or undercapitalized and the institution's "supervisory subgroups": Subgroup A, B or C. Subgroup A institutions are financially sound institutions with a few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. Based on its capital and supervisory subgroups, each BIF member institution is assigned an annual FDIC assessment rate per $100 of insured deposits varying between 0.00% per annum (for well capitalized Subgroup A institutions) and 0.27% per annum (for undercapitalized Subgroup C institutions). As of January 1, 1998, well capitalized Subgroup A institutions will pay between 0.00% and 0.10% per annum. In accordance with the Deposit Insurance Act of 1997 an additional assessment by the Financing Corporation ("FICO") became applicable to all insured institutions as of January 1, 1997. This assessment is not tied to the FDIC risk classification. The BIF FICO assessment will be 1.256 basis points for 1998. For the first quarter of 1998, the Bank's assessments for BIF and BIF FICO are $0.00 and $10,929, respectively. 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 STANDARDS Impairment of Long-Lived Assets The Corporation adopted the Financial Accounting Standards Board Statement ("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-6 in Notes to Consolidated Financial Statements included in the Corporation's 1997 Annual Report to Shareholders, incorporated herein by reference. 4 Stock Based Compensation Plans The Corporation adopted SFAS No. 123, "Accounting for Stock Based Compensation" on January 1, 1996. See Note A-10 in Notes to Consolidated Financial Statements included in the Corporation's 1997 Annual Report to Shareholders, incorporated herein by reference. Accounting for Transfer and Services of Financial Assets and Establishment of Liability The Corporation adopted SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" as amended by SFAS No. 127, as of January 1, 1997. See Note A-14 in Notes to Consolidated Financial Statements included in the Corporation's 1997 Annual Report to Shareholders, incorporated herein by reference. Earnings Per Share The Corporation adopted SFAS No. 128, "Earnings per Share" as of January 1, 1997. See Note A-12 in Notes to Consolidated Financial Statements included in the Corporation's 1997 Annual Report to Shareholders, incorporated herein by reference. Reporting Comprehensive Income The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income" effective as of January 1, 1998. See Note A-15 in Notes to Consolidated Financial Statements included in the Corporation's 1997 Annual Report to Shareholders, incorporated herein by reference. Disclosures About Segments Of An Enterprise And Related Information The Corporation adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" effective as of January 1, 1998. See Note A-16 in Notes to Consolidated Financial Statements included in the Corporation's 1997 Annual Report to Shareholders, incorporated herein 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 1997 Annual Report to Shareholders, incorporated herein by reference. 5 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES RATE VOLUME ANALYSIS (1)
Increase (decrease) in net interest income due to: ----------------------------------------------------------------------- Volume (2) Rate (2) Total Volume (2) Rate (2) Total ------ ---- ----- ------ ---- ----- (Dollars in thousands) 1997 Compared to 1996 1996 Compared to 1995 - ---------------------- --------------------- --------------------- INTEREST INCOME Federal funds sold $ (435) $ 9 $ (426) $ 153 $ (67) $ 86 Interest Bearing Deposits in Banks (35) - (35) - 47 47 ----- ------ ----- ------ ------ ------ Investment securities Taxable (946) 187 (759) 777 130 907 Tax-exempt(3) (29) 5 (24) (73) 8 (65) ----- ------ ----- ------ ------ ------ Total investment securities (975) 192 (783) 704 138 842 Loans Taxable 4,430 (738) 3,692 556 (423) 133 Tax-exempt(3) 210 (169) 41 10 90 100 ----- ------ ----- ------ ------ ------ Total loans(4) 4,640 (907) 3,733 566 (333) 233 ----- ------ ----- ------ ------ ------ Total interest income 3,195 (706) 2,489 1,423 (215) 1,208 ----- ------ ----- ------ ------ ------ INTEREST EXPENSE Savings, NOW and money market deposits 162 43 205 207 (407) (200) Certificates of deposits and other time 582 68 650 787 126 913 ----- ------ ----- ------ ------ ------ Total interest bearing deposits 744 111 855 994 (281) 713 Securities sold under repurchase agreements (37) (2) (39) (85) 2 (83) Other borrowings -- 401 401 (59) -- (59) ----- ------ ----- ------ ------ ------ Total Interest expense 707 510 1,217 850 (279) 571 ----- ------ ----- ------ ------ ------ Net Interest income $2,488 $(1,216) $1,272 $ 573 $ 64 $ 637 ===== ====== ===== ====== ====== ====== NOTES: (1) The related average balance sheets can be found on page 21 of the Corporation's 1997 Annual Report to Shareholders. (2) The changes in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (3) The indicated changes are presented on a tax equivalent basis. (4) Non-accruing loans have been used in the daily average balances to determine changes in interest due to volume. Loan fees included in the interest income computation are not material.
6 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES LOAN PORTFOLIO BY TYPE AT DECEMBER 31,
(Dollars in thousands) 1997 1996 1995 1994 1993 ---------------- ---------------- ---------------- ---------------- --------------- Amount % Amount % Amount % Amount % Amount % ------ - ------ - ------ - ------ - ------ - Commercial loans $ 93,914 30% $ 87,932 34% $ 86,686 36% $ 87,689 37% $ 88,632 40% Real estate - construction 17,256 5% 11,447 4% 9,372 4% 4,607 2% 6,327 3% Real estate - other 117,953 37% 109,179 41% 100,814 41% 101,589 42% 87,389 40% Consumer loans (1) 66,753 21% 39,803 15% 33,836 14% 32,984 14% 27,414 12% Lease financing receivables 23,023 7% 16,221 6% 11,879 5% 12,257 5% 11,671 5% -------- -------- ------- -------- -------- Total gross loans $ 318,899 100% $ 264,582 100% $242,587 100% $ 239,126 100% $ 221,433 100% Allowance for possible loan losses(2) $ (5,900) $ (5,218) $(4,506) $ (3,303) (2,839) ------- ------- ------ -------- -------- Total loans(2) $312,999 $259,364 $238,081 $ 235,823 $ 218,594 ======= ======= ======= ======== ======== NOTES: - ------ (1) Consumer loans include open-end home equity lines of credit and credit card receivables. (2) 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 24-25 of the Corporation's 1997 Annual Report to Shareholders for additional information. (3) At December 31, 1997 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.
7 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MATURITIES AND RATE SENSITIVITY OF LOANS DUE TO CHANGES IN INTEREST RATES AT DECEMBER 31, 1997 (1) (2)
Maturing Maturing After 1 Year Maturing Within And Within After (Dollars in thousands) 1 Year (3) 5 Years 5 Years Total -------- ----------- ------- -------- Commercial loans $71,683 $6,138 $16,093 $ 93,914 Real Estate - construction 17,256 -- -- 17,256 ------ ----- ------ ------- Total $88,939 $6,138 $16,093 $111,170 ====== ===== ====== ======= Loans maturing after 1 year with: Fixed interest rates $6,138 $16,093 Variable interest rates -- -- ----- ------ Total $6,138 $16,093 ===== ====== NOTES: (1) Determination of maturities included in the loan maturity table are based upon contract terms. In situations where a "rollover" is appropriate, the Corporation's policy in this regard is to evaluate the credit for collectability consistent with the normal loan evaluation process. This policy is used primarily in evaluating ongoing customer's use of their lines of credit with the Bank that are at floating interest rates. (2) This data excludes real estate-other loans, consumer loans and lease financing receivables. (3) Demand loans and overdrafts are reported maturing "Within 1 Year". 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.
8 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES YIELD BY MATURITY AT DECEMBER 31, 1997
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 1,493 -- -- -- 1,493 U.S. Government agency -- -- -- -- -- Mortgage-backed securities (1) -- 1,428 91 -- 1,519 State and municipal (2) 750 1,149 2,030 25 3,955 Corporate securities 1,000 3,115 -- -- 4,115 Asset-backed (1) -- -- 1,000 -- 1,000 ----- ------ ------- ------ ------ 3,243 5,692 3,121 25 12,082 ----- ------ ------- ------ ------ Available-for-Sale U.S. Treasury 2,500 4,013 -- -- 6,512 U.S. Government agency -- 2,999 4,356 -- 7,356 Mortgage-backed securities (1) -- 10,717 6,088 30,936 47,742 State and municipal (2) -- -- -- 254 -- Corporate securities -- 1,000 -- -- 1,000 Asset-backed (1) -- -- -- -- -- Mutual Funds -- -- -- 1,091 1,091 Other equity securities (3) -- -- -- 1,866 1,866 ----- ------ ------ ------ ------ 2,500 18,729 10,445 33,894 65,567 ----- ------ ------ ------ Total Investment securities $5,743 $24,421 $13,566 $33,919 $77,649 ===== ====== ====== ====== ====== Percent of portfolio 7.40% 31.45% 17.47% 43.68% 100.00% ==== ===== ===== ===== ====== Weighted average yield 5.95% 6.05% 6.92% 6.40% 6.35% ==== ==== ==== ==== ==== NOTES: - ------ (1) Mortgage-backed and Asset-backed securities are included in the above table based on their contractual maturity. (2) The yield on tax-exempt obligations has been computed on a tax equivalent basis using the Federal marginal rate of 34% adjusted for the 20% interest expense disallowance. (3) Other equity securities having no stated maturity have been included in "Due over 10 years".
9 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES INVESTMENT SECURITIES AT DECEMBER 31,
1997 1996 1995 ------------------------ ---------------------- --------------------- (Dollars in thousands) Book Market Book Market Book Market Value Value Value Value Value Value ----- ----- ----- ----- ----- ----- Held-to-Maturity - ---------------- U.S. Treasury $ 1,493 $ 1,494 $ 1,483 $ 1,482 $ 1,473 $ 1,485 U.S. Government agency -- -- -- -- 1,501 1,496 Mortgage-backed securities 1,519 1,520 2,145 2,130 2,685 2,689 State and municipal 3,955 4,081 5,742 5,834 4,759 4,862 Corporate securities 4,115 4,129 5,121 5,123 11,806 11,867 Asset-backed 1,000 1,013 1,176 1,180 824 814 Mutual funds -- -- -- -- -- -- Other equity securities -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ $12,082 $12,237 $15,667 $15,749 $23,048 $23,213 ====== ====== ====== ====== ====== ====== Available-for-Sale - ------------------ U.S. Treasury $ 6,528 $ 6,528 $ 9,529 $ 9,529 $13,091 $13,091 U.S. Government agency 7,392 7,392 14,503 14,503 12,176 12,176 Mortgage-backed securities 47,688 47,688 47,031 47,031 34,475 34,475 State and municipal -- -- 278 278 281 281 Corporate securities 1,000 1,000 -- -- 1,079 1,079 Asset-backed -- -- 1,268 1,268 -- -- Mutual Funds 1,042 1,042 7,535 7,535 7,733 7,733 Other equity securities 1,866 1,866 1,864 1,864 1,628 1,628 ------ ------ ------ ------ ------ ------ $65,516 $65,516 $82,008 $82,008 $70,463 $70,463 ====== ====== ====== ====== ====== ======
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS, $100,000 OR MORE, AT DECEMBER 31, 1997
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 $ 5,787 $ 4,252 $ 2,016 $ 7,002 $19,057
10 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES EFFECT OF NONACCRUING LOANS ON INTEREST FOR YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Interest income which would have been recorded (1) $ 64 $ 42 $ 103 $432 $225 Interest income that was received from customer 37 1 172 -- -- ----- ----- ----- --- --- $ 27 $ 41 $ (69) $432 $225 ===== ===== ===== === === 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.
11 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
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. 12 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 1997 Annual Report to Shareholders, attached as an exhibit hereto. As of March 1, 1998, there were approximately 869 shareholders of record of the Corporation's Common Stock. The Corporation declared cash dividends per share on its Common Stock during each quarter of the fiscal years ended December 31, 1997 and 1996, as set forth in the following table (which have been adjusted for the stock split which occurred on April 1, 1997): Dividends --------- Amount Per Share ---------------- 1997 1996 ---- ---- First Quarter............................................. 0.19 $ 0.17 Second Quarter............................................ 0.19 0.17 Third Quarter............................................. 0.21 0.19 Fourth Quarter............................................ 0.26 0.22 ----- ----- Total................................................... $ 0.85 $ 0.75 ===== ===== 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 herein by reference from the Corporation's 1997 Annual Report to Shareholders, attached as an exhibit hereto. 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 herein by reference from the Corporation's 1997 Annual Report to Shareholders, attached as an exhibit hereto. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------- ---------------------------------------------------------- Quantitative and Qualitative Disclosures About Market Risk are incorporated herein by reference from the Corporation's 1997 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 herein by reference from the Corporation's 1997 Annual Report to Shareholders, attached as an exhibit hereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. ----------------------------------------------------------------------- None. 13 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 25, 1998, for its 1998 Annual Meeting of Shareholders. Item 11. Executive Compensation. - -------- ----------------------- The information called for by this item is incorporated herein by reference to the Corporation's Proxy Statement dated February 25, 1998, for its 1998 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 25, 1998, for its 1998 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 25, 1998, for its 1998 Annual Meeting of Shareholders. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - -------- ----------------------------------------------------------------- 1. Index to Consolidated Financial Statements ------------------------------------------ Page of Annual Report to Shareholders ---------------------- Consolidated Balance Sheets Page 28 at December 31, 1997 and 1996 Consolidated Statements of Page 29 Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Page 30 Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Page 31 Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Pages 32 to 49 Financial Statements Report of Independent Certified Public Accountants Page 51 The Consolidated Financial Statements listed in the above index, together with the report thereon of Grant Thornton LLP dated January 28, 1998, which are included in the Corporation's Annual Report to Shareholders for the year ended December 31, 1997, are hereby incorporated herein by reference. 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. 14 3. Exhibits -------- The following is a list of the exhibits filed with, or incorporated by reference into, this Report (those exhibits marked with an asterisk are filed herewith): * 3(i). Articles of Incorporation. Copy of the Articles of Incorporation of the Corporation, as amended. * 3(ii). By-Laws of the Corporation. Copy of the By-Laws of the Corporation, as amended. 10. Material contracts. ------------------- * (a) Copy of Employment Agreement among the Corporation, the Bank and Charles E. Swope dated January 1, 1998. (b) Copy of the Corporation's Dividend Reinvestment and Stock Purchase Plan, filed as an exhibit to the Corporation's registration statement on Form S-3 (File no. 333-33175) is incorporated herein by reference. (c) Copy of the Corporation's Amended and Restated Stock Bonus Plan, filed as an exhibit to the Corporation's registration statement on Form S-8 (File no. 333-33411) is incorporated herein by reference. (d) Copy of the Bank's Amended and Restated Supplemental Benefit Retirement Plan, effective date January 1, 1995, is incorporated herein by reference to Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994. (e) Copy of the Corporation's and the Bank's Directors Deferred Compensation Plan, effective December 30, 1995, is incorporated herein by reference to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995. (f) Copy of the Corporation's Amended and Restated 1995 Stock Option Plan, filed as an exhibit to the Corporation's Proxy statement for the 1998 Annual Meeting of Shareholders (File no. 000-12870) is incorporated herein by reference. * (g) Copy of the Agreement of sale by and between Robert H. Trenner, Jr. and Debra L. Trenner, h/w and the Bank dated December 1, 1997. * 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, 1997. 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 1997 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 30, 1998. ------------------------------------------------------------------------- * 27. Financial Data Schedules. ------------------------ A Financial Data Schedule is being submitted with the Corporation's 1997 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. 1996 and 1995 Restated Financial Data as per FASB 128. (b) Reports on Form 8-K. -------------------- No reports on Form 8-K were filed by the Corporation during the quarter ended December 31, 1997. 15 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 30, 1998 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 30, 1998. Signature Title --------- ----- /s/ Charles E. Swope President, Chief Executive ______________________________ Officer and Chairman of the Charles E. Swope Board of Directors /s/ J. Duncan Smith Treasurer (Principal ______________________________ Accounting and Financial Officer) J. Duncan Smith (Signatures continued on following page) 16 (Signatures continued from previous page) Signature Title /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 17 Index to Exhibits Exhibits - -------- 3.1 Articles of Incorporation of the Corporation, as amended. 3.2 By-Laws of the Corporation, as amended. 10.1 Employment Agreement among the Corporation, the Bank, and Charles E. Swope, dated January 1, 1998. 10.2 Agreement of Sale by and between Robert H. Trenner, Jr. and Debra L. Trenner, h/w and the Bank, dated December 1, 1997. 13 The Corporation's Annual Report to Shareholders for the year ended December 31, 1997. 23 Consent of Grant Thornton LLP. 27.1 Financial Data Schedule. 27.2 Restated 1996 and 1995 Financial Data Schedules. EX-3.(I) 2 ARTICLES OF INCORPORATION, AS AMENDED COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU ARTICLES OF INCORPORATION OF FIRST WEST CHESTER CORPORATION In compliance with the requirements of the Business Corporation Law, approved the fifth day of May, A.D., 1933, as amended, the undersigned, desiring to be incorporated as a business corporation, does hereby certify: Article 1 --------- The name of the Corporation is: First West Chester Corporation Article 2 --------- The location and post office address of the initial registered office of the Corporation in the Commonwealth of Pennsylvania is: Nine North High Street, West Chester, Pennsylvania 19380. Article 3 --------- The Corporation is incorporated under the Business Corporation law of the Commonwealth of Pennsylvania for the following purposes: To engage in and do any lawful act concerning all lawful business for which corporations may be incorporated under the Business Corporation Law of Pennsylvania and to do all things and exercise all powers, rights and privileges which a business corporation may now or hereafter be organized or authorized to do or to exercise under the laws of the Commonwealth of Pennsylvania. Article 4 --------- The term for which the Corporation is to exist is perpetual. Article 5 --------- The aggregate number of shares of capital stock which the Corporation shall have authority to issue is 500,000 shares of common stock with a par value of $20.00 per share. Article 6 --------- A. The provisions of this Article 6 shall apply to any of the following transactions (hereinafter referred to as "Business Combinations"): (1) any merger or consolidation of the Corporation or any subsidiary of the Corporation with or into any other corporation, person or other entity which is the owner or beneficial owner, directly or indirectly, of 20% or more of the outstanding voting securities of the Corporation; or (2) any sale or lease or exchange or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Corporation to any other corporation, person or other entity which is the beneficial owner, directly or indirectly, of 20% or more of the outstanding voting securities of the Corporation; or (3) any sale or lease or exchange or other disposition (in one transaction or a series of related transactions) to the Corporation or any subsidiary of the Corporation of any agents having an aggregate fair market value equal to or greater than ten (10%) percent of the Corporation's consolidated stockholders' equity as of the date thereof in exchange for voting securities (or securities convertible into or exchangeable for voting securities, or options, warrants or rights to purchase voting securities or securities convertible into or exchangeable for voting securities) of the Corporation or any subsidiary of the Corporation by any other corporation, person or other entity which is the beneficial owner, directly or indirectly, of 20% or more of the outstanding voting securities of the Corporation; or (4) any reclassification of securities, recapitalization or other transactions designed to decrease the numbers of hollers of the Corporation's voting securities remaining after any other corporation, person or other entity has acquired 20% or more of the outstanding voting securities of the Corporation. A corporation, person or other entity (other than the Corporation or any subsidiary of the Corporation) which is the beneficial owner, directly or indirectly, of 20% or more of the Corporation's outstanding voting securities (taken together as a single class) is herein referred to as the "Acquiring Entity". B. Notwithstanding the fact that by law or by agreement with a national securities exchange or otherwise, no vote, or a lesser vote, of shareholders may be specified or required, the affirmative vote of the holders of at least seventy-five (75%) percent of outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken together as a single class) shall be required to approve any Business Combination or any plan or proposal for the liquidation or dissolution of the Corporation which would require or permit a distribution of any surplus remaining after payment of all debts and liabilities o the Corporation to the shareholders in accordance with their respective rights and preferences. C. Notwithstanding the foregoing, if three-fourths (3/4) of the entire Board of Directors (or if there is a person or persons serving on the Board other than Continuing Directors (as hereinafter defined); in which event this requirement shall be for three-fourths (3/4) of the Continuing Directors ) recommends in favor of acceptance of Business Combination or a plan of liquidation or dissolution described in paragraph B of this Article 6, the Board may waive the provisions above requiring a greater percentage of shareholder vote and the same may be effected upon the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken together as a single class). If any provision herein requiring a 75% shareholder approval is finally judicially determined invalid, then a Business Combination or plan of liquidation or dissolution must be approved by the affirmative vote of the holders of not less than two-thirds (2/3) of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken together as a single class). A "Continuing Director" shall mean a person who was a member of the Board of Directors of the Corporation elected prior to the date as of which any Acquiring Entity acquired in excess of twenty (20%) percent of the Corporation's outstanding voting securities (taken together as a single class), or a person designated (before his initial election as a director) as a Continuing Director by a majority of the then Continuing Directors. Article 7 --------- Any amendment, alteration, change or repeal of these Articles of Incorporation or the By-Laws of the Corporation shall require the affirmative vote of the holders of at least seventy-five (75%) percent of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken as a single class); provided, however, that this Article 7 shall not apply to, and such seventy-five (75%) percent vote shall not be required for, and the affirmative vote or a majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken together as a single class) shall be required for, any amendment, alteration, change or repeal recommended to the stockholders by three-fourths (3/4) of the entire Board of Directors (or if there is a person or persons serving on the Board other than Continuing Directors, by three-fourths (3/4) of the Continuing Directors). If any of the foregoing provisions are finally judicially determined to be invalid, then these Articles of Incorporation and the By-Laws of the Corporation may only be amended, altered, changed or repealed by the affirmative vote of the holders of not less than two-thirds (2/3) of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken together as a single class). Article 8 --------- The management, control and government of the Corporation shall be vested in a Board of Directors consisting of not less than nine (9) nor more than twenty-five (25) members in number, as fixed from time to time by the Board of Directors of the Corporation. The Directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Each class shall be as nearly equal in number as possible. If the number of Class I, Class II or Class III Directors is fixed for any term of office, it shall not be increased during that term, except by a majority vote of Directors, the term of office of each class shall be three years; provided, however, that the term of office of the initial Class I Directors shall expire at the annual election of Directors by the shareholders of the Corporation in 1985; the term of office of the initial Class II Directors shall expire at the annual election of Directors by the shareholders of the Corporation in 1986; the term of office of the initial Class III Directors shall expire at the annual election of Directors by the shareholders of the Corporation in 1987, so that, after the expiration of each such initial term, the terms of office of one class of Directors shall expire each year when their respective successors have been duly elected by the shareholders and qualified. At each annual election of the Directors by the shareholders of the Corporation held during and after 1984, the Directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the Directors they succeed. A Director must be a shareholder of the Corporation. If a vacancy occurs on the Board of Directors of the Corporation after the first annual election of Directors for the class in which such Director sits, a majority of the remaining Directors shall have the exclusive power to fill the vacancy by electing a Director to hold office for the unexpired term in respect of which the vacancy occurred. Article 9 --------- The shareholders of this Corporation shall not be permitted to cumulate their votes for the election of directors. Article 10 ---------- The Corporation shall indemnify its officers and directors and the officers and directors of its subsidiaries to the full extent permitted by and under the terms and conditions of Section 410 of the Business Corporation Law of the Commonwealth of Pennsylvania, as amended from time to time, and the Corporation may, be action of its Board of Directors, indemnify all other persons it may indemnify under said Section 4.0 pursuant thereto. Article 11 ---------- The name and post office address of the incorporators and the number and class of shares subscribed by him is: Number of and Name Address Class of Shares - ---- ------- --------------- David B. Harwi 3800 Centre Square West 1 Philadelphia, PA 19102 Common IN TESTIMONY WHEREOF, the incorporator has signed and sealed these Articles of Incorporation this 7th day of March 1984. /s/ DAVID B. HARWI(SEAL) ------------------------ David B. Harwi APPLICANT ACCT. NO. DSCB: BCL-806 (Rev. 11-72) (Line for numbering) Articles of COMMONWEALTH OF PENNSYLVANIA Amendment - DEPARTMENT OF STATE Domestic Business Corporation CORPORATION BUREAU - -------------------------------------------------------------------------------- In compliance with the requirements of section 806 of the Business Corporation Law, act of May 5, 1933 (P. L. 364) (15 P. S. ss.1806), the undersigned corporation desiring to amend its Articles, does hereby certify that: 1. The name of the corporation is: First West Chester Corporation - -------------------------------------------------------------------------------- 2. The location of its registered office in this Commonwealth is (the Department of State is hereby authorized to correct the following statement to conform to the records of the Department): 9 North High Street - -------------------------------------------------------------------------------- (NUMBER) (STREET) West Chester Pennsylvania 19380 - -------------------------------------------------------------------------------- (CITY) (ZIP CODE) 3. The statute by or under which it was incorporated is: Pennsylvania Business Corporation Law, - -------------------------------------------------------------------------------- Act of May 5, 1933, P.L. 364, as amended. - -------------------------------------------------------------------------------- 4. The date of its incorporation is: March 9, 1984 ------------- 5. (Check, and if appropriate, complete one of the following): |_| The meeting of the shareholders of the corporation at which the amendment was adopted was held at the time and place and pursuant to the kind and period of notice herein stated. Time: The day of 19 ------------------------ ------------------ --- Place: ------------------------------------------------------------ Kind and period of notice ---------------------------------------------- - -------------------------------------------------------------------------------- |X| The amendment was adopted by a consent in writing, setting forth the action so taken, signed by all of the shareholders entitled to vote thereon and filed with the Secretary of the corporation. 6. At the time of the action of shareholders: (a) The total number of shares outstanding was: 5 - -------------------------------------------------------------------------------- (b) The number of shares entitled to vote was: 5 - -------------------------------------------------------------------------------- 7. In the action taken by the shareholders: (a) The number of shares voted in favor of the amendment was: 5 - -------------------------------------------------------------------------------- (b) The number of shares voted against the amendment was: 0 - -------------------------------------------------------------------------------- 8. The amendment adopted by the shareholders, set forth in full, is as follows: "RESOLVED, that the Articles of Incorporation of this Corporation be amended so that the first sentence of Article 8 shall read as follows: 'The management, control and government of the Corporation shall be vested in a Board of Directors consisting of not less than five (5) nor more than twenty-five (25) members in number, as fixed from time to time by the Board of Directors of the Corporation.'" IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer and its corporate seal, duly attested by another such officer, to be hereunto affixed this 23rd day of March , 1984. -------- -- FIRST WEST CHESTER CORPORATION ------------------------------ (NAME OF CORPORATION) Attest: /s/ EDWARD J. COTTER By: /s/ CHARLES E. SWOPE - -------------------- --- -------------------- (SIGNATURE) (SIGNATURE) Edward J. Cotter, Secretary Charles E. Swope, President - --------------------------- --------------------------- (TITLE, SECRETARY, ASSISTANT SECRETARY, ETC.) (TITLE, PRESIDENT, VICE PRESIDENT, ETC.) (CORPORATE SEAL) INSTRUCTIONS FOR COMPLETION OF FORM A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name) or Form DSCB:17.3 (Consent to Use of Similar Name) shall accompany Articles of Amendment effecting a change of name. B. Any necessary governmental approvals shall accompany this form. C. Where action is taken by partial written consent pursuant to the Articles, the second alternate of Paragraph 5 should be modified accordingly. D. If the shares of any class were entitled to vote as a class, the number of shares of each class so entitled and the number of shares of all other classes entitled to vote should be set forth in Paragraph 6(b). E. If the shares of any class were entitled to vote as a class, the number of shares of such class and the number of shares of all other classes voted for and against such amendment respectively should be set forth in Paragraphs 7(a) and 7(b). F. BCL #807 (15 P. S. ss.1807) requires that the corporation shall advertise its intention to file or the filing of Articles of Amendment. Proofs of publication of such advertising should not be delivered to the Department, but should be filed with the minutes of the corporation. DSCB: BCL-806 (Rev. 8-72)-2 APPLICANT ACCT. NO. DSCB: BCL-806 (Rev. 11-72) --------------------- (Line for numbering) Articles of COMMONWEALTH OF PENNSYLVANIA Amendment - DEPARTMENT OF STATE Domestic Business Corporation CORPORATION BUREAU - -------------------------------------------------------------------------------- In compliance with the requirements of section 806 of the Business Corporation Law, act of May 5, 1933 (P. L. 364) (15 P. S. ss.1806), the undersigned corporation desiring to amend its Articles, does hereby certify that: 1. The name of the corporation is: First West Chester Corporation - -------------------------------------------------------------------------------- 2. The location of its registered office in this Commonwealth is (the Department of State is hereby authorized to correct the following statement to conform to the records of the Department): 9 North High Street - -------------------------------------------------------------------------------- (NUMBER) (STREET) West Chester Pennsylvania 19380 - -------------------------------------------------------------------------------- (CITY) (ZIP CODE) 3. The statute by or under which it was incorporated is: Pennsylvania Business Corporation Law, Act of May 5, 1933, P.L. 364, as amended. - -------------------------------------------------------------------------------- 4. The date of its incorporation is: 5. (Check, and if appropriate, complete one of the following): |X| The meeting of the shareholders of the corporation at which the amendment was adopted was held at the time and place and pursuant to the kind and period of notice herein stated. Time: The 1st day of April 1986 ------------------------ ------------------------ -- Place: West Chester, Pennsylvania --------------------------------------- Kind and period of notice Proxy Statement dated March 3, 1986 was mailed to shareholders on March 7, 1986 -------------------------------------------- |X| The amendment was adopted by a consent in writing, setting forth the action so taken, signed by all of the shareholders entitled to vote thereon and filed with the Secretary of the corporation. 6. At the time of the action of shareholders: (a) The total number of shares outstanding was: 300,000 shares common stock - -------------------------------------------------------------------------------- (b) The number of shares entitled to vote was: 300,000 shares common stock - -------------------------------------------------------------------------------- 7. In the action taken by the shareholders: (a) The number of shares voted in favor of the amendment was: 241,219 - -------------------------------------------------------------------------------- (b) The number of shares voted against the amendment was: 3,610 - -------------------------------------------------------------------------------- 9. The amendment adopted by the shareholders, set forth in full, is as follows: RESOLVED, that the Articles of Incorporation of the Corporation be amended by changing the Article thereof numbered "FIFTH" so that, as amended said Article shall be and read as follows: "FIFTH. Capitalization. The aggregate number of shares of capital stock which the corporation shall have authority to issue is Five Million (5,000,000) shares of Common Stock with a par value of One Dollar ($1.00) per share." IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer and its corporate seal, duly attested by another such officer, to be hereunto affixed this 1st day of April , 1986. --- ------------- -- FIRST WEST CHESTER CORPORATION (NAME OF CORPORATION) Attest: /s/ EDWARD J, COTTER By: /s/ CHARLES E. SWOPE - ----------------------- ------------------------- (SIGNATURE) (SIGNATURE) Edward J. Cotter, Secretary Charles E. Swope, President - --------------------------- --------------------------- (TITLE, SECRETARY, ASSISTANT SECRETARY, ETC.) (TITLE, PRESIDENT, VICE PRESIDENT, ETC.) (CORPORATE SEAL) INSTRUCTIONS FOR COMPLETION OF FORM A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name) or Form DSCB:17.3 (Consent to Use of Similar Name) shall accompany Articles of Amendment effecting a change of name. B. Any necessary governmental approvals shall accompany this form. C. Where action is taken by partial written consent pursuant to the Articles, the second alternate of Paragraph 5 should be modified accordingly. D. If the shares of any class were entitled to vote as a class, the number of shares of each class so entitled and the number of shares of all other classes entitled to vote should be set forth in Paragraph 6(b). E. If the shares of any class were entitled to vote as a class, the number of shares of such class and the number of shares of all other classes voted for and against such amendment respectively should be set forth in Paragraphs 7(a) and 7(b). F. BCL #807 (15 P. S. ss.1807) requires that the corporation shall advertise its intention to file or the filing of Articles of Amendment. Proofs of publication of such advertising should not be delivered to the Department, but should be filed with the minutes of the corporation. DSCB: BCL-806 (Rev. 8-72)-2 APPLICANT ACCT. NO. DSCB: BCL-806 (Rev. 11-72) -------------------- (Line for numbering) Articles of COMMONWEALTH OF PENNSYLVANIA Amendment - DEPARTMENT OF STATE Domestic Business Corporation CORPORATION BUREAU - -------------------------------------------------------------------------------- In compliance with the requirements of section 806 of the Business Corporation Law, act of May 5, 1933 (P. L. 364) (15 P.S. ss.1806), the under signed corporation desiring to amend its Articles, does hereby certify that: 1. The name of the corporation is: First West Chester Corporation - -------------------------------------------------------------------------------- 2. The location of its registered office in this Commonwealth is (the Department of State is hereby authorized to correct the following statement to conform to the records of the Department): 9 North High Street - -------------------------------------------------------------------------------- (NUMBER) (STREET) West Chester Pennsylvania 19380 - -------------------------------------------------------------------------------- (CITY) (ZIP CODE) 3. The statute by or under which it was incorporated is: Pennsylvania Business Corporation Law, Act of May 5, 1933, P.L. 364, as amended. - -------------------------------------------------------------------------------- 4. The date of its incorporation is: 3/9/84 5. (Check, and if appropriate, complete one of the following): |X| The meeting of the shareholders of the corporation at which the amendment was adopted was held at the time and place and pursuant to the kind and period of notice herein stated. Time: The 24th day of March 1987 ------------------------ ------------------------ -- Place: West Chester, Pennsylvania ---------------------------------------------------------------- Kind and period of notice Proxy Statement dated March 2, 1987 was mailed to shareholders on March 3, 1987. --------------------------------------------- |_| The amendment was adopted by a consent in writing, setting forth the action so taken, signed by all of the shareholders entitled to vote thereon and filed with the Secretary of the corporation. 6. At the time of the action of shareholders: (a) The total number of shares outstanding was: 1,200,000 shares common stock - -------------------------------------------------------------------------------- (b) The number of shares entitled to vote was: 1,200,00 shares common stock - -------------------------------------------------------------------------------- 7. In the action taken by the shareholders: (a) The number of shares voted in favor of the amendment was: - -------------------------------------------------------------------------------- (b) The number of shares voted against the amendment was: - -------------------------------------------------------------------------------- 8. The amendment adopted by the shareholders, set forth in full, is as follows: RESOLVED, that Article X of the Articles of Incorporation of the Corporation shall hereby be amended in its entirety to read as follows: "ARTICLE X The Corporation shall indemnify the officers, directors, employees and agents of the Corporation and its subsidiaries to the extent set forth in the By-Laws of the Corporation as amended from time to time." IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles of Amendment to be signed by a duly authorized officer and its corporate seal, duly attested by another such officer, to be hereunto affixed this 24th day of March, 1987. ---- ----- -- FIRST WEST CHESTER CORPORATION (NAME OF CORPORATION) Attest: /s/ EDWARD J. COTTER By: /s/ CHARLES E. SWOPE - -------------------- ----------------------------- (SIGNATURE) (SIGNATURE) Edward J. Cotter Charles E. Swope Secretary President - ------------------------------------------- ----------------------------- (TITLE, SECRETARY, ASSISTANT SECRETARY, ETC.) (TITLE, PRESIDENT, VICE PRESIDENT, ETC.) (CORPORATE SEAL) INSTRUCTIONS FOR COMPLETION OF FORM A. Any necessary copies of Form DSCB:17.2 (Consent to Appropriation of Name) or Form DSCB:17.3 (Consent to Use of Similar Name) shall accompany Articles of Amendment effecting a change of name. B. Any necessary governmental approvals shall accompany this form. C. Where action is taken by partial written consent pursuant to the Articles, the second alternate of Paragraph 5 should be modified accordingly. D. If the shares of any class were entitled to vote as a class, the number of shares of each class so entitled and the number of shares of all other classes entitled to vote should be set forth in Paragraph 6(b). E. If the shares of any class were entitled to vote as a class, the number of shares of such class and the number of shares of all other classes voted for and against such amendment respectively should be set forth in Paragraphs 7(a) and 7(b). F. BCL #807 (15 P. S. ss.1807) requires that the corporation shall advertise its intention to file or the filing of Articles of Amendment. Proofs of publication of such advertising should not be delivered to the Department, but should be filed with the minutes of the corporation. EX-3.(II) 3 BY-LAWS OF THE CORPORATION, AS AMENDED FIRST WEST CHESTER CORPORATION ---------- BY-LAWS ---------- ARTICLE I OFFICES Section 1.01 Registered Office. The location and post office address of the registered office of the Corporation in Pennsylvania shall be as specified in the Articles of Incorporation. Section 1.02 Other Offices. The Corporation shall also have offices at such other places within or without the Commonwealth of Pennsylvania as the Board of Directors may from time to time appoint and the business of the Corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.01 Place of Meetings. All meetings of the shareholders shall be held at such place, within or without the Commonwealth, as may be designated from time to time by the Board of Directors and stated in the notice of meeting or in a duly executed waiver of notice thereof. Section 2.02 Date of Annual Meetings. An annual meeting of the shareholders commencing with the year 1985, shall be held in each calendar year within five months after the end of the fiscal year of the Corporation on such day and at such time and place as the Board of Directors shall fix, at which the shareholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. Any business may be transacted at the annual meeting, irrespective of whether the notice of such meeting contains a reference thereto, except as otherwise provided in these By-Laws, or by statute. Section 2.03 Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called at any time by the Chairman of the Board or the President or a majority of the Board of Directors, or shareholders entitled to cast at least one-fifth of the votes which all shareholders are entitled to cast at the particular meeting, upon written request delivered to the Secretary of the Corporation. Such request shall state the purpose or purposes of the proposed meeting. Upon receipt of any such request, it shall be the duty of the Secretary to call a special meeting of the shareholders to be held at such time, not more than sixty days after the receipt of the request, as the Secretary may fix. If the Secretary shall neglect or refuse to issue such call, the person or persons making the request may issue the call. Business transacted at all special meetings of shareholders shall be limited to the purposes stated in the notice. Section 2.04 Notice. Written notice of every meeting of the shareholders, specifying the place, date and hour and the general nature of the business of the meeting, shall be given either personally or by mail or by telegram at least five days prior to the meeting, unless a greater period of notice is required by statute, to each shareholder entitled to vote thereat. Section 2.05 List of Shareholders. The officer or agent having charge of the transfer books for shares of the Corporation shall prepare and make, at least five days before each meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, with the address and the number of shares held by each, which list shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. Section 2.06 Quorum. A shareholder's meeting duly called shall not be organized for the transaction of business unless a quorum is present. Unless provided otherwise by statute, the Articles of Incorporation, or these By-Laws, the presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast on the particular matter shall be requisite and shall constitute a quorum for the purpose of considering such matter. The shareholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a meeting of the shareholders cannot be organized because a quorum has not attended, the shareholders entitled to vote thereat, present in person or by proxy, shall have power, except as otherwise provided by statute, to adjourn the meeting to such time and place as they may determine. In the case of any meeting called for the election of directors, those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors. At any adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. Section 2.07 Voting. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the shares having voting powers, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes or of the Articles of Incorporation or of these By-Laws, a different vote is required in which case such express provision shall govern and control the decision of such question. Except as otherwise provided by statute, or in the Articles of Incorporation, every shareholder of record shall have the right, at every shareholders' meeting, to one vote for every share standing in his name on the books of the Corporation. Every shareholder may vote in person or by proxy as provided by law. 2 Section 2.08 Conference Telephone. One or more shareholders may participate in a meeting of the shareholders by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Section 2.09 Informal Action. Any action which may be taken at a meeting of the shareholders may be taken without a meeting if a consent or consents in writing, setting forth the action so taken, shall be signed by all of the shareholders who would be entitled to vote at a meeting for such purpose and shall be filed with the Secretary of the Corporation. Section 2.10 Judges of Election. In advance of any meeting of shareholders, the Board of Directors may appoint Judges of Election, who need not be shareholders, to act at such meeting or any adjournment thereof. If Judges of Election be not so appointed, the Chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of Judges shall be one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present and entitled to vote shall determine whether one or three judges are to be appointed. No person who is a candidate for office shall act as a Judge. If there are three Judges of Election the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. Section 2.11 Manner of Voting. All elections and votes of shareholders shall be viva voce unless otherwise required by law, or unless any shareholder shall file with the Secretary of the meeting a written request that such election or vote shall be by ballot. ARTICLE III DIRECTORS Section 3.01 Number of Directors and Election. The management, control and government of the Corporation shall be vested in a Board of Directors consisting of not less than five (5) nor more than twenty-five (25) members in number, as fixed from time to time by the Board of Directors of the Corporation. The Directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Each class shall be as nearly equal in number as possible. If the number of Class I, Class II or Class III Directors is fixed for any term of office, it shall not be increased during that term, except by a majority vote of the Continuing Directors. Except for the initial Board of Directors, the term of office of each class shall be three years; provided, however, that the term of office of the initial Class I Directors shall expire at the annual election of Directors by the shareholders of the Corporation in 1985; the term of office of the initial Class II Directors shall expire at the annual election of Directors by the shareholders of the Corporation in 1986; the term of office of the initial Class III Directors shall expire at the annual 3 election of Directors by the shareholders of the Corporation in 1987, so that, after the expiration of each such initial term, the terms of office of one class of Directors shall expire each year when their respective successors have been duly elected by the shareholders and qualified. At each annual election of the Directors by the shareholders of the Corporation held during and after 1984, the Directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the Directors they succeed. A Director must be a shareholder of the Corporation. Section 3.02 Vacancies. If a vacancy occurs on the Board of Directors of the Corporation after the first annual election of Directors for the class in which such Director sits, a majority of the remaining Directors shall have the exclusive power to fill the vacancy by electing a Director to hold office for the unexpired term in respect of which the vacancy occurred. Section 3.03 Powers. The business of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-Laws directed or required to be exercised and done by the shareholders. Section 3.04 Meetings. The Board of Directors may hold meetings, both regular and special, either within or without the Commonwealth of Pennsylvania. Section 3.05 First Meeting. The first meeting of each newly elected Board of Directors shall be held immediately following the annual meeting of shareholders at which such directors are elected and no notice of such meeting shall be necessary or the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. At such regular annual meeting the Board of Directors shall organize itself and elect the officers of the Corporation for the ensuing year and may transact any other business. Section 3.06 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be designated by the directors. Section 3.07 Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President on two days' notice to each director, given either personally or by mail or by telegram; special meetings shall be called by the Chairman of the Board or the President or the Secretary in like manner and on like notice on the written request of two directors. Section 3.08 Quorum. At all meetings of the Board of Directors a majority of the directors in office shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the directors at a meeting at which a quorum is present shall be the acts of the Board of Directors. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than by announcement at the meeting, until a quorum shall be present. 4 Section 3.09 Conference Telephone. One or more directors may participate in a meeting of the Board of Directors (or a committee thereof) by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Section 3.10 Informal Action. Any action which may be taken at a meeting of the directors or the members of the executive committee may be taken without a meeting if a consent or consents in writing setting forth the action so taken shall be signed by all the directors or the members of the executive committee, as the case may be, and shall be filed with the secretary of the Corporation. Section 3.11 Committees. The Board of Directors may, by resolution adopted by a majority of the whole Board of Directors, designate one or more committees, each committee to consist of two or more directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided by resolution of the Board of Directors, shall have and exercise the authority of the Board of Directors in the management of the business and affairs of the Corporation. Vacancies in the membership of any committee shall be filled by the Board of Directors at a regular or special meeting of the Board of Directors. Each Committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. Section 3.12 Compensation. Directors, as such, shall not receive any stated salary for their services but, by resolution of the Board of Directors, a fixed sum, and expenses of attendance, may be allowed for attendance at each regular or special meeting of the Board of Directors or at meetings of the Executive Committee. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE IV OFFICERS AND AGENTS Section 4.01 Titles. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Secretary and a Treasurer who shall have such powers and duties as set forth herein and as from time to time determined by the Board of Directors. The board may also elect, at its discretion, a Chairman of the Board, one or more vice presidents, assistant secretaries and assistant treasurers, and such other officers, agents, trustees and fiduciaries as it shall deem appropriate who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. The Chairman of the Board, President and Secretary shall be natural persons of full age; the Treasurer may be a corporation but, if a natural person, shall be of full age. Any number of the aforesaid offices may be held by the same person. 5 Section 4.02 Election of Officers. The Board of Directors, immediately after each annual meeting of shareholders, shall elect a President, a Secretary and a Treasurer, who need not be members of the Board of Directors. Section 4.03 Salaries. The salaries of the executive officers of the Corporation shall be fixed by the Board of Directors. The President shall fix the compensation of all other officers, agents and employees of the Corporation. Section 4.04 Terms of Office. The officers of the Corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. ARTICLE V DUTIES OF OFFICERS Section 5.01 Chairman of the Board. The Chairman of the Board, if any, shall have such powers and perform such duties as may be assigned to him by the Board of Directors. Section 5.02 President. Unless provided otherwise by the Board of Directors, the President shall be the chief executive officer of the Corporation; shall preside at all meetings of the shareholders and the Board of Directors; shall have general and active management of the business of the Corporation; and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Section 5.03 Vice Presidents. The Vice-President, or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President, and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 5.04 Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the Executive Committee when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the President, under whose supervision he shall be. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board of Directors, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature. 6 Section 5.05 Assistant Secretaries. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 5.06 Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. Section 5.07 Assistant Treasurers. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI SHARES OF CAPITAL STOCK Section 6.01 Right to Certificate. Every shareholder of record of fully paid stock shall be entitled to a share certificate representing the shares owned by him. Section 6.02 Form of Certificate. Share certificates shall be in such form as may be required by law and prescribed by the Board of Directors. Every share certificate shall show the name of the registered holder, the number and class of shares and the series, if any, represented thereby, and the par value of each share or a statement that such shares are without par value. Every share certificate shall be signed by the President or a Vice-President, and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall be sealed with the corporate seal, which may be a facsimile, either engraved or printed. Where a certificate is signed by a transfer agent or a registrar, the signature of any such corporate officer may be a facsimile, engraved or printed. If any officer whose signature appears on such certificate shall cease to be such officer of the Corporation for any reason, such certificate may nevertheless be adopted by the Corporation and be issued and delivered with the same effect as though the person had not ceased to be such officer of the Corporation. 7 Section 6.03 Registered Stockholders. Each shareholder, at the time of the issuance of the share certificate to him shall notify the Secretary of the Corporation in writing of the address to which such shareholder wishes notices relating to the business of the Corporation to be mailed to him. He shall thereafter notify the Secretary in writing of any changes in such address. The Corporation shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, and shall not be liable for any registration or transfer of shares which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration or transfer, or with knowledge of such facts that its participation therein amounts to bad faith. Section 6.04 Transfers of Stock. Shares of the capital stock of the Corporation shall be transferable on the books of the Corporation only upon delivery of the certificates representing the same duly endorsed by the person in whose name such shares are registered or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, the original letter of attorney, duly approved or an official copy thereof, duly certified, shall be deposited and remain with the Corporation. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and remain with the Corporation in its discretion. Section 6.05 Lost and Destroyed Certificates. New certificates for shares of stock may be issued to replace certificates lost, stolen, destroyed or mutilated upon such terms and conditions, including proof of loss or destruction and the giving of a satisfactory bond of indemnity as the Board of Directors or the transfer agent of the corporation from time to time may determine. Section 6.06 Record Date. Unless otherwise required by law, the Board of Directors may fix a time, not more than fifty days prior to the date of any meeting of the shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or will go into effect, as a record date for the determination of the shareholders entitled to notice of, or to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or entitled to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion, or exchange of shares. In any such case only such shareholders as shall be shareholders of record on the day fixed shall be entitled to notice of, or to vote at, such meeting or to receive payment of such dividend or distribution, or to receive such allotment of rights, or to exercise any such rights in respect to any such change, conversion or exchange of shares, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after 8 the date so fixed. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of such period, and in such case written or printed notice thereof shall be mailed at least ten days before the closing thereof to each shareholder of record at the address appearing on the records of the Corporation or supplied by him to the Corporation for the purpose of notice. While the stock transfer books are closed, no transfer of shares shall be made thereon. Unless such a record date is fixed by the Board of Directors for the determination of shareholders entitled to receive notice of, or vote at, a shareholders' meeting, transferees of shares which are transferred on the books of the Corporation within ten days next preceding the date of such meeting shall not be entitled to notice of or to vote at such meeting. ARTICLE VII DIVIDENDS Section 7.01 Declaration of Dividends. Dividends upon the shares of the Corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in its shares, subject to the provisions of the Articles of Incorporation. Section 7.02 Reserves. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE VIII INDEMNIFICATION AND INSURANCE Section 8.01 Scope of Indemnification. The Corporation shall indemnify its officers and directors and the officers and directors of its subsidiaries to the full extent permitted by Sections 410(a) and (b) of the Pennsylvania Business Corporation Law, as amended from time to time, in accordance with the terms and conditions of Section 410 of that Act, as may, by action of its Board of Directors, indemnify all other persons it may indemnify under said Section 410 pursuant thereto. Section 8.02 Insurance. The Board of Directors may authorize, by a vote of a majority of the whole Board of Directors, the Corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VIII. 9 ARTICLE IX GENERAL PROVISIONS Section 9.01 Financial Reports. The Board of Directors shall have discretion to determine whether financial reports shall be sent to shareholders, what such reports shall contain, and whether such reports shall be audited or accompanied by the report of an independent or certified public accountant. Section 9.02 Corporate Seal. The Board of Directors shall prescribe the form of a suitable corporate seal, which shall contain the full name of the Corporation and the year and state of incorporation. Section 9.03 Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 9.04 Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 9.05 Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Attendance of a person, either in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting. ARTICLE X AMENDMENTS Section 10.01 Amendment. Any amendment, alteration, change or repeal of these By-Laws of the Corporation shall require the affirmative vote of the holders of at least seventy-five (75%) percent of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken as a single class); provided, however, that this Section 10.01 shall not apply to, and such seventy-five (75%) percent vote shall not be required for, and the affirmative vote or a majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken together as a single class) shall be required for, any amendment, alteration, change or repeal recommended to the stockholders by three-fourths (3/4) of the entire Board of Directors (or if there is a person or persons serving on the Board other than Continuing Directors, by three-fourths (3/4) of the Continuing Directors). If any of the foregoing provisions are finally judicially determined to be invalid, then these By-Laws of the Corporation may only be amended, altered, changed or repealed by the affirmative vote of the holders of not less than two-thirds (2/3) of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (taken together as a single class). 10 EX-10.1 4 EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT FIRST WEST CHESTER CORPORATION THE FIRST NATIONAL BANK OF WEST CHESTER and CHARLES E. SWOPE MacELREE, HARVEY, GALLAGHER, FEATHERMAN & SEBASTIAN, LTD. 17 West Miner Street P.O. Box 660 West Chester, PA 19381-0660 (610) 436-0100 TABLE OF CONTENTS ----------------- 1. Employment..................................................................2 2. Term........................................................................2 3. Compensation................................................................2 4. Position and Responsibilities...............................................3 5. Breach of Agreement.........................................................4 6. Termination.................................................................5 7. Expenses and Automobile.....................................................7 8. Disability..................................................................7 9. Restrictive Covenant........................................................7 10. Binding Effect.............................................................8 11. Notice.....................................................................8 12. Waiver of Breach...........................................................8 13. Vested Benefits............................................................9 14. Savings Clause.............................................................9 15. Governing Law..............................................................9 16. Entire Agreement; Modifications............................................9 EXHIBIT "A"...................................................................11 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT made this 1st day of January, 1998, by and between FIRST WEST CHESTER CORPORATION, a Pennsylvania business corporation, and THE FIRST NATIONAL BANK OF WEST CHESTER, a wholly owned subsidiary of First West Chester Corporation and a national banking association with its principal offices located at 9 North High Street, West Chester, Pennsylvania (hereinafter individually referred to as "Corporation" and "Bank" respectively, and collectively referred to as "FNB") and CHARLES E. SWOPE, of West Chester, Pennsylvania (Hereinafter referred to as "Swope"). WITNESSETH: ----------- WHEREAS, Swope is the President of the Corporation and the Bank and a member of the Boards of Directors of the Corporation and the Bank and has served as Chief Executive Officer of the Corporation continuously during the past fourteen (14) years and has served as Chief Executive Officer of the Bank continuously during the past twenty (20) years; and WHEREAS, Swope's leadership skills and services have constituted a major factor in the successful growth and development of FNB; and WHEREAS, FNB desires to employ and retain the experience and financial ability and services of Swope as Chief Executive Officer from the effective date hereof and to prevent any other business in competition with FNB from securing the benefit of his services, background and expertise in the banking business; and WHEREAS, the terms, conditions and undertaking of this Agreement were submitted to and duly approved and authorized by the Boards of Directors of both the Corporation and the Bank at separate meetings held on or about the 15th day of September, 1997 (the meeting date of the Board of Directors of the Corporation) and on or about the 15th day of September, 1997 (the meeting date of the Board of Directors of the Bank). NOW, THEREFORE, in consideration of the foregoing recitals, which are hereby incorporated by reference, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. FNB hereby employs Swope, and Swope hereby accepts such employment, under and subject to the terms and conditions hereinafter set forth. 2. Term. Subject to the provisions for termination of this Agreement provided in Paragraph 6 hereof, the term of this Agreement shall be for a period of ten (10) years, commencing January 1, 1998, and terminating December 31, 2007 (the "Term"). 3. Compensation. During the Term of this Agreement, FNB shall pay Swope a salary (hereinafter referred to as "Compensation") and provide Swope with life, health and disability insurance coverage, retirement benefits, vacations, bonuses, and other benefits (hereinafter collectively referred to as the "Benefits"), the amounts and nature of which shall be fixed by the Boards of Directors or the Corporation and the Bank from time to time and set forth on the attached Exhibit "A"; provided, however, that in no event shall Swope's Compensation be less than one hundred percent (100%) of the Compensation which he is receiving as of the date of this Agreement and in no event shall Swope's Benefits be less than or materially different from the Benefits he is receiving as of the date of this Agreement. 4. Position and Responsibilities. (a) During the first calendar year of the Term of this Agreement, Swope shall be employed as the President and Chief Executive Officer of the Corporation and the Bank, and it is contemplated by the parties that Swope shall continue to serve as the President and Chief Executive Officer of the Corporation and the Bank throughout the entire Term of this Agreement; provided, however, that in no event shall Swope be employed by the Corporation and/or the Bank during any calendar year subsequent to the first calendar year of this Agreement at a lower position or rank or with substantially diminished authority or responsibilities than Senior Vice President and any such diminution in position or authority shall be considered a breach of this Agreement. Swope shall devote his full time and efforts solely to the business of FNB and shall diligently, efficiently and effectively perform such duties as shall be assigned to him, which shall consist of the general and active management of the business of FNB and such other duties of supervision and management as are generally vested in the office of President or Senior Vice President of a corporation or as are set forth in job descriptions established by the Boards of Directors of the Corporation and/or the Bank for such offices. Swope shall at all times during the Term of this Agreement refrain from doing any act, disclosing any information or making any statements to any person other than officers of FNB which may result in the disclosure of confidential information or adversely affect the good reputation of FNB in the community or which might adversely affect the professional or business relationship between FNB and any business, depositor, borrower or any other person with whom FNB is doing business or is contemplating doing business. (b) FNB shall provide Swope with an office, secretarial assistance and such other facilities and support services as shall be suitable to Swope's position and responsibilities as set forth above and as may be necessary to enable Swope to perform such duties effectively and efficiently. (c) In connection with Swope's employment by the Corporation and the Bank, Swope shall maintain his office at the principal executive offices of FNB located at 9 North High Street, West Chester, Pennsylvania, or at such other FNB office as the Board of Directors of the Corporation and/or the Bank may select within the immediate vicinity of West Chester, Pennsylvania. 5. Breach of Agreement. If FNB breaches any provision of this Agreement (specifically including, but not limited to, substantial diminution in the position and authority of Swope as set forth in the preceding paragraphs), Swope may leave the employment of FNB whereupon he shall be under no obligation to perform his duties hereunder and shall have no further liability or obligations under any provisions of this Agreement. In such event, however, FNB shall be obligated to continue to provide Swope with the Compensation and Benefits provided for herein for the remaining period of this Agreement at the rate, times and intervals at which such Compensation is being paid on the date on which FNB commits a breach of this Agreement. 6. Termination. (a) Swope may terminate this Agreement effective as of December 31st or any year during the Term of this Agreement for any reason, by giving the Boards of Directors of the Corporation and the Bank written notice thereof on or before December 1st of such year. If Swope terminates this Agreement pursuant to this subparagraph, FNB shall be under no obligation to pay any Compensation or provide any Benefits to Swope following the effective date of such termination, except that FNB shall remain liable to pay Compensation and Benefits which have accrued but which remain unpaid or unfurnished as of the effective date of such termination. (b) The Board of Directors of the Corporation or the Bank may terminate this Agreement at any time if Swope is convicted of a crime which is a felony under the laws of the state in which he is prosecuted for such crime and which involves theft, embezzlement, breach of fiduciary duty, or any similar crime involving moral turpitude, or if he breaches any provision of this Agreement or fails to provide the services which are required of him under the terms of this Agreement. However, prior to terminating this Agreement by reason of Swope's failure to provide services hereunder or his breach of any provision of this Agreement, the Board of Directors of the Corporation or the Bank shall first give Swope written notice specifically identifying the manner in which Swope has breached the terms of this Agreement and the approximate date or dates on which such violations have occurred. Swope shall have thirty (30) days from his receipt of such notice within which to cure or correct the effects of such breach and to report in writing to the Boards of Directors of the Corporation and the Bank all steps which he has taken to cure such breach. If Swope shall not have corrected or cured such breach or diligently taken all steps which are necessary to do so within the aforesaid thirty (30) day period, the Board of Directors of the Corporation or the Bank may terminate this Agreement effective immediately upon giving Swope written notice of such termination on or after the 31st day following the date on which notice of the breach was delivered to Swope. In the event that the breach asserted by the Board of Directors of the Corporation or the Bank is, because of its nature, incapable of being corrected or cured, then such breach shall not be cause for termination of this Agreement unless such breach shall be deemed to have caused FNB significant and irreparable harm in the opinion of a simple majority of the Board of Directors of the Corporation or the Bank. Any decision rendered by the Board of Directors of the Corporation or the Bank which determines that such breach has caused significant or irreparable harm to FNB shall be final, binding and conclusive for purposes of this Agreement and shall not be subject to challenge by Swope. If such breach is not deemed to have causal FNB significant and irreparable harm, then this Agreement shall not be terminated by reason thereof, but any future breach of a similar nature shall be cause for immediate termination by the Board of Directors of the Corporation or the Bank upon giving Swope written notice thereof. In the event that this Agreement is terminated by FNB pursuant to this subparagraph, then FNB shall be under no obligation to provide compensation or benefits to Swope following the effective date of such termination, except for such Compensation and Benefits which have accrued and which have not been paid or furnished as of the effective date of such termination. (c) Except as provided in this Paragraph 6, this Agreement may not be terminated by either party. 7. Expenses and Automobile. Swope is authorized to incur reasonable expenses for promoting the business of FNB, including expenses for travel, entertainment and similar items on behalf of FNB business. FNB shall reimburse Swope for all such expenses upon the presentation by Swope, from time to time, of an itemized account of such expenditures. In addition, FNB shall provide Swope with an automobile for his use during the Term of this Agreement. 8. Disability. If Swope shall become disabled (as determined by FNB's insurance carrier or a physician of its choice) during the Term of this Agreement, then from and after the date upon which it is determined that Swope became disabled and until such time as Swope returns to the full time employment at FNB, he shall not receive his Compensation and Benefits, but shall only be entitled to receive disability benefits as are provided under the disability insurance and/or salary continuation policy covering Swope which is maintained in force by FNB at the time such disability occurs. FNB hereby covenants and agrees to maintain a disability insurance policy and/or salary continuation policy covering Swope during the entire Term of this Agreement, and that it shall not cause or suffer any termination, lapse, suspension or modification of any of such policies or any reductions in the amounts of coverage provided thereunder without first giving Swope at least fifteen (15) days prior written notice thereof. 9. Restrictive Covenant. During the Term of this Agreement and for a period of two (2) years thereafter, Swope shall not, directly or indirectly, be employed by any other bank or financial institution doing business in Chester County, Pennsylvania; provided, however, that if FNB breaches this Agreement and Swope terminates this Agreement by reason thereof, this restrictive covenant shall be null and void and Swope shall be entitled to be employed by any commercial banking institution doing business in Chester County, Pennsylvania or in any other location. 10. Binding Effect. This Agreement shall inure to the benefit of and be binding upon FNB, its successors and assigns, including, without limitation, any person, partnership, company or corporation which may acquire all or substantially all of the assets or business of FNB or into which FNB may be liquidated, consolidated, merged or otherwise combines, regardless of the identity or form of the surviving entity, and shall inure to the benefit of and be binding upon Swope, his heirs, and personal representatives. 11. Notice. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail, return receipt requested, correctly addressed to Swope's residence, in the case of Swope, or to its principal office, in the case of FNB. Copies of all such notices shall simultaneously be personally delivered or sent by United States first class mail, postage prepaid, to John A. Featherman, III, Esquire, MacElree, Harvey, Gallagher, Featherman & Sebastian, Ltd., 17 West Miner Street, West Chester, Pennsylvania, General Counsel to FNB. 12. Waiver of Breach. Waiver by either party of the breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the other party. 13. Vested Benefits. This Agreement shall not limit or in any way affect any benefits which Swope may be entitled to receive under FNB's pension plan or any other benefits in which Swope has a vested interest as of the date of this Agreement. 14. Savings Clause. Should any provision contained herein be determined by decree or court or other judicial body to be illegal or unenforceable, such provision shall be considered null and void and the remainder of this Agreement shall remain in full force and effect and shall be construed without reference to any such provision. Nevertheless, it is the intention of the parties hereto that any such invalid or unenforceable provision shall, if possible, be construed and enforced in such a manner as to make the same valid and enforceable under applicable law and consistent with the reasonable intention of the parties as expressed in such provision. 15. Governing Law. Questions pertaining to the validity, construction and administration of this Agreement shall be determined in accordance with the laws of the Commonwealth of Pennsylvania. 16. Entire Agreement; Modifications. This Agreement constitutes the entire understanding and agreement between the parties hereto with regard to the subject matter hereof, and there are no other agreements, conditions, representations or understandings, oral or written, expressed or implied, with regard to the subject of this Agreement. This Agreement may be amended or modified only by a written instrument executed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. WITNESS: THE FIRST NATIONAL BANK OF WEST CHESTER /s/ MARYANN L. HIMES By: /s/ DAVID L. PEIRCE - --------------------- ---------------------------------- David L. Peirce, Director Personnel & Compensation Committee ATTEST: FIRST WEST CHESTER CORPORATION /s/ JOHN C. STODDART By: /s/ DAVID L. PEIRCE - -------------------- ---------------------------------- David L. Peirce, Director WITNESS: /s/ MARYANN L. HIMES /s/ CHARLES E. SWOPE - -------------------- ----------------------------------- Charles E. Swope EXHIBIT "A" COMPENSATION AND BENEFITS AS OF JANUARY 1, 1998 1. Annual Salary as of January 1, 1998: $310,000. 2. Health Insurance: Major Medical and Hospitalization Insurance through National Alliance of Self-Funded Group Insurance Trust, Policy/Plan #JB 3/100250 3. Pension Plan: Self-Administered by FNB 4. Salary Continuance (Disability) Policy / Plan: Mutual Benefit Life Insurance Company, Policy #G-33196 5. Life Insurance: One year term renewable through Equitable Insurance Company, Agreement #A0360392 6. Executive Carve-out Life Insurance Policy 7. Bonus Plan: Self-Funded by FNB 8. Automobile Rental, Maintenance and Insurance 9. Five (5) Weeks Paid Vacation EX-10.2 5 AGREEMENT OF SALE DATED DECMBER 1, 1997 AGREEMENT OF SALE ----------------- Fox Commercial Real Estate Services, Inc. Licensed Real Estate Broker THIS AGREEMENT OF SALE ("Agreement") made by and between Robert H. Trenner, Jr. & Debra L. Trenner, h/w ("Seller") and The First National Bank of West Chester ("Buyer") will be effective on the later of: the date it is executed by Seller; or, the date it is executed by Buyer. WITNESSETH: 1. Sale. Seller agrees to sell and convey to Buyer, and Buyer agrees to purchase from Seller, under the conditions hereinafter set forth, all that certain lot, tract and parcel of land together with the buildings and improvements thereon erected and all right, title and interest of Seller in and to the beds of any abutting roads or streets located in the Township of West Goshen, County of Chester, Pennsylvania, (the "Property") more fully described as follows: 887 South Matlack Street (24,000 SF building) West Chester, PA 19382 The zoning classification of the Property is 1-2 Light Industrial Failure of this Agreement to contain the zoning classification (except for single family dwelling) shall render this Agreement voidable by the Buyer and, if voided, any deposits tendered by the Buyer shall be returned to the Buyer without a requirement of court action. Flood Zone: No X Yes ____ (Attach Form 5230) ------- 2. Purchase Price. Buyer agrees to pay to Seller and Seller agrees to accept from Buyer, the sum of $1,750,000.00 (One Million Seven Hundred Fifty Thousand Dollars) ("Purchase Price") in full payment for the Property, payable as follows: (a) $10,000 in cash or by plain check upon Buyer's execution of this Agreement. (b) $65,000 in cash within 14 days of a fully executed agreement 1 (c) The balance of the Purchase Price shall be payable as follows: Cash at time of final settlement. 3. Escrow Provisions. All monies paid on account of this Agreement shall be delivered and held in escrow by FOX COMMERCIAL REAL ESTATE SERVICES, INC. ("Broker") in accordance with the laws of the Commonwealth of Pennsylvania and the provisions of this Agreement shall be applied to the Purchase Price at the time of Settlement. Buyer and Seller understand and agree that all monies paid on account of the Agreement may be held in Broker's trust account pending disbursement as provided for herein. In the event Broker shall be in doubt as to its duties or obligations with regard to said escrow monies, Broker shall not be required to disburse same and may, at its option, continue to hold same until both Buyer and Seller agree as to its disposition, or until final judgment is entered by a court of competent jurisdiction directing its disposition, or Broker may place said earnest money in the registry of a court of competent jurisdiction and file an action in interpleader, in which case Broker shall thereupon be released of all liability for holding earnest money. Buyer and Seller shall pay all costs and legal fees of Broker in connection with such action in interpleader or in connection with any action instituted by either Buyer or Seller related to said earnest money. Except for willful breach of the terms of this Agreement or gross negligence, Broker shall not be liable to any person whomsoever for misdelivery or other error in the handling of the earnest money. 4. Settlement. Settlement ("Settlement") shall be held on or before March 2, 1998 at the office of the title company insuring Buyer's title at 11:00 AM or at such other mutually satisfactory time and place as Buyer and Seller agree upon. 5. Apportionments. At the time of Settlement, real estate taxes, water and sewer charges, rents and other income from the Property, if any, and all other apportionable charges shall be apportioned between Buyer and Seller to the day of Settlement. In the case of real estate taxes, such apportionments are to be based on the period for which such taxes are assessed and due and payable; that is, either on a calendar or fiscal year. Insurance premiums, if Buyer accepts an assignment of Seller's existing policies, are to be apportioned as of the day of Settlement. All apportionments shall be based upon a 30 day month. 6. Title. (a) Title to the Property shall be good and marketable, and such as will be insured at regular rates by any one of the reputable title insurance companies authorized to do business in Pennsylvania, free and clear of all encumbrances, except existing restrictions, easements, zoning ordinances and regulations, including statutes and ordinances relating to the lines of streets and to other municipal improvements affecting the Property. 2 (b) Within thirty (30) days following the effective date of this Agreement, Buyer shall pay for and furnish to Seller, a title report on the Property, together with all exceptions set forth therein, and a written notification to Seller of Buyer's disapproval of any exceptions shown in said title report. In the event of any disapproval, Seller shall have until the date for Settlement within which to eliminate any disapproved exception(s) from the policy or title insurance to be issued in favor of Buyer and if not eliminated, then the Settlement shall be canceled unless Buyer elects to waive, in writing, its prior disapproval. Failure of Buyer to disapprove any exception(s) within the aforementioned time limit shall be deemed an approval of said title report. (c) Buyer shall submit to Seller, no later than thirty (30) days prior to the date of Settlement, a Special Warranty Deed conveying title in accordance with the terms of this Agreement. At the time of Settlement, Buyer shall be responsible for all conveyancing and recording charges, notary fees and other routine settlement costs customarily paid by the Buyer in the jurisdiction where the Property is located. All transfer taxes imposed upon the transaction contemplated by this Agreement shall be divided equally between Buyer and Seller. 7. Commission. 7. Commission. (a) Seller hereby agrees to pay to Broker, as compensation for its services in connection with this sale, an amount equal to six percent (6%) of the Purchase Price. Seller's settlement representative(s) is hereby authorized and directed to deduct such amount from the proceeds of the sale and to pay the same to Broker at the time of Settlement. Furthermore, Seller agrees that, if it has executed an exclusive sales listing agreement with Broker, and if Settlement does not occur hereunder, Seller will be bound by the terms of such exclusive sales listing agreement. (b) Seller and Buyer each warrant to the other and to Broker that it has had no dealings with any real estate broker, agent, finder or other intermediary in connection with the negotiation of the transaction contemplated by this Agreement excepting only Broker and none other and neither know of any other real estate broker, agent, finder or other intermediary who is entitled to a commission in connection with such transaction. Seller will indemnify and hold harmless Buyer and Broker from any loss, claim or damage, including all costs, expenses and attorneys' fees arising from any claim for commission or fees from any person or other entity, excluding Broker and none other , claiming by, under or through Seller. Buyer will indemnify and hold harmless Seller and Broker and none other , from any loss, claim or damage, including all costs, expenses and attorneys' fees arising from any claim for commission or fees from any person or other entity, excluding Broker and none other , claiming by, under or through Buyer. 3 (c) If there is a failure of Settlement by reason of Buyer's default, a commission shall be paid by Seller to Broker only to the extent of 50% of any monies paid on account of this Agreement by Buyer (in which event Broker shall remit to Seller the balance of the monies paid on account of this Agreement), but in no event will the sum paid to the Broker be in excess of the Broker's commission specified in Paragraph 7 (a) above. Thereafter, Broker shall have no further liability or responsibility to either Seller or Buyer. 8. Notices of Improvement. 8. Notices of Improvement. Provided Settlement is completed hereunder, Buyer agrees to comply, at Buyer's sole cost and expense, with the requirements of any notices or ordinances relating to the Property or to any streets bounding thereon, which may be issued or enacted by any governmental authority having jurisdiction over the Property on or after the effective date of this Agreement by such authority. Seller agrees to comply, at Seller's sole cost and expense, with the requirements of any authority at any time prior to the effective date of this Agreement. Seller agrees to forward to Buyer copies of any such notices received by Seller on or after the effective date of this Agreement. 9. Damage. (a) Seller shall maintain the Property (including all items referred to in Paragraph 12 herein) and any personal property as specifically scheduled herein in its present condition, normal wear and tear excepted. (b) Seller shall bear the risk of loss from fire or other casualty until the time of Settlement. In the event of damage to any property included in this sale by fire or other casualties, not repaired or replaced prior to Settlement, Buyer shall have the option to declare this Agreement null and void and receiving all monies paid on account, or to accept the Property in the then condition together with the proceeds of any insurance recovery obtainable by the Seller. Buyer is hereby notified that it may insure its equitable interest in this Property as of the time of the acceptance of this Agreement. 10. Buyer's Default. 10. Buyer's Default. If Buyer fails to complete Settlement on or before the date for Settlement provided for herein, or otherwise defaults in any of the terms and conditions of this Agreement, the amount paid on account of this Agreement, together with such further sum or sums of money as may be paid on account, or as consideration for any extension or amendment of the terms and conditions hereof, at the option of Seller may: 4 (a) Be retained by Seller as assessed and liquidated damages and not as penalty; 11. Buyer's Remedies. In the event title is not as agreed, or in the event of failure of area, or in case the zoning classification or present use of the Property is not as herein set forth, then in any such event, Buyer shall only have the option of completing Settlement subject to any such defect in title, failure of area, zoning classification or violation that may exist, without abatement of the Purchase Price, or of terminating this Agreement, in which latter event all executed original copies of this Agreement in Buyer's possession shall be returned to Seller, all deposit monies paid on account hereof shall be refunded to Buyer, and Seller shall reimburse Buyer for the reasonable costs expended by Buyer for a title search, whereupon this Agreement shall become null and void and neither party shall have any further liability hereunder. 12. Personality. This sale specifically includes all electric, heating, air-conditioning (if any), ventilating and plumbing systems and fixtures owned by Seller and attached to and appurtenant to the Property. 13. Condition of Property. Except as provided by addendum to this Agreement, Buyer, or Buyer's duly authorized representative, has inspected the Property, its value, its condition, including, but not limited to the presence of asbestos, hazardous materials and underground storage tanks, and its suitability for Buyer's intended use thereof, and the same has been purchased as a result of such inspection, and not on reliance upon any representations made by Seller, or any selling agent or other representative of Seller, and agrees that Seller shall not be liable or responsible for any agreement, condition or representation not specifically set forth in writing herein relating to or affecting the physical condition of the Property. 14. Possession. Possession of the Property shall be given to Buyer at the time of Settlement by the execution and delivery of the Special Warranty Deed. Formal tender of the Deed and purchase money is hereby waived. 15. Recording. This Agreement shall not be recorded in any public office. Any attempt by Buyer to record this Agreement shall be of no force and effect and shall constitute a default of Buyer hereunder. 5 16. Contingencies. If any contingency to this Agreement has not been eliminated within the time limits and pursuant to the provisions of this Agreement or waived, this Agreement shall be deemed null and void, all monies deposited hereunder shall be returned to Buyer and the Settlement canceled. 17. Interpretation. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. 18. Binding Effect. This Agreement shall be binding upon Buyer and Seller and their respective heirs, successors and assigns. 19. Agent(s). It is expressly understood and agreed between the parties that the named Agent, Broker, and any Subagent, and their salespeople, employees, officers and or partners, are Agent(s) for the Seller, not the Buyer, however, the Agent(s) may perform services for the Buyer in connection with the financing, insurance and document preparation. 20. Time of the Essence. Time is of the essence in the performance of all the terms, covenants, conditions and obligations of this Agreement. 21. Assignment. Neither this Agreement nor any interest therein is assignable by Buyer without Seller's prior written consent. 22. Entire Agreement. This Agreement represents the entire agreement between Buyer and Seller and supersedes all prior oral and written proposals, communications and agreements regarding the Property. Neither Buyer, Seller nor Broker shall be bound by any understanding, agreement, promise, representation or stipulation, whether oral or written, expressed or implied, not specified in this Agreement. 6 23. Notices. Any notices required or permitted hereunder shall be deemed delivered if addressed to the parties or Broker at the addresses herein following and such notices were deposited in the United States mail with first class postage prepaid. 24. Time Limit. If this Agreement is not accepted by Seller on or before November 21, 1997, the offer contained herein shall be null and void and any check delivered hereunder to Broker shall be returned to Buyer. 25. Foreign Investment In Real Property Tax Act. The Foreign Investment in Real Property Tax Act (FIRPTA), IRC 1445, requires that every purchaser of U. S. real property must, unless an exemption applies, deduct and withhold from Seller's proceeds ten percent (10%) of the gross sale price. The primary exemptions which might be applicable are: (a) Seller provides Purchaser with an affidavit under penalty of perjury, that Seller is not a "foreign person", as defined in FIRPTA, or (b) Seller provides Purchaser with a "qualifying statement", as defined in FIRPTA, issued by the Internal Revenue Service. Seller and Purchaser agree to execute and deliver as appropriate, any instrument, affidavit and statement, and to perform any acts reasonably necessary to carry out the provisions of FIRPTA and regulations promulgated thereunder. 26. Real Estate Recovery Fund. There has been established under the Pennsylvania Real Estate Licensing and Registration Act, a Real Estate Recovery Fund, the purpose of which, subject to the provisions of the Act, is to provide a fund for the payment to aggrieved parties upon grounds of fraud, misrepresentation or deceit in connection with a transaction for which a license is required under the Act. Questions concerning such Fund should be directed to the Real Estate commission whose telephone number is (717) 783-3683. 27. Addendum. Any addendum attached hereto and signed or initialed by Buyer, Seller and Broker shall be deemed a part hereof. 28. Toxic Contamination. A. Seller certifies that he/she has no knowledge of any adverse soil or underground conditions of the Property. Seller and the Property are in compliance with all requirements of law in connection with the disposal and storage of waste. To the best of Seller's knowledge, there has been no emission or discharge of any effluent, contaminants, pollution, sewage or other material 7 at or near the Property nor have any polluting, toxic or hazardous substances been used, generated, treated, stored, released, discharged or disposed of on or near the Property by the Seller or by others, at any time. No notification of release of "a hazardous substance" or "hazardous waste' as such terms are defined in and pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., ("CERCLA"), The Resource Conservation and Recovery Act, 44 U.S.C. Section 6901 et seq. or the Federal Clean Water Act, 33 U.S.C. Section 1251 et seq, or any state or local environmental law, regulations or ordinance has been served upon Seller as to the Property, and the Property is not listed or formally proposed for listing in the National Priority List promulgated pursuant to CERCLA or on any state list of hazardous substance sites requiring investigation or clean-up. No PCB-contaminated, friable asbestos or formaldehyde-based insulation items are present at the Property. B. The parties hereto indemnify and hold Agent harmless (including payment of Agent's reasonable attorney's fees) from and against any and all claims, suits or causes of action whatsoever arising out of the contamination of, or presence at, the Property by or of any substance, material or element referred to in this disclosure 17 caused by or attributable to Buyer, it's agents, representatives or employees. 29. Compliance. The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of the Agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and The Americans With Disabilities Act. 8 Fox Commercial Real Estate Services, Inc. Buyer: The First National Bank of Licensed Real Estate Broker West Chester 1235 Westlakes Drive Suite 425, Berwyn, PA 19312 By: /s/James S. Lees, Jr. By: /s/Charles E. Swope ---------------------- --------------------------------- Title: Vice President Title: Chairman of the Board / President ---------------------- --------------------------------- By: /s/Eric W. Rohrbach --------------------------------- Title: Senior Vice President --------------------------------- Address: 9 North High Street --------------------------------- West Chester, PA 19381 --------------------------------- ACCEPTED AND APPROVED: Date: 12-1-97 --------------------------------- Seller: Robert H. Trenner, Jr. --------------------------------- By: /s/Robert H. Trenner, Jr. --------------------------------- Title: --------------------------------- By: /s/Debra L. Trenner --------------------------------- Title: --------------------------------- Address: --------------------------------- FOX COMMERCIAL REAL ESTATE SERVICES, INC. is executing this Agreement only for the purpose of acknowledging receipt and acceptance of the amount as provided in Section 2 (a) hereof, and agreeing to the provisions of Sections 3 and 7 hereof. 9 ADDENDUM TO AGREEMENT OF SALE ----------------------------- Fox Commercial Real Estate Services, Inc. Licensed Real Estate Broker This is an Addendum to the Agreement of Sale ("Agreement") dated between First National Bank of West Chester as Buyer, and Robert H. Trenner, Jr. & Debra L. Trenner, h/w as Seller, concerning the property known as 887 South Matlack Street, West Chester, PA 19382 as more specifically described in the Agreement. The term "Agreement of Sale" shall be deemed to include a Deposit Receipt, Earnest Money Contract, or any similar document. 1. Contingency Period: Buyer shall have a period of thirty (30) days following the execution date (the "Due Diligence Period") within which to perform certain activities with respect to the property including without limitation, surveying, topographical studies, soil tests, engineering, environmental and other tests, preliminary land planning, review of the zoning classification and other requirements of applicable laws, statutes and ordinance of the land, determining the availability of utilities, communications with the applicable governmental and quasi-governmental authorities in connection with Buyer's reconstruction of building(s) for office and office related use (the "Proposed Improvements"). All investigations and inquiries by Buyer and the results thereof shall not affect or limit the representations and warranties of Seller contained in this agreement or waive or limit Buyer's right with respect to such representations and warranties. If, within the Due Diligence Period, Buyer, in its sole and absolute discretion, is unsatisfied with the results of such inquiries and investigations, Buyer shall have the absolute right to so notify Seller and to terminate this agreement, without further liability or either party, in which case the deposit previously paid by Buyer plus all interest accrued thereon shall be refunded to Buyer and Buyer shall deliver to Seller, at no cost to Seller, all surveys, plans, sketches, tests and the like (the "Development Data") in connection with the land which material shall be delivered without representation or warranty as to their accuracy, veracity or fitness for a particular purpose. During the Due Diligence Period, however, the parties shall otherwise be fully bound in accordance with the provisions hereof. 2. Environmental Matters, To the best of Seller's knowledge: (i) the land is not now, and never has been, used as a landfill, disposal site or for generating, producing, processing, refining, handling, transferring, transporting, treating, storing, or disposing of "toxic wastes", "hazardous wastes", "petroleum" or "hazardous substances", as such terms are defined In all now and hereafter existing statutes, laws, ordinances, codes, regulations, rules, rulings, orders, decrees, directives, policies and requirements by any federal, state or local governmental authority regulating, relating to, or imposing liability or standards of conduct concerning public health and safety or the environment, nor has any toxic waste, hazardous wastes, petroleum or hazardous substances been released from or onto the land or any adjoining property. (ii) the land contains no friable asbestos, asbestos-containing materials, PCB's PCB containing materials, or urea formaldehyde; (iii) no underground or above ground storage tanks are located on the land. (iv) the land, and any operations thereon, are in compliance with all applicable federal, state and local environmental statutes, ordinances, regulations and rules; (v) there are no conditions on or under the land which require removal, remediation or corrective action under any applicable federal, state or local environmental statutes, regulations, ordinances or rules; and (vi) there are no pending investigations, actions or proceedings concerning the land for violations of, or which may require removal, remediation or corrective action under, or for any lien, claim or charge under any applicable federal, state or local environmental statutes, regulations, ordinances or rules. 3. Access for Tests: Between the date of this agreement and the closing, Buyer or its agents, employees or contractors may enter upon the land for the purpose of making all surveys, plans, soil, environmental, water, and other tests, inspections and studies as Buyer may reasonably desire. In such connection, Buyer shall have free access, for inspection and copying, to all existing surveys, plans, studies, reports and other relevant information concerning the property which are in Seller's possession. If Buyer shall cause damage to the property as a result of the exercise of the foregoing rights, Buyer shall forthwith restore the affected portion of the land to substantially its condition immediately prior to the occurrence of such damage; and Buyer shall indemnify, defend and hold harmless Seller from and against any loss or liability (including without limitation claims or injury to persons or damage to property) arising from the negligent acts or omissions of Buyer, its agents, employees or contractors in the exercise of Buyer's rights under this paragraph. Buyer shall furnish Seller with, proof that all of the inspections to be conducted upon the property by Buyer or its agents shall be protected by liability 2 insurance policy naming Seller as an additional insured thereunder and having a single limit of not less than One Million Dollars ($1,000,000.00), which policy shall be in form and issued by an insurance company licensed to do business in the Commonwealth of Pennsylvania. The provision of this paragraph shall survive closing as well as any earlier termination of this agreement and shall be deemed a surviving obligation. 4. Tax Free Exchange: Seller reserves the right to elect to sell the property and purchase a replacement property ("Replacement Property") as part of a tax deferred exchange under Section 1031 of the United States Internal Revenue Code ("Code"), by assigning its rights under this agreement to a qualified intermediary (the "Seller's Intermediary"), pursuant to the Code pursuant to a deferred exchange agreement between Seller and Seller's Intermediary ("Seller's Exchange Agreement"). In the event that Seller makes such elections, Buyer understands, acknowledges and agrees that Seller's Intermediary shall sell the property to the Buyer pursuant to the terms of this agreement and the Seller's Exchange Agreement and acquire the Replacement Property and that such arrangement shall in no event permit Buyer to withdraw from or fail to perform any of its obligations under this agreement of sale. Buyer shall cooperate with Seller and Seller's Intermediary to complete the sale of the property and the acquisition of the Replacement Property. Nothing herein contained shall require Buyer to take title to the Seller's Replacement Property or to execute any agreement by which Buyer shall assume any obligations with regard to Seller's exchange. Seller shall indemnify and hold the Buyer harmless from any liability, cost or expense incurred by Buyer's compliance with the terms of this paragraph, including Buyer's reasonable legal fees. 5. Seller to assign leases from Sonobond and Trend to the First National Bank of West Chester at settlement. Said leases to commence March 2, 1998 and expire September 30, 1998. Leases to be submitted to Buyer during the due diligence period for approval and acceptance. Both leases to be triple net, plus utilities and janitorial. 3 In the event of any conflict between the terms of this Addendum and the Agreement, the terms of this Addendum shall prevail. Seller: ROBERT H. TRENNER, JR. Buyer: FIRST NATIONAL BANK OF WEST & DEBRA L. TRENNER CHESTER By: /s/Robert H. Trenner By: /s/Charles E. Swope -------------------------- --------------------------------- /s/Debra L. Trenner -------------------------- Title: Title: Chairman of the Board / President -------------------------- --------------------------------- Address: Address: 9 North High Street -------------------------- --------------------------------- West Chester, PA 19381 -------------------------- --------------------------------- Date: 12-1-97 Date: Nov. 26, 1997 -------------------------- --------------------------------- 4 EX-13 6 CORPORATION'S ANNUAL REPORT YEAR ENDED 12/31/97 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES FIVE-YEAR STATISTICAL SUMMARY (Dollars in thousands, except per share) December 31 -------------------------------------------------------------
STATEMENTS OF CONDITION 1997 1996 1995 1994 1993 - ----------------------- -------- -------- -------- -------- ------ Assets $431,368 $397,684 $388,500 $348,099 $351,073 Loans 318,899 264,582 242,587 239,126 221,433 Investment securities 77,598 97,675 93,511 78,389 92,829 Deposits 374,249 351,266 343,926 305,465 307,355 Stockholders' equity 36,213 33,175 30,692 28,299 27,767 Financial Management Services assets, at market value 348,069 271,212 255,992 256,998 240,189 Year Ended December31 STATEMENTS OF INCOME 1997 1996 1995 1994 1993 - -------------------- -------- -------- -------- -------- ------ Interest income $ 32,114 $ 29,627 $ 28,466 $ 24,374 $ 23,471 Interest expense 13,351 12,135 11,564 8,719 9,405 -------- -------- -------- -------- -------- Net interest income 18,763 17,492 16,902 15,655 14,066 Provision for possible loan losses 1,135 1,079 1,666 1,790 1,524 -------- -------- -------- -------- -------- Net interest income after provision for possible loan losses 17,628 16,413 15,236 13,865 12,542 Noninterest income 3,787 3,562 3,497 3,514 2,929 Noninterest expense 14,911 13,632 12,768 12,216 11,329 -------- -------- -------- -------- -------- Income before income taxes and cumulative effect of accounting method change 6,504 6,343 5,965 5,163 4,142 Income taxes 1,889 2,038 1,865 1,556 1,201 -------- -------- -------- -------- -------- Income before cumulative effect of accounting method change 4,615 4,305 4,100 3,607 2,941 Cumulative effect of accounting method change - - - - 489 -------- -------- -------- -------- -------- Net income $ 4,615 $ 4,305 $ 4,100 $ 3,607 $ 3,430 ========= ========= ========= ========= ========= PER SHARE (1) - --------- Income before cumulative effect of accounting method change $ 2.01 $ 1.88 $ 1.75 $ 1.50 $ 1.23 Cumulative effect of accounting method change - - - - 0.20 -------- -------- -------- -------- -------- Net income per share (Basic) $ 2.01 $ 1.88 $ 1.75 $ 1.50 $ 1.43 ========== ========== ========== ========== =========== Net income per share (Diluted) $ 2.00 $ 1.88 $ 1.75 $ 1.50 $ 1.43 ========== ========== ========== ========== =========== Cash dividends declared $ 0.85 $ 0.75 $ 0.67 $ 0.58 $ 0.52 Book value $ 15.77 $ 14.50 $ 13.44 $ 11.79 $ 11.57 Weighted average shares outstanding 2,290,407 2,284,856 2,336,550 2,399,712 2,399,136 (1) Adjusted for 1997 4-for-3 stock split. See Note A12 - 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 ACorporation") 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. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. EARNINGS AND DIVIDEND SUMMARY 1997 was another profitable year for the Corporation as net income increased $310 thousand or 7.2% to $4.6 million from $4.3 million in 1996. The improvement was primarily the result of increases in net interest income and a reduction in the effective tax rate, partially offset by higher provision for loan losses and increased operating expenses. Net income for 1996 increased $205 thousand or 5.0% from $4.1 million in 1995. The 1996 increase was primarily the result of a reduction in Federal Deposit Insurance Corporation ("FDIC") insurance premiums and an increase in net interest income, offset by increased other operating expenses. On a per share basis, 1997 earnings were $2.01, an increase of 6.9% over 1996 earnings of $1.88. On a per share basis, 1996 earnings were 7.4% higher than 1995 earnings of $1.75. Cash dividends per share in 1997 were $0.85, a 13.3% increase over the 1996 dividend of $0.75. Cash dividends per share in 1996 were 11.9% higher than the 1995 dividend of $0.67. In the past, the Corporation's practice has been to pay a dividend of at least 35.0% of net income. Performance ratios for 1997 remained stable compared to 1996 and 1995 numbers.
PERFORMANCE RATIOS 1997 1996 1995 - ------------------ -------- -------- ------ Return on Average Assets 1.12% 1.12% 1.14% Return on Average Equity 13.36% 13.59% 13.68% Earnings Retained 57.88% 60.19% 62.05% Dividend Payout Ratio 42.12% 39.81% 37.95%
The "Consolidated Average Balance Sheet" on page may assist the reader in the following discussion. NET INTEREST INCOME Net interest income is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income, on a tax equivalent basis, increased 7.3% or $1.3 million, from $17.8 million in 1996 to $19.1 million in 1997, compared to a 3.5% increase of $590 thousand from 1995 to 1996. The net yield on interest-earning assets, on a tax equivalent basis, was 4.94% for the years ended 1997 and 1996, and 5.07% in 1995. The Corporation's ability to maintain the net yield from 1996 to 1997 was attributable to increased loan demand, primarily in our third party automobile loan and lease programs and improved yields on the Corporation's investment portfolio. This strength in loan demand has given the Corporation the ability to shift more of our assets into higher-yielding loans, resulting in increases in earned asset yields during the last eighteen months. The increases in yields and net interest income were partially offset by increases in the cost of our liabilities, such as deposits and borrowings. The decrease in net yield on interest-earning assets from 1995 to 1996 reflected the reduced loan demand FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS during the first three quarters of 1996, and corresponding increased funding costs. Although the net yield on earning assets was maintained for the year ended December 31, 1997 compared to 1996, 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 1997 1996 1995 - -------- ------ ------ ------ Interest-Earning Assets 8.39% 8.30% 8.48% Interest-Bearing Liabilities 4.25 4.13 4.18 ---- ---- ---- Net Interest Spread 4.14 4.17 4.30 Contribution of Interest-Free Funds 0.80 0.77 0.77 ---- ---- ---- Net Yield on Interest-Earning Assets 4.94% 4.94% 5.07% ==== ==== ====
INTEREST INCOME ON FEDERAL FUNDS SOLD AND INVESTMENT SECURITIES Interest income on federal funds decreased 58.0%, from $734 thousand in 1996 to $308 thousand in 1997. The decrease in 1997 is primarily the result of a $8.1 million decrease in average balances, partially offset by a 16 basis point (a basis point equals one hundredth of one percent) increase in rates compared to the same period in 1996. 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. INTEREST INCOME ON INVESTMENT SECURITIES Interest income on investment securities, on a tax equivalent basis, decreased 13.0%, from $6.1 million in 1996 to $5.3 million in 1997, compared to an $831 thousand increase from 1995 to 1996. The decrease in investment interest income from 1996 to 1997 was the direct result of a decrease in average balances of $15.5 million, partially offset by a 24 basis point increase in the yield on investment securities. Proceeds from net investment securities sales and maturities were used to fund 1997 loan growth. The 16.0% increase in investment interest income from 1995 to 1996 was the result of a 12 basis point increase in yield investment securities, and an $11.7 million increase in average balances. INTEREST INCOME ON LOANS Interest income, on a tax equivalent basis, generated by the Corporation's loan portfolio increased 16.2%, from $23.1 million in 1996 to $26.8 million in 1997. The increase in interest income during 1997 was attributable to a $50.0 million increase in average loans outstanding, approximately 36.0% of which are third party automobile loans and leases. The 1997 volume increases were partially offset by a 30 basis point decrease in rates. Loan interest income, on a tax equivalent basis, increased $193 thousand, from $22.9 million in 1995 to $23.1 million 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 15 basis point decrease in rates earned. Competition for new and existing loan relationships has been very strong the last three years, especially 1997. Price and fee competition on loans over $500,000 (new and renewals) has been especially strong. The Corporation expects that this pricing pressure will continue, thereby reducing overall loan yields and the net interest margins. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST EXPENSE ON DEPOSIT ACCOUNTS Interest expense on deposits increased 7.2% in 1997 to $12.7 million. The increase in interest expense on deposits from 1996 to 1997 was the result of increases in average interest-bearing deposit balances of $15.4 million and a 7 basis point increase in the rates paid. The 6.4% increase in interest expense for 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. While total average interest-bearing deposits have grown 5.4% and 7.7% in 1997 and 1996, respectively, the components have not grown proportionately. During 1997, average savings, NOW, and money market deposits increased $5.2 million or 3.1%, while average certificates of deposit and other time deposits increased $10.2 million or 8.8%. 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 $14.1 million or 13.9%. The Corporation's effective rate on interest-bearing deposits changed from 4.18%, 4.12%, 4.10%, and 4.15% in the first, second, third, and fourth quarters of 1996, respectively, to 4.11%, 4.22%, 4.31%, and 4.30% in the first, second, third, and fourth quarters of 1997, respectively. Competition for deposits from other banks and non-banking institutions such as credit unions and Mutual Fund companies continues to grow. The slow growth rates for interest bearing and noninterest bearing deposits are expected to continue for future time periods. In an effort to expand its deposit base, the Bank has scheduled a new branch opening for the Spring of 1998. PROVISION FOR POSSIBLE LOAN LOSSES During 1997, the Corporation recorded a provision for possible loan losses of $1.14 million, compared to $1.08 million and $1.67 million in 1996 and 1995, respectively. Net charge-offs in 1997 were $453 thousand, compared to $367 thousand and $463 thousand in 1996 and 1995, respectively. Net charge-offs as a percentage of average loans outstanding were 0.15%, 0.15%, and 0.19% for 1997, 1996, and 1995, respectively. The 1997 increase in provision for loan losses brings the total allowance level to $5.9 million or 1.85% loans outstanding. See "Asset Quality and the Allowance For Possible Loan Losses" for additional information. NONINTEREST INCOME Total noninterest income increased $225 thousand or 6.3%, from $3.6 million in 1996 to $3.8 million in 1997, compared to an increase of $65 thousand or 1.9% from 1995 to 1996. The primary component of noninterest income was Financial Management Services (formerly known as the Trust Department) revenue, which increased $139 thousand or 7.5%, from $1.9 million in 1996 to $2.0 million in 1997, compared to an increase of $25,000 or 1.4% from 1995 to 1996. Market value of Financial Management Services assets under management increased $76.9 million or 28.3%, from $271.2 million at the end of 1996 to $348.1 million at the end of 1997, and increased $15.2 million or 5.9% from 1995 to 1996. The 1997 and 1996 increase in market value of assets under management was attributable to new business development in the areas of trust, investment and pension management 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 increased 16.0% to $987 thousand in 1997, when compared to 1996. The increase relates to more effective enforcement of service charge policies and an increase in fee based products and services offered and sold. In 1996, service charges on deposit accounts decreased 4.9% compared to 1995 numbers, a result of increases in the earnings credit paid to commercial checking customers. Other noninterest income decreased 3.6% to $815 thousand in 1997. In 1996, other noninterest income included a gain of $135 thousand relating to the sale of a property by EGSC. Noninterest income in 1995 included a $190 thousand gain relating to the termination of the Corporation's Defined Benefit Plan. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NONINTEREST EXPENSE Total noninterest expense increased $1.3 million or 9.4%, from $13.6 million in 1996 to $14.9 million in 1997, compared to an increase of $864 thousand or 6.8% from 1995 to 1996. 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. Salary and employee benefits increased $626 thousand or 8.1%, from $7.7 million in 1996 to $8.4 million in 1997. The increase in 1997 was a result of an average 4.0% salary increase for annual raises and a 3.8% increase in staff, partially offset by decreases in pension costs. Salary and employee benefits increased $662 thousand or 9.4% from 1995 to 1996, primarily the result of an average 4.0% salary increase and 4.4% increase in staff, partially offset by decreases in pension costs. The Corporation's full-time equivalents were 194, 190, and 182 at the end of 1997, 1996, and 1995, respectively. Occupancy, equipment and data processing expense increased $317 thousand or 12.0%, from $2.6 million in 1996 to $3.0 million in 1997. Occupancy, equipment and data processing expense increased $283 thousand or 12.0% from 1995 to 1996. The increases in 1997 from 1996 were primarily a result of building renovations for our new mortgage center and Financial Management Services building and costs related to new technology systems. 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 FDIC's Bank Insurance Fund ("BIF") insurance assessment was $0 for 1997, compared to $2 thousand in 1996. Effective January 1, 1997, in accordance with the Deposit Insurance Act of 1996 an additional assessment by the Financing Corporation ("FICO") became applicable to all insured institutions. This assessment is not tied to the FDIC risk classification. The BIF FICO assessment is 1.296 basis points per $100 in deposits for 1997. The Bank's assessment for the BIF FICO in 1997 was $43 thousand. FDIC insurance in 1995 was $349 thousand. Bank shares tax was 0.84%, 0.97%, and 0.99% of average stockholders' equity for 1997, 1996, and 1995, respectively. The Pennsylvania Bank Shares Tax is based primarily on Bank Stockholders equity and paid annually. See Note G Other Noninterest Expense and Note H - Income Taxes for additional information on Bank Shares tax. INCOME TAXES Income tax expense was $1.9 million in 1997 compared to $2.0 million in 1996 and $1.9 million in 1995, representing an effective tax rate of 29.0%, 32.1%, and 31.3%, respectively. In 1997, effective tax rates were reduced to account for an expected 1997 historic rehabilitation tax credit of approximately $200 thousand. The tax credit is the result of an investment the Bank made in a local community development project. The primary reason for the increase in the effective tax rates from 1995 to 1996 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 2.6%, 2.4%, and 2.8% in 1997, 1996, and 1995, respectively. LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for business expansion. Liquidity management addresses the Corporation's ability to meet deposit withdrawals either on demand or at contractual maturity, to repay borrowings as they mature, and to make new loans and investments as opportunities arise. Liquidity is managed on a daily basis enabling Senior Management to effectively monitor changes in liquidity and to FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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:
DEPOSIT ANALYSIS (Dollars in thousands) 1997 1996 1995 ---------------------- ---------------------- ---------------------- Average Effective Average Effective Average Effective DEPOSIT TYPE Balance Yield Balance Yield Balance Yield ------------ ------- ----- ------- ----- ------- ----- NOW $ 52,758 2.19% $ 47,984 2.20% $ 42,974 2.32% Money Market 28,433 3.15 28,974 3.09 29,610 3.23 Statement Savings 48,381 3.31 48,834 3.24 46,347 3.64 Other Savings 2,996 2.74 4,222 2.75 4,657 2.73 CD's Less than $100,000 108,022 5.80 102,566 5.76 89,866 5.67 ------- ------- -------- Total Core Deposits 240,590 4.16 232,580 4.11 213,454 4.15 Noninterest-Bearing Demand Deposits 57,659 -- 55,018 - 52,177 - ------- ------- -------- Subtotal 298,249 -- 287,598 - 265,631 - Tiered Savings 41,184 4.14 38,514 4.11 38,744 4.29 CD's Greater than $100,000 17,415 5.54 12,677 5.36 11,331 5.11 -------- -------- -------- Total Deposits $356,848 -- $338,789 - $315,706 - ======= ======= =======
The Bank as a member of the Federal Home Loan Bank ("FHLB"), maintains a credit line secured by the Bank's mortgage related assets. Additionally, the FHLB has several other credit related products which are available to the Bank. The Corporation utilizes borrowings from the FHLB and collateralized repurchase agreements in managing its interest rate risk and as a tool to augment deposits in funding asset growth. The Corporation may utilize these funding sources to better match its longer term repricing assets (i.e., between one and five years). See Note F - Short Term Borrowings and Credit Facility for more detailed information on these funding sources. 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,
1997 1996 1995 ---------------------- ---------------------- --------------------- (Dollars in thousands) Daily Daily Daily Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- ASSETS Federal funds sold $ 5,544 $ 308 5.56% $ 13,603 $ 734 5.40% $ 11,001 $ 648 5.89% Interest bearing deposits in Banks 197 12 6.09 798 47 5.89% -- -- -- Investment securities Taxable 78,672 5,104 6.49 93,809 5,863 6.25 81,098 4,956 6.11 Tax-exempt (1) 2,114 157 7.45 2,519 182 7.21 3,576 257 7.20 ------- ------ ------- ------ ------- ------ Total investment securities 80,786 5,261 6.51 96,328 6,045 6.28 84,674 5,213 6.16 ------- ------ ------- ------ ------- ------ Loans (2) Taxable 291,114 26,012 8.94 242,862 22,320 9.19 236,923 22,186 9.36 Tax-exempt (1) 8,623 823 9.49 6,835 781 11.43 6,734 723 10.73 ------- ------ ------- ------ ------- ------ Total loans 299,737 26,835 8.95 249,697 23,101 9.25 243,657 22,909 9.40 ------- ------ ------- ------ ------- ------ Total interest-earning assets 386,264 32,416 8.39 360,426 29,927 8.30 339,332 28,770 8.48 ------ ------ ------ Noninterest-earning assets Allowance for possible loan losses (5,607) (4,848) (3,796) Cash and due from banks 18,853 17,153 16,037 Other assets 13,218 13,016 11,827 ------- ------- -------- Total assets $412,728 $385,747 $363,400 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Savings, NOW, and money market deposits $173,753 $ 5,436 3.13% $168,528 $ 5,231 3.10% $162,332 $ 5,431 3.35% Certificates of deposit and other time 125,436 7,234 5.77 115,243 6,584 5.71 101,197 5,671 5.60 ------- ------ ------- ------ ------- ------ Total interest-bearing deposits 299,189 12,670 4.23 283,771 11,815 4.16 263,529 11,102 4.21 Securities sold under repurchase agreements 8,560 281 3.28 9,713 320 3.29 12,313 403 3.27 Other borrowings 6,508 401 6.16 -- -- 949 59 6.22 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 314,257 13,352 4.25 293,484 12,135 4.13 276,791 11,564 4.18 ------ ------ ------ Noninterest-bearing liabilities Noninterest-bearing demand deposits 57,659 55,018 52,177 Other liabilities 6,264 5,574 4,471 ------- ------- ------- Total liabilities 378,180 354,076 333,439 Stockholders' equity 34,548 31,671 29,961 ------- ------- ------- Total liabilities and stockholders' equity $412,728 $385,747 $363,400 ======= ======= ======= Net interest income $19,064 $17,792 $17,206 ====== ====== ====== Net yield on interest-earning assets 4.94% 4.94% 5.07% ==== ===== ===== (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 1997, 1996, and 1995. (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 The goal of interest rate sensitivity management is to avoid fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates. Such sensitivity is measured as the difference in the volume of assets and liabilities in the existing portfolio that are subject to repricing in a future time period. The Corporation's net interest rate sensitivity gap (gap position) within one year is ($114.4) million or 26.5% of total assets at December 31, 1997, compared with ($109.5) million or 27.5% of total assets at the end of 1996. INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1997
(Dollars in thousands) One Over Within Through Five Non-Rate One Year Five Years Years Sensitive Total -------- ---------- ----- --------- ----- ASSETS Federal funds sold $ 4,200 $ - $ - $ - $ 4,200 Investment securities 13,388 32,502 31,708 - 77,598 Loans and leases 133,421 168,220 17,258 (5,900) 312,999 Cash and cash equivalents - - - 22,248 22,248 Premises & equipment - - - 6,659 6,659 Other assets - - - 7,664 7,664 -------- -------- -------- -------- -------- Total assets $ 151,009 $ 200,722 $ 48,966 $ 30,671 $ 431,368 ======== ======== ======== ======== ======== LIABILITIES AND CAPITAL Noninterest-bearing deposits $ - $ - $ - $ 63,287 $ 63,287 Interest bearing deposits 253,646 56,403 913 - 310,962 Borrowed funds 11,767 772 2,465 - 15,004 Other liabilities - - - 5,902 5,902 Capital - - - 36,213 36,213 -------- -------- -------- -------- -------- Total liabilities and capital $ 265,413 $ 57,175 $ 3,378 $ 105,402 $ 431,368 ======== ======= ======== ======== ======== Net interest rate sensitivity gap $(114,404) $ 143,547 $ 45,588 $ (74,731) $ - ======== ======== ======== ======== ======== Cumulative interest rate sensitivity gap $(114,404) $ 29,143 $ 74,731 $ - $ - ======== ======== ======== ======== ======== Cumulative interest rate sensitivity gap divided by total assets (26.5)% 6.8% 17.3% - -
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 (NII) under various interest rate forecasts and scenarios. The Corporations Asset Liability Management Policy requires quarterly calculation of the effects of changes in interest rates on NII. These calculations are prepared quarterly using computer based asset liability software. The table below summarizes estimated changes in NII over a twelve-month period, under alternative interest rate scenarios. The change in interest rates was based on an immediate and proportional shift in the December 31, 1997 Wall Street Journal prime rate of 8.50%. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Net Dollar Percent Management Interest Rates Interest Income Change Change Limits -------------- --------------- ------ ------ ------ +300 Basis Points $21,284 $690 3.35% 12.00% +200 Basis Points 21,052 459 2.23 10.00 +100 Basis Points 20,823 229 1.11 5.00 FLAT RATE 20,593 0 0.00 0.00 -100 Basis Points 20,365 -230 -1.11 5.00 -200 Basis Points 20,137 -457 -2.22 10.00 -300 Basis Points 19,910 -684 -3.32 12.00
Management believes that the assumptions utilized in evaluating the vulnerability of the Corporation's NII to changes in interest rates approximate actual experience; however, the interest rate sensitivity of the Corporation's assets and liabilities as well as the estimated effect of changes in interest rates on NII could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. In the event the Corporation should experience a mismatch in its desired GAP ranges or an excessive decline in its NII subsequent to an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy such a mismatch. The Corporation could restructure its investment portfolio through sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or it could attract deposits or obtain borrowings with desired maturities. The nature of the Corporation's current operation is such that it is not subject to foreign currency exchange or commodity price risk. Additionally, neither the Corporation nor the Bank owns trading assets. At December 31, 1997, the Corporation did not have any hedging transactions in place such as interest rate swaps, caps or floors. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is an amount that management believes will be adequate to absorb possible loan losses on existing loans that may become uncollectible based on evaluations of the collectibility of loans. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, adequacy of collateral, review of specific problem loans, and current economic conditions that may affect the borrower's ability to pay. 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) 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------ Balance at beginning of year $ 5,218 $ 4,506 $ 3,303 $ 2,839 $ 2,300 --------- --------- --------- --------- --------- Provision charged to operating expense 1,135 1,079 1,666 1,790 1,524 --------- --------- --------- --------- --------- Recoveries of loans previously charged off Commercial loans 67 36 4 19 69 Real estate - mortgages - - 46 9 2 Consumer loans 16 8 29 10 21 --------- --------- --------- --------- --------- Total recoveries 83 44 79 38 92 --------- --------- --------- --------- --------- Loan charge-offs Commercial loans (237) (118) (348) (253) (28) Real estate - mortgages (117) (218) (25) (1,042) (975) Consumer loans (153) (62) (108) (69) (71) Lease financing receivables (29) (13) (61) - (3) --------- --------- --------- --------- --------- Total charge-offs (536) (411) (542) (1,364) (1,077) --------- --------- --------- --------- --------- Net loan charge-offs (453) (367) (463) (1,326) (985) --------- --------- --------- --------- --------- Balance at end of year $ 5,900 $ 5,218 $ 4,506 $ 3,303 $ 2,839 ========= ========= ========= ========= ========= Year-end loans outstanding $ 318,899 $ 264,582 $ 242,587 $ 239,126 $ 221,433 Average loans outstanding $ 299,737 $ 249,697 $ 243,657 $ 228,456 $ 217,086 Allowance for possible loan losses as a percentage of year-end loans outstanding 1.85% 1.97% 1.86% 1.38% 1.28% Ratio of net charge-offs to average loans outstanding 0.15% 0.15% 0.19% 0.58% 0.45%
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. All loans that are past due over 90 days and still accruing are adequately collateralized as to principal and interest are in the process of collection. Other real estate owned ("OREO") represents residential and commercial real estate written down to realizable value (net of estimated disposal costs) FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Management is not aware of any loans other than those included in the following table and mentioned in this paragraph 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. During 1997, the Bank increased third party automobile loans $23 million to $24 million. These loans are unseasoned and may potentially increase nonperforming loan numbers. Management is closely monitoring these loans and has tightened credit standards and significantly reduced planned growth in this new product. At December 31, 1997, 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) 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- Past due over 90 days and still accruing $ 466 $ 2,772 $ 419 $ 323 $ 1,074 Nonaccrual loans 1,443 713 726 2,997 2,804 -------- --------- --------- -------- -------- Total nonperforming loans 1,909 3,485 1,145 3,320 3,878 Other real estate owned 1,651 1,274 1,447 1,565 - -------- -------- -------- -------- -------- Total nonperforming assets $ 3,560 $ 4,759 $ 2,592 $ 4,885 $ 3,878 ======== ======== ========= ========= ======== Nonperforming loans as a percentage of total loans 0.60% 1.32% 0.47% 1.39% 1.75% Allowance for possible loan losses as a percentage of nonperforming loans 309.1% 149.7% 393.5% 99.5% 73.2% Nonperforming assets as a percentage of total loans and other real estate owned 1.11% 1.79% 1.06% 2.03% 1.75% Allowance for possible loan losses as a percentage of nonperforming assets 165.7% 109.6% 173.8% 67.6% 73.2%
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, 1997, 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 1993. The Corporation's and Banks Risk-Based Capital Ratios, shown below, have been computed in accordance with regulatory accounting policies. See Note I - Capital Requirements - for additional information. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31 RISK-BASED -------------------------------------- "Well" Capitalized" CAPITAL RATIOS 1997 1996 1995 Requirements - -------------- ------------ ------------ ----------- ------------------- Corporation ----------- Leverage Ratio 8.57% 8.58% 8.47% 5.00% Tier I Capital Ratio 11.22% 12.05% 11.51% 6.00% Total Risk-Based Capital Ratio 12.48% 13.31% 12.77% 10.00% Bank ---- Leverage Ratio 8.30% 8.30% 8.24% 5.00% Tier I Capital Ratio 10.89% 11.66% 11.22% 6.00% Total Risk-Based Capital Ratio 12.14% 12.92% 12.48% 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 9.16%, 8.09%, and 2.68% for the years ended December 31, 1997, 1996, and 1995, respectively. NEW BRANCH AND ADDITIONAL OFFICE SPACE During 1997, the Corporation entered into a lease agreement for the purpose of constructing a new branch. Additionally, an agreement to acquire office space was signed. For more information see Note P -Commitments and Contingencies. CORE SYSTEM SOFTWARE AND YEAR 2000 ISSUES During 1997, Management completed an in depth review of its core processing system and concluded that a new core system was needed for competitive, functional and year 2000 reasons. After extensive research, the Corporation selected Jack Henry and Associates to provide the new core processing system. Jack Henry and Associates is a major provider of Community Bank Core Processing Systems. Specifically, the Corporation has contracted to purchase Jack Henry's Silverlake System, related hardware, installation and training services. First year contract costs are estimated to be $1.2 million. The conversion is expected to take place in the fourth quarter of 1998. Management is addressing Year 2000 issues on several levels. Jack Henry's Silverlake software is Year 2000 compliant, which addresses a major component of the Corporation's Year 2000 Compliance Action Plan. The Plan requires a review of the remainder of the Corporation's system's for compliance or replacement. The Plan also calls for communication with significant customers, critical vendors and service providers. 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 2,399,833 shares and 1,799,941 shares were outstanding at the end of 1997 and 1996, respectively. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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) ---------- 1997 1996 ---- ---- Quarter Ended High Low High Low ------------- ---- --- ---- --- First $27.00 $22.50 $23.44 $21.75 Second $30.00 $25.88 $22.50 $21.94 Third $31.00 $30.00 $22.50 $21.94 Fourth $33.00 $30.50 $22.88 $22.69 (1) Adjusted for 1997 4-for-3 stock split. See Note A12 - Earnings per Share and Stockholders Equity - in the accompanying financial statements for additional information.
Other statistical disclosures required by Bank Holding Companies can be found in the Corporation's 10-K, to be filed with the Securities and Exchange Commission on March 31, 1998. 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 ---------------------------- 1997 1996 ---- ---- ASSETS Cash and due from banks $ 22,248 $ 21,956 Federal funds sold 4,200 3,800 ---------- ---------- Total cash and cash equivalents 26,448 25,756 --------- --------- Interest-bearing deposits with banks -- 1,000 Investment securities held-to-maturity (market value of $12,237 and $15,749 in 1997 and 1996, respectively) 12,082 15,667 Investment securities available-for-sale, at fair value 65,516 82,008 Loans 318,899 264,582 Less: Allowance for possible loan losses (5,900) (5,218) ---------- ---------- Net loans 312,999 259,364 Premises and equipment, net 6,659 6,752 Other assets 7,664 7,137 ---------- ---------- Total assets $ 431,368 $ 397,684 ======== ======== LIABILITIES Deposits Noninterest-bearing $ 63,287 $ 63,591 Interest-bearing (including certificates of deposit over $100 of $11,978 and $11,479 - 1997 and 1996, respectively) 310,962 287,675 -------- -------- Total deposits 374,249 351,266 Securities sold under repurchase agreements 7,625 7,943 Federal Home Loan Bank advances 7,380 -- Other liabilities 5,901 5,300 --------- -------- Total liabilities 395,155 364,509 -------- -------- STOCKHOLDERS' EQUITY Common stock, par value $1.00; authorized, 5,000,000 shares; outstanding, 1997 - 2,399,833 and 1996 - 1,799,941. 2,400 1,800 Additional paid-in capital 2,729 3,305 Retained earnings 32,803 30,133 Net unrealized loss on securities available-for-sale (33) (242) Treasury stock, at cost: 1997 - 103,700 and 1996 - 84,000. (1,686) (1,821) -------- -------- Total stockholders' equity 36,213 33,175 -------- -------- Total liabilities and stockholders' equity $ 431,368 $ 397,684 ======== ======== 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 ------------------------------------- 1997 1996 1995 ------------ ----------- --------- INTEREST INCOME Loans, including fees $ 26,580 $ 22,856 $ 22,682 Investment securities 5,214 5,990 5,136 Federal funds sold 308 734 648 Deposits in banks 12 47 -- -------- -------- -------- Total interest income 32,114 29,627 28,466 -------- -------- -------- INTEREST EXPENSE Deposits 12,670 11,815 11,102 Securities sold under repurchase agreements 280 320 462 Other borrowings 401 - - -------- -------- -------- Total interest expense 13,351 12,135 11,564 -------- -------- -------- Net interest income 18,763 17,492 16,902 PROVISION FOR POSSIBLE LOAN LOSSES 1,135 1,079 1,666 -------- -------- -------- Net interest income after provision for possible loan losses 17,628 16,413 15,236 -------- -------- -------- NONINTEREST INCOME Financial Management Services 2,000 1,861 1,836 Service charges on deposit accounts 987 851 895 Investment securities gains (losses), net (15) 5 9 Other 815 845 757 -------- -------- -------- Total noninterest income 3,787 3,562 3,497 -------- -------- -------- NONINTEREST EXPENSE Salaries and employee benefits 8,361 7,735 7,073 Occupancy, equipment, and data processing 2,964 2,647 2,364 Other 3,586 3,250 3,331 -------- -------- -------- Total noninterest expense 14,911 13,632 12,768 -------- -------- -------- Income before income taxes 6,504 6,343 5,965 INCOME TAXES 1,889 2,038 1,865 -------- -------- -------- NET INCOME $ 4,615 $ 4,305 $ 4,100 ======== ======== ======== PER SHARE Basic Earnings Per Common Share(1) $ 2.01 $ 1.88 $ 1.75 ======== ======== ======== Diluted Earnings Per Common Share(1) $ 2.00 $ 1.88 $ 1.75 ======== ======== ======== Dividends declared $ 0.85 $ 0.75 $ 0.67 ======== ======== ======== Weighted average shares outstanding 2,290,407 2,284,856 2,336,550 ========= ========= ========= (1) Please refer to the Note M - Earnings Per Share for information on this calculation.
The accompanying notes are an integral part of these statements. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common Stock Paid-in Retained Treasury (Dollars in thousands) Shares Par Value Capital Earnings Other Stock - ---------------------- ------ --------- ------- -------- ----- ----- Balance at January 1, 1995 1,200,000 1,200 3,900 24,998 (1,799) - Net income - - - 4,100 - - Cash dividends declared - - - (1,556) - - Net unrealized gain on investment securities available-for-sale - - - - 1,734 - 3-for-2 stock split 599,941 600 (600) - - - Treasury stock transactions - - 1 - - (1,886) --------- ------- ------- ------ -------- ------- Balance at December 31, 1995 1,799,941 1,800 3,301 27,542 (65) (1,886) Net income - - - 4,305 - - Cash dividends declared - - - (1,714) - - Net unrealized loss on investment securities available-for-sale - - - - (177) - Treasury stock transactions - - 4 - - 65 --------- ------- ------- ------ -------- ------- Balance at December 31, 1996 1,799,941 $ 1,800 $ 3,305 $30,133 $ (242) $ (1,821) Net income - - - 4,615 - - Cash dividends declared - - - (1,945) - - Net unrealized gain on investment securities available-for-sale - - - - 209 - 4 for 3 stock split 599,892 600 (600) - - - Treasury stock transactions - - 24 - - 135 --------- ------- ------- ------ -------- ------- Balance at December 31, 1997 2,399,833 $ 2,400 $ 2,729 $32,803 $ (33) $ (1,686) ========= ======= ======= ====== ======== =======
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 --------------------------------------- 1997 1996 1995 ------------ ------------- ---------- OPERATING ACTIVITIES Net income $ 4,615 $ 4,305 $ 4,100 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 860 786 614 Provision for loan losses 1,135 1,079 1,666 Amortization of investment security premiums and accretion of discounts, net 52 141 217 Amortization of deferred fees, net on loans 53 (57) (5) Provision for deferred income taxes (235) (331) (394) Investment securities (gains) losses, net 15 (5) (9) (Decrease) increase in other assets (399) 29 (163) Increase (decrease) in other liabilities 601 222 1,127 --------- -------- -------- Net cash provided by operating activities 6,697 6,169 7,153 --------- -------- -------- INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits with banks 1,000 (1,000) -- Net increase in loans (54,823) (22,309) (3,919) Proceeds from sales of investment securities available-for-sale 30,646 4,172 301 Proceeds from maturities of investment securities available-for-sale 13,588 17,826 13,367 Proceeds from maturities of investment securities held-to-maturity 3,635 11,477 7,244 Purchase of investment securities available-for-sale (27,543) (33,919) (32,615) Purchase of investment securities held-to-maturity -- (4,120) (999) Purchase of premises and equipment, net (767) (2,017) (1,309) --------- -------- -------- Net cash used in investing activities (34,264) (29,890) (17,930) --------- -------- -------- FINANCING ACTIVITIES Increase in Federal Home Loan Bank advances 7,380 -- -- Increase in deposits 22,983 7,340 38,461 (Decrease) in securities sold under repurchase agreements (318) (915) (1,640) Cash dividends (1,945) (1,661) (1,495) Treasury stock transactions 159 69 (1,886) --------- -------- -------- Net cash provided by financing activities 28,259 4,833 33,440 --------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 692 (18,888) 22,663 Cash and cash equivalents at beginning of year 25,756 44,644 21,981 --------- -------- -------- Cash and cash equivalents at end of year $ 26,448 $ 25,756 $ 44,644 ========= ======== ======== The accompanying notes are an integral part of these statements.
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 six branch locations. The Bank encounters vigorous competition for market share in the communities it serves from bank holding companies, other community banks, thrift institutions, credit unions 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 consolidated financial statements include the accounts of the Corporation, the Bank, and EGSC. All significant intercompany transactions have been eliminated. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the balance sheets, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The principal estimate that is susceptible to significant change in the near term relates to the allowance for loan and lease losses. The evaluation of the adequacy of the allowance for loan losses include an analysis of the individual loans and overall risk characteristics and size of the different loan portfolios, and takes into consideration current economic and market conditions, the capability of specific borrowers to pay specific loan obligations, as well as current loan collateral values. However, actual losses on specific loans, which also are encompassed in the analysis, may vary from estimated losses. 2. Financial Instruments --------------------- The Corporation follows 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 follows SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires investments in securities to be classified in one of three categories: held-to-maturity, trading, or available-for-sale. Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. As the Corporation does not engage in security trading, the balance of its debt securities and any equity securities are classified as available-for-sale. Net unrealized gains and losses for such securities, net of tax effect, are required to be recognized as a separate component of stockholders' equity and excluded from the determination of net income. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 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, current economic conditions, loss experience, and other relevant factors which, in management's judgment, deserve recognition in estimating possible losses. On January 1, 1995, the Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114 requires loan impairment to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, its observable market price or the fair value of the collateral if the loan is collateral dependent. If it is probable that a creditor will foreclose on a property, the creditor must measure impairment based on the fair value of the collateral. SFAS No. 118 allows creditors to use existing methods for recognizing interest income on impaired loans. 5. Loan Fees and Related Costs --------------------------- Certain origination and commitment fees and related direct loan origination costs are deferred and amortized over the contractual life of the related loans, resulting in an adjustment of the related loan's yield. 6. Premises and Equipment ---------------------- Premises and equipment are stated at cost less accumulated depreciation. Assets are depreciated over their estimated useful lives, principally by the straight-line method. 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. 7. 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. 8. Income Taxes ------------ The Corporation accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 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 and benefits are the result of changes in deferred tax assets and liabilities. 9. Employee Benefit Plans ---------------------- The Corporation has certain employee benefit plans covering eligible employees. The Bank accrues such costs as earned. 10. 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. 11. 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. 12. Earnings per Share and Stockholders' Equity ------------------------------------------- Earnings per share are calculated using the weighted average shares outstanding during the year. On February 20, 1997, the Board of Directors declared a stock split, in the form of a 33 1/2% stock dividend to stockholders of record on March 21, 1997, payable April 21, 1997. Par value remained at $1.00 per share. The stock split resulted in the issuance of 599,892 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. The Financial Accounting Standards Board ("FASB") issued a new standard, SFAS 128, "Earnings per Share", which is effective for financial statements issued after December 15, 1997. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. 13. 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, 1997, 1996, and 1995 for interest was $12,600,000, $11,718,000, and $10,901,000, respectively. Cash paid during the years ended December 31, 1997, 1996, and 1995 for income taxes was $2,045,000, $2,100,000, and $2,144,000, respectively. 14. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -------------------------------------------------------------- The FASB issued SFAS 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 has not had a material impact on the Company's consolidated financial position or results of operations. 15. Reporting Comprehensive Income ------------------------------ In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which is effective for years beginning after December 15, 1997. This new standard requires entities presenting a complete set of financial statements to include details of comprehensive income. Comprehensive income consists of net income or loss for the current period and income, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. Management has chosen not to adopt this standard early. Adoption of this standard is not expected to have a material impact on the disclosure of the Corporation's income. 16. Disclosures about Segments of an Enterprise and Related Information ------------------------------------------------------------------- In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for all periods beginning after December 15, 1997. SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers. Management is currently evaluating the disclosure impact of SFAS No. 131 on its financial statements. 17. Advertising Costs ----------------- The Bank expenses advertising costs as incurred. 18. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform to the current year presentation. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and fair market value of the Corporation's available-for-sale and held-to-maturity securities at December 31, 1997 and 1996 are summarized as follows:
Held-to-Maturity Available-for-Sale ---------------- ------------------ (Dollars in thousands) Gross Gross Fair Gross Gross Fair 1997 Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market ---- Cost Gains Losses Value Cost Gains Losses Value ---- ----- ------ ----- ---- ----- ------ ----- U.S. Treasury $ 1,493 $ 1 $ - $ 1,494 $ 6,512 $ 18 $ (2) $ 6,528 U.S. Government agency - - - - 7,356 36 - 7,392 Mortgage-backed securities 1,519 8 (7) 1,520 47,742 213 (267) 47,688 State and municipal 3,955 126 - 4,081 - - - - Corporate securities 4,115 14 - 4,129 1,000 - - 1,000 Asset-backed securities 1,000 13 - 1,013 - - - - Mutual funds - - - - 1,091 - (49) 1,042 Other equity securities - - - - 1,866 - - 1,866 ------ ----- ---- ------ ------- ------ ----- ------- $12,082 $ 162 $ (7) $12,237 $ 65,567 $ 267 $ (318) $ 65,516 ====== ===== ==== ====== ======= ====== ===== =======
Held-to-Maturity Available-for-Sale ---------------- ------------------ (Dollars in thousands) Gross Gross Fair Gross Gross Fair 1996 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 ====== ===== === ====== ======= ====== ===== ======
The amortized cost and estimated fair value of debt securities classified as available-for-sale and held-to-maturity at December 31, 1997, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE B - INVESTMENT SECURITIES - continued
Held-to-Maturity Available-for-Sale ---------------- ------------------ Estimated Estimated Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value ---- ----- ---- ----- Due in one year or less $ 3,243 $ 3,247 $ 2,500 $ 2,506 Due after one year through five years 4,265 4,330 8,012 8,024 Due after five years through ten years 2,030 2,100 4,356 4,390 Due after ten years 25 26 - - -------- -------- -------- -------- 9,563 9,703 14,868 14,920 Mortgage-backed securities 1,519 1,521 47,742 47,688 Asset-backed securities 1,000 1,013 - - -------- -------- -------- -------- $ 12,082 $ 12,237 $ 62,610 $ 62,608 ======== ======== ======== ========
Gains of $330,000, $31,000, and $17,000, and losses of $345,000, $26,000, and $8,000 were realized on sales of securities in 1997, 1996, and 1995, 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 $29,140,000 and $25,402,000 at December 31, 1997 and 1996, respectively. There were no securities held from a single issuer that represented more than 10% of stockholders' equity. NOTE C - LOANS Major classifications of loans are as follows:
(Dollars in thousands) 1997 1996 ------------ ----------- Commercial loans $ 93,914 $ 87,932 Real estate - construction 17,256 11,447 Real estate - other 117,953 109,179 Consumer loans 66,753 39,803 Lease financing receivables 23,023 16,221 --------- --------- 318,899 264,582 Less: Allowance for loan losses (5,900) (5,218) --------- --------- $ 312,999 $ 259,364 ========= ========
Loan balances on which the accrual of interest has been discontinued amounted to approximately $1,443,000 and $713,000 at December 31, 1997 and 1996, respectively. Interest on these nonaccrual loans would have been approximately $115,000 and $62,000 in 1997 and 1996, 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 $466,000 and $2,772,000 at December 31, 1997 and 1996, respectively. Changes in the allowance for loan losses are summarized as follows: FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE C - LOANS - continued
(Dollars in thousands) 1997 1996 1995 ------------ ------------ ---------- Balance at beginning of year $ 5,218 $ 4,506 $ 3,303 Provision charged to operating expenses 1,135 1,079 1,666 Recoveries of charged-off loans 83 44 79 Loans charged-off (536) (411) (542) ---------- ---------- --------- Balance at end of year $ 5,900 $ 5,218 $ 4,506 ========= ========== =========
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. See Note A4 - Loans and Allowance for Loan Losses for more information. The balance of impaired loans was $1,121,000, $443,000, and $590,000 at December 31, 1997, 1996, and 1995, respectively. The associated allowance for loan losses for impaired loans was $306,000, $419,000, and $433,000 at December 31, 1997, 1996, and 1995, respectively. During 1997, activity in the allowance for impaired loan losses included a provision of $182,000, write offs of $295,000 and recoveries of $0. Interest income of $37,000 was recorded in 1997, while contractual interest in the same period amounted to $64,000. Cash collected on impaired loans in 1997 was $278,000 of which $241,000 was applied to principal and $37,000 was applied to interest. 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. In the normal course of business, the Bank makes loans to certain officers, directors, and their related interests. All loan transactions entered into between the Bank and such related parties were made on the same terms and conditions as transactions with all other parties. In management's opinion, such loans are consistent with sound banking practices and are within applicable regulatory lending limitations. The balance of these loans at December 31, 1997 and 1996, was approximately $7,234,000 and $8,544,000, respectively. In 1997, new loans and payments amounted to approximately $1,390,000 and $2,700,000, respectively. NOTE D - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
(Dollars in thousands) 1997 1996 ------------ ---------- Premises $ 8,307 $ 7,990 Equipment 5,982 5,532 --------- --------- 14,289 13,522 Less Accumulated depreciation (7,630) (6,770) --------- --------- $ 6,659 $ 6,752 ========= =========
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE E - DEPOSITS At December 31, 1997, the scheduled maturities of certificates of deposit are as follows: (Dollars in thousands) 1998 $ 72,605 1999 26,987 2000 23,394 2001 3,810 2002 and thereafter 3,125 ------- $129,921 NOTE F - SHORT-TERM BORROWINGS AND CREDIT FACILITY Securities sold under agreements to repurchase are generally overnight transactions. These borrowings had interest rates of approximately 3.3% and balances of $7,625,000, $7,943,000 and $8,858,000 at December 31, 1997, 1996 and 1995, respectively. Daily average balances and weighted average interest rates for the years ended December 31, 1997, 1996 and 1995 were $8,560,000, $9,713,000 and $12,313,000 and 3.3%, 3.3% and 3.3%, respectively. Maximum amounts outstanding at any month-end were approximately $11,450,000, $11,715,000 and $16,037,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Bank, as a member of the Federal Home Loan Bank ("FHLB"), maintains a $10 million line of credit secured by the Bank's mortgage related assets. As of December 31, 1997, the amount outstanding on this line of credit was $0. The Bank had no borrowings under this line of credit during 1996. In addition to the line of credit, the Bank has additional borrowing capacity at the FHLB of approximately $91 million. FHLB advances as of December 31, 1997 consisted of $7.4 million in term advances, which represent a combination of maturities ranging from 6 months to 10 years. The weighted average interest rate on these advances for the year ended December 31, 1997 was 6.2%. 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 G - OTHER NONINTEREST EXPENSE The components of other noninterest expense are detailed as follows:
(Dollars in thousands) 1997 1996 1995 ---------------------- ---- ---- ---- Purchased services $ 833 $ 664 $ 647 Telephone, postage, and supplies 583 633 516 Marketing and corporate communications 406 340 359 Loan and deposit supplies 436 406 200 Director costs 276 260 281 Bank shares tax 290 308 297 FDIC Insurance 43 2 349 Other 719 637 682 ------- ------- ------- $ 3,586 $ 3,250 $ 3,331 ======= ======= =======
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE H - INCOME TAXES The components of income taxes are detailed as follows:
(Dollars in thousands) 1997 1996 1995 ---------------------- ---- ---- ---- Current $ 2,124 $ 2,369 $ 2,259 Deferred (235) (331) (394) -------- -------- -------- $ 1,889 $ 2,038 $ 1,865 ======== ======== ========
The income tax provision reconciled to the tax computed at the statutory federal rate was as follows:
1997 1996 1995 -------- -------- ------- Tax at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in taxes resulting from Tax-exempt loan and investment income (3.0) (3.3) (3.1) Tax credits (3.0) -- -- Other, net 1.0 1.4 0.4 ----- ----- ----- Applicable income tax 29.0% 32.1% 31.3% ==== ==== ====
The net deferred tax asset consists of the following:
(Dollars in thousands) 1997 1996 1995 -------- ------- ------- Allowance for possible loan losses $ 1,699 $ 1,489 $ 1,243 Unrealized loss on securities available-for-sale 18 125 34 Deferred loan fees 210 249 231 Accrued pension and deferred compensation 367 305 262 Depreciation 53 29 - Other 28 91 82 ------- ------- ------- 2,375 2,288 1,852 Valuation allowance - - - ------- ------- ------- Total deferred tax asset 2,375 2,288 1,852 ------- ------- ------- Bond accretion (48) (89) (75) ------- ------- ------- Total deferred tax liabilities (48) (89) (75) ------- ------- ------- Net deferred tax asset $ 2,327 $ 2,199 $ 1,777 ======= ======= =======
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 $290,000, $308,000, and $297,000 in 1997, 1996, and 1995, respectively. The 1997 Shares tax expense reflects tax credits of approximately $51,000 resulting from an investment in a local community development project. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - 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 judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets, and Tier I capital to average quarterly assets. Management believes that the Corporation and the Bank meet all capital adequacy requirements to which it is subject, as of December 31, 1997. As of December 31, 1997, 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, 1997: Total Capital (to Risk Weighted Assets) Corporation $ 40,253 12.48% $ 25,811 less than or = 8.00% $ 32,264 less than or = 10.00% Bank $ 39,060 12.14% $ 25,731 $ 32,164 Tier I Capital (to Risk Weighted Assets) Corporation $ 36,197 11.22% $ 12,906 less than or = 4.00% $ 19,359 less than or = 6.00% Bank $ 35,016 10.89% $ 12,865 $ 19,298 Tier I Capital (to Average Assets) Corporation $ 36,197 8.57% $ 16,891 less than or = 4.00% $ 21,114 less than or = 5.00% Bank $ 35,016 8.30% $ 16,885 $ 21,106 As of December 31, 1996: Total Capital (to Risk Weighted Assets) Corporation $ 36,839 13.31% $ 22,145 less than or = 8.00% $ 27,681 less than or = 10.00% Bank $ 35,722 12.92% $ 22,120 $ 27,651 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE I - CAPITAL REQUIREMENTS- continued Tier I Capital (to Risk Weighted Assets) Corporation $ 33,357 12.05% $ 11,073 less than or = 4.00% $ 16,609 less than or = 6.00% Bank $ 32,244 11.66% $ 11,060 $ 16,590 Tier I Capital (to Average Assets) Corporation $ 33,357 8.58% $ 15,544 less than or = 4.00% $ 19,430 less than or = 5.00% Bank $ 32,244 8.30% $ 15,534 $ 19,418 Corporation 1997 1996 ---- ---- Risk Weighted Assets 322,642 276,814 Average Assets (Current Quarter) 422,284 388,603 Bank 1997 1996 ---- ---- Risk Weighted Assets 321,635 276,505 Average Assets (Current Quarter) 422,129 388,350
NOTE J - 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: FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
1997 1996 ---- ---- Estimated Estimated (Dollars in thousands) Fair Carrying Fair Carrying Value Amount Value Amount ----- ------ ----- ------ Financial Assets Cash and cash equivalents $ 26,448 $ 26,448 $ 25,756 $ 25,756 Investment securities held-to-maturity 12,237 12,082 16,749 15,667 Investment securities available-for-sale 65,516 65,516 82,008 82,008 Interest-bearing deposits with banks -- -- 1,000 1,000 Net loans 314,508 312,999 263,703 259,364 Financial Liabilities Deposits with no stated maturities 244,328 244,328 236,585 236,585 Deposits with stated maturities 130,239 129,921 115,310 115,260 Short-term borrowings 7,625 7,625 7,943 7,943 Off-Balance-Sheet Investments Commitments for extended credit and outstanding letters of credit 95,212 95,212 102,651 102,651
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Corporation is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risks in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Corporation does not require collateral or other security to support financial instruments with credit risk. The contract amounts are as follows:
(Dollars in thousands) 1997 1996 ---------------------- ---- ---- Financial instruments whose contract amounts represent credit risk Commitments to extend credit $90,029 $97,954 Standby letters of credit and financial guarantees written 5,183 4,697
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 FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK - continued 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 credit worthiness 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, 1997, varies up to 100%; the average amount collateralized is 80%. Substantially all of the Corporation's loans, commitments, and commercial and standby letters of credit have been granted to customers in the Corporation's primary market area, Chester County, Pennsylvania. Investments in state and municipal securities also involve governmental entities within the Corporation's market area. The concentrations of credit by type of loan are set forth in Note C - Loans. Although the Corporation has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon 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 L - 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 250,000 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 APB 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:
1997 1996 1995 --------- --------- ------- Net income (in thousands) As reported $ 4,615 $ 4,305 $ 4,100 Pro forma $ 3,909 $ 3,904 $ 4,100 Earnings per share (Basic) As reported $ 2.01 $ 1.88 $ 1.75 Pro forma $ 1.70 $ 1.70 $ 1.75 Earnings per share (Diluted) As reported $ 2.00 $ 1.88 $ 1.75 Pro forma $ 1.69 $ 1.70 $ 1.75
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE L - ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS - continued 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 1997: dividend yield of 2.82%; expected volatility of 0.48; risk-free interest rate of 5.99%; and an expected life of 5 years. The following assumptions were used for grants in 1996: dividend yield of 3.80%; expected volatility of 0.47; risk free rate of 6.13%; and an expected life of 5 years. Information about stock options outstanding at December 31, 1997, is summarized as follows: Weighted-Average Outstanding Exercise Price ----------- ---------------- Balance 1/1/96 - - Granted 64,000 $19.69 Exercised (4,000) 17.31 -------- ----- Balance 1/1/97 60,000 19.85 Granted 62,500 31.03 Exercised (8,300) 19.09 -------- ----- Balance, 12/31/97 114,200 $26.02 ======= ===== The weighted average fair value of options granted during 1996 and 1997 was $7.97 and $12.20, respectively.
Options Outstanding ------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise-Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price -------------- ----------- ---------------- -------------- ----------- -------------- $17.31 - 22.22 51,700 8.27 years $19.97 51,700 $19.97 $31.00 - 31.63 62,500 9.76 years $31.03 -- $ -- ------- ------ 114,200 51,700 ======= ======
NOTE M - EARNINGS PER SHARE (EPS) During 1997, the Bank adopted the provisions of SFAS No. 128, "Earnings Per Share". SFAS 128 eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share. The following table illustrates the reconciliation of the numerators and denominators of the basic and diluted EPS computations:
For the Year Ended December 31, 1997 ------------------------------------------------ 1997: Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS: Net income available to common stockholders $4,615,000 2,290,407 $2.01 ==== Effect of Dilutive Securities Add options to purchase common stock -- 19,403 --------- --------- Diluted EPS: $4,615,000 2,309,810 $2.00 ========= ========= ====
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE M - EARNINGS PER SHARE (EPS) - continued 62,500 options to purchase shares of common stock with a range of exercise prices from $31.00 to $31.63 per share were not included in the computation of 1997 diluted EPS because the options' exercise price was greater than the average market price of the common shares.
For the Year Ended December 31, 1996 ------------------------------------------ 1996: Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS: Income available to common stockholders $4,305,000 2,284,856 $1.88 ==== Effect of Dilutive Securities Add options to purchase common stock -- 7,478 ---------- ---------- Diluted EPS: $4,305,000 2,292,334 $1.88 ========= ========= ==== 1995: The dilutive securities had no effect on the per share calculation.
NOTE N - 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, 1997 and 1996, was approximately $3,754,000 and $2,795,000, 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 $5,084,000 plus additional amounts equal to the net earnings of the Bank for the period from January 1, 1998, through the date of declaration, less dividends previously paid in 1998. NOTE O - EMPLOYEE BENEFIT PLANS - DEFINED CONTRIBUTION PLANS 1. Qualified --------- The Corporation has a qualified deferred salary savings 401(k) plan (the "401(k) Plan") under which the Corporation contributes $0.75 ($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 $152,000, $136,000, and $123,000 in 1997, 1996, and 1995, respectively. The Corporation also has a qualified defined contribution pension plan (the "QDCP Plan"). Under the QDCP Plan, the Corporation makes annual contributions into the 401(k) Plan on behalf of each eligible participant in an amount equal to 3% of salary up to $30,000 in salary plus 6% in excess of $30,000 up to $160,000. Contribution expense in 1997, 1996 and 1995 under the QDCP Plan was $138,000, $220,000 and $200,000, respectively. The Corporation may make additional discretionary employer contributions subject to approval of the Board of Directors. FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE O - EMPLOYEE BENEFIT PLANS - DEFINED CONTRIBUTION PLANS - continued 2. Non-Qualified ------------- The Corporation makes annual contributions to a non-qualified defined contribution Plan ("the NQDCP Plan ") equal to 3% of the participant's salary up to $160,000 plus 9% in excess of $160,000. Contribution expense for 1997, 1996 and 1995 under the NQDCP Plan was $39,000, $38,000 and $35,000, respectively. The Corporation may make additional discretionary employer contributions subject to approval of the Board of Directors. NOTE P - COMMITMENTS AND CONTINGENCIES In the third quarter of 1997, the Bank entered into a contract for the purpose of constructing a 2,750 square foot branch office in the Frazer area. The Frazer branch office is expected to open in the Spring of 1998. In December of 1997 the Bank entered into an agreement with Jack Henry and Associates, Inc. for certain computer hardware, core system software and related installation and training services. The first year value of the contract is estimated at $1.2 million. Also in December of 1997, the Bank entered into an agreement to purchase a 25,000 square foot office building adjacent to the Bank's existing Operation Center in West Chester for approximately $1.7 million. The Bank is expected to take possession of the property in the fourth quarter of 1998. NOTE Q - 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 ---------------------- ------------------- 1997 1996 ---- ---- ASSETS Cash and cash equivalents $ 67 $ 460 Investment in subsidiaries, at equity 35,152 32,589 Inter company loan 932 - Other assets 120 516 -------- -------- Total assets $ 36,271 $ 33,565 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 25 $ 17 Stockholders' equity 36,246 33,548 -------- -------- Total liabilities and stockholders' equity $ 36,271 $ 33,565 ======== ========
FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - continued CONDENSED STATEMENTS OF INCOME
(Dollars in thousands) Year ended December 31 ---------------------- -------------------------------------- 1997 1996 1995 ----------- ---------- -------- INCOME Dividends from subsidiaries $ 2,022 $ 1,814 $ 3,609 Dividends from investment securities 1 12 21 Investment securities gains, net 182 - 17 Other income 16 23 30 --------- --------- -------- Total income 2,221 1,849 3,677 --------- --------- -------- EXPENSES Other expenses 169 196 145 --------- --------- -------- Total expenses 169 196 145 --------- --------- -------- Income before equity in undistributed income of subsidiaries 2,052 1,653 3,532 EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 2,563 2,652 568 --------- --------- -------- NET INCOME $ 4,615 $ 4,305 $ 4,100 ========= ========= ========
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31 -------------------------------------- (Dollars in thousands) 1997 1996 1995 ---- ---- ---- OPERATING ACTIVITIES Net income $ 4,615 $ 4,305 $ 4,100 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiary (2,563) (2,652) (568) Investment securities (gains), net (182) - (17) Decrease (increase) in other assets (61) 423 (432) (Decrease) increase in other liabilities 8 (491) (5) ------ ------ ------ Net cash provided by operating activities 1,817 1,585 3,078 ------ ------ ------ INVESTING ACTIVITIES Proceeds from sales and maturities of investment securities 509 - 57 ------ ------ ------ Net cash provided by investing activities 509 - 57 ------ ------ ------ FINANCING ACTIVITIES Inter company loan (933) - - Dividends paid (1,945) (1,661) (1,495) FIRST WEST CHESTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE Q - CONDENSED FINANCIAL INFORMATION - PARENT CORPORATION ONLY - continued Effect of treasury stock transactions 159 69 (1,885) ------ ------ ------ Net cash used in financing activities (2,719) (1,592) (3,380) ------ ------ ------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (393) (7) (245) Cash and cash equivalents at beginning of year 460 467 712 ------ ------ ------ Cash and cash equivalents at end of year $ 67 $ 460 $ 467 ====== ====== ======
NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of the unaudited quarterly results of operations is as follows:
1997 ---- (Dollars in thousands, except per share) December 31 September 30 June 30 March 31 ----------- ------------ ------------- --------- Interest income $ 8,150 $ 8,227 $ 8,072 $ 7,664 Interest expense 3,452 3,451 3,342 3,106 Net interest income 4,698 4,776 4,730 4,558 Provision for loan losses 189 290 446 210 Investment securities gains (losses), net - - (20) 5 Income before income taxes 1,623 1,734 1,523 1,625 Net income 1,172 1,214 1,129 1,100 Per share Net income (Basic) $ 0.51 $ 0.53 $ 0.49 $ 0.48 Dividends declared 0.26 0.21 0.19 0.19 1996 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 (Basic) $ 0.50 $ 0.46 $ 0.48 $ 0.44 Dividends declared 0.22 0.19 0.17 0.17
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Philadelphia, Pennsylvania January 28, 1998 EX-23 7 CONSENT OF GRANT THORNTON LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 28, 1998 accompanying the consolidated financial statements included in the 1997 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, 1997. 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; File No. 33-15733, effective November 7, 1996; File No. 33-33175, effective August 8, 1997; and File No. 33-33411, effective August 12, 1997). GRANT THORNTON LLP /s/ GRANT THORNTON LLP - ---------------------- Philadelphia, Pennsylvania March 26, 1998 EX-27.1 8 FDS FOR FIRST WEST CHESTER CORPORATION
9 This is Financial Data Schedule for First West Chester Corproation for the year ended 1997. 0000744126 First West Chester Corporation 1000 U. S. Dollars 12-Mos Dec-31-1997 Jan-1-1997 Dec-31-1997 1.000 22,248 0 4,200 0 65,516 12,082 12,237 318,899 5,900 431,368 374,249 11,767 9,139 0 0 0 2,400 33,813 431,368 26,580 5,214 320 32,114 12,670 13,351 18,763 1,135 0 14,911 6,504 6,504 0 0 4,615 2.01 2.00 4.94 1,443 466 0 0 5,218 536 83 5,900 5,900 0 0
EX-27.2 9 FDS FOR FIRST WEST CHESTER CORPORATION
9 These are the Restated Financial Data Schedules for First West Chester Corporation for the years ended 1996 and 1995. 0000744126 First West Chester Corporation 1000 U. S. Dollars 12-Mos 12-Mos Dec-31-1996 Dec-31-1995 Jan-1-1996 Jan-1-1995 Dec-31-1996 Dec-31-1995 1.000 1.000 21,956 19,994 1,000 0 3,800 24,700 0 0 82,008 70,463 15,667 23,048 15,749 23,213 264,582 242,587 5,218 4,506 397,684 388,500 351,266 343,926 7,943 8,858 5,300 5,024 0 0 0 0 0 0 1,800 1,800 31,375 28,892 397,684 388,500 22,856 22,682 5,990 5,136 781 648 29,627 28,466 11,815 11,102 12,135 11,564 17,492 16,902 1,079 1,666 5 9 13,632 12,768 6,343 5,965 6,343 5,965 0 0 0 0 4,305 4,100 1.88 1.75 1.88 1.75 4.94 5.07 713 726 2,772 419 0 0 0 0 4,506 3,303 411 542 44 79 5,218 4,506 5,218 4,506 0 0 0 0
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