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TABLE OF CONTENTS

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-34500

~~For~~FIRST ~~the~~CHESTER ~~transition~~COUNTY ~~period~~CORPORATION (Exact ~~from to .~~name of Registrant as specified in its charter)

~~Commission~~Pennsylvania ~~File~~(State ~~No. 0~~or other jurisdiction of Incorporation or organization) 23-~~12870~~2288763 (I.R.S. Employer Identification No.)

~~FIRST~~9 ~~CHESTER~~North ~~COUNTY~~High ~~CORPORATION~~Street West Chester, Pennsylvania 19380 (Address of principal executive office) (Zip code)

(~~Exact name of~~ 484) 881-4000 (Registrant's ~~as specified~~telephone innumber, ~~its~~including ~~charter~~area code)

Pennsylvania		23-2288763
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

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 ý No o

9 North High Street

West Chester, Pennsylvania 19380

(Address of principal executive office)

(Zip code)

(484) 881-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “"large accelerated filer,”" “"accelerated filer,” " and “"smaller reporting company”" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer xý Non-accelerated filer o ~~Smaller reporting company o~~ (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xý

The number of shares outstanding of Common Stock of the registrant as of ~~August~~November 108, 2010 was 6,~~318~~317,~~611~~925.

Table of Contents

INDEX

			~~Page~~
Part I.	~~FINANCIAL INFORMATION~~	FINANCIAL INFORMATION			2
	Item 1 -	Financial Statements
		Item 1—Financial Statements			2
		Consolidated Balance Sheets June 30, 2010 (unaudited) and December 31, 2009	2
				Consolidated Balance Sheets September 30, 2010 (unaudited) and December 31, 2009	2
		Consolidated Statements of Operations Three and Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	3
				Consolidated Statements of Operations Three and Nine Months Ended September 30, 2010 (unaudited) and 2009 (unaudited)	3
		Consolidated Statements of Cash Flows Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	4
				Consolidated Statements of Cash Flows Nine Months Ended September 30, 2010 (unaudited) and 2009 (unaudited)	4
		Consolidated Statements of Equity Six Months Ended June 30, 2010 (unaudited) and 2009 (unaudited)	5
				Consolidated Statements of Equity Nine Months Ended September 30, 2010 (unaudited) and 2009 (unaudited)	5
		~~Notes to Consolidated Financial Statements (unaudited)~~	6	Notes to Consolidated Financial Statements (unaudited)	6
	Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
		Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations			35
	Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	41
		Item 3—Quantitative and Qualitative Disclosures About Market Risk			51
	Item 4 -	Controls & Procedures	41
		Item 4—Controls & Procedures			51
Part II.	~~OTHER INFORMATION~~	OTHER INFORMATION			54
	Item 1 -	Legal Proceedings	44
		Item 1—Legal Proceedings			54
	Item 1A -	Risk Factors	44
		Item 1A—Risk Factors			54
	Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	44
		Item 2—Unregistered Sales of Equity Securities and Use of Proceeds			54
	Item 3 -	Defaults Upon Senior Securities	44
		Item 3—Defaults Upon Senior Securities			55
	Item 4 -	[Removed and Reserved]	44
		Item 4—[Removed and Reserved]			55
	Item 5 -	Other Information	44
		Item 5—Other Information			55
	Item 6 -	Exhibits	45
		Item 6—Exhibits			55
	Signatures		46
	Exhibits

Table of Contents

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “"forward-looking statements.” " These forward-looking statements are made in in good faith pursuant to the “"safe harbor”" provisions of the Private Securities Litigation Reform Act of 1995. The words “ "may,”" “"could,”" “"should,”" “"would,”" “"believe,”" “"anticipate,”" “"estimate,~~” “~~" "expect,~~” “~~" "intend,”" “"plan”" and similar expressions are intended to identify forward-looking statements. References to “"we,”" “"our”" and the “"Corporation” " refer to First Chester County Corporation, together in each case with our consolidated subsidiaries unless the context suggests otherwise.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management’'s beliefs and assumptions. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, including as a result of risks discussed in “ "Part I, ~~Item~~ Item 1A. Risk Factors”" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, in this Quarterly Report on Form 10-Q, and in subsequent filings with the Securities and Exchange Commission (“"SEC”").

Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)						September 30, 2010			December 31, 2009
		June 30,			December 31,
(Dollars in thousands)		2010			2009
						(unaudited)
		(unaudited)
ASSETS
ASSETS
	Cash and due from banks					$	18,186		$	20,853
Cash and due from banks		$	19,306		$	20,853
	Federal funds sold and other overnight investments						2,441			1,721
Federal funds sold and other overnight investments		806			1,721
	Interest bearing deposits						38,488			124,107
Interest bearing deposits		23,638			124,107
				Total cash and cash equivalents			59,115			146,681
Total cash and cash equivalents		43,750			146,681
	Investment securities available-for-sale, at fair value						58,204			82,698
Investment securities available-for-sale, at fair value		62,801			82,698
	Loans and leases						835,388			901,889
Loans and leases		867,478			901,889
	Less: allowance for loan and lease losses						(22,101	)		(23,217	)
Less: allowance for loan and lease losses		(21,534		)	(23,217		)
				Net loans and leases			813,287			878,672
Net loans and leases		845,944			878,672
	Premises and equipment, net						18,761			20,513
Premises and equipment, net		19,389			20,513
	Deferred tax asset, net						1,182			2,593
Deferred tax asset, net		357			2,593
	Bank owned life insurance						1,526			1,474
Bank owned life insurance		1,510			1,474
	Other real estate owned						4,080			3,692
Other real estate owned		1,414			3,692
	Other assets						18,500			32,560
Other assets		19,915			32,560
	Discontinued assets (see Note 6):
Discontinued assets (see Note 6):
		Mortgage loans and related derivative instruments					158,125			205,150
Mortgage loans and related derivative instruments		169,126			205,150
		Other discontinued assets held for sale					3,640			3,203
Other discontinued assets held for sale		3,664			3,203
				Total assets		$	1,136,420		$	1,377,236
Total assets		$	1,167,870		$	1,377,236
LIABILITIES
LIABILITIES
	Deposits
Deposits
		Non-interest-bearing				$	149,203		$	155,647
Non-interest-bearing		$	161,760		$	155,647
		Interest-bearing (including certificates of deposit over $100 thousand of $188,420 and $250,757 at September 30, 2010 and December 31, 2009, respectively)					821,050			954,653
Interest-bearing (including certificates of deposit over $100 thousand of $178,679 and $250,757 at June 30, 2010 and December 31, 2009, respectively)		830,207			954,653
		Total deposits					970,253			1,110,300
Total deposits		991,967			1,110,300
	Federal Home Loan Bank advances and other borrowings						73,239			172,897
Federal Home Loan Bank advances and other borrowings		83,302			172,897
	Subordinated debentures						20,795			20,795
Subordinated debentures		20,795			20,795
	Other liabilities						11,921			13,097
Other liabilities		12,176			13,097
	Discontinued liabilities (see Note 6)						4,690			3,245
Discontinued liabilities (see Note 6)		4,078			3,245
				Total liabilities		$	1,080,898		$	1,320,334
Total liabilities		$	1,112,318		$	1,320,334
EQUITY
EQUITY
	Common stock, par value $1.00; authorized 25,000,000 shares; outstanding, 6,354,475 at September 30, 2010 and December 31, 2009					$	6,354		$	6,354
Common stock, par value $1.00; authorized 25,000,000 shares; outstanding, 6,354,475 at June 30, 2010 and December 31, 2009		$	6,354		$	6,354
	Additional paid-in capital						23,801			23,678
Additional paid-in capital		23,772			23,678
	Retained earnings						24,227			25,753
Retained earnings		24,122			25,753
	Accumulated other comprehensive income (loss)						415			(499	)
Accumulated other comprehensive income (loss)		177			(499		)
	Treasury stock, at cost: 34,879 shares and 13,702 shares at September 30, 2010 and December 31, 2009, respectively						(442	)		(209	)
Treasury stock, at cost: 35,374 shares and 13,702 shares at June 30, 2010 and December 31, 2009, respectively		(443		)	(209		)
				Total First Chester County Corporation stockholders' equity			54,355			55,077
Total First Chester County Corporation stockholders’ equity		53,982			55,077
	Non-controlling interests						1,167			1,825
Non-controlling interests		1,570			1,825
			Total equity			$	55,522		$	56,902
Total equity		$	55,552		$	56,902
				Total liabilities and equity		$	1,136,420		$	1,377,236
Total liabilities and equity		$	1,167,870		$	1,377,236

The accompanying notes are an integral part of these statements.

~~Table~~ Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

						Three Months Ended September 30,						Nine Months Ended September 30,
		Three Months Ended						Six Months Ended
		June 30,						June 30,
(Dollars in thousands—except per share)						2010			2009			2010			2009
(Dollars in thousands - except per share)		2010			2009			2010			2009
INTEREST INCOME
INTEREST INCOME
	Loans and leases, including fees					$	11,949		$	13,565		$	36,391		$	40,140
Loans and leases, including fees		$	12,071		$	13,367		$	24,442		$	26,576
	Investment securities						413			764			1,306			2,991
Investment securities		463			996			894			2,227
	Federal funds sold and deposits in banks						40			5			233			40
Federal funds sold and deposits in banks		72			13			191			35
			Total interest income				12,402			14,334			37,930			43,171
Total interest income		12,606			14,376			25,527			28,838
INTEREST EXPENSE
INTEREST EXPENSE
	Deposits						2,351			2,881			7,869			9,854
Deposits		2,576			3,105			5,518			6,973
	Subordinated debt						286			295			833			721
Subordinated debt		276			252			547			426
	Federal Home Loan Bank and other borrowings						891			1,388			3,317			4,360
Federal Home Loan Bank and other borrowings		992			1,514			2,426			2,973
			Total interest expense				3,528			4,564			12,019			14,935
Total interest expense		3,844			4,871			8,491			10,372
Net interest income							8,874			9,770			25,911			28,236
Net interest income		8,762			9,505			17,036			18,466
	Provision for loan and lease losses						369			11,222			767			17,693
Provision for loan and lease losses		132			5,084			398			6,471
			Net interest income after provision for loan and lease losses				8,505			(1,452	)		25,144			10,543
Net interest income after provision for loan and lease losses		8,630			4,421			16,638			11,995
NON-INTEREST INCOME
NON-INTEREST INCOME
	Wealth management and advisory services						939			965			2,928			2,931
Wealth management and advisory services		1,100			1,048			1,989			1,966
	Service charges on deposit accounts						561			669			1,726			1,961
Service charges on deposit accounts		579			659			1,165			1,291
	(Loss) gain on sales and calls of investment securities, net						(9	)		1			(9	)		1
Gains on sales and calls of investment securities, net		1			89			1			1
	Operating lease rental income						222			314			726			999
Operating lease rental income		247			345			504			685
	Net gain (loss) on the sales of fixed assets and other real estate owned						46			162			(29	)		279
Net (loss) gains on the sale of fixed assets and OREO		(27		)	72			(75		)	117
	Write down of other real estate owned						—			—			(1,333	)		—
Write down of other real estate owned		—			—			(1,333		)	—
	Bank owned life insurance						16			13			52			39
Bank owned life insurance		18			13			36			26
	Net impairment losses on available for sale securities:
Other		561			496			1,205			1,081
		Total impairment loss					—			(1,576	)		—			(1,576	)
Total non-interest income		2,479			2,722			3,492			5,167
		Portion of loss in other comprehensive income (before taxes)					—			—			—			—
NON-INTEREST EXPENSE
				Net impairment losses recognized in operations			—			(1,576	)		—			(1,576	)
Salaries and employee benefits		3,528			4,894			7,110			10,127
	Other						633			523			1,838			1,552
Occupancy, equipment and data processing		1,677			1,823			3,429			3,599
			Total non-interest income				2,408			1,071			5,899			6,186
Depreciation expense on operating leases		199			290			407			570
NON-INTEREST EXPENSE
FDIC deposit insurance		670			1,062			1,340			1,475
	Salaries and employee benefits						3,471			5,367			10,581			15,493
Bank shares tax		239			232			478			467
	Occupancy, equipment and data processing						1,681			1,811			5,110			5,410
Professional services		2,695			832			4,510			1,408
	Depreciation expense on operating leases						179			259			585			828
Marketing		151			446			376			620
	FDIC deposit insurance						598			422			1,938			1,897
Other real estate expense		1			10			61			15
	Bank shares tax						(173	)		207			305			674
Communications expense		150			240			340			452
	Professional services						2,564			1,100			7,074			2,508
Other		1,425			1,005			2,308			1,920
	Marketing						153			216			529			836
Total non-interest expense		10,735			10,834			20,359			20,653
	Other real estate expense						45			1			107			16
Income (loss) from continuing operations before income taxes		374			(3,691		)	(229		)	(3,491		)
	Communications expense						176			177			516			628
INCOME TAXES		—			(780		)	—			(787		)
	Other						765			1,022			3,072			2,893
NET INCOME (LOSS) FROM CONTINUING OPERATIONS		374			(2,911		)	(229		)	(2,704		)
			Total non-interest expense				9,459			10,582			29,817			31,183
DISCONTINUED OPERATIONS:
			Income (loss) from continuing operations before income taxes				1,454			(10,963	)		1,226			(14,454	)
Income (loss) from discontinued operations, net of taxes of $0 for the three and six months ended June 30, 2010 and $524 thousand and $2.0 million for the three and six months ended June 30, 2009, respectively		449			3,482			(549		)	6,833
INCOME TAXES							582			(3,891	)		582			(4,610	)
Less: Net income attributable to non-controlling interests		654			633			853			870
NET INCOME (LOSS) FROM CONTINUING OPERATIONS						$	872		$	(7,072	)	$	644		$	(9,844	)
Net (loss) income attributable to discontinued operations		$	(205	)	$	2,849		$	(1,402	)	$	5,963
DISCONTINUED OPERATIONS:
NET INCOME (LOSS) INCOME ATTRIBUTABLE TO FIRST CHESTER COUNTY CORPORATION		$	169		$	(62	)	$	(1,631	)	$	3,259
Loss (income) from discontinued operations, net of taxes of $0 for the three and nine months ended September 30, 2010 and $617 thousand and $2.5 million for the three and nine months ended September 30, 2009, respectively							(594	)		1,122			(1,145	)		8,021
PER SHARE DATA
Less: Net income attributable to non-controlling interests							173			494			1,025			1,363
Net income (loss) per share from continuing operations (Basic)		$	0.06		$	(0.46	)	$	(0.04	)	$	(0.43	)
Net (loss) income attributable to discontinued operations						$	(767	)	$	628		$	(2,170	)	$	6,658
Net income (loss) per share from continuing operations (Diluted)		$	0.06		$	(0.46	)	$	(0.04	)	$	(0.43	)
NET INCOME (LOSS) INCOME ATTRIBUTABLE TO FIRST CHESTER COUNTY CORPORATION						$	105		$	(6,444	)	$	(1,526	)	$	(3,186	)
Net (loss) income per share from discontinued operations (Basic)		$	(0.03	)	$	0.45		$	(0.22	)	$	0.95
PER SHARE DATA
Net (loss) income per share from discontinued operations (Diluted)		$	(0.03	)	$	0.45		$	(0.22	)	$	0.95
	Net income (loss) per share from continuing operations (Basic)					$	0.14		$	(1.12	)	$	0.11		$	(1.57	)
Net income (loss) per share attributable to First Chester County Corporation (Basic)		$	0.03		$	(0.01	)	$	(0.26	)	$	0.52
	Net income (loss) per share from continuing operations (Diluted)					$	0.14		$	(1.12	)	$	0.11		$	(1.57	)
Net income (loss) per share attributable to First Chester County Corporation (Diluted)		$	0.03		$	(0.01	)	$	(0.26	)	$	0.52
	Net (loss) income per share from discontinued operations (Basic)					$	(0.12	)	$	0.10		$	(0.35	)	$	1.06
Dividends declared		$	—		$	0.14		$	—		$	0.28
	Net (loss) income per share from discontinued operations (Diluted)					$	(0.12	)	$	0.10		$	(0.35	)	$	1.06
Basic weighted average shares outstanding		6,320,546			6,268,195			6,328,446			6,255,295
	Net income (loss) per share attributable to First Chester County Corporation (Basic)					$	0.02		$	(1.02	)	$	(0.24	)	$	(0.51	)
Diluted weighted average shares outstanding		6,320,546			6,268,195			6,328,446			6,255,295
	Net income (loss) per share attributable to First Chester County Corporation (Diluted)					$	0.02		$	(1.02	)	$	(0.24	)	$	(0.51	)
	Dividends declared					$	—		$	0.14		$	—		$	0.42
Basic weighted average shares outstanding							6,318,986			6,306,889			6,325,258			6,272,682
Diluted weighted average shares outstanding							6,318,986			6,306,889			6,325,258			6,272,682

The accompanying notes are an integral part of these statements.

~~Table~~ Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

					Nine Months Ended September 30,
		Six Months Ended
		June 30,
(Dollars in thousands)					2010			2009
(Dollars in thousands)		2010			2009
OPERATING ACTIVITIES
OPERATING ACTIVITIES
	Net loss attributable to First Chester County Corporation				$	(1,526	)	$	(3,186	)
Net (loss) income attributable to First Chester County Corporation		$	(1,631	)	$	3,259
	Net income attributable to non-controlling interests					1,025			1,363
Net income attributable to non-controlling interests		853			870
	Net loss including non-controlling interests				$	(501	)	$	(1,823	)
Net (loss) income including non-controlling interests		$	(778	)	$	4,129
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
		Depreciation				2,200			2,728
Depreciation		1,536			1,835
		Provision for loan and lease losses				767			17,693
Provision for loan and lease losses		398			6,471
		Amortization of investment security premiums and accretion of discounts, net				309			300
Amortization of investment security premiums and accretion of discounts, net		234			182
		Amortization of deferred loan fees				(1,129	)		(728	)
Amortization of deferred loan fees		(1,050		)	(1,099		)
		Losses (gains) on sales and calls of investment securities available for sale, net				9			(1	)
Gains on sales and calls of investment securities available for sale, net		(1		)	(1		)
		Net losses (gains) from sales of fixed assets and OREO				29			(279	)
Net gains (losses) from sales of fixed assets and OREO		75			(117		)
		Write down of other real estate owned				1,333			—
Write down of other real estate owned		1,333			—
		Net gain from mortgage banking activities				(33,910	)		(37,172	)
Net gain from mortgage banking activities		(22,988		)	(25,439		)
		Proceeds from the sale of mortgage loans held for sale				1,430,326			1,897,596
Proceeds from the sale of mortgage loans held for sale		553,157			1,218,374
		Origination of mortgage loans held for sale				(1,349,440	)		(1,950,649	)
Origination of mortgage loans held for sale		(494,230		)	(1,435,744		)
		Net cash paid for the settlement of derivative contracts				(1,006	)		(277	)
Net cash paid for the settlement of derivative contracts		(516		)	(1,005		)
		Stock-based compensation expense				93			147
Stock-based compensation expense		64			100
		Other than temporary impairment on investment securities available for sale				—			1,576
~~Decrease (increase) in deferred tax asset~~		~~1,887~~Decrease (increase) in deferred tax asset			~~(29~~	939	)		(3,201	)
~~Decrease (increase) in other assets~~		~~10,527~~Decrease (increase) in other assets			~~(7,116~~	9,730	)		(12,339	)
~~Increase in other liabilities~~		~~765~~Increase in other liabilities			~~6,632~~	1,294			2,369
~~Net cash provided by (used in) operating activities~~		~~50,413~~	Net cash provided by (used in) operating activities		~~(232,827~~	61,043	)		(84,060	)
INVESTING ACTIVITIES
~~Net decrease (increase) in loans~~	Net decrease (increase) in loans	~~33,380~~			~~(8,010~~	65,747	)		(21,108	)
~~Proceeds from sales of investment securities available-for-sale~~	Proceeds from sales of investment securities available-for-sale	—			~~30,333~~	245			33,641
~~Proceeds from maturities, prepayments and calls of investment securities available-for-sale~~	Proceeds from maturities, prepayments and calls of investment securities available-for-sale	~~21,403~~			~~6,867~~	26,031			10,048
~~Purchases of investment securities available-for-sale~~	Purchases of investment securities available-for-sale	~~(713~~		)	~~(5,786~~	(713	)		(16,649	)
~~Proceeds from the sale of OREO~~	Proceeds from the sale of OREO	~~2,191~~			~~1,475~~	2,064			5,060
~~Purchase of premises and equipment~~	Purchase of premises and equipment	~~(502~~		)	~~(3,281~~	(576	)		(3,794	)
~~Proceeds from the sale of premises and equipment~~	Proceeds from the sale of premises and equipment	~~137~~			—	184			114
~~Net cash provided by investing activities~~		~~55,896~~	Net cash provided by investing activities		~~21,598~~	92,982			7,312
FINANCING ACTIVITIES
Change in subsidiary’s shares from non-controlling interest		(1,108		)	(552		)
	Change in subsidiary's shares from non-controlling interest					(1,683	)		(1,009	)
Increase in short term Federal Home Loan Bank and other short term borrowings		10,000			145,000
	Net increase in short term Federal Home Loan Bank and other short term borrowings					—			49,700
~~Increase in long term Federal Home Loan Bank and other borrowings~~	Increase in long term Federal Home Loan Bank and other borrowings	—			~~48,300~~	—			58,300
~~Repayment of long term Federal Home Loan Bank and other borrowings~~	Repayment of long term Federal Home Loan Bank and other borrowings	~~(99,595~~		)	~~(59,097~~	(99,658	)		(77,047	)
~~Proceeds from issuance of subordinated debentures~~	Proceeds from issuance of subordinated debentures	—			~~5,330~~	—			5,330
Net (decrease) increase in deposits		(118,333		)	241
	Net decrease in deposits					(140,047	)		(29,077	)
~~Cash dividends paid~~	Cash dividends paid	—			~~(874~~	—	)		(1,759	)
~~Net treasury stock transactions~~	Net treasury stock transactions	~~(204~~		)	90	(203	)		111
~~Net cash (used in) provided by financing activities~~		~~(209,240~~	Net cash (used in) provided by financing activities	)	~~138,438~~	(241,591	)		4,549
~~NET DECREASE IN CASH AND CASH EQUIVALENTS~~		~~(102,931~~	NET DECREASE IN CASH AND CASH EQUIVALENTS	)	~~(72,791~~	(87,566	)		(72,199	)
Cash and cash equivalents at beginning of period		~~146,681~~			~~95,150~~	146,681			95,150
Cash and cash equivalents at end of period		$	~~43,750~~		$	2259,~~359~~115		$	22,951
Supplementary cash flow information:
~~Interest paid~~	Interest paid	$	~~9,643~~		$	613,~~300~~627		$	17,611
~~Income taxes paid~~	Income taxes paid	$	—		$	50—		$	2,750
~~Loans transferred to real estate owned~~	Loans transferred to real estate owned	$	~~1,137~~		$	13,~~117~~890		$	2,963

The accompanying notes are an integral part of these statements.

~~Table~~ Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

		~~Common Stock~~	Common Stock		~~Additional Paid -in~~			~~Retained~~			~~Accumulated Other Comprehensive~~			~~Treasury~~Accumulated Other Comprehensive Income (loss)			~~Non- Controlling~~			~~Total~~			~~Comprehensive~~
(Dollars in thousands)		Shares	Par Value		Capital			Earnings			Income (loss)			Stock			Interest			Equity			Income
								Additional Paid -in Capital			Retained Earnings						Treasury Stock			Non- Controlling Interest			Total Equity			Comprehensive Income
Balance January 1, 2009		6,331,975	$	6,332	$	24,708		$	57,899		$	(3,292	)	$	(1,815	)	$	1,485		$	85,317
(Dollars in thousands)			Shares		Par Value
Cumulative effect adjustment under ASC 860-50		—	—		—			240			—			—			—			240
Balance January 1, 2009				6,331,975	$	6,332		$	24,708		$	57,899		$	(3,292	)	$	(1,815	)	$	1,485		$	85,317
Balance January 1, 2009, as adjusted		6,331,975	6,332		24,708			58,139			(3,292		)	(1,815		)	1,485			85,557
	Cumulative effect adjustment under ASC 860-50			—		—			—			240			—			—			—			240
Change in subsidiary shares from non-controlling interest		—	—		—			—			—			—			(552		)	(552		)
Balance January 1, 2009, as adjusted				6,331,975		6,332			24,708			58,139			(3,292	)		(1,815	)		1,485			85,557
Net income		—	—		—			3,259			—			—			870			4,129			$	4,129
	Change in subsidiary shares from non-controlling interest			—		—			—			—			—			—			(1,009	)		(1,009	)
Cash dividends declared		—	—		—			(1,749		)	—			—			—			(1,749		)
	Net income			—		—			—			(3,186	)		—			—			1,363			(1,823	)	$	(1,823	)
Other comprehensive income		—	—		—			—			—			—			—			—
	Cash dividends declared			—		—			—			(2,632	)		—			—			—			(2,632	)
Net unrealized gains on investment securities available-for-sale		—	—		—			—			888			—			—			888			888
	Other comprehensive income			—		—			—			—			—			—			—			—
Treasury stock transactions		—	—		(1,316		)	—			—			1,406			—			90
		Net unrealized gains on investment securities available-for-sale		—		—			—			—			2,769			—			—			2,769			2,769
Stock based compensation		—	—		100			—			—			—			—			100
	Treasury stock transactions			—		—			(1,330	)		—			—			1,441			—			111
Total comprehensive income																							$	5,017
	Stock based compensation			—		—			147			—			—			—			—			147
Balance June 30, 2009		6,331,975	$	6,332	$	23,492		$	59,649		$	(2,404	)	$	(409	)	$	1,803		$	88,463
	Stock based compensation tax benefit			—		—			(10	)		—			—			—			—			(10	)
Balance January 1, 2010		6,354,475	$	6,354	$	23,678		$	25,753		$	(499	)	$	(209	)	$	1,825		$	56,902
	Total comprehensive income																									$	946
Change in subsidiary shares from non-controlling interest		—	—		—			—			—			—			(1,108		)	(1,108		)
Balance September 30, 2009				6,331,975	$	6,332		$	23,515		$	52,321		$	(523	)	$	(374	)	$	1,839		$	83,110
Net (loss) income		—	—		—			(1,631		)	—			—			853			(778		)	$	(778	)
Balance January 1, 2010				6,354,475	$	6,354		$	23,678		$	25,753		$	(499	)	$	(209	)	$	1,825		$	56,902
Other comprehensive income		—	—		—			—			—			—			—			—
	Change in subsidiary shares from non-controlling interest			—		—			—			—			—			—			(1,683	)		(1,683	)
Net unrealized gains on investment securities Available-for-sale		—	—		—			—			676			—			—			676			676
	Net (loss) income			—		—			—			(1,526	)		—			—			1,025			(501	)	$	(501	)
Treasury stock transactions		—	—		30			—			—			(234		)	—			(204		)
	Other comprehensive income			—		—			—			—			—			—			—			—
Share based compensation		—	—		64			—			—			—			—			64
		Net unrealized gains on investment securities Available-for-sale		—		—			—			—			914			—			—			914			914
Total comprehensive loss																							$	(102	)
	Treasury stock transactions			—		—			30			—			—			(233	)		—			(203	)
Balance June 30, 2010		6,354,475	$	6,354	$	23,772		$	24,122		$	177		$	(443	)	$	1,570		$	55,552
	Share based compensation			—		—			93			—			—			—			—			93
	Total comprehensive loss																									$	413
Balance September 30, 2010				6,354,475	$	6,354		$	23,801		$	24,227		$	415		$	(442	)	$	1,167		$	55,522

The accompanying notes are an integral part of these statements.

~~Table~~ Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Summary of Significant Accounting Policies

Basis of presentation

The foregoing unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“"GAAP”") for interim financial information. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Certain prior period amounts have been reclassified to conform to current year presentation, which includes ~~reclassifications~~ reclassifications for discontinued operations (see Note 6 for discontinued operations disclosure and Note 13 12 for earnings (loss) per share). Actual results could differ from those estimates.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been included. The results of operations for the three and ~~six~~nine month periods ended ~~June~~September 30, 2010 are not necessarily indicative of the results to be expected for the full year. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009 (our “"2009 Annual Report”").

Prior to January 1, 2010, our business was conducted through two primary segments, community banking and mortgage banking. During the first quarter 2010, we announced the potential sale of our American Home Bank (“"AHB”") mortgage banking segment. Accordingly, the mortgage banking operations related to this segment have been reclassified, and are now presented as discontinued operations in the consolidated statements of operations. Certain assets and liabilities of this former segment are presented as discontinued assets and liabilities held for sale. ~~The~~ The statements of cash flows are presented on a consolidated basis, including both continuing and discontinued operations. The notes to the consolidated financial statements have been adjusted to exclude discontinued operations unless otherwise noted. Footnote segment disclosures are not provided. Refer to Note 6 of the accompanying consolidated financial statements for information related to ~~discontinued~~ discontinued operations.

The consolidated financial statements include the accounts of First Chester County Corporation (“"First Chester”" or the “"Corporation”") and First National Bank of Chester County (the “ "Bank”"). All material intercompany balances and transactions have been eliminated in consolidation.

2. Going Concern

~~The~~ The Corporation’'s financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. However, due to the Corporation’'s financial results, the substantial uncertainty throughout the U.S. banking industry and other matters discussed in this report, a ~~substantial~~ substantial doubt exists regarding our ability to continue as a going concern. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

As further described in Note 5, on October 16, 2009, the Bank entered into a Memorandum of Understanding (“"MOU”") with the Office of the Comptroller of the Currency (“"OCC”"). ~~The OCC also mandated higher individual minimum capital~~ ~~ratios~~On ~~(“IMCRs”), which the Bank was required to achieve by December~~August 3127, ~~2009.~~ ~~Continued operations may depend on the Corporation’s ability to comply with the terms of the MOU~~2010, the ~~IMCRs~~Bank ~~and~~entered ~~the~~into ~~closing of the pending merger with Tower Bancorp, Inc. (“Tower”). For the year ended December 31, 2009, the Corporation incurred~~ a ~~net~~formal ~~loss~~written ~~from~~agreement operations, primarily from the higher provisions for loan losses due to increased levels of non-performing assets, the write-off of goodwill and the establishment of a valuation allowance on the deferred tax assets. Our efforts to raise capital to comply with the ~~IMCRs prior to the deadline ultimately resulted in the planned merger with Tower~~OCC, ~~as described in Note 3 below,~~ which ~~was~~supersedes ~~announced on December 28, 2009. In addition, in efforts to conserve capital, we elected to reduce~~ and ~~subsequently suspend~~replaces our cash dividends on our common stock beginning with the third quarter of 2009. However, despite the above efforts, as of March 31, 2010 and December 31, 2009, the Bank was below certain IMCR thresholds. The Corporation is in compliance with the IMCRs as of June 30, 2010, as further discussed in Note 5.

Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

~~Management and~~ ~~the board of directors are committed to the planned merger with Tower~~2. ~~However,~~ ifGoing ~~the~~Concern ~~announced~~(Continued) merger were not to occur, then Management would seek to recapitalize the Bank by finding another merger partner or by raising additional capital in the public or private markets. The Corporation is completing a regular planning cycle for 2011, which includes, among other things, updating the Corporation’s strategic business plan and creating detailed operating and marketing plans for the Bank as an independent company.

the MOU. The OCC also mandated higher individual minimum capital ratios ("IMCRs"), which the Bank was required to achieve by December 31, 2009. Continued operations may depend on the Corporation's ability to comply with the terms of the formal agreement, the IMCRs and the closing of the pending merger with Tower Bancorp, Inc. ("Tower"). For the year ended December 31, 2009, the Corporation incurred a net loss from operations, primarily from the higher provisions for loan losses due to increased levels of non-performing assets, the write-off of goodwill and the establishment of a valuation allowance on the deferred tax assets. Our efforts to raise capital to comply with the IMCRs prior to the deadline ultimately resulted in the planned merger with Tower, as described in Note 3 below, which was announced on December 28, 2009. ~~Pending~~ In addition, in efforts to conserve capital, we elected to reduce and ~~Merger~~subsequently suspend our cash dividends on our common stock beginning with the third quarter of 2009. However, despite the above efforts, as of March 31, 2010 and December 31, 2009, the Bank was below certain IMCR thresholds. The Corporation has been compliance with the IMCRs since the quarter ended June 30, 2010, as further discussed in Note 5.

On Management ~~December 27,~~and ~~2009,~~ the ~~Corporation~~board ~~entered~~of ~~into~~directors aare ~~definitive~~committed ~~merger agreement,~~to ~~as amended on March 4, 2010 (~~the ~~“Merger~~planned ~~Agreement”),~~merger with ~~Tower,~~ ~~the holding company for Graystone~~ Tower. ~~Bank (“Graystone”)~~However, ~~pursuant~~if ~~to which~~the ~~First~~announced ~~Chester~~merger ~~will~~were ~~merge~~not ~~with~~to ~~and into Tower (the “Merger”)~~occur, ~~with~~then ~~Tower being~~Management ~~the~~would ~~surviving~~seek ~~corporation.~~to ~~The~~recapitalize ~~Merger Agreement also provides that upon~~the ~~consummation~~Bank ofby ~~the~~finding another merger, ~~the~~partner ~~Bank~~or ~~will~~by ~~merge~~raising ~~with~~additional ~~and~~capital ~~into~~in ~~Graystone, with Graystone as~~ the ~~surviving~~public ~~institution~~or ~~(the~~private ~~“Bank Merger”)~~markets. The ~~Merger Agreement~~Corporation ~~additionally~~is ~~provides~~completing ~~for~~a ~~the~~regular ~~potential~~planning ~~sale~~cycle offor ~~the~~2011, ~~AHB~~which ~~segment at or prior to the consummation of the Merger. At the effective time of the Merger~~includes, ~~the~~ ~~board~~among ~~of directors of Tower will be increased by three (3) directors~~other ~~and three (3) of the current directors of First Chester selected by the board of directors of First Chester~~things, ~~with~~updating the ~~approval of Tower’~~Corporation's ~~board~~strategic ~~of directors,~~business ~~will~~plan beand ~~added~~creating todetailed ~~the~~operating ~~board~~and ofmarketing ~~directors~~plans offor ~~Tower,~~the toBank ~~serve~~ as ~~such for~~an noindependent ~~less than three years~~company.

~~Under the~~ ~~terms of the Merger Agreement, shareholders of First Chester will receive 0~~3.~~453~~ ~~shares~~Pending ~~of Tower common stock for each share of First Chester common stock they own. The~~ Merger Agreement establishes loan delinquency thresholds and provides for an increase or reduction in the consideration paid by Tower to First Chester shareholders in the event of specified increases or decreases in First Chester’s loan delinquencies prior to closing.

~~Directors~~ ~~and~~ On ~~executive~~December 27, ~~officers~~2009, ofthe ~~First~~Corporation ~~Chester have~~ entered into ~~Voting~~a ~~Agreements~~ definitive merger agreement, as amended (the "Merger Agreement"), with Tower, the holding company for Graystone Tower Bank ("Graystone"), pursuant to which ~~they~~First ~~have~~Chester ~~agreed~~will merge with and into Tower (the "Merger"), ~~among~~with ~~other~~Tower ~~things~~being the surviving corporation. The Merger Agreement also provides that upon consummation of the merger, tothe ~~vote~~Bank ~~all~~will merge with and into Graystone, with Graystone as the surviving institution (the "Bank Merger"). The Merger Agreement additionally provides for the potential sale of the AHB ~~shares~~segment at or prior to the consummation of ~~common~~the ~~stock~~Merger. At the effective time of the Merger, the board of directors of Tower will be increased by three (3) directors and three (3) of the current directors of First Chester ~~owned~~selected by ~~them~~the inboard ~~favor~~of directors of First Chester, with the approval of ~~the~~Tower's ~~Merger~~board atof directors, will be added to the ~~special~~board ~~shareholder’s~~of ~~meeting~~directors of Tower, to ~~vote~~serve ~~upon~~as such ~~the~~for ~~Merger~~no less than three years.

~~Consummation~~ Under the terms of the Merger isAgreement, ~~subject~~shareholders toof ~~certain~~First ~~terms~~Chester ~~and~~will ~~conditions,~~receive ~~including,~~0.453 ~~but~~shares ~~not limited~~of ~~to,~~Tower ~~receipt~~common stock for each share of ~~various~~First ~~regulatory~~Chester ~~approvals~~common ~~and~~stock ~~approval~~they byown. ~~both~~The ~~Tower’s~~Merger ~~and~~Agreement ~~First~~establishes ~~Chester’s~~loan ~~shareholders~~delinquency thresholds and ~~First~~provides ~~Chester’s~~for ~~loan~~an ~~delinquencies~~increase ~~not exceeding~~or ~~$90~~reduction ~~million~~ in the ~~aggregate.~~consideration Aspaid ofby ~~June 30,~~Tower ~~2010,~~to ~~all regulatory~~First ~~approvals~~Chester ~~have~~shareholders ~~been~~in ~~received~~the ~~from~~event ~~the~~of ~~bank~~specified ~~regulators.~~increases ~~However,~~or ~~certain~~decreases ofin ~~these~~First ~~approvals~~Chester's ~~contain~~loan ~~expiration~~delinquencies ~~dates~~prior ~~such~~to ~~that~~closing. ~~extensions~~If ~~may need~~the tomerger behad ~~obtained~~closed ifin October 2010, the ~~merger~~exchange isratio ~~not~~would ~~closed~~have ~~prior~~been to0.291 ~~the~~based ~~end~~on ofFirst ~~the~~Chester ~~third~~Delinquent Loans of ~~quarter~~$76.2 million calculated as of September 30, 2010.

~~4. Recent~~ Directors ~~Accounting~~and ~~Pronouncements~~executive officers of First Chester have entered into Voting Agreements with Tower, pursuant to which they have agreed, among other things, to vote all shares of common stock of First

In July 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The update requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. The amendments that require disclosures as of the end of a reporting period are effective for the periods ending on or after December 15, 2010. ASU No. 2010-20 will enhance the disclosure requirements for financing receivables and credit losses, but will not impact the Corporation’s financial position, results of operations or cash flows.7

InTable February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This guidance removes the requirement for a SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. ASU 2010-09 is intended to remove potential conflicts with the SEC’s literature and all of the amendments are effective upon issuance, except for the use of the issued date for conduit debt obligors. The Corporation adopted the guidance for the interim period ending June 30, 2010 with no impact on the Corporation’s financial condition or results of operations.Contents

In ~~January 2010,~~FIRST ~~the~~CHESTER ~~FASB~~COUNTY ~~issued~~CORPORATION ~~ASU~~AND ~~2010-06,~~SUBSIDIARIES Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance requires: (1) disclosure of the significant amount transferred in and out of Level 1 and Level 2 fair value measurements and the reasons for the

7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Table~~ of(UNAUDITED) ~~Contents~~

~~FIRST~~ ~~CHESTER~~3. ~~COUNTY~~Pending ~~CORPORATION AND~~Merger ~~SUBSIDIARIES~~(Continued)

~~NOTES~~Chester owned TOby ~~CONSOLIDATED FINANCIAL~~them ~~STATEMENTS~~in favor of the approval of the Merger at the special shareholder's meeting to vote upon the Merger.

~~(UNAUDITED)~~ Consummation of the Merger is subject to certain terms and conditions, including, but not limited to, receipt of various regulatory approvals and approval by both Tower's and First Chester's shareholders and First Chester's loan delinquencies not exceeding $90 million in the aggregate. As of September 30, 2010, all regulatory approvals have been received from the bank regulators. However, certain of these approvals contain expiration dates such that extensions may need to be obtained if the merger is not closed prior to the end of 2010.

~~transfers;~~ On ~~and (2)~~November ~~separate presentation of purchases~~1, ~~sales~~2010, ~~issuances~~First Chester and ~~settlements~~ inTower ~~the~~jointly ~~reconciliation~~announced ~~for~~that ~~fair~~the ~~value~~companies ~~measurements~~will ~~using~~each ~~significant unobservable~~hold ~~inputs~~a ~~(Level~~special ~~3). In addition,~~meeting ~~ASU 2010-06 clarifies the requirements~~ of ~~the~~its ~~following~~respective ~~existing disclosures~~shareholders ~~set~~on ~~forth in FASB Accounting Standards Codifications (ASC) 820~~December 8, ~~“Fair Value~~2010 ~~Measurements and Disclosures”: (1) For~~ for purposes of ~~reporting~~considering ~~fair value~~and ~~measurement~~approving ~~for~~the ~~each~~Merger. ~~class~~The ofMerger ~~assets~~is ~~and~~currently ~~liabilities,~~anticipated ~~a reporting entity needs~~ to ~~use~~close ~~judgment~~ in ~~determining~~mid-December ~~the~~2010. ~~appropriate~~The ~~classes~~transaction ofremains ~~assets~~subject ~~and liabilities;~~to ~~and~~approval ~~(2) a~~by ~~reporting entity should provide disclosures about~~ the ~~valuation~~shareholders ~~techniques and inputs used to measure fair value for both~~of ~~recurring~~Tower and ~~nonrecurring~~First ~~fair value measurements. This guidance is effective for interim and annual reporting periods beginning January 1~~Chester, ~~2010,~~as ~~except for~~well ~~the~~as ~~disclosures about purchases, sales, issuances, and settlements in~~ the ~~roll~~ ~~forward~~satisfaction of ~~activity~~other inclosing ~~Level~~conditions. 3First ~~fair~~Chester ~~value measurements, which are effective for fiscal years beginning January 1, 2011,~~ and ~~for~~Tower ~~interim periods~~mailed ~~within~~the ~~those~~joint ~~fiscal~~proxy ~~years.~~statement/prospectus ~~The~~related ~~Corporation~~to ~~adopted~~ the ~~guidance~~special onmeetings ~~January 1,~~to their ~~2010,~~respective ~~and~~shareholders ~~the guidance did not have an impact~~ on ~~the Corporation’s financial condition~~ or ~~results~~about ofNovember 5, ~~operations~~2010.

In June 2009, the FASB updated ASC 860, “Transfers and Servicing,” to eliminate the concept of a qualifying special-purpose entity (“QSPE”), modify the criteria for applying sale accounting to transfers of financial assets or portions of financial assets, differentiate between the initial measurement of an interest held in connection with the transfer of an entire financial asset recognized as a sale and participating interests recognized as a sale and remove the provision allowing classification of interests received in a guaranteed mortgage securitization transaction that does not qualify as a sale as available-for-sale or trading securities4. ~~The updates~~Recent toAccounting ASC 860 clarify (i) that an entity must consider all arrangements or agreements made contemporaneously or in contemplation of a transfer, (ii) the isolation analysis related to the transferor and its consolidated subsidiaries and (iii) the principle of effective control over the transferred financial asset. The updates to ASC 860 also enhance financial statement disclosures. The updates to ASC 860 are effective for fiscal years beginning after November 15, 2009 with earlier application prohibited. Revised recognition and measurement provisions are to be applied to transfers occurring on or after the effective date and the disclosure provisions are to be applied to transfers that occurred both before and after the effective date. The guidance was effective for January 1, 2010 and did not have an impact on the Corporation’s financial condition or results of operations.Pronouncements

In ~~June 2009~~July 2010, the FASB ~~updated~~issued ~~ASC~~Accounting ~~810,~~Standards ~~“Consolidation,” to~~Update ~~modify~~("ASU") ~~certain~~2010-20, ~~characteristics~~Receivables ~~that identify a variable interest entity~~ (~~“VIE”~~Topic 310)~~, revise~~: ~~the~~Disclosures ~~criteria~~about ~~for determining~~ the ~~primary~~Credit ~~beneficiary~~Quality of aFinancing ~~VIE,~~Receivables ~~add an~~and ~~additional~~the ~~reconsideration~~Allowance ~~event~~for toCredit ~~determining~~Losses. ~~whether~~The anupdate ~~entity~~requires iscompanies ato ~~VIE, eliminating~~provide ~~troubled~~more ~~debt~~information ~~restructurings~~in astheir ~~an excluded reconsideration event and enhance~~ disclosures ~~regarding~~about ~~involvement with a VIE. Additionally, with~~ the ~~elimination~~credit quality of ~~the~~their ~~concept~~financing ofreceivables ~~QSPEs~~and in the ~~updates~~credit toreserves ~~ASC 860, entities~~held ~~previously~~against ~~considered~~them. ~~QSPEs~~The ~~are~~amendments ~~now~~that ~~within~~require ~~the~~disclosures ~~scope~~as of ~~ASC~~the ~~810.~~end ~~Entities required~~of ~~to consolidate or deconsolidate~~ a ~~VIE~~reporting ~~will~~period ~~recognize~~are aeffective ~~cumulative effect in retained earnings~~ for ~~any difference in~~ the ~~carrying amount of the~~ ~~interest~~periods ~~recognized.~~ending ~~The~~on ~~updates~~or ~~to ASC 810 are effective for fiscal years beginning~~ after ~~November~~December 15, ~~2009~~2010. ~~with~~ASU ~~earlier~~No. 2010-20 ~~application~~will ~~prohibited.~~enhance ~~The guidance~~the ~~was~~disclosure ~~effective~~requirements for ~~January 1,~~financing ~~2010~~receivables and ~~did~~credit ~~not~~losses, ~~have~~but anwill not impact on the Corporation’'s financial ~~condition~~position, or results of operations or cash flows.

5 In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. ~~Regulatory~~ This guidance removes the ~~Matters~~requirement for a SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. ASU 2010-09 is intended to remove potential conflicts with the SEC's literature and all of the amendments are effective upon issuance, except for the use of the issued date for conduit debt obligors. The Corporation adopted the guidance for the interim period ending June 30, 2010 with no impact on the Corporation's financial condition or results of operations.

~~Supervisory~~ In January ~~Actions~~2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance requires: (1) disclosure of the significant amount transferred in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers; and (2) separate presentation of purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures set forth in FASB Accounting Standards Codifications (ASC) 820, "Fair Value

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can prompt 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators involving factors such as the risk weights assigned to assets and what items may be counted as capital. Regulators also have broad discretion to require any institution to maintain higher capital levels than otherwise required by statute or regulation, even institutions that are considered “well-capitalized” under applicable regulations.8

~~On October 16,~~Table ~~2009, the Board~~ of ~~Directors of the Bank entered into an MOU with the OCC. An MOU with regulatory authorities is an informal action that is not published or publicly available and that is used when~~ Contents

8 FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

~~Table~~ ~~of Contents~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~FIRST~~ ~~CHESTER~~(UNAUDITED) ~~COUNTY CORPORATION AND SUBSIDIARIES~~

~~NOTES~~ TO4. ~~CONSOLIDATED FINANCIAL~~Recent ~~STATEMENTS~~Accounting Pronouncements (Continued)

Measurements and Disclosures": (~~UNAUDITED~~1) For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning January 1, 2011, and for interim periods within those fiscal years. The Corporation adopted the guidance on January 1, 2010, and the guidance did not have an impact on the Corporation's financial condition or results of operations.

~~circumstances~~ In ~~warrant~~June 2009, the FASB updated ASC 860, "Transfers and Servicing," to eliminate the concept of a ~~milder~~qualifying ~~form~~special-purpose entity ("QSPE"), modify the criteria for applying sale accounting to transfers of ~~action~~financial ~~than~~assets aor ~~formal~~portions ~~supervisory~~of ~~action~~financial assets, ~~such~~differentiate between the initial measurement of an interest held in connection with the transfer of an entire financial asset recognized as a sale and participating interests recognized as a sale and remove the provision allowing classification of interests received in a guaranteed mortgage securitization transaction ~~formal~~that ~~written~~does ~~agreement~~not qualify as a sale as available-for-sale or ~~order~~trading securities. ~~Under~~The ~~the~~updates ~~MOU~~to ASC 860 clarify (i) that an entity must consider all arrangements or agreements made contemporaneously or in contemplation of a transfer, (ii) the ~~Bank~~isolation ~~has~~analysis ~~agreed~~related to the transferor and its consolidated subsidiaries and (iii) the principle of ~~address~~effective control over the transferred financial asset. The updates to ASC 860 also enhance financial statement disclosures. The updates to ASC 860 are effective for fiscal years beginning after November 15, ~~among~~2009 ~~other~~with ~~things~~earlier application prohibited. Revised recognition and measurement provisions are to be applied to transfers occurring on or after the effective date and the disclosure provisions are to be applied to transfers that occurred both before and after the effective date. The guidance was effective for January 1, 2010 and did not have an impact on the ~~following~~Corporation's ~~matters:~~financial condition or results of operations.

~~· Develop~~ In June 2009, the FASB updated ASC 810, "Consolidation," to modify certain characteristics that identify a ~~comprehensive~~variable ~~three-year~~interest ~~capital~~entity ("VIE"), revise the criteria for determining the ~~plan;~~primary beneficiary of a VIE, add an additional reconsideration event to determining whether an entity is a VIE, eliminating troubled debt restructurings as an excluded reconsideration event and enhance disclosures regarding involvement with a VIE. Additionally, with the elimination of the concept of QSPEs in the updates to ASC 860, entities previously considered QSPEs are now within the scope of ASC 810. Entities required to consolidate or deconsolidate a VIE will recognize a cumulative effect in retained earnings for any difference in the carrying amount of the interest recognized. The updates to ASC 810 are effective for fiscal years beginning after November 15, 2009 with earlier application prohibited. The guidance was effective for January 1, 2010 and did not have an impact on the Corporation's financial condition or results of operations.

~~· Take~~ ~~action~~5. toRegulatory ~~protect criticized assets and adopt and implement a program to eliminate the basis of criticism of such assets;~~Matters

~~· Establish~~ anSupervisory ~~effective program that provides for early problem loan identification and a formal plan to proactively manage those assets;~~Actions

~~· Review~~ The ~~the~~Bank ~~adequacy~~is ofsubject ~~the~~to ~~Bank’s~~various ~~information technology~~regulatory ~~activities~~capital ~~and~~requirements ~~Bank~~administered ~~Secrecy~~by ~~Act~~the ~~compliance~~federal ~~and~~banking ~~approve~~agencies. ~~written programs~~Failure ofto ~~policies~~meet ~~and~~minimum capital ~~procedures~~requirements tocan ~~provide~~prompt ~~for~~certain ~~compliance;~~mandatory, and possibly

~~· Establish a Compliance Committee of the Board to monitor and coordinate the Bank’s adherence to the provisions of the MOU.~~9

~~The Board~~Table of ~~Directors and Management have initiated corrective actions to comply with the provisions of the MOU.~~Contents

~~Additionally,~~ inFIRST ~~November 2009,~~CHESTER ~~the~~COUNTY ~~Bank~~CORPORATION ~~was~~AND ~~advised~~SUBSIDIARIES that the OCC established IMCRs for the Bank higher than the capital ratios generally applicable to banks under current regulations. In the case of the Bank, the OCC established IMCRs requiring a Tier 1 leverage ratio of at least eight percent (8%), a Tier 1 risk-based capital ratio of at least ten percent (10%) and a total risk-based capital ratio of at least twelve percent (12%) which the Bank was required to achieve by December 31, 2009. The Corporation’s efforts to raise capital prior to the deadline ultimately resulted in the planned merger with Tower Bancorp, which was announced on December 28, 2009. During the fourth quarter of 2009, the Corporation also received notice from the Federal Reserve, its primary regulator, that the Federal Reserve must approve any dividends to be paid in advance of the declaration or payment of the dividend.

~~For the~~ ~~purpose~~NOTES ofTO ~~satisfying~~CONSOLIDATED ~~the~~FINANCIAL ~~IMCRs,~~STATEMENTS ~~during~~(Continued) December 2009, the Corporation entered into an amendment to our existing loan agreement with Graystone to recapitalize the Bank. As of December 31, 2009, the Corporation borrowed the full $26.0 million available under the credit facility which was contributed to the Bank as Tier 1 capital. Additionally, Graystone purchased $52.5 million in first lien residential real estate and commercial loan participations at a 1.5% discount.

~~As set~~ ~~forth~~(UNAUDITED) in the tables below, as of June 30, 2010, the Bank met the IMCR thresholds for all capital ratios, but as of December 31, 2009, the Bank was below the IMCR thresholds for Tier 1 leverage and total risk-based capital.

							To Be Well
							Capitalized Under
				For Capital			Individual Minimum
	Actual			Adequacy Purposes			Capital Ratios
(Dollars in thousands)	Amount	Ratio		Amount	Ratio		Amount	Ratio
As of June 30, 2010:
Leverage Ratio
Corporation	73,765	6.03	%	48,916	>4.00	%	N/A	N/A
Bank	102,574	8.40	%	48,833	>4.00	%	97,665	>8.00	%
Tier I Capital Ratio
Corporation	73,765	8.09	%	36,469	>4.00	%	N/A	N/A
Bank	102,574	11.27	%	36,395	>4.00	%	90,986	>10.00	%
Total Risk Based Capital Ratio
Corporation	87,635	9.61	%	72,938	>8.00	%	N/A	N/A
Bank	114,106	12.54	%	72,789	>8.00	%	109,184	>12.00	%

5. Regulatory Matters (Continued)

9additional 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators involving factors such as the risk weights assigned to assets and what items may be counted as capital. Regulators also have broad discretion to require any institution to maintain higher capital levels than otherwise required by statute or regulation, even institutions that are considered "well-capitalized" under applicable regulations.

~~Table~~ On October 16, 2009, the Board of ~~Contents~~Directors of the Bank entered into an MOU with the OCC. An MOU with regulatory authorities is an informal action that is not published or publicly available and that is used when circumstances warrant a milder form of action than a formal supervisory action, such as a formal written agreement or order. Under the MOU, the Bank has agreed to address, among other things, the following matters:

•: develop a comprehensive three-year capital plan;
•: take action to protect criticized assets and adopt and implement a program to eliminate the basis of criticism of such assets;
•: establish an effective program that provides for early problem loan identification and a formal plan to proactively manage those assets;
•: review the adequacy of the Bank's information technology activities and Bank Secrecy Act compliance and approve written programs of policies and procedures to provide for compliance; and
•: establish a Compliance Committee of the Board to monitor and coordinate the Bank's adherence to the provisions of the MOU.

~~FIRST~~ On August 27, ~~CHESTER~~2010, ~~COUNTY~~the ~~CORPORATION~~Board of Directors of the Bank entered into a formal written agreement with the OCC, which supersedes and replaces the MOU. The formal agreement requires ~~AND~~that ~~SUBSIDIARIES~~the Board of Directors of the Bank ensure that the Bank takes those actions identified in the MOU (described above), and, in some cases, augments those requirements, such as by establishing a written program regarding criticized assets of $750,000 or above, rather than the $1,000,000 threshold referenced in the MOU. In addition, the formal agreement adds a number of new requirements, requiring the Bank to: (i) ensure the Bank has adequate and competent senior management; (ii) develop and implement a written profit plan to improve and sustain the earnings of the Bank; (iii) develop and implement a written program to improve loan portfolio management; (iv) review the methodology for the Bank's allowance for loan and lease losses and establish a program providing for the maintaining of an adequate allowance; and (v) adopt and implement a written interest rate risk policy. Unlike the MOU, the formal agreement is a form of formal enforcement action enforceable by the OCC through several means, including injunctions and the assessment of civil money penalties against the Bank, its Board of Directors and/or its management.

~~NOTES~~ The Board TOof ~~CONSOLIDATED FINANCIAL~~Directors ~~STATEMENTS~~and Management have initiated corrective actions to comply with the provisions of the formal agreement.

~~(UNAUDITED)~~10

							To Be Well
							Capitalized Under
				For Capital			Individual Minimum
	Actual			Adequacy Purposes			Capital Ratios
(Dollars in thousands)	Amount	Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2009:
Leverage Ratio
Corporation	76,459	5.71	%	53,522	>4.00	%	N/A	N/A
Bank	102,617	7.68	%	53,472	>4.00	%	106,943	>8.00	%
Tier I Capital Ratio
Corporation	76,459	7.79	%	39,262	>4.00	%	N/A	N/A
Bank	102,617	10.47	%	39,203	>4.00	%	98,008	>10.00	%
Total Risk Based Capital Ratio
Corporation	89,936	9.16	%	78,525	>8.00	%	N/A	N/A
Bank	115,035	11.74	%	78,407	>8.00	%	117,610	>12.00	%

Table of Contents

~~Dividend~~ FIRST ~~Restrictions~~CHESTER COUNTY CORPORATION AND SUBSIDIARIES

~~The Bank,~~ asNOTES aTO ~~national~~CONSOLIDATED ~~bank,~~FINANCIAL isSTATEMENTS 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 the 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, subject to the further limitations that a national bank can pay dividends only to the extent that the payment of such dividends would not cause the Bank to become “undercapitalized” (~~as defined under federal law~~Continued)~~. There~~ ~~were no dividends declared or payable by the Bank as of June 30, 2010.~~

~~During the~~ ~~fourth~~(UNAUDITED) quarter of 2009, the Corporation received notice from the Federal Reserve Board that the Federal Reserve must approve any dividends to be paid by the Corporation in advance of the declaration or payment of the dividend. The Corporation announced during the first quarter 2010 that it will not be paying any dividends prior to the completion of the proposed merger. There were no dividends declared or payable by the Corporation as of June 30, 2010.

6 5. ~~Discontinued Assets~~ ~~Held~~Regulatory ~~for~~Matters ~~Sale~~(Continued) ~~and Discontinued Operations~~

~~On March 4~~ Additionally, in ~~2010~~November 2009, the ~~Corporation~~Bank ~~and~~was ~~Tower,~~advised ~~entered~~that ~~into~~the anOCC ~~amendment~~established toIMCRs for the ~~Merger~~ ~~Agreement,~~Bank ~~which~~higher ~~provides~~than ~~for~~the capital ratios generally applicable to banks under current regulations. In the ~~merger~~case of the Bank, ~~with~~the ~~and~~OCC ~~into Graystone~~established IMCRs requiring a Tier 1 leverage ratio of at least eight percent (8%), ~~with~~a ~~Graystone~~Tier 1 asrisk-based ~~the~~capital ~~surviving~~ratio ~~institution.~~of ~~Graystone~~at ~~and~~least ~~the~~ten ~~Bank~~percent ~~entered~~(10%) ~~into~~and a ~~Bank~~total ~~Plan~~risk-based capital ratio of ~~Merger~~at onleast ~~March~~twelve percent (12%) which the Bank was required to achieve by December 431, ~~2010~~2009. The ~~amendment additionally~~Corporation's ~~provides~~efforts ~~for~~to raise capital prior to the ~~potential~~deadline ~~sale~~ultimately ofresulted in the ~~AHB~~planned ~~division~~merger atwith orTower ~~prior~~Bancorp, to which was announced on December 28, 2009. During the ~~consummation~~fourth quarter of 2009, the ~~Merger. The~~ Corporation ~~has~~also ~~engaged~~received notice afrom ~~financial~~the ~~advisor~~Federal Reserve, its primary regulator, that the Federal Reserve must approve any dividends to ~~assist~~be paid in advance of the ~~sale~~declaration or payment of the ~~AHB division~~dividend.

~~The~~ For ~~results~~the purpose of ~~operations~~satisfying ofthe aIMCRs, ~~component~~during ofDecember an2009, ~~entity~~the ~~that~~Corporation ~~has~~entered ~~either~~into ~~been~~an ~~disposed of,~~amendment orto isour ~~classified~~existing asloan ~~held~~agreement ~~for~~with ~~sale,~~Graystone ~~shall~~to berecapitalize ~~reported~~the inBank. ~~discontinued~~As of ~~operations~~December 31, if2009, ~~both~~ the ~~operations~~Corporation ~~and~~borrowed ~~cash flows of~~ the ~~component~~full ~~have~~$26.0 million ~~been,~~available ~~or will~~under ~~be,~~the ~~eliminated~~credit ~~from~~facility ~~ongoing~~which ~~operations~~was ofcontributed to the ~~entity~~Bank as aTier 1 ~~result~~capital. ofAdditionally, ~~the~~Graystone ~~disposal~~purchased ~~transaction~~$52.5 million ~~and~~in ~~the~~first ~~entity~~lien ~~will~~residential ~~not~~real ~~have~~estate ~~any~~and ~~significant~~commercial ~~continuing involvement~~loan inparticipations ~~the~~at ~~operations~~a of1.5% ~~the component after the disposal transaction~~discount.

In As ~~determining~~set ~~whether~~forth ~~the~~in ~~Corporation met~~ the ~~conditions~~tables ~~for~~below, aas ~~qualified~~of ~~plan~~September 30, ~~of sale~~2010, ~~management considered~~ the ~~relevant~~Bank ~~accounting guidance and concluded that the “held for sale” conditions were~~ met ~~during~~ the ~~first~~IMCR ~~quarter~~thresholds ~~2010. Management~~for ~~determined~~all ~~that~~capital ~~the~~ratios, ~~Corporation~~but ~~will~~as ~~exit significant mortgage banking activities after the sale~~ of ~~AHB and~~December 31, ~~as such~~2009, ~~certain assets and liabilities of~~ the ~~Corporation’s~~Bank ~~mortgage~~was ~~banking~~below ~~operations will be presented as discontinued assets held for sale and~~ the ~~results of operations directly~~ ~~related~~IMCR tothresholds ~~mortgage banking activity will be presented as discontinued operations~~ for ~~the quarter ended March~~Tier ~~31,~~1 ~~2010,~~leverage and ~~for~~total ~~all~~risk-based ~~future periods~~capital.

			Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Individual Minimum Capital Ratios

(Dollars in thousands)			Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2010:
	Leverage Ratio
		Corporation		73,418		6.35	%		46,245		³4.00	%		N/A		N/A
		Bank		102,509		8.88	%		46,163		³4.00	%		92,326		³8.00	%
	Tier I Capital Ratio
		Corporation		73,418		8.38	%		35,060		³4.00	%		N/A		N/A
		Bank		102,509		11.72	%		34,996		³4.00	%		87,490		³10.00	%
	Total Risk Based Capital Ratio
		Corporation		86,971		9.92	%		70,121		³8.00	%		N/A		N/A
		Bank		113,616		12.99	%		69,992		³8.00	%		104,988		³12.00	%

~~Table of Contents~~11

~~FIRST~~Table ~~CHESTER~~of ~~COUNTY CORPORATION AND SUBSIDIARIES~~Contents

~~NOTES~~ FIRST TOCHESTER ~~CONSOLIDATED FINANCIAL~~COUNTY ~~STATEMENTS~~CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (~~UNAUDITED~~Continued)

~~Loans~~ ~~held~~(UNAUDITED) for sale and related derivative instruments are shown as a separate disposal group separate from other AHB assets. Based on discussions with interested third parties to date, management anticipates that these assets, although discontinued from the Corporation’s future business model most likely will not be sold in the transaction as described above. These assets although directly related to the mortgage banking segment’s operations are to be sold by the Corporation in the normal course of business shortly after the close of a potential sale transaction. The Corporation does not expect to originate significant loans held for sale after the completion of the sale of its mortgage banking operations.

~~The remaining~~ ~~assets, disposal group 2, will likely be sold as indicated in the amended Merger Agreement noted above~~5. ~~The~~Regulatory ~~carrying~~Matters ~~value~~(Continued) ~~of these assets are required to be at the lower of their carrying value or fair market value less costs to sell, and depreciation and amortization expense associated with assets held-for-sale ceases.~~

			Actual						For Capital Adequacy Purposes					To Be Well Capitalized Under Individual Minimum Capital Ratios
		June 30,			December 31,
		2010			2009
(Dollars in thousands)			Amount			Ratio			Amount		Ratio			Amount		Ratio
Disposal Group 1
As of December 31, 2009:
Loans held for sale, at fair value		$	166,818		$	202,757
	Leverage Ratio
Derivative instruments, at fair value		2,308			2,393
	Corporation			76,459			5.71	%		53,522		³4.00	%		N/A		N/A
Total assets		$	169,126		$	205,150
	Bank			102,617			7.68	%		53,472		³4.00	%		106,943		³8.00	%
Fair value of derivative instruments		$	331		$	—
	Tier I Capital Ratio
Total liabilities		$	331		$	—
	Corporation			76,459			7.79	%		39,262		³4.00	%		N/A		N/A
Disposal Group 2
	Bank			102,617			10.47	%		39,203		³4.00	%		98,008		³10.00	%
Premises and equipment		$	2,007		$	1,956
	Total Risk Based Capital Ratio
Other miscellaneous assets		1,657			1,247
	Corporation			89,936			9.16	%		78,525		³8.00	%		N/A		N/A
Total assets		$	3,664		$	3,203
	Bank			115,035			11.74	%		78,407		³8.00	%		117,610		³12.00	%
Accounts payable and accrued liabilities		$	3,747		$	3,245
Total liabilities		$	3,747		$	3,245

~~Results of~~ ~~operations~~Dividend ~~for discontinued operations for the three and six months ended June 30, 2010 and 2009 are presented below.~~Restrictions

	Three Months Ended
	June 30,
	2010			2009
Interest income (1)	$	1,491		$	3,099
Interest expense (2)	380			881
Net interest income	1,111			2,218
Non-interest income	13,280			15,280
Non-interest expense	13,942			13,492
Income before income taxes	449			4,006
Income taxes	—			524
Net income prior to non-controlling interest	$	449		$	3,482
Less: Net income attributable to non-controlling interest	$	654		$	633
(Loss) income from discontinued operations, net of taxes	$	(205	)	$	2,849

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 the 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, subject to the further limitations that a national bank can pay dividends only to the extent that the payment of such dividends would not cause the Bank to become "undercapitalized" (as defined under federal law). There were no dividends declared or payable by the Bank as of September 30, 2010.

11 During the fourth quarter of 2009, the Corporation received notice from the Federal Reserve Board that the Federal Reserve must approve any dividends to be paid by the Corporation in advance of the declaration or payment of the dividend. The Corporation announced during the first quarter 2010 that it will not be paying any dividends prior to the completion of the proposed merger. There were no dividends declared or payable by the Corporation as of September 30, 2010.

~~Table~~ of6. ~~Contents~~Discontinued Assets Held for Sale and Discontinued Operations

~~FIRST~~ On ~~CHESTER~~March 4, ~~COUNTY~~2010, ~~CORPORATION~~the Corporation and Tower entered into an amendment to the Merger Agreement, which provides for the merger of the Bank with and into Graystone, with Graystone as ~~AND~~the ~~SUBSIDIARIES~~surviving institution. Graystone and the Bank entered into a Bank Plan of Merger on March 4, 2010. The amendment additionally provides for the potential sale of the AHB division at or prior to the consummation of the Merger. The Corporation has engaged a financial advisor to assist in the sale of the AHB division.

~~NOTES~~ The results TOof ~~CONSOLIDATED~~operations of a component of an entity that has either been disposed of, or is classified as held for sale, shall be reported in discontinued operations if both the ~~FINANCIAL~~operations ~~STATEMENTS~~and cash flows of the component have been, or will be, eliminated from ongoing operations of the entity as a

~~(UNAUDITED)~~12

	Six Months Ended
	June 30,
	2010			2009
Interest income (1)	$	2,686		$	4,944
Interest expense (2)	728			1,561
Net interest income	1,958			3,383
Non-interest income	23,473			28,242
Non-interest expense (3)	25,980			22,804
(Loss) income before income taxes	(549		)	8,821
Income taxes	—			1,988
Net (loss) income prior to non-controlling interest	$	(549	)	$	6,833
Less: Net income attributable to non-controlling interest	$	853		$	870
(Loss) income from discontinued operations, net of taxes	$	(1,402	)	$	5,963

Table of Contents

~~(1) Interest income excludes~~ ~~interest~~FIRST ~~income~~CHESTER ~~earned~~COUNTY onCORPORATION ~~the~~AND ~~Corporation’s~~SUBSIDIARIES residential and construction loans held for investment that was previously disclosed as part of the results of operations of the mortgage banking segment. Management anticipates that these held for investment portfolios will remain as part of the Corporation’s continuing community banking operations after the sale of the mortgage banking business.

~~(2) Interest~~ ~~expense~~NOTES ofTO ~~the mortgage~~CONSOLIDATED ~~banking~~FINANCIAL ~~segment~~STATEMENTS is based on management’s internal methodology of allocating consolidated interest expense of the Corporation’s existing funding sources to the mortgage banking segment’s assets directly related to discontinued loans held for sale and certain discontinued non-interest earning assets held for sale. This allocation methodology is consistent with management’s previous segment reporting policies, however, it excludes any funding costs attributable to the Corporation’s residential and construction loans held for investment that were previously disclosed as part of the results of operations of the mortgage banking segment. Imputed interest expense of the mortgage banking segment is shown as part of the consolidated statement of operations as deposit and Federal Home Loan Bank (~~“FHLB”~~Continued) advances and other borrowings interest expense. To properly report the net loss (income) from discontinued operations, interest expense from deposits of $347 thousand and $665 thousand and interest expense from FHLB advances and other borrowings of $33 thousand and $63 thousand for the three and six month periods ending June 30, 2010, respectively, was reclassified from the Corporation’s continuing operations on the consolidated statements of operations to interest expense from discontinued operations. Interest expense from deposits of $778 thousand and $1.4 million and interest expense from FHLB advances and other borrowings of $103 thousand and $180 thousand for the three and six month periods ending June 30, 2009, respectively, was reclassified from the Corporation’s continuing operations on the consolidated statements of operations to interest expense from discontinued operations.

(3UNAUDITED) ~~Non-interest~~ ~~expense includes a $500 thousand charge recorded in the first quarter 2010 resulting from anticipated investment banking, legal and audit fees directly related to the potential sale of AHB.~~

7 6. ~~Investment Securities~~ Discontinued Assets Held for Sale and Discontinued Operations (Continued)

~~The~~result of ~~Corporation’s~~the ~~investment portfolio~~disposal ~~consists~~transaction ofand the ~~following~~entity ~~categories~~will not have any significant continuing involvement in the operations of ~~securities:~~the component after the disposal transaction.

~~· US~~ In determining ~~Treasury~~whether -the ~~Consists~~Corporation met the conditions for a qualified plan of sale, management considered the relevant accounting guidance and concluded that the "held for sale" ~~debt~~conditions ~~securities~~were ~~issued~~met byduring the USfirst ~~Government~~quarter 2010. Management determined that the Corporation will exit significant mortgage banking activities after the sale of AHB and, as such, certain assets and liabilities of the Corporation's mortgage banking operations will be presented as discontinued assets held for sale and the results of operations directly related to mortgage banking activity will be presented as discontinued operations for the quarter ended March 31, 2010, and for all future periods.

~~· US Government~~ Loans ~~Agency~~held ~~Notes~~for -sale ~~Consists~~and ofrelated ~~debt~~derivative instruments ~~issued~~are byshown USas a separate disposal group separate from other AHB assets. Based on discussions with interested third parties to date, ~~Government~~management ~~agencies~~anticipates ~~such~~that these assets, although discontinued from the Corporation's future business model most likely will not be sold in the transaction as described above. These assets although directly related to the ~~Federal~~mortgage ~~Home~~banking ~~Loan~~segment's ~~Bank~~operations ~~and~~are ~~Freddie~~to ~~Mac~~be sold by the Corporation in the normal course of business shortly after the close of a potential sale transaction. The Corporation does not expect to originate significant loans held for sale after the completion of the sale of its mortgage banking operations.

~~· US Government~~ The ~~Agency~~remaining ~~Mortgage~~assets, ~~Backed~~disposal ~~Securities~~group -2, ~~Consists~~will oflikely ~~residential mortgage~~be ~~pass-through~~sold ~~securities~~as ~~and~~indicated ~~collateralized~~in ~~mortgage~~the ~~obligations~~amended ~~“CMOs” issued~~Merger byAgreement USnoted ~~government~~above. ~~agencies~~The ~~such~~carrying asvalue ~~GNMA,~~of ~~FNMA~~these ~~and~~assets ~~Freddie~~are ~~Mac.~~required ~~The~~to ~~GNMA~~be at the lower ~~pass-through~~of ~~securities~~their carrying value or ~~the~~fair ~~underlying~~market ~~GNMA~~value ~~securities~~less ~~backing~~costs ~~the~~to ~~CMOs~~sell, ~~are guaranteed~~and bydepreciation ~~the~~and USamortization ~~Government,~~expense ~~while~~associated ~~the~~with ~~FNMA~~assets ~~and~~held-for-sale ~~Freddie~~ceases.

			September 30, 2010		December 31, 2009

Disposal Group 1
	Loans held for sale, at fair value		$	155,264	$	202,757
	Derivative instruments, at fair value			2,861		2,393

		Total assets	$	158,125	$	205,150

	Fair value of derivative instruments		$	384	$	—

		Total liabilities	$	384	$	—

Disposal Group 2
	Premises and equipment		$	2,044	$	1,956
	Other miscellaneous assets			1,596		1,247

		Total assets	$	3,640	$	3,203

	Accounts payable and accrued liabilities		$	4,306	$	3,245

		Total liabilities	$	4,306	$	3,245

~~Table of Contents~~13

~~FIRST~~ ~~CHESTER~~ ~~COUNTY CORPORATION~~ ~~AND~~Table ~~SUBSIDIARIES~~of Contents

~~NOTES~~ FIRST TOCHESTER ~~CONSOLIDATED FINANCIAL~~COUNTY ~~STATEMENTS~~CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (~~UNAUDITED~~Continued)

~~Mac~~ ~~pass-through securities or the underlying FNMA and Freddie Mac securities backing the CMOs are guaranteed by the respective US Government agency.~~(UNAUDITED)

~~· Collateralized Mortgage~~ ~~Obligations~~6. -Discontinued ~~Residential~~Assets —Held ~~Consists~~for ofSale ~~private~~and ~~label CMOs~~Discontinued ~~backed~~Operations ~~by non-government agency residential mortgage pools.~~(Continued)

~~· Collateralized~~ ~~Mortgage~~ Results ~~Obligations~~of -operations ~~Commercial~~for —discontinued ~~Consists~~operations offor ~~private~~the ~~label CMOs~~three ~~backed~~and bynine ~~non-government~~months ~~agency~~ended ~~commercial~~September 30, ~~mortgage~~2010 ~~pools~~and 2009 are presented below.

· State and Municipal— Consists of securities issued by state, city or local governments.

		Three Months Ended September 30,

		2010			2009
Interest income(1)		$	1,480		$	2,867
Interest expense(2)			392			803

	Net interest income		1,088			2,064
Non-interest income			10,557			12,472
Non-interest expense			12,239			12,797

(Loss) income before income taxes			(594	)		1,739
Income taxes			—			617

Net (loss) income prior to non-controlling interest		$	(594	)	$	1,122

Less: Net income attributable to non-controlling interest		$	173		$	494

(Loss) income from discontinued operations, net of taxes		$	(767	)	$	628

· Corporate Debt Securities — Consists of corporate debt securities.

		Nine Months Ended September 30,

		2010			2009
Interest income(1)		$	4,166		$	7,810
Interest expense(2)			1,120			2,364

	Net interest income		3,046			5,446
Non-interest income			34,029			40,714
Non-interest expense			38,220			35,601

(Loss) income before income taxes			(1,145	)		10,559
Income taxes			—			2,538

Net (loss) income prior to non-controlling interest		$	(1,145	)	$	8,021

Less: Net income attributable to non-controlling interest		$	1,025		$	1,363

(Loss) income from discontinued operations, net of taxes		$	(2,170	)	$	6,658

~~· Bank~~ ~~equity~~ ~~securities~~ (1)Interest income —excludes ~~Consists~~interest income earned on the Corporation's residential and construction loans held for investment that was previously disclosed as part of ~~equity~~the ~~securities~~results of ~~banks,~~operations ~~bank~~of the mortgage banking segment. Management anticipates that these held for investment portfolios will remain as part of the Corporation's continuing community ~~holding~~banking ~~companies~~operations orafter ~~bank~~the ~~trust~~sale ~~preferred~~of ~~securities~~the mortgage banking business. (2)Interest expense of the mortgage banking segment is based on management's internal methodology of allocating consolidated interest expense of the Corporation's existing funding sources to the mortgage banking segment's assets directly related to discontinued

~~· Other Equity Securities — Consists primarily of equity securities of the Federal Reserve and the Federal Home Loan Bank.~~14

~~The~~Table ~~amortized cost, gross unrealized gains and losses, and fair market value~~ of ~~the Corporation’s available-for-sale securities at June 30, 2010 and December 31, 2009 are summarized as follows:~~Contents

~~June 30,~~ ~~2010~~FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
US Treasury	$	5,002	$	16	$	—		$	5,018
US Government agency notes	2,005		1		—			2,006
US Government agency mortgage-backed securities	31,076		1,197		(20		)	32,253
Collateralized mortgage obligations - Residential	1,113		4		(106		)	1,011
Collateralized mortgage obligations - Commercial	1,003		—		(87		)	916
State and municipal	3,270		49		—			3,319
Corporate debt securities	7,048		—		(826		)	6,222
Bank equity securities	525		59		(19		)	565
Other equity securities	11,491		—		—			11,491
Totals	$	62,533	$	1,326	$	(1,058	)	$	62,801

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~December 31, 2009~~ (UNAUDITED)

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value
US Treasury	$	20,003	$	13	$	—		$	20,016
US Government agency notes	2,040		7		—			2,047
US Government agency mortgage-backed securities	36,193		902		(100		)	36,995
Collateralized mortgage obligations - Residential	1,249		—		(251		)	998
Collateralized mortgage obligations - Commercial	1,004		—		(196		)	808
State and municipal	4,542		52		—			4,594
Corporate debt securities	7,056		—		(1,191		)	5,865
Bank equity securities	525		50		(42		)	533
Other equity securities	10,842		—		—			10,842
	$	83,454	$	1,024	$	(1,780	)	$	82,698

6. Discontinued Assets Held for Sale and Discontinued Operations (Continued)

~~The~~loans held ~~amortized~~for ~~cost~~sale and ~~estimated~~certain ~~fair~~discontinued ~~value~~non-interest earning assets held for sale. This allocation methodology is consistent with management's previous segment reporting policies, however, it excludes any funding costs attributable to the Corporation's residential and construction loans held for investment that were previously disclosed as part of ~~debt~~the ~~securities~~results of operations of ~~classified~~the mortgage banking segment. Imputed interest expense of the mortgage banking segment is shown as ~~available-~~part of the consolidated statement of operations as deposit and Federal Home Loan Bank ("FHLB") advances and other borrowings interest expense. To properly report the net loss (income) from discontinued operations, interest expense from deposits of $356 thousand and $1.0 million and interest expense from FHLB advances and other borrowings of $36 thousand and $99 thousand for~~-sale~~ atthe ~~June~~three and nine month periods ending September 30, 2010, ~~by contractual maturity~~respectively, was ~~are~~reclassified ~~shown~~from inthe Corporation's continuing operations on the ~~following~~consolidated ~~table~~statements of operations to interest expense from discontinued operations. Interest expense from deposits of $631 thousand and $2.0 million and interest expense from FHLB advances and other borrowings of $172 thousand and $352 thousand for the three and nine month periods ending ~~Expected~~September 30, ~~maturities~~2009, ~~will~~respectively, ~~differ~~was reclassified from ~~contractual~~the Corporation's continuing operations on the consolidated statements of operations to interest expense from discontinued operations.

13 7. Investment Securities

~~Table~~ The Corporation's investment portfolio consists of ~~Contents~~ the following categories of securities:

•: US Treasury—Consists of debt securities issued by the US Government.
•: US Government Agency Notes—Consists of debt instruments issued by US Government agencies such as the Federal Home Loan Bank and Freddie Mac.
•: US Government Agency Mortgage Backed Securities—Consists of residential mortgage pass-through securities and collateralized mortgage obligations "CMOs" issued by US government agencies such as GNMA, FNMA and Freddie Mac. The GNMA pass-through securities or the underlying GNMA securities backing the CMOs are guaranteed by the US Government, while the FNMA and Freddie Mac pass-through securities or the underlying FNMA and Freddie Mac securities backing the CMOs are guaranteed by the respective US Government agency.
•: Collateralized Mortgage Obligations—Residential—Consists of private label CMOs backed by non-government agency residential mortgage pools.
•: Collateralized Mortgage Obligations—Commercial—Consists of private label CMOs backed by non-government agency commercial mortgage pools.
•: State and Municipal—Consists of securities issued by state, city or local governments.
•: Corporate Debt Securities—Consists of corporate debt securities.
•: Bank equity securities—Consists of equity securities of banks, bank holding companies or bank trust preferred securities.

~~FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES~~15

~~NOTES~~Table TOof ~~CONSOLIDATED FINANCIAL STATEMENTS~~Contents

~~(UNAUDITED)~~ FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

~~maturities~~ ~~because~~NOTES ~~borrowers~~TO ~~may~~CONSOLIDATED ~~have~~FINANCIAL ~~the~~STATEMENTS ~~right~~(Continued) ~~to call or prepay obligations with or without call or prepayment penalties.~~

	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	5,949	$	5,980
Due after one year through five years	9,887		9,436
Due after five years through ten years	500		506
Due after ten years	989		643
	17,325		16,565
Mortgage-backed securities and CMOs	33,192		34,180
Bank equity and other equity securities	12,016		12,056
	$	62,533	$	62,801

(UNAUDITED)

~~During the~~ ~~six months ended June 30, 2010, there were no sales of investment securities available for sale~~7. ~~Proceeds~~Investment ~~from~~Securities ~~the~~(Continued) sale of investment securities available for sale for the three months ended June 30, 2009 were $18.5 million. Gross gains from the sale of investment securities for the three months ended June 30, 2009 were $89 thousand. The principal amount of investment securities pledged to secure public deposits and for other purposes required or permitted by law were $50.8 million at June 30, 2010 and $71.4 million at December 31, 2009. Other than US government agency mortgage back securities, there were no securities held from a single issuer that represented more than 10% of stockholders’ equity.

•: Other Equity Securities—Consists primarily of equity securities of the Federal Reserve and the Federal Home Loan Bank.

The amortized ~~table~~cost, ~~below~~gross ~~indicates the~~unrealized ~~length~~gains ofand ~~time~~losses, ~~individual~~and ~~securities~~fair ~~have~~market ~~been~~value inof athe ~~continuous~~Corporation's ~~unrealized loss~~available-for-sale ~~position~~securities at ~~June~~September 30, 2010. and December 31, 2009 are summarized as follows:

	Less than 12 months						12 months or longer					Total
(Dollars in thousands)	Number
Description of	of	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	Securities	Value		Losses			Value		Losses			Value		Losses
US Government agency mortgage-backed securities	2	$	3,465	$	(20	)	$	—	$	—		$	3,465	$	(20	)
Collateralized mortgage obligations — Residential	1	—		—			569		(106		)	569		(106		)
Collateralized mortgage obligations — Commercial	1	—		—			1,003		(87		)	1,003		(87		)
Corporate debt securities	6	987		(13		)	5,235		(813		)	6,222		(826		)
Bank equity securities	2	—		—			235		(19		)	235		(19		)
Total temporarily impaired investment securities	12	$	4,452	$	(33	)	$	7,042	$	(1,025	)	$	11,494	$	(1,058	)

September 30, 2010

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2009.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

US Treasury	$	5,001	$	11	$	—		$	5,012
US Government agency mortgage-backed securities		29,408		1,166		—			30,574
Collateralized mortgage obligations—Residential		1,042		8		(84	)		966
Collateralized mortgage obligations—Commercial		1,003		—		(47	)		956
State and municipal		2,346		41		—			2,387
Corporate debt securities		7,044		—		(525	)		6,519
Bank equity securities		270		60		—			330
Other equity securities		11,460		—		—			11,460

Totals	$	57,574	$	1,286	$	(656	)	$	58,204

14 December 31, 2009

Table of Contents

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

US Treasury	$	20,003	$	13	$	—		$	20,016
US Government agency notes		2,040		7		—			2,047
US Government agency mortgage-backed securities		36,193		902		(100	)		36,995
Collateralized mortgage obligations—Residential		1,249		—		(251	)		998
Collateralized mortgage obligations—Commercial		1,004		—		(196	)		808
State and municipal		4,542		52		—			4,594
Corporate debt securities		7,056		—		(1,191	)		5,865
Bank equity securities		525		50		(42	)		533
Other equity securities		10,842		—		—			10,842

	$	83,454	$	1,024	$	(1,780	)	$	82,698

~~FIRST~~ The amortized ~~CHESTER~~cost ~~COUNTY~~and ~~CORPORATION~~estimated fair value of debt securities classified as available-for-sale at September 30, 2010, by contractual maturity, are shown ~~AND~~in ~~SUBSIDIARIES~~the following table. Expected maturities will

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~16

~~(UNAUDITED)~~Table of Contents

	Less than 12 months						12 months or longer					Total
(Dollars in thousands)	Number
Description of	of	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Securities	Securities	Value		Losses			Value		Losses			Value		Losses
US Government agency mortgage-backed securities	5	$	9,386	$	(100	)	$	—	$	—		$	9,386	$	(100	)
Collateralized mortgage obligations — Residential	3	292		—			700		(251		)	992		(251		)
Collateralized mortgage obligations — Commercial	1	—		—			808		(196		)	808		(196		)
Corporate debt securities	6	—		—			5,865		(1,191		)	5,865		(1,191		)
Bank equity securities	2	—		—			213		(42		)	213		(42		)
Total temporarily impaired investment securities	17	$	9,678	$	(100	)	$	7,586	$	(1,680	)	$	17,264	$	(1,780	)

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

~~Other~~ ~~than~~NOTES ~~Temporary~~TO ~~Impairment~~CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~In accordance~~ ~~with ASC 320-10, “Investments — Debt and Equity Securities,” the Corporation evaluates its securities portfolio for other-than-temporary impairment~~ (~~“OTTI”~~UNAUDITED) throughout the year. Each investment, that has a fair value less than the book value is reviewed on a quarterly basis by management. Management considers at a minimum the following factors that, both individually or in combination, could indicate that the decline is other-than-temporary: (a) the Corporation has the intent to sell the security; (b) it is more likely than not that it will be required to sell the security before recovery; and (c) the Corporation does not expect to recover the entire amortized cost basis of the security. Among the factors that are considered in determining intent is a review of capital adequacy, interest rate risk profile and liquidity at the Corporation. An impairment charge is recorded against individual securities if the review described above concludes that the decline in value is other-than-temporary. There were no impairments recorded during the six months ended June 30, 2010 and 2009 on available for sale securities.

~~Specific conclusions~~ ~~for~~7. ~~each~~Investment ~~category~~Securities of(Continued) ~~securities with an unrealized loss position and where management believed an other than temporary impairment analysis was warranted are summarized below:~~

~~CMO~~differ from —contractual ~~Residential~~maturities ~~and Commercial~~because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

There are a total of two private label CMO securities that had unrealized loss positions at June 30, 2010. One of the securities had a AA- rating from S&P, and the other had a B- rating from S&P. All contractual cash flows have been received on these securities. All of these issuances have subordinated tranches supporting principal. In addition, we conducted due diligence of publicly available information regarding these securities and no material information came to our attention that would indicate an inability to recover our basis in these securities. We reviewed and considered information about the underlying collateral as well information provided by our professional investment advisors. This information indicated likelihood that subordinate tranches of the CMO provide sufficient protection to the Bank’s senior tranches such that management can conclude that the probability of suffering a principal loss is unlikely. Because the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of its amortized cost basis, which may be maturity, it does not consider these investments to be other-than-temporarily impaired at June 30, 2010.

(Dollars in thousands)	Amortized Cost		Fair Value

Due in one year or less	$	5,840	$	5,864
Due after one year through five years		7,560		7,353
Due after five years through ten years		—		—
Due after ten years		991		701

		14,391		13,918
Mortgage-backed securities and CMOs		31,453		32,496
Bank equity and other equity securities		11,730		11,790

	$	57,574	$	58,204

~~Corporate~~ Proceeds from ~~Debt~~the ~~Securities~~sale of investment securities available for sale for the three and nine months ended September 30, 2010 was $245 thousand. Gross losses from the sale of investment securities for the three and nine months ended September 30, 2009 was $9 thousand. Proceeds from the sale of investment securities available for sale for the three and nine months ended September 30, 2009 was $3.3 million and $33.6 million respectively. Gross gains from the sale of investment securities for the three and nine months ended September 30, 2009 was $1 thousand. The principal amount of investment securities pledged to secure public deposits and for other purposes required or permitted by law were $46.4 million at September 30, 2010 and $71.4 million at December 31, 2009. Other than US government agency mortgage back securities and Federal Home Loan Bank stock, there were no securities held from a single issuer that represented more than 10% of stockholders' equity.

~~There~~ The table ~~are~~below aindicates ~~total~~the length of ~~six~~ time individual securities inhave ~~this~~been ~~category~~in ~~that~~a ~~had~~continuous unrealized loss ~~positions~~position at ~~June~~September 30, 2010. All of these securities are obligations of well-known, established companies or subsidiaries thereof. All contractual cash flows have been received on these securities. Depreciation on three of the securities accounted for 91% of the total depreciation in this category. For these three securities management reviewed rating agency information

	Less than 12 months							12 months or longer					Total

(Dollars in thousands) Description of Securities	Number of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Collateralized mortgage obligations—Residential		1		—		—			568		(84	)		568		(84	)
Collateralized mortgage obligations—Commercial		1		—		—			957		(47	)		957		(47	)
Corporate debt securities		6		995		(5	)		5,524		(520	)		6,519		(525	)

Total temporarily impaired investment securities		8	$	995	$	(5	)	$	7,049	$	(651	)	$	8,044	$	(656	)

~~Table of Contents~~17

~~FIRST~~Table ~~CHESTER~~of ~~COUNTY CORPORATION AND SUBSIDIARIES~~Contents

~~NOTES~~ FIRST TOCHESTER ~~CONSOLIDATED FINANCIAL~~COUNTY ~~STATEMENTS~~CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (~~UNAUDITED~~Continued)

~~and~~ ~~noted~~(UNAUDITED) that all three securities had below investment grade ratings. Current news and filings as well as the length and duration of the depreciation was also reviewed and management concluded that there was no information that would indicate a going concern or other issue that would impair our ability to recover our cost basis. Management performed additional analysis, which included reviewing analysis from our third party investment advisor as well as current news and filings. The conclusion drawn from this information was that there was no information that indicated a going concern or other issue that would impair our ability to recover our cost basis. Because the Corporation does not intend to sell these securities and it is not more likely than not that the Corporation will be required to sell the securities before recovery of its amortized cost basis, it does not consider these investments to be other-than-temporarily impaired at June 30, 2010.

8 7. ~~Loans and~~ ~~Leases~~Investment Securities (Continued)

The ~~following~~table ~~charts~~below ~~present~~indicates ~~information~~the ~~about~~length ~~major~~of ~~loan~~time ~~classifications~~individual assecurities ~~well as~~have ~~impaired~~been ~~loans~~in ~~and~~a ~~lease~~continuous ~~balances~~unrealized asloss ofposition ~~June 30,~~at ~~2010 and~~ December 31, 2009:.

June 30, 2010

	Less than 12 months							12 months or longer					Total

(Dollars in thousands) Description of Securities	Number of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
US Government agency mortgage-backed securities		5	$	9,386	$	(100	)	$	—	$	—		$	9,386	$	(100	)
Collateralized mortgage obligations—Residential		3		292		—			700		(251	)		992		(251	)
Collateralized mortgage obligations—Commercial		1		—		—			808		(196	)		808		(196	)
Corporate debt securities		6		—		—			5,865		(1,191	)		5,865		(1,191	)
Bank equity securities		2		—		—			213		(42	)		213		(42	)

Total temporarily impaired investment securities		17	$	9,678	$	(100	)	$	7,586	$	(1,680	)	$	17,264	$	(1,780	)

						Specific
			Impaired		Number of	Allowance
	Loan		Loan		Impaired	on Impaired
(Dollars in thousands)	Balance		Balance		Loans	Loans
Commercial loans	$	312,533	$	18,215	54	$	2,615
Real estate — commercial	258,350		19,198		15	2,203
Real estate — commercial construction	56,629		13,242		12	286
Real estate — residential	93,715		2,524		9	826
Real estate — residential construction	31,695		844		2	348
Consumer loans	113,531		1,517		37	262
Lease financing receivables	1,025		89		3	89
Totals	$	867,478	$	55,629	132	$	6,629

Other than Temporary Impairment

~~Unearned~~ In ~~income~~accordance ~~included~~with inASC 320-10, "Investments—Debt and Equity Securities," the ~~carrying~~Corporation ~~amount~~evaluates ofits securities portfolio for other-than-temporary impairment ("OTTI") throughout the ~~loan~~year. ~~balances~~Each investment that has a fair value less than the book value is reviewed on a quarterly ~~above~~basis ~~was~~by ~~$772~~management. ~~thousand~~Management considers at ~~June 30~~a minimum the following factors that, ~~2010.~~both individually or in combination, could indicate that the decline is other-than-temporary: (a) the Corporation has the intent to sell the security; (b) it is more likely than not that it will be required to sell the security before recovery; and (c) the Corporation does ~~The~~not ~~amount~~expect to recover the entire amortized cost basis of ~~deposit~~the ~~account~~security. ~~overdrafts~~Among ~~classified~~the asfactors ~~loans~~that are considered in determining intent is a review of capital adequacy, interest rate risk profile and liquidity at the Corporation. An impairment charge is recorded against individual securities if the review described above concludes that the decline in value is ~~totaled~~other-than-temporary. ~~$146~~There ~~thousand~~were atno ~~June~~impairments recorded during the nine months ended September 30, 2010 on available for sale securities.

~~The non-accrual loan and lease balance was $37.0 million at June 30,~~ Specific ~~2010.~~conclusions ~~The approximate gross interest income that would have been recorded~~ for ~~the~~ ~~three~~each ~~and~~category ~~six~~of ~~months~~securities ~~ending June 30, 2010 if the $37.0 million in non-accrual loans had been current in accordance~~ with ~~their~~an ~~original~~unrealized ~~terms~~loss ~~was $533~~position ~~thousand~~ and ~~$859~~where ~~thousand,~~management ~~respectively.~~believed ~~The~~an ~~actual~~other ~~amount~~than oftemporary ~~interest income~~impairment ~~included~~analysis ~~in net income as of the three and six months ended June 30, 2010 on these loans~~ was $2warranted ~~and $35 thousand, respectively resulting from interest earned prior to the~~are ~~loans~~summarized ~~being~~below: ~~placed on non-accrual status.~~

~~December 31,~~ ~~2009~~CMO—Residential and Commercial

						Specific
			Impaired		Number of	Allowance
	Loan		Loan		Impaired	on Impaired
(Dollars in thousands)	Balance		Balance		Loans	Loans
Commercial loans	$	334,286	$	13,269	35	$	1,029
Real estate — commercial	261,643		12,071		11	3,637
Real estate — commercial construction	66,204		8,786		8	135
Real estate — residential	88,024		2,601		7	644
Real estate — residential construction	29,387		2,137		7	874
Consumer loans	120,767		2,596		42	1,148
Lease financing receivables	1,578		167		8	55
Totals	$	901,889	$	41,627	118	$	7,522

There are a total of two private label CMO securities that had unrealized loss positions at September 30, 2010. One of the securities had a AA- rating from S&P, and the other had a B- rating from S&P. All contractual cash flows have been received on these securities. Each of these issuances has subordinated tranches supporting principal. In addition, we conducted due diligence of

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

~~Unearned~~ ~~income included in the carrying amount of the loan balances above was $746 thousand at December 31, 2009~~7. ~~The~~ ~~amount~~Investment ofSecurities ~~deposit~~(Continued) ~~account overdrafts classified as loans above totaled $220 thousand at December 31, 2009.~~

~~The~~publicly available ~~non-accrual~~information ~~loan~~regarding these securities and ~~lease~~no ~~balance~~material ~~was~~information ~~$27.6~~came ~~million~~to atour ~~December 31, 2009.~~attention ~~The~~that ~~approximate~~would ~~gross~~indicate ~~interest~~an ~~income~~inability ~~that~~to ~~would~~recover ~~have~~our ~~been~~basis ~~recorded~~in ~~for~~these securities. We reviewed and considered information about the ~~twelve~~underlying ~~months~~collateral ~~ending~~as ~~December 31,~~well ~~2009~~as ifinformation ~~the~~provided ~~$27~~by our professional investment advisors.6 ~~million~~This ininformation indicated likelihood that subordinate tranches of the ~~non-accrual~~CMO ~~loans~~provide ~~had~~sufficient ~~been~~protection ~~current~~to inthe ~~accordance~~Bank's ~~with~~senior ~~their~~tranches ~~original~~such ~~terms~~that ~~was $1.8~~management ~~million.~~can ~~The~~conclude ~~actual~~that ~~amount~~the probability of ~~interest~~suffering ~~income~~a ~~included~~principal inloss ~~net~~is ~~income~~unlikely. asBecause ofthe Corporation does not ~~December 31,~~intend ~~2009~~to onsell these ~~loans~~securities ~~was~~and ~~$960~~it ~~thousand~~is ~~resulting~~more ~~from~~likely ~~interest earned~~than ~~prior~~not that the Corporation will not be required to sell the ~~loans~~securities ~~being~~before ~~placed~~recovery onof ~~non~~its amortized cost basis, which may be maturity, it does not consider these investments to be other-~~accrual~~than-temporarily ~~status~~impaired at September 30, 2010.

~~The~~ ~~following~~Corporate ~~chart~~Debt ~~presents changes in the allowance for loan and lease losses for the three and six months ended June 30, 2010 and 2009:~~Securities

	Three Months Ended
	June 30,
(Dollars in thousands)	2010			2009
Balance at beginning of period	$	22,464		$	11,263
Provision charged to operating expenses	132			5,084
Recoveries	141			104
Loans charged-off	(1,303		)	(924		)
Allowance adjustment — Other	100			1
Balance at end of Period	$	21,534		$	15,528

There are a total of six securities in this category that had unrealized loss positions at September 30, 2010. All of these securities are obligations of well-known, established companies or subsidiaries thereof. All contractual cash flows have been received on these securities. Depreciation on three of the securities accounted for 93% of the total depreciation in this category. For these three securities management reviewed rating agency information and noted that all three securities had below investment grade ratings. Current news and filings, the length and duration of the depreciation, and a review of the analysis performed by our third party investment advisor indicated that there was no information that would indicate a going concern or other issue that would impair our ability to recover our cost basis. As the Corporation does not intend to sell these securities and it is not more likely than not that the Corporation will be required to sell the securities before recovery of its amortized cost basis, it does not consider these investments to be other-than-temporarily impaired at September 30, 2010.

	Six Months Ended
	June 30,
(Dollars in thousands)	2010			2009
Balance at beginning of period	$	23,217		$	10,335
Provision charged to operating expenses	398			6,471
Recoveries	278			249
Loans charged-off	(2,529		)	(1,366		)
Allowance adjustment — Other	170			(161		)
Balance at end of Period	$	21,534		$	15,528

8. Loans and Leases

~~9. Income~~ ~~Taxes~~ The following charts present information about major loan classifications as well as impaired loans and lease balances as of September 30, 2010 and December 31, 2009:

~~The~~ ~~Corporation has not recorded an income tax benefit for its net operating loss for the six month period ended June~~September 30, 2010. At June 30, 2010 the valuation allowance against the Corporation’s deferred tax asset increased to $8.4 million from $7.5 million at December 31, 2009. The valuation allowance is recorded against a portion of the Corporation’s deferred tax assets after concluding that it was more likely than not that a portion of the deferred tax asset would not be realized. In evaluating the ability to recover our deferred tax assets, Management considers all available positive and negative evidence regarding the ultimate realizability of our deferred tax assets including past operating results and our forecast of future taxable income. In addition, general uncertainty surrounding the future economic and business conditions have increased the likelihood of volatility in our future earnings. The Corporation has concluded and recorded a valuation allowance against its deferred tax asset, except for amounts available for carry back claims.

(Dollars in thousands)	Loan Balance		Impaired Loan Balance			Specific Allowance on Impaired Loans

Commercial loans	$	305,143	$	21,248	62	$	3,252
Real estate—commercial		246,172		16,871	16		2,728
Real estate—commercial construction		52,512		9,065	7		—
Real estate—residential		92,980		3,047	11		816
Real estate—residential construction		27,433		1,065	3		406
Consumer loans		110,327		1,380	34		252
Lease financing receivables		821		83	3		83

Totals	$	835,388	$	52,759	136	$	7,537

~~Table of Contents~~19

~~FIRST~~Table ~~CHESTER~~of ~~COUNTY CORPORATION AND SUBSIDIARIES~~Contents

~~NOTES~~ FIRST TOCHESTER ~~CONSOLIDATED FINANCIAL~~COUNTY ~~STATEMENTS~~CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (~~UNAUDITED~~Continued)

~~10. Other Real~~ ~~Estate~~(UNAUDITED) ~~Owned~~

~~Other real~~ ~~estate owned (“OREO”) represents property owned by the Bank following default by the borrowers~~8. ~~OREO~~Loans property acquired through foreclosure is initially transferred at fair value based on an appraised value less estimated cost to dispose. Adjustments are subsequently made to mark the property below this amount if circumstances warrant. Losses arising from foreclosure transactions are charged against the allowance for loan losses. Costs to maintain real estate owned and ~~any subsequent~~Leases ~~gains~~(Continued) or losses are included in the Corporation’s results of operations. In June 2010, the Corporation sold eight other real estate owned properties to one buyer. A charge of $1.3 million was recorded during the first quarter 2010 to reduce the carrying amount of these assets to an amount that reflects the realizable value of these properties based on the actual sales price.

~~The~~ Unearned income ~~following~~included ~~table~~in ~~summarizes~~the ~~properties~~carrying ~~held~~amount asof ~~OREO~~the asloan ofbalances ~~June~~above was $1.0 million at September 30, 2010. ~~and~~The ~~December~~amount of deposit account overdrafts classified as loans above totaled $252 31thousand at September 30, ~~2009:~~2010.

(Dollars in thousands)	June 30, 2010		Number of properties	December 31, 2009		Number of properties
Land	$	389	4	$	49	1
Residential 1-4 family	1,025		6	3,643		15
Total	$	1,414	10	$	3,692	16

The non-accrual loan and lease balance was $35.8 million at September 30, 2010. The approximate gross interest income that would have been recorded for the three and nine months ending September 30, 2010 if the $35.8 million in non-accrual loans had been current in accordance with their original terms was $553 thousand and $1.3 million, respectively. The actual amount of interest income included in net income as of the three and nine months ended September 30, 2010 on these loans was $28 and $183 thousand, respectively resulting from interest earned prior to the loans being placed on non-accrual status.

11 We identify a loan as impaired when it is probable that interest and/or principal will not be collected according to the contractual terms of the loan agreement. ~~Other~~ ~~Assets~~ASC 310-10-35, "Receivables," requires us to individually examine loans where it is probable that we will be unable to collect all contractual interest and principal payments according to the contractual terms of the loan agreement and assess for impairment. The average recorded investment in the September 30, 2010 and December 31, 2009 impaired loans was $54.3 million and $25.2 million, respectively. For the three and nine months ending September 30, 2010, interest income recognized during the time within the period that the loans were impaired was $178 thousand and $401 thousand, respectively.

~~During~~ ~~the first quarter of 2010, the Corporation received cash proceeds in full payment of an $8.7 million receivable recorded in other assets during the year ended~~ December 31, ~~2009,~~ which related to a former BOLI policy which the Bank had surrendered in 2008. The Corporation also received an income tax refund of $3.1 million during the second quarter of 2010 which was recorded as a receivable in other assets at December 31, 2009.

12. Borrowings

(Dollars in thousands)	Loan Balance		Impaired Loan Balance			Specific Allowance on Impaired Loans

Commercial loans	$	334,286	$	13,269	35	$	1,029
Real estate—commercial		261,643		12,071	11		3,637
Real estate—commercial construction		66,204		8,786	8		135
Real estate—residential		88,024		2,601	7		644
Real estate—residential construction		29,387		2,137	7		874
Consumer loans		120,767		2,596	42		1,148
Lease financing receivables		1,578		167	8		55

Totals	$	901,889	$	41,627	118	$	7,522

~~At June 30,~~ Unearned ~~2010,~~income ~~the~~included ~~Bank~~in ~~had borrowings totaling $83.3 million compared to $172.9 million at December 31, 2009. During~~ the ~~first~~carrying ~~half~~amount of ~~2010 borrowings from~~ the ~~FHLB~~ ~~decreased~~loan ~~$89.3~~balances ~~million~~above towas $~~54.5~~746 thousand ~~million~~at ~~as compared to~~ December 31, 2009. ~~Scheduled~~The ~~maturities~~amount of ~~$42.5~~deposit ~~million~~account ~~and~~overdrafts ~~prepayments~~classified ~~of $56.7 million~~as ~~net~~loans ofabove ~~advances~~totaled of $~~10.0~~220 thousand ~~million~~at ~~during the six months ended June~~December 3031, ~~2010 totaled $89~~2009.2 ~~million. The remaining decrease was due to amortization.~~

The ~~Corporation~~non-accrual ~~deferred~~loan ~~its~~and ~~regularly~~lease ~~scheduled~~balance ~~interest~~was ~~payments on its outstanding junior subordinated notes relating to its~~ $2027.8 6 million ofat ~~trust preferred~~December 31, ~~securities~~2009. ~~beginning~~The ~~with~~approximate ~~the~~gross ~~regularly scheduled quarterly~~ interest ~~payments~~ income that would ~~otherwise~~ have been ~~made~~recorded infor ~~September 2010. The~~the ~~terms~~twelve ofmonths ~~the~~ending ~~junior~~December 31, ~~subordinated~~2009 ~~notes~~if ~~and~~ the ~~related~~$27.6 million ~~trust~~in ~~indentures~~non-accrual ~~allow the~~loans ~~Corporation~~had tobeen ~~defer~~current ~~such~~in ~~payments~~accordance ofwith ~~interest~~their ~~for~~original upterms towas ~~20 consecutive quarterly periods without default~~$1. ~~During~~8 million. ~~the~~The ~~deferral period, the~~actual ~~respective~~amount ~~trusts will suspend the declaration and payment~~ of ~~dividends~~interest onincome ~~the trust~~included ~~preferred~~in ~~securities.~~net ~~During~~income ~~the~~as ~~deferral~~of ~~period~~December 31, ~~the~~2009 ~~Corporation~~on ~~may not,~~these ~~among~~loans ~~other~~was ~~things~~$960 thousand ~~and~~resulting ~~with~~from ~~limited~~interest ~~exceptions,~~earned ~~pay~~prior ~~cash~~to ~~dividends~~the onloans ~~or repurchase~~being ~~its~~placed ~~common stock nor make any payment~~ on ~~outstanding debt~~ ~~obligations~~non-accrual ~~that rank equally with or junior to the junior subordinated notes~~status.

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13 8. ~~Earnings~~ Loans and Leases (~~Loss~~Continued) ~~per Share~~

~~Three~~ The following ~~Months~~chart presents changes in the allowance for loan and lease losses for the three and nine months ended ~~June~~September 30, 2010 and 2009:

			Three Months Ended September 30,
		Income
		(thousands)			Shares (1)		Per Share
(Dollars in thousands)			2010			2009
		(numerator)			(denominator)		Amount
Balance at beginning of period			$	21,534			15,528
Basic income from continuing operations per share
	Provision charged to operating expenses			369			11,222
Net income from continuing operations		$	374		6,320,546		$	0.06
	Recoveries			781			90
Effect of dilutive securities
	Loans charged-off			(628	)		(3,183	)
Options to purchase common stock		—			—		—
	Allowance adjustment—Other			45			(167	)
Diluted net income from continuing operations available to common stockholders		$	374		6,320,546		$	0.06
Balance at end of Period			$	22,101		$	23,490
Basic loss from discontinued operations per share
Net loss from discontinued operations		$	(205	)	6,320,546		$	(0.03	)
Effect of dilutive securities
Options to purchase common stock		—			—		—
Diluted net loss from discontinued operations available to common stockholders		$	(205	)	6,320,546		$	(0.03	)
Basic income available to common stockholders per share
Net income available to common stockholders		$	169		6,320,546		$	0.03
Effect of dilutive securities
Options to purchase common stock		—			—		—
Diluted net income available to common stockholders		$	169		6,320,546		$	0.03

(1) 226,720 anti-dilutive weighted average shares have been excluded from this computation because the option exercise price was greater than the average market price of the common shares.

		Nine Months Ended September 30,

(Dollars in thousands)		2010			2009
Balance at beginning of period		$	23,217		$	10,335
	Provision charged to operating expenses		767			17,693
	Recoveries		1,059			339
	Loans charged-off		(3,157	)		(4,549	)
	Allowance adjustment—Other		215			(328	)

Balance at end of Period		$	22,101		$	23,490

~~Three~~ ~~Months~~9. ~~ended~~Income ~~June 30, 2009~~Taxes

	Income
	(thousands)			Shares (1)	Per Share
	(numerator)			(denominator)	Amount
Basic loss from continuing operations per share
Net loss from continuing operations	$	(2,911	)	6,268,195	$	(0.46	)
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net loss from continuing operations available to common stockholders	$	(2,911	)	6,268,195	$	(0.46	)
Basic income from discontinued operations per share
Net income from discontinued operations	$	2,849		6,268,195	$	0.45
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net income from discontinued operations available to common stockholders	$	2,849		6,268,195	$	0.45
Basic loss available to common stockholders per share
Net loss available to common stockholders	$	(62	)	6,268,195	$	(0.01	)
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net loss available to common stockholders	$	(62	)	6,268,195	$	(0.01	)

At September 30, 2010 and December 31, 2009 the valuation allowance against the Corporation's deferred tax was $7.7 million and $7.5 million, respectively. The valuation allowance is recorded against a portion of the Corporation's deferred tax assets after concluding that it was more likely than not that a portion of the deferred tax asset would not be realized. In evaluating the ability to recover our deferred tax assets, Management considers all available positive and negative evidence regarding the ultimate realizability of our deferred tax assets including past operating results and our forecast of future taxable income. In addition, general uncertainty surrounding the future economic and business conditions have increased the likelihood of volatility in our future earnings. The Corporation has concluded and recorded a valuation allowance against its deferred tax asset, except for amounts available for carry back claims.

~~(1) 289,047~~ ~~anti-dilutive weighted~~10. ~~average~~Other ~~shares~~Real ~~have~~Estate ~~been excluded from this computation because the option exercise price was greater than the average market price of the common shares.~~Owned

19 Other real estate owned ("OREO") represents property owned by the Bank following default by the borrowers. OREO property acquired through foreclosure is initially transferred at fair value based on an appraised value less estimated cost to dispose. Adjustments are subsequently made to mark the property below this amount if circumstances warrant. Losses arising from foreclosure transactions are charged against the allowance for loan losses. Costs to maintain real estate owned and any subsequent

~~Table of Contents~~21

~~FIRST~~Table ~~CHESTER~~of ~~COUNTY CORPORATION AND SUBSIDIARIES~~Contents

~~NOTES~~ FIRST TOCHESTER ~~CONSOLIDATED FINANCIAL~~COUNTY ~~STATEMENTS~~CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (~~UNAUDITED~~Continued)

~~Six~~ ~~Months~~(UNAUDITED) ~~ended June 30, 2010~~

	Income
	(thousands)			Shares (1)	Per Share
	(numerator)			(denominator)	Amount
Basic loss from continuing operations per share
Net loss from continuing operations	$	(229	)	6,328,446	$	(0.04	)
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net loss from continuing operations available to common stockholders	$	(229	)	6,328,446	$	(0.04	)
Basic loss from discontinued operations per share
Net loss from discontinued operations	$	(1,402	)	6,328,446	$	(0.22	)
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net loss from discontinued operations available to common stockholders	$	(1,402	)	6,328,446	$	(0.22	)
Basic loss available to common stockholders per share
Diluted net loss available to common stockholders	$	(1,631	)	6,328,446	$	(0.26	)
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net loss available to common stockholders	$	(1,631	)	6,328,446	$	(0.26	)

10. Other Real Estate Owned (Continued)

~~(1) 226,720~~gains ~~anti-dilutive~~or ~~weighted~~losses ~~average~~are ~~shares~~included ~~have~~in ~~been~~the ~~excluded~~Corporation's ~~from~~results ~~this~~of ~~computation because~~operations. ~~the~~The ~~option~~following ~~exercise~~table ~~price~~summarizes ~~was~~properties ~~greater~~held ~~than~~as ~~the~~OREO ~~average~~as ~~market~~of ~~price~~September 30, ~~of the~~2010 ~~common~~and ~~shares.~~December 31, 2009:

Six Months ended June 30, 2009

(Dollars in thousands)	September 30, 2010			December 31, 2009

Land	$	3,453	7	$	49	1
Residential 1 - 4 family		627	5		3,643	15

Total	$	4,080	12	$	3,692	16

	Income
	(thousands)			Shares (1)	Per Share
	(numerator)			(denominator)	Amount
Basic loss from continuing operations per share
Net income from continuing operations	$	(2,704	)	6,255,295	$	(0.43	)
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net loss from continuing operations available to common stockholders	$	(2,704	)	6,255,295	$	(0.43	)
Basic income from discontinued operations per share
Net income from discontinued operations	$	5,963		6,255,295	$	0.95
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net income from discontinued operations available to common stockholders	$	5,963		6,255,295	$	0.95
Basic income available to common stockholders per share
Net income available to common stockholders	$	3,259		6,255,295	$	0.52
Effect of dilutive securities
Options to purchase common stock	—			—	—
Diluted net income available to common stockholders	$	3,259		6,255,295	$	0.52

11. Other Assets

~~(1) 289,047~~ ~~anti-dilutive~~ During ~~weighted~~the ~~average~~first ~~shares~~quarter ~~have~~of ~~been~~2010, ~~excluded~~the ~~from~~Corporation ~~this~~received ~~computation because~~cash proceeds in full payment of an $8.7 million receivable recorded in other assets during the ~~option~~year ~~exercise~~ended December 31, ~~price~~2009, ~~was~~which ~~greater~~related ~~than~~to a former BOLI policy which the ~~average~~Bank ~~market~~had ~~price~~surrendered in 2008. The Corporation also received an income tax refund of $3.1 million during the ~~common~~second quarter ~~shares~~of 2010 which was recorded as a receivable in other assets at December 31, 2009.

20 12. Borrowings

~~Table~~ At September 30, 2010, the Bank had borrowings totaling $73.2 million compared to $172.9 million at December 31, 2009. During 2010, borrowings from the FHLB decreased $100.1 million to $44.4 million as compared to December 31, 2009. Scheduled maturities of ~~Contents~~$52.5 million and prepayments of $56.7 million net of advances of $10.0 million during the nine months ended September 30, 2010 totaled $99.2 million. The remaining decrease was due to amortization.

~~FIRST~~ The Corporation ~~CHESTER~~deferred ~~COUNTY~~its ~~CORPORATION~~regularly scheduled interest payments on its outstanding junior subordinated notes relating to its $20.8 million of trust preferred securities ~~AND~~beginning ~~SUBSIDIARIES~~with the regularly scheduled quarterly interest payments that would otherwise have been made in September 2010. The terms of the junior subordinated notes and the related trust indentures allow the Corporation to defer such payments of interest for up to 20 consecutive quarterly periods without default. During the deferral period, the respective trusts will suspend the declaration and payment of dividends on the trust preferred securities. During the deferral period, the Corporation may not, among other things and with limited exceptions, pay cash dividends on or repurchase its common stock nor make any payment on outstanding debt obligations that rank equally with or junior to the junior subordinated notes.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~22

~~(UNAUDITED)~~Table of Contents

~~14. Comprehensive~~ FIRST ~~Income~~CHESTER COUNTY CORPORATION AND SUBSIDIARIES

~~Components~~ ofNOTES ~~comprehensive~~TO ~~income~~CONSOLIDATED ~~are~~FINANCIAL ~~presented~~STATEMENTS in(Continued) ~~the following charts:~~

	Three Months Ended
	June 30,
Dollars in thousands	2010			2009
Unrealized gains on securities:
Unrealized gains arising in period	$	225		$	1,869
Reclassification adjustment	1			89
Net unrealized gains	226			1,958
Other comprehensive income before taxes	226			1,958
Income tax expense	(77		)	(666		)
Other comprehensive income	149			1,292
Net income including non-controlling interests	823			571
Comprehensive income	972			1,863
Less comprehensive income attributable to non- controlling interests	654			633
Comprehensive income for First Chester County Corporation	$	318		$	1,230

(UNAUDITED)

	Six Months Ended
	June 30,
Dollars in thousands	2010			2009
Unrealized gains on securities:
Unrealized gains arising in period	$	1,023		$	1,345
Reclassification adjustment	1			1
Net unrealized gains	1,024			1,346
Other comprehensive income before taxes	1,024			1,346
Income tax expense	(348		)	(458		)
Other comprehensive income	676			888
Net (loss) income including non-controlling interests	(778		)	4,129
Comprehensive (loss) income	(102		)	5,017
Less comprehensive income attributable to non- controlling interests	853			870
Comprehensive (loss) income for First Chester County Corporation	$	(955	)	$	4,147

13. Earnings (Loss) per Share

~~15. Fair~~ ~~Value~~Three ~~Measurement~~Months ~~and~~ended ~~Fair Value~~September 30, ~~of Financial Instruments~~2010

ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 clarifies proper fair value determination in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The Corporation considered the requirements of ASC 820-10 when estimating fair value.

		Income (thousands) (numerator)				Per Share Amount

Basic income from continuing operations per share
	Net income from continuing operations	$	872		6,318,986	$	0.14
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net income from continuing operations available to common stockholders		$	872		6,318,986	$	0.14

Basic loss from discontinued operations per share
	Net loss from discontinued operations	$	(767	)	6,318,986	$	(0.12	)
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net loss from discontinued operations available to common stockholders		$	(767	)	6,318,986	$	(0.12	)

Basic income available to common stockholders per share
	Net income available to common stockholders	$	105		6,318,986	$	0.02
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net income available to common stockholders		$	105		6,318,986	$	0.02

~~ASC~~ ~~825~~ (1)204,737 anti-10dilutive —weighted ~~Financial~~average ~~Instruments~~shares ~~permits~~have ~~entities~~been toexcluded ~~choose~~from tothis ~~measure~~computation ~~many financial~~because ~~instruments~~the ~~and~~option ~~certain~~exercise ~~other~~price ~~items~~was atgreater ~~fair~~than ~~value at specified~~the ~~election~~average ~~dates.~~market ~~The~~price ~~Corporation~~of ~~elected~~the tocommon ~~account~~shares. ~~for loans held for sale~~ ~~under~~ ~~this election option.~~

~~ASC 820-10 describes three levels of inputs that may be used to measure fair value:~~23

~~· Level~~ 1: ~~Quoted prices~~ ~~(unadjusted)~~Table ~~for~~of ~~identical~~Contents ~~assets or liabilities in active markets that the entity~~

21 FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

~~Table~~ ofNOTES ~~Contents~~TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~FIRST~~ ~~CHESTER COUNTY CORPORATION AND SUBSIDIARIES~~(UNAUDITED)

~~NOTES~~ TO13. ~~CONSOLIDATED FINANCIAL~~Earnings ~~STATEMENTS~~(Loss) per Share (Continued)

~~(UNAUDITED)~~ Three Months ended September 30, 2009

has the ability to access as of the measurement date.

		Income (thousands) (numerator)				Per Share Amount

Basic loss from continuing operations per share
	Net loss from continuing operations	$	(7,072	)	6,306,889	$	(1.12	)
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net loss from continuing operations available to common stockholders		$	(7,072	)	6,306,889	$	(1.12	)

Basic income from discontinued operations per share
	Net income from discontinued operations	$	628		6,306,889	$	0.10
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net income from discontinued operations available to common stockholders		$	628		6,306,889	$	0.10

Basic loss available to common stockholders per share
	Net loss available to common stockholders	$	(6,444	)	6,306,889	$	(1.02	)
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net loss available to common stockholders		$	(6,444	)	6,306,889	$	(1.02	)

~~· Level 2: Significant other~~ ~~observable~~ ~~inputs other than Level~~ (1 ~~prices~~)234,109 anti-dilutive ~~such~~weighted asaverage ~~quoted~~shares ~~prices~~have ~~for~~been ~~similar assets~~excluded orfrom ~~liabilities,~~this ~~quoted~~computation ~~prices~~because inthe ~~markets~~option ~~that~~exercise ~~are~~price ~~not~~was ~~active,~~greater ~~and~~than ~~other~~the ~~inputs~~average ~~that~~market ~~are~~price ~~observable~~of orthe ~~can~~common beshares. ~~corroborated~~ ~~by observable market data.~~

· Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.24

~~Assets~~Table ~~and~~of ~~Liabilities Measured at Fair Value on a Recurring Basis~~Contents

A ~~description~~FIRST ofCHESTER ~~the~~COUNTY ~~valuation~~CORPORATION ~~methodologies~~AND ~~used~~SUBSIDIARIES ~~for financial instruments measured at fair value on a recurring basis, as well as the classification of the instruments pursuant to the valuation hierarchy, are as follows:~~

~~Securities:~~ ~~Investment securities~~NOTES ~~available-for-sale~~TO ~~are~~CONSOLIDATED ~~recorded~~FINANCIAL atSTATEMENTS ~~fair~~(Continued) value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

~~Level 1~~ ~~Valuation~~(UNAUDITED) ~~Techniques and Inputs for Investment Securities~~

~~The Corporation~~ ~~reports U~~13.S. ~~Treasury~~Earnings ~~and~~(Loss) ~~certain~~per ~~Bank~~Share ~~equity~~(Continued) ~~securities at fair value utilizing Level 1 inputs. These securities are priced using observable quotations for the indicated security.~~

~~Level 2~~ ~~Valuation~~Nine ~~Techniques~~Months ~~and~~ended ~~Inputs~~September 30, ~~for Investment Securities~~2010

The majority of the Corporation’s investment securities are reported at fair value utilizing Level 2 inputs. The valuations for U.S. Government agency securities, U.S. Government agency mortgage backed securities, residential and commercial CMO’s, and corporate debt securities are obtained through independent, third-party pricing services. Prices obtained through these sources include market derived quotations and matrix pricing and may include both observable and unobservable inputs. Fair market values take into consideration data such as dealer quotes, new issue pricing, trade prices for similar issues, prepayment estimates, cash flows, market credit spreads and other factors.

		Income (thousands) (numerator)				Per Share Amount

Basic income from continuing operations per share
	Net income from continuing operations	$	644		6,325,258	$	0.11
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net income from continuing operations available to common stockholders		$	644		6,325,258	$	0.11

Basic loss from discontinued operations per share
	Net loss from discontinued operations	$	(2,170	)	6,325,258	$	(0.35	)
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net loss from discontinued operations available to common stockholders		$	(2,170	)	6,325,258	$	(0.35	)

Basic loss available to common stockholders per share
Diluted net loss available to common stockholders		$	(1,526	)	6,325,258	$	(0.24	)
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net loss available to common stockholders		$	(1,526	)	6,325,258	$	(0.24	)

~~The~~ ~~valuations~~ ~~for state and municipal obligations are obtained through~~ ~~independent, third-party pricing services as well. Valuations for these securities are performed~~ ~~using information on identical or similar securities provided by market makers~~ (1)204,737 ~~broker/dealers and buy~~anti-~~side~~dilutive ~~firms,~~weighted ~~new~~average ~~issue~~shares ~~sales~~have ~~and~~been ~~bid-wanted~~excluded ~~lists.~~from ~~The individual~~this ~~securities~~computation ~~are~~because ~~then~~the ~~priced~~option ~~based~~exercise onprice ~~mapping~~was ~~the~~greater ~~characteristics~~than of the average ~~security~~market ~~such~~price asof ~~obligation~~the ~~type~~common ~~(General Obligation, Revenue, etc~~shares.~~), maturity,~~ ~~state discount and premiums, call features, taxability and other~~ ~~considerations.~~

~~Level 3 Valuation Techniques and Inputs for Investment Securities~~25

~~Other equity~~Table ~~securities are primarily comprised~~ of Federal Home Loan Corporation (“FHLB”) and Federal Reserve Board (“FRB”) stock. The Corporation is required to purchase and hold stock in the FHLB and FRB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB, FRB or to another member institution, and all sales must be at par. As a result of these restrictions, these equity securities are unlike other investment securities insofar as there is no trading market and the transfer price is determined by membership rules and not by market participants. Accordingly, the Corporation’s valuation for these securities is estimated at its par value.Contents

~~Mortgage~~ ~~Servicing~~FIRST ~~Rights~~CHESTER ~~(“MSRs”):~~COUNTY ToCORPORATION ~~determine~~AND ~~the~~SUBSIDIARIES fair value of MSRs, the Bank uses an independent third party to estimate the present value of estimated future net servicing income. This valuation method incorporates an assumption that market participants would use in estimating future net servicing income, which include

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Table~~ of(UNAUDITED) ~~Contents~~

~~FIRST~~ ~~CHESTER~~13. ~~COUNTY~~Earnings ~~CORPORATION AND~~(Loss) ~~SUBSIDIARIES~~per Share (Continued)

~~NOTES~~ TONine ~~CONSOLIDATED FINANCIAL~~Months ~~STATEMENTS~~ended September 30, 2009

(UNAUDITED)

		Income (thousands) (numerator)				Per Share Amount

Basic loss from continuing operations per share
	Net loss from continuing operations	$	(9,844	)	6,272,682	$	(1.57	)
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net loss from continuing operations available to common stockholders		$	(9,844	)	6,272,682	$	(1.57	)

Basic income from discontinued operations per share
	Net income from discontinued operations	$	6,658		6,272,682	$	1.06
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net income from discontinued operations available to common stockholders		$	6,658		6,272,682	$	1.06

Basic loss available to common stockholders per share
	Net income available to common stockholders	$	(3,186	)	6,272,682	$	(0.51	)
Effect of dilutive securities
	Options to purchase common stock		—		—		—

Diluted net loss available to common stockholders		$	(3,186	)	6,272,682	$	(0.51	)

~~estimates~~ of ~~the cost to service, the discount rate, custodial earnings rate, an~~ ~~inflation rate~~ (1)234, ~~ancillary income, prepayment speeds, and default rates and~~109 ~~losses.~~anti-dilutive ~~The~~weighted ~~fair~~average ~~value~~shares ofhave ~~servicing~~been ~~rights~~excluded ~~was determined using discount rates ranging~~ from ~~8.0%~~this tocomputation ~~12.5%,~~because ~~prepayment~~the ~~speeds~~option ~~ranging~~exercise ~~from~~price ~~6.7%~~was togreater ~~50.8% depending~~than on the average ~~stratification~~market price of the ~~specific~~common ~~right,~~shares. ~~and a weighted average~~ ~~default~~ ~~rate of 0.9%. The Corporation records the MSR as a recurring Level 3.~~

~~The Corporation had no transfers in or out of Level 1 and Level 2 during the six month period ended June 30, 2010.~~26

~~The table~~Table ~~below presents the balance~~ of ~~assets and liabilities from continuing operations at June 30, 2010 and December 31, 2009, measured at fair value on a recurring basis:~~Contents

(Dollars in thousands)
June 30, 2010	Level 1		Level 2		Level 3		Total
Assets
Investment securities available for sale:
U.S. Treasury	$	5,018	$	—	$	—	$	5,018
U.S. Government agency	—		2,006		—		2,006
U.S. Government agency mortgage-backed securities	—		32,253		—		32,253
CMO — Residential	—		1,011		—		1,011
CMO — Commercial	—		916		—		916
State and municipal	—		3,319		—		3,319
Corporate debt securities	—		6,222		—		6,222
Bank equity securities	3		562		—		565
Other equity securities	—		—		11,491		11,491
Mortgage servicing rights	—		—		534		534

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

December 31, 2009	Level 1		Level 2		Level 3		Total
Assets
Investment securities available for sale:
U.S. Treasury	$	20,016	$	—	$	—	$	20,016
U.S. Government agency	—		$	2,047	—		2,047
U.S. Government agency mortgage-backed securities	—		36,995		—		36,995
CMO — Residential	—		998		—		998
CMO — Commercial	—		808		—		808
State and municipal	—		4,594		—		4,594
Corporate debt securities	—		5,865		—		5,865
Bank equity securities	3		530		—		533
Other equity securities	—		—		10,842		10,842
Mortgage servicing rights	—		—		575		575

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Assets~~ ~~Measured~~(UNAUDITED) ~~at Fair Value on a Nonrecurring Basis~~

23 14. Comprehensive Income

~~Table~~ Components of ~~Contents~~comprehensive income are presented in the following charts:

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

		Three Months Ended September 30,

Dollars in thousands		2010			2009
Unrealized gains on securities:
	Unrealized gains arising in period	$	370		$	4,425
	Reclassification adjustment		(9	)		(1,575	)

	Net unrealized gains		361			2,850

Other comprehensive income before taxes			361			2,850
Income tax expense			(123	)		(969	)

Other comprehensive income			238			1,881

Net income (loss) including non-controlling interests			278			(5,950	)
Comprehensive income (loss)			516			(4,069	)
Less comprehensive income attributable to non-controlling interests			(173	)		(494	)

Comprehensive income (loss) for First Chester County Corporation		$	343		$	(4,563	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Nine Months Ended September 30,

Dollars in thousands		2010			2009
Unrealized gains on securities:
	Unrealized gains arising in period	$	1,395		$	5,771
	Reclassification adjustment		(9	)		(1,575	)

	Net unrealized gains		1,386			4,196

Other comprehensive income before taxes			1,386			4,916
Income tax expense			(472	)		(1,427	)

Other comprehensive income			914			2,769

Net (loss) including non-controlling interests			(501	)		(1,823	)
Comprehensive income			413			946
Less comprehensive income attributable to non-controlling interests			(1,025	)		(1,363	)

Comprehensive (loss) for First Chester County Corporation		$	(612	)	$	(417	)

~~(UNAUDITED)~~ 15. Fair Value Measurement and Fair Value of Financial Instruments

A ~~description~~ ASC of820-10 defines fair value as the ~~valuation~~exchange ~~methodologies~~price ~~and~~that ~~classification~~would ~~levels~~be ~~used~~received for ~~financial~~ ~~instruments~~an ~~measured~~asset ator ~~fair~~paid ~~value~~to ontransfer a ~~nonrecurring~~liability ~~basis~~(an ~~are~~exit ~~listed~~price) in an orderly transaction between asmarket ~~follows.~~participants ~~These~~on ~~listed~~the ~~instruments~~measurement ~~are~~date. ~~subject~~ASC to820-10 also establishes a fair value ~~adjustments (impairment)~~hierarchy aswhich ~~they~~requires ~~are~~an ~~valued~~entity atto maximize the ~~lower~~use of ~~cost~~observable orinputs ~~market~~and minimize the use of unobservable inputs when measuring fair value. ASC 820-10 clarifies proper fair value determination in a market that is not active and

Loans and leases: The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, Management measures impairment in accordance with ASC 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2010 substantially all of the impaired loans were evaluated based on the fair value of the collateral less costs to sell. In accordance with ASC 820-10 impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the impaired loan as nonrecurring Level 3. The Bank’s policies require loan officers to regularly review accounts. Consistent with OCC guidance appraisals are updated as warranted based on specific facts and circumstances. Appraisals are also updated whenever a loan becomes criticized or classified.27

~~OREO:~~Table ~~OREO is adjusted to fair value upon transfer~~ of the loans to foreclosed assets. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or Management’s estimation of the value of the collateral. The Corporation records the foreclosed asset as nonrecurring Level 3.Contents

~~The~~ ~~table~~FIRST ~~below~~CHESTER ~~presents~~COUNTY ~~the~~CORPORATION ~~balance~~AND ofSUBSIDIARIES ~~assets and liabilities from continuing operations at June 30, 2010 and December 31, 2009, measured at fair value on a nonrecurring basis:~~

(Dollars in thousands)
June 30, 2010	Level 1		Level 2		Level 3		Total
Impaired loans & leases	$	—	$	—	$	49,000	$	49,000
OREO	—		—		1,414		1,414

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)
December 31, 2009	Level 1		Level 2		Level 3		Total
Impaired loans & leases	$	—	$	—	$	34,105	$	34,105
OREO	—		—		3,692		3,692

(UNAUDITED)

24 15. Fair Value Measurement and Fair Value of Financial Instruments (Continued)

~~Table~~provides an example to illustrate key considerations in determining the fair value of ~~Contents~~a financial asset when the market for that financial asset is not active. The Corporation considered the requirements of ASC 820-10 when estimating fair value.

~~FIRST~~ ASC 825-10—Financial ~~CHESTER~~Instruments ~~COUNTY~~permits ~~CORPORATION~~entities to choose to measure many financial instruments and certain other items at fair value at specified election ~~AND~~dates. ~~SUBSIDIARIES~~The Corporation elected to account for loans held for sale under this election option.

~~NOTES~~ ASC 820-10 TOdescribes ~~CONSOLIDATED FINANCIAL~~three ~~STATEMENTS~~levels of inputs that may be used to measure fair value:

•: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•: Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
•: Level 3: Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

~~(UNAUDITED)~~ Assets and Liabilities Measured at Fair Value on a Recurring Basis

~~Disclosures~~ A ~~about~~description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the classification of the instruments pursuant to the valuation hierarchy, are as follows:

~~The table~~ Securities: Investment ~~below~~securities ~~presents~~available-for-sale ~~the~~are ~~rollforward~~recorded ofat ~~assets~~fair ~~from~~value ~~continuing~~on ~~operations~~a ~~that~~recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are ~~valued~~not available, fair values are measured using ~~significant~~matrix ~~unobservable~~pricing, ~~inputs~~which ~~(Level~~is 3)a ~~for~~mathematical technique used widely in the ~~six~~industry ~~months~~to value ~~ended~~debt ~~June 30,~~securities ~~2010:~~without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities.

(Dollars in thousands)	Mortgage Servicing Rights			Investments
Beginning balance	$	575		$	10,842
Total gains realized/unrealized:
Included in earnings	(41		)	—
Included in other comprehensive loss	—			—
Purchases	—			713
Maturities/amortizations	—			(64		)
Prepayments	—			—
Calls	—			—
Transfers into Level 3	—			—
Ending Balance	$	534		$	11,491

Level 1 Valuation Techniques and Inputs for Investment Securities

The Corporation ~~estimated~~reports ~~fair~~U.S. ~~values~~Treasury and ~~carrying~~certain ~~amounts~~Bank ofequity ~~the~~securities ~~assets~~at ~~and~~fair ~~liabilities from~~value ~~continuing~~utilizing ~~operations~~Level 1 inputs. These securities are ~~summarized~~priced asusing ~~follows:~~observable quotations for the indicated security.

	June 30, 2010				December 31, 2009
	Estimated		Carrying		Estimated		Carrying
(Dollars in thousands)	Fair Value		Amount		Fair Value		Amount
Financial Assets
Cash and cash equivalents	$	43,750	$	43,750	$	146,681	$	146,681
Investment securities available-for-sale	62,801		62,801		82,698		82,698
Gross loans and leases	830,310		867,478		866,754		901,889
Mortgage servicing rights	534		534		575		575
Financial Liabilities
Deposits with no stated maturities	555,407		555,407		594,278		594,278
Deposits with stated maturities	440,671		436,560		518,642		516,022
FHLB and other borrowings	85,455		83,302		175,904		172,897
Subordinated debentures	14,870		20,795		12,410		20,795
Off-Balance-Sheet
Commitments to extend credit and outstanding letters of credit	132,359		132,359		205,468		205,468

Level 2 Valuation Techniques and Inputs for Investment Securities

16The majority of the Corporation's investment securities are reported at fair value utilizing Level 2 inputs. ~~Accounting~~ The valuations for ~~Stock~~U.S. Government agency securities, U.S. Government agency mortgage backed securities, residential and commercial CMO's, and corporate debt securities are obtained through independent, third-~~Based~~party pricing services. Prices obtained through these sources ~~Compensation~~include ~~Plans~~market derived quotations and matrix pricing and may include both observable and unobservable inputs. Fair market values take into consideration data such as dealer quotes, new issue pricing, trade prices for similar issues, prepayment estimates, cash flows, market credit spreads and other factors.

At June 30, 2010, the Corporation had one stock based compensation plan, pursuant to which, shares of the Corporation’s common stock could be issued, subject to certain restrictions. The plan, adopted in 2005, allows the Corporation to grant up to 150,000 shares of restricted stock to employees. During the six months ended June 30, 2010 the Corporation granted no shares of restricted stock under this plan. These restricted stock grants are subject to accelerated vesting of all or a portion of the shares upon the occurrence of certain events. A summary of the Corporation’s unvested restricted shares is as follows:28

25Table of Contents

~~Table~~ FIRST ofCHESTER ~~Contents~~COUNTY CORPORATION AND SUBSIDIARIES

~~FIRST~~ ~~CHESTER~~NOTES ~~COUNTY~~TO ~~CORPORATION AND~~CONSOLIDATED ~~SUBSIDIARIES~~FINANCIAL STATEMENTS (Continued)

~~NOTES~~ TO(UNAUDITED) ~~CONSOLIDATED FINANCIAL STATEMENTS~~

15. Fair Value Measurement and Fair Value of Financial Instruments (~~UNAUDITED~~Continued)

(Dollars in thousands, except shares, and per share data)	Shares		Grant Date Fair Value		Aggregate Intrinsic Value of Unvested Shares
Unvested at January 1, 2010	54,474		$	10.57	$	503
Granted	—		$
Vested	(2,199	)	$	21.05
Forfeited	(1,400	)	$	11.35
Unvested at June 30, 2010	50,875		$	10.09	$	440

The valuations for state and municipal obligations are obtained through independent, third-party pricing services as well. Valuations for these securities are performed using information on identical or similar securities provided by market makers, broker/dealers and buy-side firms, new issue sales and bid-wanted lists. The individual securities are then priced based on mapping the characteristics of the security such as obligation type (General Obligation, Revenue, etc.), maturity, state discount and premiums, call features, taxability and other considerations.

~~The~~ ~~Corporation~~Level 3 ~~recorded~~Valuation ~~approximately~~Techniques ~~$29 thousand~~ and ~~$64~~Inputs ~~thousand and $41 thousand and $100 thousand of restricted stock expense~~ for ~~the~~Investment ~~three and six months ended June 30, 2010 and 2009, respectively.~~Securities

Other equity securities are primarily comprised of Federal Home Loan Corporation ("FHLB") and Federal Reserve Board ("FRB") stock. The Corporation’s ~~ability~~is required to ~~issue~~purchase ~~stock~~and ~~options~~hold ~~under~~stock in the ~~Corporation’s~~FHLB ~~1995~~and ~~Stock~~FRB ~~Option~~to ~~Plan~~satisfy ~~has~~membership ~~expired.~~and ~~However,~~borrowing ~~outstanding~~requirements. This stock ~~options~~is ~~remain~~ restricted in ~~effect~~that ~~according~~it can only be sold to ~~their~~the ~~terms.~~FHLB, ~~Aggregated~~FRB ~~information~~or ~~regarding~~to ~~the~~another member institution, and all sales must be at par. As ~~Corporation’s~~a ~~1995~~result ~~Stock~~of ~~Option~~these ~~Plan~~restrictions, these equity securities are unlike other investment securities insofar as there is no trading market and the ~~options~~transfer ~~assumed~~price inis ~~the~~determined ~~AHB acquisition~~by asmembership ofrules ~~June 30~~and not by market participants. Accordingly, ~~2010~~the Corporation's valuation for these securities is ~~presented~~estimated ~~below~~at its par value.

(Dollars in thousands, except shares, per share and years data) Options	Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding at January 1, 2010	230,900		$	15.79	3.32	$	—
Granted	—
Exercised	—
Forfeited	(4,180	)	15.86
Expired	—		$	—
Outstanding at June 30, 2010	226,720		$	15.75	2.80	$	—
Exercisable at June 30, 2010	226,720		$	15.75	2.80	$	—

Mortgage Servicing Rights ("MSRs"): To determine the fair value of MSRs, the Bank uses an independent third party to estimate the present value of estimated future net servicing income. This valuation method incorporates an assumption that market participants would use in estimating future net servicing income, which include estimates of the cost to service, the discount rate, custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses. The fair value of servicing rights was determined using discount rates ranging from 8.0% to 12.5%, prepayment speeds ranging from 10.5% to 50.7% depending on the stratification of the specific right, and a weighted average default rate of 1.02%. The Corporation records the MSR as a recurring Level 3.

~~There were no options granted during the six months ended June 30,~~ The ~~2010. There~~Corporation ~~was~~had no ~~intrinsic~~transfers ~~value~~in ~~(market value~~or onout ~~date~~ of ~~exercise~~Level 1 ~~less~~and ~~grant price) of options at June~~Level ~~30,~~2 ~~2010~~during ~~as all~~the ~~options~~nine ~~had~~month anperiod ~~exercise~~ended ~~price that was higher than the June~~September 30, 2010 ~~market price~~.

~~17. Commitment and Contingencies~~29

~~Reserve~~Table ~~for~~of ~~Unfunded Commitments~~Contents

~~The~~ ~~Corporation~~FIRST ~~maintains~~CHESTER aCOUNTY ~~reserve~~CORPORATION ~~for~~AND ~~unfunded~~SUBSIDIARIES loan commitments and letters of credit which is reported in other liabilities in the Unaudited Consolidated Statements of Financial Condition consistent with ASC 825-10. As of the balance sheet date, the Corporation records estimated losses inherent with unfunded loan commitments in accordance with ASC 450-20, and estimated future obligations under letters of credit in accordance with ASC 460-10. The methodology used to determine the adequacy of this reserve is integrated in the Corporation’s process for establishing the allowance for loan losses and considers the probability of future losses and obligations that may be incurred under these off-balance sheet agreements. The reserve for unfunded loan commitments and letters of credit as of June 30, 2010 and December 31, 2009 was approximately $499 thousand and $669 thousand, respectively. Management believes this reserve level is sufficient to absorb estimated probable losses related to these commitments.

~~Loan~~ ~~Recourse~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~The Corporation~~ ~~sells~~(UNAUDITED) its residential mortgage loans on a non-recourse basis. The Corporation also provides representations and warranties to purchasers and insurers of the loans sold. In the event of a breach of these representations and warranties, the Corporation may be required to repurchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by the Corporation. If there is no breach of a representation and warranty provision, the Corporation has no obligation to repurchase the loan or indemnify the investor against loss. The unpaid principal balance of the loans sold by the Corporation represents the maximum potential exposure related to representations and warranty provisions; however, the Corporation cannot estimate its maximum exposure because it does not service all of the loans for which it has provided a

26 15. Fair Value Measurement and Fair Value of Financial Instruments (Continued)

~~Table~~ The table below presents the balance of ~~Contents~~assets and liabilities from continuing operations at September 30, 2010 and December 31, 2009, measured at fair value on a recurring basis:

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

(Dollars in thousands) September 30, 2010		Level 1		Level 2		Level 3		Total

Assets
Investment securities available for sale:
	U.S. Treasury	$	5,012	$	—	$	—	$	5,012
	U.S. Government agency mortgage-backed securities		—		30,574		—		30,574
	CMO—Residential		—		966		—		966
	CMO—Commercial		—		956		—		956
	State and municipal		—		2,387		—		2,387
	Corporate debt securities		—		6,519		—		6,519
	Bank equity securities		—		330		—		330
	Other equity securities		—		—		11,460		11,460
Mortgage servicing rights			—		—		449		449

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009		Level 1		Level 2		Level 3		Total

Assets
Investment securities available for sale:
	U.S. Treasury	$	20,016	$	—	$	—	$	20,016
	U.S. Government agency		—		2,047		—		2,047
	U.S. Government agency mortgage-backed securities		—		36,995		—		36,995
	CMO—Residential		—		998		—		998
	CMO—Commercial		—		808		—		808
	State and municipal		—		4,594		—		4,594
	Corporate debt securities		—		5,865		—		5,865
	Bank equity securities		3		530		—		533
	Other equity securities		—		—		10,842		10,842
Mortgage servicing rights			—		—		575		575

~~(UNAUDITED)~~ Assets Measured at Fair Value on a Nonrecurring Basis

~~representation or~~ A ~~warranty.~~description As of ~~June 30, 2010 and December 31, 2009,~~ the ~~Corporation~~ ~~had~~valuation amethodologies ~~liability of $733 thousand~~ and ~~$688~~classification ~~thousand,~~levels ~~respectively, included~~used infor ~~Liabilities~~financial ~~related~~instruments tomeasured ~~assets~~at ~~held~~fair ~~for~~value ~~sale~~ on ~~the Consolidated~~a ~~Balance~~nonrecurring ~~Sheet,~~basis ~~for~~are ~~probable~~listed ~~losses~~as ~~related to the Corporation’s recourse exposure~~follows. ~~This~~ ~~liability~~These islisted ~~part~~instruments ofare ~~our discontinued~~subject ~~mortgage~~to ~~banking~~fair ~~operations,~~value ~~however~~adjustments it(impairment) isas ~~anticipated~~they ~~that~~are ~~the Corporation~~valued ~~will~~at ~~retain this liability after~~ the ~~anticipated~~lower ~~sale~~ of ~~the mortgage~~cost ~~banking~~or ~~division~~market.

27 Loans and leases: The Corporation does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, Management measures impairment in accordance with ASC 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected

~~Table of Contents~~30

~~ITEM~~Table 2.of ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Contents

~~This~~ ~~discussion~~FIRST isCHESTER ~~intended~~COUNTY toCORPORATION ~~further~~AND ~~your~~SUBSIDIARIES understanding of the consolidated financial condition and results of operations of the Corporation and its direct and indirect subsidiaries. It should be read in conjunction with the consolidated financial statements included in this report.

~~OVERVIEW~~ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~The Corporation~~ ~~reported~~(UNAUDITED) a net income from continuing operations of $374 thousand and net loss from continuing operations of $229 thousand for the three and six months ended June 30, 2010, as compared to a net loss from continuing operations of $2.9 million and $2.7 million for the three and six months ended June 30, 2009.

~~The following~~ is15. anFair ~~overview~~Value ofMeasurement ~~key~~and ~~factors~~Fair ~~affecting~~Value ~~our~~of ~~June 30,~~Financial ~~2010 results~~Instruments ~~from~~(Continued) ~~continuing operations:~~

~~· Net~~repayments or ~~interest~~collateral ~~income~~exceed ~~from~~the ~~continuing operations~~recorded ~~decreased~~investments ~~$743~~in ~~thousand~~such ~~to $8~~loans.8 ~~million~~At ~~for~~September 30, 2010 substantially all of the ~~three-month~~impaired ~~period ended~~loans ~~June 30,~~were ~~2010,~~evaluated ~~and~~based ~~decreased~~on ~~$1.4~~the ~~million~~fair value of the collateral less costs to ~~$17~~sell.0 ~~million~~In ~~for~~accordance with ASC 820-10 impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. ~~six~~When ~~month~~the ~~period~~fair ~~ended~~value ~~June 30~~of the collateral is based on an observable market price or a current appraised value, ~~2010~~the Corporation records the impaired loan as ~~compared~~nonrecurring Level 3. The Bank's policies require loan officers to ~~the~~regularly ~~same~~review ~~period~~accounts. inConsistent with OCC guidance appraisals are updated as warranted based on specific facts and circumstances. Appraisals are also updated whenever a ~~2009~~loan becomes criticized or classified.

~~· Professional~~ OREO: OREO ~~fees~~is ~~increased~~adjusted ~~$1.9~~to ~~million~~fair ~~and $3.1~~value ~~million~~upon transfer of the loans to $2foreclosed assets.7 ~~million~~Subsequently, ~~and~~OREO ~~$4.5~~is ~~million~~carried ~~for~~at the ~~three~~lower ~~and~~of carrying ~~six~~value ~~months~~or ~~ending~~fair ~~June 30,~~value. ~~2010~~Fair value is based upon independent market prices, ~~respectively~~appraised values of the collateral or Management's estimation of the value of the collateral. The Corporation records the foreclosed asset as nonrecurring Level 3.

~~· Salaries~~ The table ~~and~~below ~~employee~~presents ~~benefits~~the ~~decreased~~balance ~~$1.4 million~~of assets and ~~$3.0~~liabilities ~~million~~from tocontinuing ~~$3.5~~operations ~~million~~at ~~and~~September 30, ~~$7.1~~2010 ~~million~~and ~~for~~December 31, ~~the~~2009, ~~three~~measured ~~and~~at ~~six months~~fair ~~ending~~value ~~June 30,~~on ~~2010,~~a nonrecurring ~~respectively.~~basis:

· The provision for loan and lease losses decreased $5.0 million and $6.1 million to $132 thousand and $398 thousand for the three and six months ended June 30, 2010, respectively.

(Dollars in thousands) September 30, 2010	Level 1		Level 2		Level 3		Total

Impaired loans & leases	$	—	$	—	$	45,222	$	45,222
OREO		—		—		4,080		4,080

· During the first quarter ended March 31, 2010, the Corporation recorded a write-down on OREO of $1.3 million. There were no such write-downs during the six months ended June 30, 2009.

(Dollars in thousands) December 31, 2009	Level 1		Level 2		Level 3		Total

Impaired loans & leases	$	—	$	—	$	34,105	$	34,105
OREO		—		—		3,692		3,692

~~During~~ ~~first~~Disclosures ~~quarter~~about 2010, we announced the potential sale of the AHB mortgage banking segment. Accordingly, assets related to mortgage banking operations have been reclassified to discontinued assets held for sale and the mortgage banking operations related to this segment have been reclassified, and are now reflected as discontinued operations. Refer to Note 6 of the accompanying consolidated financial ~~statements for information related to discontinued operations.~~instruments

~~CRITICAL~~ The ~~ACCOUNTING~~table ~~POLICIES,~~below presents the rollforward of assets from continuing operations that are valued using significant unobservable inputs ~~JUDGMENTS~~(Level 3) ~~AND~~for ~~ESTIMATES~~the nine months ended September 30, 2010:

Our accounting and reporting policies conform with GAAP and the general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

(Dollars in thousands)			Mortgage Servicing Rights			Investments

Beginning balance			$	575		$	10,842
	Total gains realized/unrealized:
		Included in earnings		(126	)		—
		Included in other comprehensive loss		—			—
Purchases				—			713
Maturities/amortizations				—			(95	)
Prepayments				—			—
Calls				—			—
Transfers into Level 3				—			—

Ending Balance			$	449		$	11,460

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. In addition to the information contained in Note 4 of the accompanying consolidated financial statements and Note C of the consolidated financial statements included in our 2009 Annual Report, management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:31

~~Discontinued~~Table ~~Operations~~of Contents

~~In accordance with ASC 360-10-45, “Property, Plant~~ ~~and~~FIRST ~~Equipment~~CHESTER —COUNTY ~~Overall~~CORPORATION —AND ~~Other~~SUBSIDIARIES Presentation Matters,” we classify the assets and liabilities of a business as held-for-sale when management approves and commits to a formal plan of sale and it is probable that the sale will be completed. The carrying value of the net assets of the business held-for-sale are then recorded at the lower of their carrying value or fair market value, less costs to sell, and we cease to record depreciation and amortization expense associated with assets held-for-sale.

28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Table of~~ ~~Contents~~(UNAUDITED)

In ~~accordance~~15. ~~with~~Fair ~~ASC~~Value ~~205-20-45,~~Measurement “Presentation of Financial Statements — Discontinued Operations — Other Presentation Matters,” the results of operations of a component of an entity that has either been disposed of, or is classified as held for sale, shall be reported in discontinued operations if both the operations and ~~cash~~Fair ~~flows~~Value of ~~the~~Financial ~~component have~~Instruments ~~been,~~(Continued) or will be, eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

~~OTHER~~ The estimated ~~ASSETS~~fair values and carrying amounts of the assets and liabilities from continuing operations are summarized as follows:

Other assets decreased $12.6 million during the first half of 2010 to $19.9 million at June 30, 2010. In 2010, the Corporation received cash proceeds in full payment an $8.7 million receivable recorded in other assets during the year ended December 31, 2009, which related to a former BOLI policy which the Bank had surrendered in 2008. The Corporation also received an income tax refund of $3.1 million during the second quarter 2010 which was recorded as a receivable in other assets at December 31, 2009.

		September 30, 2010				December 31, 2009

(Dollars in thousands)		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount
Financial Assets
	Cash and cash equivalents	$	59,115	$	59,115	$	146,681	$	146,681
	Investment securities available-for-sale		58,204		58,204		82,698		82,698
	Gross loans and leases		801,262		835,388		866,754		901,889
	Mortgage servicing rights		449		449		575		575
Financial Liabilities
	Deposits with no stated maturities		538,121		538,121		594,278		594,278
	Deposits with stated maturities		436,513		432,132		518,642		516,022
	FHLB and other borrowings		75,258		73,239		175,904		172,897
	Subordinated debentures		14,620		20,795		12,410		20,795
Off-Balance-Sheet
	Commitments to extend credit and outstanding letters of credit		119,956		119,956		205,468		205,468

~~NET~~ ~~INTEREST~~16. ~~INCOME~~Accounting for Stock-Based Compensation Plans

~~Net~~ At ~~interest~~September 30, ~~income is~~2010, the ~~difference~~Corporation ~~between~~had ~~interest~~one ~~income~~stock ~~earned~~based oncompensation ~~interest-earning~~plan, ~~assets~~pursuant ~~and interest~~to ~~expense~~which, ~~paid~~shares onof ~~interest~~the ~~bearing~~Corporation's ~~liabilities~~common stock could be issued, subject to certain restrictions. The ~~following tables~~plan, ~~provides~~adopted ~~detail~~in ~~regarding~~2005, allows the Corporation’s ~~average~~to ~~balances~~grant ~~with corresponding~~up ~~interest~~to ~~income~~150,000 ~~(on~~shares aof ~~tax-equivalent~~restricted ~~basis)~~stock ~~and~~to ~~interest~~employees. ~~expense as~~During ~~well~~the asnine ~~yield~~months ~~and~~ended ~~cost~~September 30, ~~information~~2010 ~~for~~ the ~~periods~~Corporation granted ~~presented~~no shares of restricted stock under this plan. ~~Management’s~~These ~~discussion~~restricted ~~and~~stock ~~analysis~~grants are subject to accelerated vesting of ~~net interest~~all ~~income,~~or ~~interest~~a ~~income,~~portion ~~and~~of ~~interest~~the ~~expense~~shares isupon ~~based~~the onoccurrence ~~aggregated~~of certain events. A ~~amounts~~summary of ~~continuing~~the ~~and~~Corporation's ~~discontinued~~unvested ~~operations.~~restricted shares is as follows:

(Dollars in thousands, except shares, and per share data)	Shares			Grant Date Fair Value		Aggregate Intrinsic Value of Unvested Shares
	Three Months ended June 30,
	2010							2009
Unvested at January 1, 2010		54,474		$	10.57	$	503
	Average							Average
Granted		—		$
(Dollars in thousands)	Balance			Interest		Rate%		Balance			Interest	Rate%
Vested		(2,199	)	$	21.05
ASSETS
Forfeited		(1,400	)	$	11.35
Federal funds sold, interest-bearing deposits in banks and other overnight investments	$	112,988		$	71	0.25	%	$	16,019		17	0.41	%
Unvested at September 30, 2010		50,875		$	10.09	$	253
Investment securities:
Taxable	60,760			433		2.86	%	87,642			934	4.28	%
Tax-exempt (1)	3,338			44		5.32	%	7,544			91	4.82	%
Total investment securities	64,098			477		2.99	%	95,186			1,025	4.32	%
Loans held for sale	136,924			1,491		4.37	%	267,299			3,095	4.64	%
Loans and leases: (2)
Taxable	861,085			11,932		5.56	%	924,294			13,112	5.69	%
Tax-exempt (1)	14,602			207		5.68	%	20,532			377	7.36	%
Total loans and leases	875,687			12,139		5.56	%	944,826			13,489	5.73	%
Total interest-earning assets	1,189,697			14,178		4.78	%	1,323,330			17,626	5.34	%
Non-interest-earning assets
Allowance for loan and lease losses	(23,113		)					(11,236		)
Cash and due from banks	17,437							10,848
Other assets	38,893							47,004
Total assets	$	1,222,914						$	1,369,946
LIABILITIES AND EQUITY
Savings, NOW, and money market Deposits	$	423,179		$	648	0.61	%	$	437,316		1,040	0.95	%
Certificates of deposit and other time	472,790			2,275		1.93	%	429,948			2,843	2.65	%
Total interest-bearing deposits	895,969			2,923		1.31	%	867,264			3,883	1.80	%
Subordinated debt	20,795			276		5.32	%	19,436			252	5.20	%
Federal Home Loan Bank advances and other borrowings	86,899			1,025		4.73	%	228,188			1,617	2.84	%
Total interest-bearing liabilities	1,003,663			4,224		1.69	%	1,114,888			5,752	2.07	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits	149,987							149,078
Other liabilities	14,271							16,925
Total liabilities	1,167,921							1,280,891
Equity	54,993							89,055
Total liabilities and equity	$	1,222,914						$	1,369,946
Net interest income (tax equivalent) / margin on earning assets				$	9,954	3.36	%				11,874	3.60	%
Less net interest income from discontinued operations (3)				1,111							2,218
Less tax equivalent adjustment				81							151
Net interest income from continuing operations				8,762							9,505

The Corporation recorded approximately $29 thousand and $93 thousand and $47 thousand and $147 thousand of restricted stock expense for the three and nine months ended September 30, 2010 and 2009, respectively.

~~Table of Contents~~32

	Six Months ended
	June 30,
	2010							2009
	Average							Average
(Dollars in thousands)	Balance			Interest		Rate%		Balance			Interest		Rate%
ASSETS
Federal funds sold, interest-bearing deposits in banks and other overnight investments	$	147,619		192		0.26	%	$	21,238		44		0.42	%
Investment securities:
Taxable	62,509			828		2.67	%	94,732			2,087		4.44	%
Tax-exempt (1)	3,705			96		5.21	%	8,569			204		4.81	%
Total investment securities	66,214			924		2.81	%	103,301			2,291		4.47	%
Loans held for sale	126,499			2,685		4.28	%	209,291			4,939		4.76	%
Loans and leases: (2)
Taxable	867,319			24,152		5.62	%	921,975			26,062		5.70	%
Tax-exempt (1)	14,714			429		5.89	%	20,633			754		7.36	%
Total loans and leases	882,033			24,581		5.62	%	942,608			26,816		5.74	%
Total interest-earning assets	1,222,365			28,382		4.68	%	1,276,438			34,090		5.39	%
Non-interest-earning assets
Allowance for loan and lease losses	(23,560		)					(10,904		)
Cash and due from banks	18,906							19,353
Other assets	48,629							54,057
Total assets	$	1,266,340						$	1,338,944
LIABILITIES AND EQUITY
Savings, NOW, and money market Deposits	$	426,905		1,372		0.65	%	$	431,189		2,246		1.05	%
Certificates of deposit and other time	482,165			4,812		2.01	%	438,686			6,108		2.81	%
Total interest-bearing deposits	909,070			6,184		1.37	%	869,875			8,354		1.94	%
Subordinated debt	20,795			547		5.30	%	17,461			426		4.92	%
Federal Home Loan Bank advances and other borrowings	115,876			2,488		4.33	%	201,343			3,153		3.16	%
Total interest-bearing liabilities	1,045,741			9,219		1.78	%	1,088,679			11,933		2.21	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits	150,356							146,583
Other liabilities	14,637							15,667
Total liabilities	1,210,734							1,250,929
Equity	55,606							88,015
Total liabilities and equity	$	1,266,340						$	1,338,944
Net interest income (tax equivalent) / margin on earning assets				$	19,163	3.16	%				$	22,157	3.50	%
Net yield on interest-earning assets
Less net interest income from discontinued operations (3)				1,958							3,383
Less tax equivalent adjustment				169							308
Net interest income from continuing operations				17,036							18,466

Table of Contents

30 FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

~~Table~~ ~~of Contents~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1UNAUDITED) ~~The~~ ~~indicated income and annual rate are presented on a taxable equivalent basis using the federal marginal rate of 34% adjusted for the TEFRA 20% interest expense disallowance for all periods presented.~~

~~(2) Non-accruing~~ ~~loans~~16. ~~are included~~Accounting infor ~~the~~Stock-Based ~~average~~Compensation ~~balance.~~Plans (Continued)

~~(3) Net~~ The Corporation's ~~interest~~ability ~~income~~to ofissue stock options under the ~~mortgage~~Corporation's ~~banking~~1995 ~~segment includes~~Stock ~~income~~Option ~~from~~Plan ~~loans~~has ~~held~~expired. ~~for~~However, ~~sale~~outstanding ~~and~~stock ~~imputed~~options ~~interest~~remain ~~expense~~in effect according to their terms. ~~calculated~~Aggregated ~~using~~information regarding the Corporation’'s ~~internal~~1995 ~~matched~~Stock ~~funds~~Option ~~transfer~~Plan ~~pricing methodology~~and the options assumed in the AHB acquisition as of September 30, 2010 is presented below.

Net interest income on a tax equivalent basis for the three month period ended June 30, 2010 was $10.0 million, a decrease of 16.2% from $11.9 million for the same period in 2009. Net interest income on a tax equivalent basis for the six month period ended June 30, 2010 was $19.2 million, a decrease of 13.5% from $22.2 million for the same period in 2009. The net yield on interest-earning assets, on a tax-equivalent basis, was 3.36% for the three month period ended June 30, 2010, compared to 3.60% for the same period in 2009, an decrease of 24 basis points (one basis point is equal to 1/100 of a percent). For the six month period ended June 30, 2010, the net yield on interest earning assets decreased 34 basis points to 3.16% from 3.50% during the same period in 2009.

(Dollars in thousands, except shares, per share and years data) Options			Weighted- Average Exercise Price			Aggregate Intrinsic Value

Outstanding at January 1, 2010	230,900		$	15.79	3.32	$	—
Granted	—
Exercised	—
Forfeited	(26,163	)	$	13.08
Expired	—
Outstanding at September 30, 2010	204,737		$	16.09	2.68	$	—

Exercisable at September 30, 2010	204,737		$	16.09	2.68	$	—

~~The~~ There were ~~yield~~no ~~earned~~options ongranted ~~average~~during ~~interest-earning assets was 4.78% for~~ the ~~three~~ ~~month~~nine ~~period~~months ended ~~June~~September 30, 2010,. ~~compared~~There towas ~~5.34%~~no ~~for~~intrinsic ~~the~~value ~~same period~~(market invalue ~~2009,~~on adate ~~decrease~~ of 56exercise ~~basis~~less ~~points.~~grant ~~For~~price) ~~the~~of ~~six~~options ~~month period ended~~at ~~June~~September 30, 2010, ~~the~~as ~~yield~~all ~~earned~~options onhad ~~interest~~an ~~earning~~exercise ~~assets~~price ~~decreased~~that ~~71 basis~~was ~~points~~higher tothan ~~4.68% from 5.39% during~~ the ~~same~~September 30, ~~period~~2010 inmarket ~~2009~~price.

~~Average~~ ~~interest-earning assets decreased approximately $133~~17.6 ~~million or~~Commitment 10.1% to $1.190 billion for the three months ended June 30, 2010 from $1.323 billion in the same period last year. The decrease in average interest-earning assets for the three month period ended June 30, 2010 was the result of a $130.4 million decrease in loans held for sale, a $69.1 million decrease in average total loans and ~~leases,~~ and a decrease of $31.1 million in investments securities available for sale. These decreases were partially offset by a $97.0 million increase in average Federal funds sold and interest bearing deposits in banks balance.Contingencies

~~Average~~ ~~interest-earning~~Reserve ~~assets decreased approximately $54.1 million or 4.2% to $1.222 billion~~ for ~~the~~Unfunded six months ended June 30, 2010 from $1.276 billion in the same period last year. The decrease in average interest-earning assets for the six month period ended June 30, 2010 was the result of a $82.8 million decrease in loans held for sale, a $60.6 million decrease in average total loans and leases, and a decrease of $37.1 million in investments securities available for sale. These decreases were partially offset by a $126.4 million increase in average Federal funds sold and interest bearing deposits in banks balance.Commitments

~~Average interest-bearing~~ The Corporation maintains a reserve for unfunded loan commitments and letters of credit which is reported in other liabilities ~~decreased~~in ~~approximately~~the Unaudited ~~$111.2~~Consolidated ~~million~~Statements orof Financial Condition consistent with ASC 825-10.0% ~~to $1.004~~As ~~billion~~of ~~for~~the balance sheet date, the ~~three~~Corporation ~~months~~records ~~ended~~estimated ~~June 30,~~losses ~~2010,~~inherent ~~from~~with ~~$1.115~~unfunded loan ~~billion~~commitments in ~~the~~accordance ~~same~~with ~~period~~ASC 450-20, and estimated future obligations under letters of credit in ~~2009~~accordance with ASC 460-10. The methodology used to determine the ~~decrease~~adequacy of this reserve is integrated in ~~average~~the ~~interest-bearing~~Corporation's ~~liabilities~~process for establishing the ~~three~~allowance ~~month~~for ~~period~~loan ~~was~~ losses and considers the ~~result~~probability of afuture ~~$141~~losses and obligations that may be incurred under these off-balance sheet agreements.3 ~~million~~The ~~decrease~~reserve ~~FHLB~~for ~~advances~~unfunded loan commitments and ~~other~~letters ~~borrowings~~of credit as of September 30, ~~offset~~ by2010 anand ~~increase~~December 31, of2009 was approximately $28454 thousand and $669 thousand, respectively.7 ~~million~~Management inbelieves ~~interest~~this ~~bearing~~reserve ~~deposits~~level is sufficient to absorb estimated probable losses related to these commitments.

~~Average interest-bearing~~ ~~liabilities~~Loan ~~decreased approximately $42.9 million or 3.9% to $1.046 billion for the six months ended June 30, 2010, from $1.089 billion in the same period in 2009. The decrease in average interest-~~Recourse

31 The Corporation sells its residential mortgage loans on a non-recourse basis. The Corporation also provides representations and warranties to purchasers and insurers of the loans sold. In the event of a breach of these representations and warranties, the Corporation may be required to repurchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by the Corporation. If there is no breach of a representation and warranty provision, the Corporation has no obligation to repurchase the loan or indemnify the investor against loss. The unpaid principal balance of the loans sold by the Corporation represents the maximum potential

~~Table of Contents~~33

~~bearing liabilities~~Table ~~for the six month period was the result~~ of ~~an $85.5 million decrease FHLB advances and other borrowings, offset by an increase of $39.2 million in interest bearing deposits.~~Contents

~~INTEREST~~ ~~INCOME~~FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

~~Interest income~~ onNOTES aTO ~~tax-equivalent~~CONSOLIDATED ~~basis~~FINANCIAL ~~decreased~~STATEMENTS ~~$3.4~~(Continued) million to $14.2 million for the three months ended June 30, 2010 from the same period in 2009. For the six month period ended June 30, 2010, interest income on a tax-equivalent basis decreased $5.7 million to $28.4 million.

~~On a~~ ~~tax~~(UNAUDITED) equivalent basis, interest income on investment securities decreased by 53.5% or $548 thousand to $477 thousand for the three month period ended June 30, 2010 compared to the same period in 2009. For the six month period ended June 30, 2010, interest income on investment securities decreased 59.7% or approximately $1.4 million to $924 thousand when compared to the same period in 2009. The decrease reflects sales, amortizations, maturities, and called securities net of purchases over the year ended 2009 and the first half of 2010. Except for the required purchase of $0.7 million of Federal Reserve Bank stock in the first quarter of 2010, no investment securities have been purchased or sold during the first six months of 2010. During the fourth quarter 2009, $52.8 million of securities were sold and $41.2 million of securities were purchased. These actions were taken primarily to reduce the level risk weighted assets to assist the Bank in satisfying the IMCRs and shorten the duration of the investment portfolio to help mitigate the risk of rising interest rates. Matured and called securities as well as principal payments on mortgage-backed securities totaled $21.5 million during the first six months of 2010.

~~Interest income~~ ~~on loans held for sale decreased $1~~17.6 ~~million~~Commitment to $1.5 million during the three month period ended June 30, 2010. For the six month period ended June 30, 2010, interest income on loans held for sale decreased $2.3 million to $2.7 million. These decreases were due to a significant decrease in the average loans held for sale balance. Average loans held for sale for the three and ~~six~~ ~~months~~Contingencies ~~periods~~(Continued) ~~ended June 30, 2010 were $136.9 million and $126.5 million as compared to approximately $267.3 million and $209.3 million for the same periods in 2009.~~

~~Interest~~exposure ~~income~~related onto ~~loans,~~representations onand awarranty ~~tax~~provisions; ~~equivalent basis~~however, ~~generated by~~ the Corporation’s ~~loan portfolio~~cannot ~~decreased~~estimate ~~10.0%~~its ormaximum ~~$1.4~~exposure ~~million~~because toit ~~$12.1~~does ~~million~~not ~~for~~service ~~the~~all ~~three~~of ~~month period~~the ~~ended~~loans ~~June 30,~~for ~~2010~~which ~~compared~~it tohas ~~$13.5~~provided ~~million for the three months~~a ~~ended~~representation ~~June 30,~~or ~~2009~~warranty. ~~For~~ ~~the~~As ~~six month~~of ~~period ended June~~September 30, 2010, ~~interest~~and ~~income on loans~~December 31, ~~on a tax equivalent basis decreased 8.3% or $2.2 million when compared to the same period in~~ 2009~~. These~~, ~~decreases in interest income for~~ the ~~three~~Corporation ~~and~~had ~~six~~a ~~month~~liability ~~periods~~of ~~ended June~~$443 ~~30,~~thousand ~~2010 were primarily due to a $69.1 million or 7.3% decrease in average loans outstanding for the three month period~~ and a $~~60.6~~688 thousand, ~~million~~respectively, orincluded ~~6.4% decrease~~ in ~~average~~Liabilities ~~loans~~related ~~outstanding for the six month period as compared~~ to ~~the~~assets ~~same periods~~held infor ~~2009. These decreases in average loan balances were primarily due a $52.5 million loan~~ sale toon ~~Tower in~~ the ~~fourth~~Consolidated ~~quarter~~Balance ~~2009~~Sheet, ~~lack~~for ofprobable ~~organic loan~~losses ~~growth~~related ~~as well as significant fourth quarter 2009 charge-offs. In addition~~ to the ~~impact~~Corporation's ~~from~~recourse ~~the~~exposure. ~~decrease~~This inliability ~~average~~is ~~loan~~part ~~balances,~~of ~~there~~our ~~was~~discontinued ~~also a~~mortgage ~~decrease~~banking ~~in the tax equivalent yield earned on average loans outstanding~~operations, ~~which decreased~~however byit 17is ~~and~~anticipated 12that ~~basis~~the ~~points~~Corporation towill ~~5.56%~~retain ~~and~~this ~~5.62%~~liability ~~for~~after the ~~three~~anticipated ~~and~~sale ~~six month~~of ~~periods ended June 30, 2010 from 5.73% and 5.74% for~~ the ~~same periods~~mortgage inbanking ~~2009~~division.

~~INTEREST EXPENSE~~ Asserted and Unasserted Claims

~~Interest expense~~ Certain onconditions ~~deposit~~may ~~accounts~~exist ~~decreased~~as byof ~~approximately~~the ~~$960~~date ~~thousand or 24.7% to $2.9 million for~~ the ~~three~~financial ~~month~~statements ~~period~~are ~~ended June 30~~issued, ~~2010~~which ~~from~~may ~~$3.9 million~~result ~~for the same period~~ in ~~2009. Interest~~a ~~expense~~loss ~~on deposit accounts decreased approximately $2.2 million or 26.0%~~ to ~~$6.2 million for~~ the ~~six~~Corporation ~~months ended June 30, 2010~~but ~~compared~~which towill ~~the~~only ~~same~~be ~~period~~resolved inwhen ~~2009. The decreases~~one ~~for~~or ~~the~~more ~~three~~future ~~and~~events ~~six~~occur ~~month~~or ~~periods~~fail ~~were primarily due~~ to ~~a decrease in the average interest rates paid on interest-bearing deposits~~occur. The ~~average rate~~Corporation's ~~paid~~management ~~for~~and ~~the~~legal ~~three~~counsel ~~month~~assess ~~period~~such incontingent ~~2010 was 1.31%~~liabilities, aand 49such ~~basis~~assessment ~~point~~inherently ~~decrease~~involves ~~from~~an ~~1.80%~~exercise inof ~~2009~~judgment. ~~The~~In ~~average~~assessing ~~rate~~loss ~~paid~~contingencies ~~for~~related ~~the~~to ~~six~~legal ~~month~~proceedings ~~period~~that ~~in 2010~~are ~~was~~pending ~~1.37%,~~against athe 57Corporation ~~basis~~or ~~point~~unasserted ~~decrease~~claims ~~from~~that ~~1.94%~~may inresult ~~2009. The impact from rate decreases was partially offset by increases~~ in ~~average~~such ~~interest-bearing deposit~~proceedings, ~~balances. These balances increased $28.7 million for~~ the ~~three month~~ ~~period~~Corporation's tolegal ~~$896.0~~counsel ~~million~~evaluates ~~in 2010 from $867.3 million in 2009. These balances increased $39.2 million for~~ the ~~six~~perceived ~~month~~merits ~~period~~of toany ~~$909.1~~legal ~~million~~proceedings inor ~~2010~~unasserted ~~from $869.9~~claims ~~million~~as inwell ~~2009. The~~as ~~increase~~the ~~in average~~perceived ~~interest~~merits ~~bearing~~of ~~deposit~~the ~~balances~~amount ~~was~~of ~~primarily~~relief ~~due~~sought toor aexpected ~~fourth quarter 2009 CD promotion which was undertaken~~ to ~~increase~~be ~~liquidity and lengthen the maturities of liabilities supporting earning assets to help mitigate the risk of rising interest rates~~sought.

~~Interest~~ If ~~expense~~the onassessment ~~FHLB~~of ~~and~~a ~~other~~contingency ~~borrowings~~indicates ~~decreased~~that ~~$592~~it ~~thousand~~is orprobable ~~36.6%~~that toa ~~$1.0 million~~material ~~for~~loss has been incurred and the ~~three~~amount ~~month~~of ~~period~~the ~~ended~~liability ~~June 30,~~can ~~2010~~be ~~from~~estimated, then the ~~same~~estimated liability ~~period~~would be accrued in ~~2009~~the Corporation's financial statements. ~~Interest~~The ~~expense~~Corporation onwill ~~FHLB~~disclose ~~and~~asserted ~~other~~claims ~~borrowings~~when ~~for~~it ~~the~~is ~~six months~~at ~~ended~~least ~~June 30,~~reasonably ~~2010~~possible ~~decreased~~that ~~approximately~~an ~~$665~~asset ~~thousand~~has been impaired or ~~21.1%~~a liability has tobeen ~~$2.5million~~incurred ~~from~~as ~~$3.2~~of ~~million~~the indate ~~2009.~~of ~~These~~the ~~decreases~~financial instatements ~~interest~~and ~~expense were~~unasserted ~~primarily~~claims ~~due~~when toit ~~decreases~~is inconsidered ~~the~~probable ~~average~~that ~~balances~~a ofclaim ~~these~~will ~~funding sources~~be inasserted ~~2010~~and asthere ~~compared~~is toa ~~2009~~reasonable possibility that the outcome will be unfavorable. The ~~average~~Corporation ~~balance~~will ofnot ~~FHLB~~accrue ~~and~~a ~~other borrowings~~liability ~~for~~or ~~the~~disclose ~~three~~unasserted claims which management believes are only reasonably possible of assertion.

32 Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

~~Table~~ As of September 30, 2010, the Corporation has been made aware of a potential claim that management believes is probable to be asserted by the beneficiaries of the American Home ~~Contents~~Bank Management Incentive Plan (the "AHB MIP") who may seek to set aside the Agreement to Finalize the AHB MIP dated May 4, 2009. The beneficiaries assert that the amounts received under the AHB MIP should be increased. Management has accrued a liability in the Corporation's financial statements in the amount of $300 thousand based on its evaluation of the circumstances related to this matter. Although the Corporation believes that its liability with respect to the claim will not exceed such amount, these matters are inherently unpredictable and there can be no assurance that relevant facts and circumstances will not change, necessitating future changes to the estimated liability.

months ended June 30, 2010 decreased by 61.9% or $141.3 million between the two periods. Average balances of these funding sources for the six month period decreased 42.4% or $85.5 million between the two periods. During the first six months of 2009 other borrowings were increased to fund the growth of the mortgages held for sale portfolio as mortgage refinancing demand was high. The mortgages held for sale portfolio declined through the second half of 2009 and the other borrowing balances were reduced. With the increase in time deposits in the fourth quarter 2009, due to promotional efforts, and the further reduction in the mortgages held for sale portfolio in 2010, $42.5 million in FHLB advances that matured during the first quarter of 2010 were not replaced. Further, in the second quarter of 2010, $56.7 million of FHLB advances were prepaid to reduce the size of the balance sheet and help improve the Bank’s Tier 1 Leverage capital ratio. Partly offsetting these decreases was a $26.0 million loan from Tower Bancorp in the fourth quarter 2009.34

~~ASSET~~ ~~QUALITY~~ Table ~~AND~~of ~~ALLOWANCE~~Contents ~~FOR LOAN AND LEASE LOSSES~~

~~Allowance and~~ ~~provision~~ITEM ~~for~~2. MANAGEMENT'S ~~loan~~DISCUSSION ~~and~~AND ~~lease~~ANALYSIS ~~losses~~OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Management believes~~ This ~~that~~discussion ~~the allowance for loan and lease losses~~ is ~~adequate. The~~intended ~~determination~~to ~~for~~further ~~this~~your ~~allowance~~understanding ~~requires significant judgment, and estimates~~ of ~~probable losses in~~ the ~~loan~~consolidated ~~and~~financial ~~lease portfolio~~condition can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the credits comprising the portfolio and ~~changes~~results ~~in the financial condition~~ of ~~borrowers.~~operations ~~In addition, regulatory agencies, as an integral part~~ of ~~their examination process, and independent consultants engaged by~~ the Corporation, ~~periodically review the loan~~ and ~~lease~~its ~~portfolio~~direct and ~~the allowance. Such~~indirect ~~reviews may result in adjustments to the provision based upon their analysis of the information available at the time of each examination~~subsidiaries. ~~During~~It ~~2010,~~should ~~there~~be ~~were~~read ~~no major changes~~ in ~~estimation~~conjunction ~~methods that~~with ~~affected~~ the ~~allowance~~consolidated ~~methodology~~financial ~~from~~statements ~~the~~included ~~prior~~in ~~year~~this report.

~~The Corporation~~ makes provisions for loan and lease losses in amounts necessary to maintain the allowance at an appropriate level, as established by use of the allowance methodology and by management review and judgment. The allowance for loans and lease losses decreased $1.7 million to $21.5 million at June 30, 2010, as compared to December 31, 2009. The allowance for loan and lease losses as a percentage of non-performing loans decreased to 38.71%, as compared to 55.07% at December 31, 2009 as total non-performing loans increased $13.5 million during the first half of 2010. During the three and six month periods ended June 30, 2010, we recorded a $132 thousand and $398 thousand provision for loan and lease losses as compared to $5.1 million and $6.5 million for the same periods in 2009.OVERVIEW

The ~~decrease~~ inCorporation ~~the~~reported ~~June 30,~~a ~~2010~~net ~~required~~income ~~allowance~~from continuing operations of $872 thousand and $644 thousand for ~~loan~~the ~~losses,~~three asand ~~compared~~nine tomonths ~~December~~ended September 3130, ~~2009~~2010, ~~can~~respectively, beas ~~attributed~~compared to a net loss from continuing operations of $7.1 million and $9.8 million for the ~~following~~three ~~factors:~~and nine months ended September 30, 2009, respectively.

· The ~~Corporation’s total loan and lease~~ ~~balances~~following ~~decreased $34.4 million at June 30, 2010 as compared to December 31, 2009. The decrease in loan balance~~ is ~~primarily~~ ~~due~~an tooverview ~~$2.3 million in net charge-offs and loans which have paid off during the six months ended June 30, 2010. This decrease had a direct effect in reducing the amount~~ of ~~required allowance~~key ~~for~~factors ~~loan~~affecting ~~and~~our ~~lease as of June~~September 30, 2010. ~~However,~~results ~~several~~from ~~other variables~~continuing ~~also~~operations: ~~contribute to the amount of required reserves as described below.~~

•: Net interest income from continuing operations decreased $896 thousand to $8.9 million for the three-month period ended September 30, 2010, and decreased $2.3 million to $25.9 million for the nine month period ended September 30, 2010 as compared to the same periods in 2009.
•: Professional fees increased $1.5 million and $4.6 million to $2.6 million and $7.1 million for the three and nine months ending September 30, 2010, respectively.
•: Salaries and employee benefits decreased $1.9 million and $4.9 million to $3.5 million and $10.6 million for the three and nine months ending September 30, 2010, respectively.
•: The provision for loan and lease losses decreased $10.9 million and $16.9 million to $369 thousand and $767 thousand for the three and nine months ended September 30, 2010, respectively.

~~· When~~ During first ~~loan~~quarter ~~losses are confirmed~~2010, ~~the Corporation~~we ~~reduces~~announced the ~~allowance~~potential ~~for~~sale ~~loan and lease losses through the recording~~ of ~~a charge-off. For~~ the ~~six~~AHB ~~months ended~~mortgage ~~June 30,~~banking ~~2010, the Corporation recorded $2~~segment.5 ~~million~~Accordingly, inassets ~~gross charge-offs. Several of these charge-offs were~~ related to ~~loans~~mortgage ~~that~~banking ~~were~~operations ~~impaired~~have atbeen ~~December 31, 2009. These~~reclassified ~~loans had approximately $1.8~~to ~~million~~discontinued ofassets ~~allocated~~held ~~specific~~for ~~reserves~~sale atand ~~December 31,~~the ~~2009. These~~mortgage ~~specific~~banking ~~reserves~~operations ~~were~~related ~~created through charges~~ to ~~the~~this ~~provision~~segment ~~for~~have ~~loan~~been reclassified, and ~~lease~~are ~~losses~~now ~~during~~reflected ~~2009.~~as ~~These~~discontinued ~~charge offs~~operations. ~~increased~~Refer ~~the~~to ~~reserve~~Note 6 ~~factors~~of ~~within~~ the ~~allowance calculation however, these~~ ~~increases~~accompanying ~~were~~consolidated ~~more~~financial ~~than~~statements ~~offset~~for byinformation ~~the~~related ~~reduction~~to indiscontinued ~~specific reserves~~operations.

~~· In~~ ~~July 2010,~~CRITICAL aACCOUNTING ~~$2.3 million impaired commercial real estate loan paid off in full. This loan had an allocated specific reserve of approximately $1.0 million at December 31~~POLICIES, ~~2009. Because~~JUDGMENTS ~~the~~AND borrower had a contract for re-financing with another lender, management determined that this specific reserve was no longer needed in the calculation of the June 30, 2010 required allowance for loan and lease losses, however the $2.3 million loan balance continued to be classified as an impaired loan until payment was received in July 2010.ESTIMATES

~~· Several~~ Our ~~commercial~~accounting ~~real~~and ~~estate~~reporting ~~loans migrated~~policies ~~from~~conform ~~the~~with ~~Corporation’s~~GAAP ~~internal~~and ~~substandard~~the ~~pool~~general ~~classification~~practices towithin ~~an impaired loan classification during~~ the ~~first~~financial ~~six~~services ~~months of 2010~~industry. ~~The~~ ~~required reserve for substandard loans is~~The ~~evaluated~~preparation ~~based on the historical loss experience, adjusted for current conditions, for similar pools~~ of ~~loans.~~financial Ifstatements anin ~~individually~~conformity ~~analyzed~~with ~~loan~~GAAP ~~is determined~~requires Management to bemake ~~impaired,~~estimates ~~reserves are specifically allocated in accordance with applicable accounting guidance,~~ and ~~not~~assumptions asthat ~~part~~affect ~~of a pool. In some cases, management’s review of these~~the ~~loans~~amounts ~~resulted~~reported in athe ~~nominal~~financial ~~specific~~statements ~~reserve~~and ~~based on supporting evidence that there was sufficient collateral to support~~ the ~~loan~~accompanying ~~balance~~notes. ~~For~~ ~~several~~Actual ofresults ~~these~~could ~~newly~~differ ~~impaired~~from ~~loans~~those ~~at June 30, 2010 specific reserves were often less than the December 31, 2009 reserves calculated based on the substandard pool classification~~estimates.

~~Net~~ Critical ~~charge-offs~~accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. In addition to the information contained in Note 4 of the accompanying consolidated financial statements and Note C of the consolidated financial statements included in our 2009 Annual Report, management believes that

Net charge-offs for the three and six month periods ended June 30, 2010 were $1.2 million and $2.3 million, respectively, compared to $820 thousand and $1.1 million of net charge-offs during the same periods in 2009. The increase in charge-offs reflects the deterioration of economic conditions and resulting failure of businesses, devaluation of collateral values and negative impact on consumers’ ability to service debt. A significant portion of loans charged-off in the three and six months ended June 30, 2010 related to loans that had been evaluated and deemed impaired at December 31, 2009. Specific reserves allocated to loans charged-off during the six months ended June 30, 2010 were approximately $1.8 million at December 31, 2009.35

33Table of Contents

~~Table~~the ofmost ~~Contents~~critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

~~The following~~ ~~chart~~Discontinued ~~presents an analysis of the Allowance for Loan and Lease Losses:~~Operations

	Three Months Ended June 30,						Six Months Ended June 30,
Dollars in thousands	2010			2009			2010			2009
Balance at beginning of period	$	22,464		$	11,263		$	23,217		$	10,335
Provision charged to operating expense	132			5,084			398			6,471
Recoveries of loans previously charged-off	141			104			278			249
Loans charged-off	(1,303		)	(924		)	(2,529		)	(1,366		)
Net loan charge-offs	(1,162		)	(820		)	(2,251		)	(1,117		)
Allowance other adjustment (1)	100			1			170			(161		)
Balance at end of period	$	21,534		$	15,528		$	21,534		$	15,528
Period-end loans outstanding	$	867,478		$	947,914		$	867,478		$	947,914
Average loans outstanding	$	875,687		$	944,826		$	882,033		$	942,608
Allowance for loan and lease losses as a percentage of period-end loans outstanding	2.48		%	1.64		%	2.48		%	1.64		%
Net charge-offs to average loans outstanding	0.13		%	0.09		%	0.26		%	0.12		%

In accordance with ASC 360-10-45, "Property, Plant and Equipment—Overall—Other Presentation Matters," we classify the assets and liabilities of a business as held-for-sale when management approves and commits to a formal plan of sale and it is probable that the sale will be completed. The carrying value of the net assets of the business held-for-sale are then recorded at the lower of their carrying value or fair market value, less costs to sell, and we cease to record depreciation and amortization expense associated with assets held-for-sale.

~~(1) The~~ In accordance ~~“Allowance~~with ~~other adjustment”~~ASC ~~represents~~205-20-45, "Presentation of Financial Statements—Discontinued Operations—Other Presentation Matters," the ~~reclassification~~results of operations of a component of an ~~allowance~~entity that has either been disposed of, or is classified as held for ~~probable~~sale, ~~losses on~~shall ~~unfunded~~be ~~loans~~reported ~~and~~in ~~unused~~discontinued ~~lines~~operations ofif ~~credit. These~~both ~~loans~~the operations and ~~lines~~cash flows of ~~credit~~the component have been, ~~although~~or ~~unfunded~~will be, eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have ~~been~~any ~~committed~~significant continuing involvement in the tooperations byof the ~~Corporation~~component after the disposal transaction.

~~Non-performing~~ ~~assets~~OTHER ASSETS

~~Non-performing~~ Other assets ~~include~~decreased ~~those~~$14.1 million ~~loans~~to on$18.5 million ~~non-accrual~~at ~~status~~September 30, ~~loans~~2010 ~~past~~from ~~due~~$32.6 million ~~90 days or~~at ~~more~~December 31, ~~and~~2009. ~~still~~In ~~accruing~~2010, ~~troubled~~the ~~debt~~Corporation ~~restructurings~~received ~~and~~cash ~~other~~proceeds ~~loans~~in ~~deemed impaired~~full ~~and~~payment ~~other~~an ~~real estate owned~~$8. ~~Non-performing~~7 million ~~loans~~receivable ~~are~~recorded ~~generally collateralized~~in ~~and~~other ~~are~~assets induring the ~~process~~year ofended ~~collection. The~~December 31, ~~percentage of~~2009, ~~non-performing~~which ~~loans~~related to ~~gross~~a ~~loans~~former ~~was~~BOLI ~~6.41%~~policy atwhich ~~June 30,~~the ~~2010,~~Bank ~~compared to~~had ~~4.67%~~surrendered atin ~~December 31, 2009~~2008. The ~~non-accrual~~ ~~loan~~Corporation ~~and~~also ~~lease~~received ~~balance~~an atincome ~~June 30,~~tax ~~2010~~refund ~~was~~of $373.0 1 million, during the second quarter 2010 which was ~~compared~~recorded toas ~~$27.6~~a ~~million~~receivable in other assets at December 31, 2009.

~~Non-accrual loan~~ ~~and~~NET ~~leases~~INTEREST INCOME

~~Loans~~ Net ~~are~~interest ~~generally~~income ~~placed on~~is ~~non-accrual when~~ the ~~loan~~difference ~~becomes~~between ~~90 days delinquent at which time all accrued but unpaid~~ interest ~~is reversed. Interest~~ income isearned ~~no longer accrued~~ on ~~such~~interest-earning assets and ~~any~~interest ~~future payments~~expense ~~are~~paid ~~applied~~on ~~as a reduction in the principal balance of the loan. All~~interest ~~non-accrual~~bearing ~~loans are considered impaired assets and are evaluated individually for required specific reserves~~liabilities. The ~~approximate~~ ~~gross~~following ~~interest~~tables ~~income~~provides ~~that~~detail ~~would~~regarding ~~have been recorded for~~ the ~~three and~~Corporation's ~~six~~average ~~months~~balances ~~ending June 30, 2010 if the $37.0 million in non-accrual loans had been current in accordance~~ with ~~their~~corresponding ~~original terms was approximately $533 thousand and $859 thousand, respectively. The actual amount of~~ interest income ~~included~~(on ina ~~net~~tax-equivalent ~~income~~basis) ~~for the three~~ and ~~six~~interest ~~months ending June 30,~~expense ~~2010~~as onwell ~~these~~as ~~loans~~yield ~~was $2 thousand~~ and ~~$35~~cost ~~thousand,~~information ~~respectively~~for ~~relating~~the ~~to interest~~periods ~~received~~presented. ~~prior~~Management's ~~to loans being placed on non accrual status.~~

~~Restructured and other impaired loans~~36

~~Through~~Table ~~negotiations with a borrower, we may restructure a loan prior to the completion~~ of its contractual term. Modification of a loan’s terms constitutes a troubled debt restructuring (“TDR”) if we for economic or legal reasons related to the borrower’s financial difficulties grant a concession that we would not otherwise consider. Not all modifications of loan terms automatically result in a TDR. At June 30, 2010, we had $18.6 million in restructured and other impaired loans of which $6.7 million are considered by management to be TDRs. At June 30, 2010, these TDRs continue to perform under their re-negotiated terms and remain on accrual status. At June 30, 2010, $5.5 million in TDRs were attributable to various loans to one commercial real estate borrower.Contents

~~The remaining $11.9 million~~discussion isand ~~comprised~~analysis of ~~loans~~net ~~which~~interest ~~Management~~income, ~~has~~interest ~~reviewed~~income, ~~individually~~ and ~~believes the~~interest ~~borrower’s~~expense ~~financial~~is ~~performance~~based ~~and/or~~on aaggregated ~~shortfall~~amounts ~~in the value~~ of ~~collateral~~ ~~securing~~continuing ~~the~~and ~~loan~~discontinued ~~provide enough evidence to deem the loan impaired~~operations. ~~These~~ ~~other impaired loans were performing under their original contractual terms as of June 30, 2010.~~

Potential Problem Loans

				Three Months ended September 30,

				2010								2009
(Dollars in thousands)				Average Balance			Interest		Rate%			Average Balance			Interest		Rate%
ASSETS
Federal funds sold, interest-bearing deposits in banks and other overnight investments				$	63,364		$	40		0.26	%	$	4,552		$	5		0.50	%
Investment securities:
			Taxable		57,441			385		2.66	%		81,339			711		3.47	%
			Tax-exempt(1)		3,085			41		5.32	%		6,522			78		4.72	%

	Total investment securities				60,526			426		2.79	%		87,861			789		3.56	%
	Loans held for sale				143,322			1,479		4.10	%		236,970			2,866		4.80	%
	Loans and leases:(2)
			Taxable		839,346			11,809		5.58	%		929,161			13,313		5.68	%
			Tax-exempt(1)		14,368			208		5.73	%		20,102			373		7.35	%

			Total loans and leases		853,714			12,017		5.58	%		949,263			13,686		5.72	%

	Total interest-earning assets				1,120,926			13,962		4.94	%		1,278,646			17,346		5.38	%
Non-interest-earning assets
	Allowance for loan and lease losses				(22,168	)							(12,383	)
	Cash and due from banks				20,527								17,010
	Other assets				36,907								59,184

		Total assets		$	1,156,192							$	1,342,457

LIABILITIES AND EQUITY
Savings, NOW, and money market Deposits				$	406,610		$	617		0.60	%	$	448,763		$	941		0.83	%
Certificates of deposit and other time					429,692			2,091		1.93	%		409,779			2,571		2.49	%

	Total interest-bearing deposits				836,302			2,708		1.28	%		858,542			3,512		1.62	%
Subordinated debt					20,795			286		5.45	%		20,795			295		5.63	%
Federal Home Loan Bank advances and other borrowings					76,535			927		4.80	%		202,854			1,559		3.05	%

	Total interest-bearing liabilities				933,632			3,921		1.67	%		1,082,191			5,366		1.97	%
Non-interest-bearing liabilities:
	Non-interest-bearing demand deposits				152,072								152,047
	Other liabilities				15,412								18,301

	Total liabilities				1,101,116								1,252,539
	Equity				55,076								89,918

	Total liabilities and equity			$	1,156,192							$	1,342,457

		Net interest income (tax equivalent) / margin on earning assets					$	10,041		3.55	%				$	11,980		3.72	%
	Less net interest income from discontinued operations(3)							1,088								2,064
	Less tax equivalent adjustment							79								146
	Net interest income from continuing operations							8,874								9,770

As a recurring part of its portfolio management program, we identified approximately $42.2 million in potential problem loans at June 30, 2010, compared to $54.1 million at December 31, 2009. Potential problem loans are loans that are currently performing, but where the borrower’s operating performance or other relevant factors could result in potential credit problems, and are typically classified by our loan rating system as “substandard.” At June 30, 2010, potential problem loans primarily consisted of commercial loans and commercial real estate. There can be no assurance that additional loans will not become nonperforming, require restructuring, or require increased provision for loan losses.37

34Table of Contents

Table of Contents

					Nine Months ended September 30,

					2010								2009
(Dollars in thousands)					Average Balance			Interest		Rate%			Average Balance			Interest		Rate%
ASSETS
Federal funds sold, interest-bearing deposits in banks and other overnight investments					$	119,225		$	233		0.26	%	$	15,615		$	50		0.43	%
Investment securities:
				Taxable		60,801			1,213		2.67	%		90,219			2,798		4.15	%
				Tax-exempt(1)		3,496			137		5.24	%		7,879			282		4.78	%

	Total investment securities					64,297			1,350		2.81	%		98,098			3,080		4.20	%
Loans held for sale						132,168			4,165		4.21	%		218,619			7,805		4.77	%
Loans and leases:(2)
				Taxable		857,891			35,960		5.60	%		924,397			39,375		5.70	%
				Tax-exempt(1)		14,597			638		5.83	%		20,454			1,126		7.36	%

				Total loans and leases		872,488			36,598		5.61	%		944,851			40,501		5.73	%

	Total interest-earning assets					1,188,178			42,346		4.76	%		1,277,183			51,436		5.38	%
Non-interest-earning assets
	Allowance for loan and lease losses					(23,091	)							(11,403	)
	Cash and due from banks					19,452								18,563
	Other assets					44,662								55,785

			Total assets		$	1,229,201							$	1,340,128

LIABILITIES AND EQUITY
	Savings, NOW, and money market Deposits				$	420,066		$	1,989		0.63	%	$	437,111		$	3,187		0.97	%
	Certificates of deposit and other time					464,481			6,901		1.99	%		428,945			8,679		2.71	%

				Total interest-bearing deposits		884,547			8,890		1.34	%		866,056			11,866		1.83	%
	Subordinated debt					20,795			833		5.35	%		18,585			721		5.18	%
	Federal Home Loan Bank advances and other borrowings					102,618			3,416		4.45	%		201,852			4,712		3.12	%

				Total interest-bearing liabilities		1,007,960			13,139		1.74	%		1,086,493			17,299		2.13	%
	Non-interest-bearing liabilities:
		Non-interest-bearing demand deposits				150,934								148,424
		Other liabilities				14,900								16,555

Total liabilities						1,173,794								1,251,472
Equity						55,407								88,656

Total liabilities and equity					$	1,229,201							$	1,340,128

Net interest income (tax equivalent) / margin on earning assets								$	29,207		3.29	%				$	34,137		3.57	%
Net yield on interest-earning assets
Less net interest income from discontinued operations(3)									3,046								5,446
Less tax equivalent adjustment									250								455
Net interest income from continuing operations									25,911								28,236

~~Other~~ ~~real~~ ~~estate~~ (1)The indicated ~~owned~~income and annual rate are presented on a taxable equivalent basis using the federal marginal rate of 34% adjusted for the TEFRA 20% interest expense disallowance for all periods presented. (2)Non-accruing loans are included in the average balance. (3)Net interest income of the discontinued operations includes income from loans held for sale and imputed interest expense calculated using the Corporation's internal matched funds transfer pricing methodology.

OREO represents property owned by us following default by the borrowers. OREO property acquired through foreclosure is initially transferred at fair value based on an appraised value less estimated cost to dispose. Adjustments are subsequently made to mark the property below this amount if circumstances warrant. Losses arising from foreclosure transactions are charged against the allowance for loan losses. Costs to maintain real estate owned and any subsequent gains or losses are included in our consolidated statements of operations. The total OREO balance at June 30, 2010 was $1.4 million, as compared to $3.7 million at December 31, 2009, and was comprised primarily of 1-4 family residential properties. In June 2010, the Corporation sold eight other real estate owned properties to one buyer. A charge of $1.3 million was recorded during the first quarter 2010 to reduce the carrying amount of these assets to an amount that reflects the realizable value of these properties based on the actual sales price.38

~~The following~~ ~~chart presents detailed information regarding non-performing loans~~ ~~and~~ Table ~~leases~~of ~~and~~Contents ~~OREO:~~

	June 30,						December 31,
(Dollars in thousands)	2010			2009			2009
Past due over 90 days and still accruing	$	—		$	686		$	530
Non-accrual loans and leases (1)	36,985			19,111			27,581
Restructured and other impaired loans	18,644			7,015			14,046
Total non-performing loans and leases	55,629			26,812			42,157
Other real estate owned	1,414			1,592			3,692
Total non-performing assets	$	57,043		$	28,404		$	45,849
Non-performing loans and leases as a percentage of total loans and leases	6.41		%	2.83		%	4.67		%
Allowance for loan and lease losses as a percentage of non-performing loans and leases	38.71		%	57.91		%	55.07		%
Non-performing assets as a percentage of total loans and other real estate owned	6.57		%	2.99		%	5.06		%
Allowance for loan and lease losses as a percentage of non-performing assets	37.75		%	54.67		%	50.64		%

Net interest income on a tax equivalent basis for the three month period ended September 30, 2010 was $10.0 million, a decrease of 16.2% from $12.0 million for the same period in 2009. Net interest income on a tax equivalent basis for the nine month period ended September 30, 2010 was $29.2 million, a decrease of 14.4% from $34.1 million for the same period in 2009. The net yield on interest-earning assets, on a tax-equivalent basis, was 3.55% for the three month period ended September 30, 2010, compared to 3.72% for the same period in 2009, an decrease of 17 basis points (one basis point is equal to ¹/100 of a percent). For the nine month period ended September 30, 2010, the net yield on interest earning assets decreased 28 basis points to 3.29% from 3.57% during the same period in 2009.

~~(1) Generally,~~ The yield ~~the~~earned ~~Bank~~on ~~places~~average ~~a loan~~interest-earning orassets ~~lease~~was in4.94% ~~non-accrual~~for ~~status~~the ~~when~~three ~~principal~~month orperiod ~~interest~~ended ~~has~~September 30, ~~been~~2010, ~~in default~~compared to 5.38% for athe same period in 2009, a decrease of 9044 basis ~~days~~points. orFor ~~more~~the ~~unless~~nine month period ended September 30, 2010, the ~~loan~~yield isearned ~~both~~on ~~well~~interest ~~secured and~~earning inassets decreased 62 basis points to 4.76% from 5.38% during the ~~process~~same ofperiod ~~collection~~in 2009.

We Average ~~identify~~interest-earning aassets ~~loan~~decreased asapproximately ~~impaired~~$157.7 million ~~when it is probable that interest and/~~or ~~principal will~~12.3% ~~not be collected according~~ to ~~the~~$1.121 billion ~~contractual~~for ~~terms of~~ the ~~loan~~three ~~agreement. ASC~~months ~~310-10-35,~~ended ~~“Receivables~~September 30,” ~~requires~~2010 usfrom $1.279 billion toin ~~individually~~the ~~examine~~same ~~loans~~period ~~where it~~last isyear. ~~probable~~The ~~that~~decrease wein ~~will~~average beinterest-earning ~~unable~~assets tofor ~~collect~~the ~~all~~three ~~contractual~~month ~~interest~~period ~~and principal~~ended ~~payments~~September 30, ~~according~~2010 towas the ~~contractual~~result ~~terms~~ of ~~the~~a ~~loan~~$93.6 million decrease ~~agreement~~in ~~and assess~~loans held for ~~impairment.~~sale, ~~The~~a ~~average~~$95.5 million ~~recorded~~decrease ~~investment~~ in ~~the~~average ~~June 30, 2010~~total loans and ~~December 31~~leases, ~~2009~~and ~~impaired~~a ~~loans~~decrease ~~was~~of $5627.8 3 million ~~and~~in ~~$25.2 million,~~investments ~~respectively. For~~securities ~~the~~available ~~three~~for ~~and six~~sale. ~~months~~These ~~ending~~decreases were ~~June 30,~~partially ~~2010,~~offset ~~interest~~by ~~income~~a ~~recognized~~$58.8 million ~~during~~increase ~~the time~~in ~~within~~average ~~the~~Federal ~~period~~funds ~~that~~sold ~~the~~and ~~loans~~interest ~~were~~bearing ~~impaired~~deposits ~~was~~in ~~$240~~banks ~~thousand and $469 thousand, respectively~~balance.

~~The~~ Average ~~following~~interest-earning ~~charts~~assets ~~present~~decreased ~~additional~~approximately ~~information~~$89.0 million ~~about~~or ~~impaired~~7.0% ~~loans~~to ~~and~~$1.188 billion ~~lease~~for the nine months ended September 30, 2010 from ~~balances~~$1.277 billion asin ofthe ~~June~~same period last year. The decrease in average interest-earning assets for the nine month period ended September 30, 2010 ~~and~~was ~~December~~the result of an $86.5 31million decrease in loans held for sale, ~~2009:~~a $72.4 million decrease in average total loans and leases, and a decrease of $33.8 million in investments securities available for sale. These decreases were partially offset by a $103.6 million increase in average Federal funds sold and interest bearing deposits in banks balance.

~~June~~ Average interest-bearing liabilities decreased approximately $148.6 million or 13.7% to $933.6 million for the three months ended September 30, 2010, from $1.082 billion in the same period in 2009. The decrease in average interest-bearing liabilities for the three month period was the result of a $126.3 million decrease in FHLB advances and other borrowings and a decrease of $22.2 million in interest bearing deposits.

						Specific
			Impaired		Number of	Allowance
	Loan		Loan		Impaired	on Impaired
(Dollars in thousands)	Balance		Balance		Loans	Loans
Commercial loans	$	312,533	$	18,215	54	$	2,615
Real estate — commercial	258,350		19,198		15	2,203
Real estate — commercial construction	56,629		13,242		12	286
Real estate — residential	93,715		2,524		9	826
Real estate — residential construction	31,695		844		2	348
Consumer loans	113,531		1,517		37	262
Lease financing receivables	1,025		89		3	89
Totals	$	867,478	$	55,629	132	$	6,629

Average interest-bearing liabilities decreased approximately $78.5 million or 7.2% to $1.008 billion for the nine months ended September 30, 2010, from $1.086 billion in the same period in 2009. The decrease in average interest-bearing liabilities for the nine month period was the result of a $99.2 million decrease in FHLB advances and other borrowings, offset by an increase of $18.5 million in interest bearing deposits.

35 INTEREST INCOME

~~Table~~ Interest income on a tax-equivalent basis decreased $3.4 million to $14.0 million for the three months ended ofSeptember 30, ~~Contents~~2010 from the same period in 2009. For the nine month period ended September 30, 2010, interest income on a tax-equivalent basis decreased $9.1 million to $42.3 million.

~~December~~ On a tax equivalent basis, interest income on investment securities decreased 46.0% or $363 31thousand to $426 thousand for the three month period ended September 30, 2010 compared to the same period in 2009. For the nine month period ended September 30, 2010, interest income on investment securities decreased 56.2% or approximately $1.7 million to $1.4 million when compared to the same period in 2009. During the fourth quarter 2009, $52.8 million of securities were sold and

						Specific
			Impaired		Number of	Allowance
	Loan		Loan		Impaired	on Impaired
(Dollars in thousands)	Balance		Balance		Loans	Loans
Commercial loans	$	334,286	$	13,269	35	$	1,029
Real estate — commercial	261,643		12,071		11	3,637
Real estate — commercial construction	66,204		8,786		8	135
Real estate — residential	88,024		2,601		7	644
Real estate — residential construction	29,387		2,137		7	874
Consumer loans	120,767		2,596		42	1,148
Lease financing receivables	1,578		167		8	55
Totals	$	901,889	$	41,627	118	$	7,522

~~NON-INTEREST INCOME~~Table of Contents

~~Total~~$41.2 million ~~non-interest~~of ~~income~~securities ~~from~~were ~~continuing~~purchased. ~~operations~~The ~~decreased~~actions ~~$243~~were ~~thousand~~taken primarily to ~~$2.5 million~~reduce ~~for~~ the ~~three~~risk ~~months~~weighted ~~ended~~assets ~~June 30,~~to ~~2010,~~assist ~~compared~~the toBank ~~$2.7~~in ~~million for~~satisfying the ~~same~~IMCRs ~~period~~and inshorten ~~2009. Total~~the duration of the ~~non-interest~~investment ~~income~~portfolio to ~~from~~help ~~continuing~~mitigate ~~operations~~the ~~decreased~~risk ~~$1.7~~of ~~million~~rising tointerest $3rates.~~5 million~~ ~~for~~Matured ~~the~~and ~~six~~called ~~months~~securities ~~ended~~as ~~June 30,~~well ~~2010,~~as ~~compared~~principal topayments on mortgage-backed securities totaled $526.2 0 million ~~for~~ during the ~~same~~first ~~period~~nine inmonths of ~~2009~~2010.

In Interest ~~June~~income on loans held for sale decreased $1.4 ~~2010,~~million to $1.5 million during the ~~Corporation~~three ~~sold~~month ~~eight~~period ~~other~~ended ~~real~~September 30, ~~estate~~2010. ~~owned~~For ~~properties~~the nine month period ended toSeptember 30, ~~one~~2010, ~~buyer. A~~interest ~~charge~~income ofon loans held for sale decreased $1.3 .6 million ~~was~~ ~~recorded~~to ~~during~~$4.2 million. ~~the~~These ~~first~~decreases ~~quarter~~were ~~2010~~due to ~~reduce~~a significant decrease in the ~~carrying~~average ~~amount~~loans ofheld for ~~these~~sale ~~assets~~balance. toAverage anloans ~~amount~~held ~~that~~for ~~reflects~~sale for the ~~realizable~~three ~~value~~and ofnine ~~these~~months periods ended September 30, 2010 were $143.3 million and $132.2 million as compared to approximately ~~properties~~$237.0 million ~~based~~and on$218.6 million for the ~~actual~~same ~~sales~~periods ~~price~~in 2009.

~~NON~~ Interest income on loans, on a tax equivalent basis, decreased 12.2% or $1.7 million to $12.0 million for the three month period ended September 30, 2010 compared to $13.7 million for the three months ended September 30, 2009. For the nine month period ended September 30, 2010, interest income on loans, on a tax equivalent basis decreased 9.6% or $3.9 million to $36.6 million for the nine month period ended September 30, 2010 compared to $40.5 million for the nine months ended September 30, 2009. These decreases in interest income for the three and nine month periods ended September 30, 2010 were primarily due to a $95.5 million or 10.1% decrease in average loans outstanding for the three month period and a $72.4 million or 7.7% decrease in average loans outstanding for the nine month period as compared to the same periods in 2009. These decreases in average loan balances were primarily due a $52.5 million loan sale to Tower in the fourth quarter 2009, lack of organic loan growth as well as significant fourth quarter 2009 charge-~~INTEREST~~offs. In addition to ~~EXPENSE~~the impact from the decrease in average loan balances, there was also a decrease in the tax equivalent yield earned on average loans outstanding, which decreased by 14 and 12 basis points to 5.58% and 5.61% for the three and nine month periods ended September 30, 2010 from 5.72% and 5.73% for the same periods in 2009.

~~Total non-interest~~ ~~expense~~INTEREST decreased $99 thousand to $10.7 million for the three-month period ended June 30, 2010, compared to $10.8 million during the same period in 2009. Total non-interest expense decreased $295 thousand to $20.4 million for the six months ended June 30, 2010, from $20.7 million during the same period in 2009.EXPENSE

~~Salaries and~~ Interest ~~employee~~expense ~~benefits~~on deposit accounts decreased by approximately $~~1.4~~804 thousand ~~million~~or 22.9% to $32.5 7 million for the three month period ended ~~June~~September 30, 2010 ~~compared~~from to$3.5 million for the same period in 2009. ~~Salaries~~ ~~and~~Interest ~~employee~~expense ~~benefits~~on deposit accounts decreased approximately $3.0 million toor $725.1% to $8.9 million for the ~~six~~ ~~month~~nine ~~period~~months ended ~~June~~September 30, 2010 ~~compared~~from to$11.9 million for the same period in 2009. The decreases for the three and nine month periods were primarily due to a decrease in the average interest rates paid on interest-bearing deposits. The ~~primary~~average ~~driver~~rate ofpaid ~~this~~for ~~reduction~~the three month period in 2010 was 1.28%, a 34 basis point decrease from 1.62% in 2009. The average rate paid for the nine month period in 2010 was 1.34%, a 49 basis point decrease from 1.83% in 2009. The impact from rate decreases was partially offset in the nine month period ended September 30, 2010 by increases in average interest-bearing deposit balances. These balances increased $18.5 million for the three month period to $884.5 million in 2010 from $866.1 million in 2009. These balances decreased $22.2 million for the three month period to $836.3 million in 2010 from $858.5 million in 2009. The increase in average interest bearing deposit balances during the nine month period was primarily due to a fourth quarter 2009 ~~reduction~~CD inpromotion which was undertaken to increase liquidity and lengthen the maturities of ~~force~~liabilities supporting earning assets to help mitigate the risk of rising interest rates.

~~FDIC~~ Interest ~~insurance~~ expense on FHLB and other borrowings decreased $~~392~~ 632 thousand or 40.5% to $~~670~~ 927 thousand for the three month period ended ~~June~~September 30, 2010 ~~compared~~from to the same period in 2009. ~~FDIC insurance~~Interest expense ~~decreased~~on ~~$135~~FHLB ~~thousand~~and toother ~~$1.3~~borrowings ~~million~~ for the ~~six~~nine ~~month period~~months ended ~~June~~September 30, 2010 ~~compared~~decreased toapproximately ~~the~~$1.3 million ~~same~~or ~~period~~27.5% to $3.4 million from $4.7 million in 2009. ~~The primary~~These ~~driver~~decreases ofin ~~this~~interest ~~reduction~~expense ~~was~~were primarily due to ~~the~~decreases ~~one~~in ~~time~~the ~~special~~average ~~FDIC~~balances ~~payment that~~of ~~the~~these ~~corporation~~funding ~~paid~~sources in ~~the~~2010 ~~second~~as ~~quarter~~compared ofto 2009. ofThe ~~approximately~~average ~~$673~~balance of ~~thousand.~~FHLB and other borrowings for the

Marketing expense decreased $295 thousand to $151 thousand for the three month period ended June 30, 2010 compared to the same period in 2009. Marketing expense decreased $244 thousand to $376 thousand for the six40

36Table of Contents

~~Table~~three months ended September 30, 2010 decreased by 62.3% or $126.3 million compare to the same period in 2009. Average balances of these funding sources for the nine month period ~~Contents~~decreased 49.2% or $99.2 million compared to the same period in 2009. During the first nine months of 2009 other borrowings were increased to fund the growth of the mortgages held for sale portfolio as mortgage refinancing demand was high. The mortgages held for sale portfolio declined throughout 2009 and the other borrowing balances were reduced. With the increase in time deposits in the fourth quarter 2009, due to promotional efforts, and the further reduction in the mortgages held for sale portfolio in 2010, $52.5 million in FHLB advances that matured during 2010 were not replaced. Further, during 2010, $56.7 million of FHLB advances were prepaid to reduce the size of the balance sheet and help improve the Bank's Tier 1 Leverage capital ratio. Partly offsetting these decreases was a $26.0 million loan from Tower Bancorp in the fourth quarter 2009.

~~month period~~ ~~ended~~ASSET ~~June 30,~~QUALITY ~~2010~~AND ~~compared~~ALLOWANCE toFOR ~~the~~LOAN ~~same~~AND ~~period~~LEASE ~~in 2009. The primary driver of this reduction was due to several special deposit campaigns that the corporation had during 2009.~~LOSSES

~~Offsetting these~~ ~~decreases,~~Allowance ~~professional~~and ~~services~~provision ~~expense increased $1.9 million to $2.7 million~~ for ~~the~~loan three month period ended June 30, 2010 from $832 thousand for the same period in 2009. Professional services expense increased $3.1 million to $4.5 million for the six month period ended June 30, 2010 from $1.4 million for the same period in 2009. The increases were primarily due to the increased legal, audit and ~~consulting~~lease ~~fees related to the merger with Tower Bank and the restatement of 2009 SEC filings.~~losses

~~Other non-interest~~ Management ~~expense~~believes ~~increased~~that ~~$420~~the ~~thousand~~allowance tofor $1loan and lease losses is adequate.4 ~~million~~The determination for ~~the~~this ~~three~~allowance requires significant ~~month~~judgment, ~~period~~and ~~ended~~estimates ~~June 30,~~of ~~2010~~probable ~~from~~losses ~~$1.0~~in ~~million~~the ~~for~~loan and lease portfolio can vary significantly from the ~~same~~amounts ~~period~~actually ~~in 2009~~observed. ~~Other~~ ~~non-interest~~While ~~expense~~management uses available information to recognize probable ~~increased~~losses, ~~$387~~future ~~thousand~~additions to ~~$2.3~~the ~~million~~allowance ~~for~~may be necessary based on changes in the ~~six~~credits ~~month~~comprising ~~period~~the ~~ended~~portfolio and changes in the financial condition of borrowers. In addition, regulatory ~~June 30~~agencies, ~~2010~~as ~~from~~an ~~$1.9~~integral ~~million~~part ~~for~~of their examination process, and independent consultants engaged by the ~~same~~Corporation, ~~period~~periodically inreview ~~2009. The~~the ~~increases~~loan ~~were~~and ~~primarily~~lease ~~due~~portfolio toand the allowance. Such reviews may ~~pre-payment~~result ~~penalties~~in ~~that~~adjustments to the ~~corporation~~provision ~~paid~~based inupon ~~conjunction~~their ~~with~~analysis of the ~~early payoff~~information available at the time of ~~certain~~each ~~Federal~~examination. ~~Home~~During ~~Loan~~2010, ~~Bank~~there ~~borrowings~~were no major changes in ~~2009~~estimation methods that affected the allowance methodology from the prior year.

~~INCOME~~ The Corporation ~~TAXES~~makes provisions for loan and lease losses in amounts necessary to maintain the allowance at an appropriate level, as established by use of the allowance methodology and by management review and judgment. The allowance for loans and lease losses decreased $1.1 million to $22.1 million at September 30, 2010, as compared to $23.2 million at December 31, 2009. The allowance for loan and lease losses as a percentage of non-performing loans decreased to 41.89%, as compared to 55.07% at December 31, 2009 as total non-performing loans increased $10.6 million to $52.8 million as compared to $42.1 million at December 31, 2009. During the three and nine month periods ended September 30, 2010, we recorded a $369 thousand and $767 thousand provision for loan and lease losses as compared to $11.2 million and $17.7 million for the same periods in 2009, respectively.

The ~~Corporation has not~~ ~~recorded~~decrease anin ~~income tax benefit for its net operating loss for~~ the ~~six month period ended June~~September 30, 2010. Atrequired ~~June 30, 2010 the valuation~~ allowance ~~against~~ ~~the~~for ~~Corporation’s~~loan ~~deferred~~losses, ~~tax~~as ~~asset~~compared ~~increased~~ to ~~$8.4 million from $7.5 million at~~ December 31., 2009., ~~The~~can ~~valuation allowance is recorded against a portion of the Corporation’s deferred tax assets after concluding that it was more likely than not that a portion of the deferred tax asset would not~~ be ~~realized.~~attributed ~~In evaluating the ability~~ to ~~recover our deferred tax assets, Management considers all available positive and negative evidence regarding~~ the ~~ultimate~~ ~~realizability of our deferred tax assets including past operating~~following ~~results~~factors: and our forecast of future taxable income. In addition, general uncertainty surrounding the future economic and business conditions have increased the likelihood of volatility in our future earnings. The Corporation has concluded and recorded a valuation allowance against its deferred tax asset, except for amounts available for carry back claims.

•: The Corporation's total loan and lease balances decreased $66.5 million at September 30, 2010 as compared to December 31, 2009. The decrease in loan balance is primarily due to loans which have been paid off as well as $3.2 million in gross charge-offs during the nine months ended September 30, 2010. This decrease had a direct effect in reducing the amount of required allowance for loan and lease losses as of September 30, 2010. However, several other variables contributed to the amount of reserves required at September 30, 2010 as described below.
•: When loan losses are confirmed, the Corporation reduces the allowance for loan and lease losses through the recording of a charge-off. For the nine months ended September 30, 2010, the Corporation recorded $3.2 million in gross charge-offs. Several of these charge-offs were related to loans that were impaired at December 31, 2009. These loans had approximately $1.8 million of allocated specific reserves at December 31, 2009. These specific reserves were created through charges to the provision for loan and lease losses during 2009. These charge offs increased the

~~LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY~~41

~~Liquidity Management~~Table of Contents

~~The~~reserve ~~objective~~factors ofwithin ~~liquidity management is to ensure~~ the ~~availability~~allowance ofcalculation ~~sufficient cash flows to meet all financial commitments. Liquidity management addresses the Corporation’s ability to meet deposit withdrawals either on demand or at contractual maturity~~however, tothese ~~repay~~increases ~~borrowings~~were ~~as they~~more ~~mature~~than ~~and~~offset toby make new loans and investments as opportunities arise. Liquidity is managed on a daily basis enabling management to monitor changes in liquidity and to react accordingly to fluctuations in market conditions. The primary sources of liquidity for the ~~Corporation~~reduction are funding available from the growth of the existing deposit base, new deposits and cash flow from the investment and loan portfolios. The Corporation considers funds from such sources to comprise its “core” funding sources because of the historical stability of such sources of funds. Additional liquidity comes from the Corporation’s credit facilities. Other deposit sources include a tiered savings product and certificates of deposit in ~~excess~~ ofspecific ~~$100,000~~reserves. Details of core deposits, non-interest bearing demand deposit accounts, and other deposit sources are highlighted in the following table and include aggregated amounts from both continuing and discontinued operations:

•: In July 2010, a $2.3 million impaired commercial real estate loan was paid off in full. This loan had an allocated specific reserve of approximately $1.0 million at December 31, 2009.
•: Several commercial, commercial real estate, and commercial real estate construction loans migrated from the Corporation's internal pool classifications to an impaired loan classification during 2010. The required reserve for pooled loans is evaluated based on the historical loss experience, adjusted for current conditions, for similar types of loans. If an individually analyzed loan is determined to be impaired, reserves are specifically allocated in accordance with applicable accounting guidance, and not as part of a pool. In some cases, management's review of these loans resulted in a nominal specific reserve based on supporting evidence that there was sufficient collateral to support the loan balance. For several of these newly impaired loans at September 30, 2010 specific reserves were often less than the December 31, 2009 reserves calculated based on the pool classification.

37 Charge-offs

~~Table~~ Charge-offs for the three and nine month periods ended September 30, 2010 were $628 thousand and $3.2 million, respectively, compared to $3.2 million and $4.5 million during the same periods in 2009. Charge-offs remain high due to the deterioration of ~~Contents~~economic conditions and resulting failure of businesses, devaluation of collateral values and negative impact on consumers' ability to service debt. A significant portion of loans charged-off in the three and nine months ended September 30, 2010 related to loans that had been evaluated and deemed impaired at December 31, 2009. Specific reserves allocated to loans charged-off during the nine months ended September 30, 2010 were approximately $1.8 million at December 31, 2009.

	For the Six Months Ended June 30, 2010				For the Year Ended December 31, 2009
	Average		Effective		Average		Effective
(Dollars in thousands)	Balance		Yield		Balance		Yield
DEPOSIT TYPE
NOW Accounts	$	224,700	0.42	%	$	193,760	0.78	%
Money Market	112,024		1.07	%	158,668		1.17	%
Statement Savings	38,949		0.43	%	40,198		0.55	%
Other Savings	2,215		0.88	%	1,946		0.96	%
Tiered Savings	49,017		0.89	%	46,650		1.05	%
Total NOW Savings, and Money Market	426,905		0.65	%	441,222		0.93	%
CDs Less than $100,000	274,743		1.99	%	276,274		2.55	%
CDs Greater than $100,000	207,422		2.05	%	152,891		2.66	%
Total CDs	482,165		2.01	%	429,165		2.59	%
Total Interest Bearing Deposits	909,070		1.37	%	870,387		1.75	%
Non-Interest Bearing
Demand Deposits	150,356		—		149,967		—
Total Deposits	$	1,059,426			$	1,020,354

The following chart presents an analysis of the Allowance for Loan and Lease Losses:

The Bank maintains several credit facilities with the FHLB as well as the Federal Reserve and other banking institutions. During the second quarter of 2010, average FHLB advances were $58.5 million and consisted of term advances with a variety of maturities. The average interest rate on these advances was 3.84%. The bank currently has a maximum borrowing capacity with FHLB of $60.0 million. FHLB advances are collateralized by a pledge on the Bank’s portfolio of certain mortgage loans and a lien on the Bank’s FHLB stock. In addition, the Bank has backup line of credit available from other financial institutions, as well as the Federal Reserve, totaling approximately $186.9 million. Federal Reserve borrowings are collateralized by a pledge on certain commercial and commercial real estate loans and a lien on the banks Federal Reserve stock.

	Three Months Ended September 30,						Nine Months Ended September 30,

Dollars in thousands	2010			2009			2010			2009
Balance at beginning of period	$	21,534		$	15,528		$	23,217		$	10,335

Provision charged to operating expense		369			11,222			767			17,693
Recoveries of loans previously charged-off		781			90			1,059			339
Loans charged-off		(628	)		(3,183	)		(3,157	)		(4,549	)

Net loan recoveries / (charge-offs)		153			(3,093	)		(2,098	)		(4,210	)

Allowance other adjustment(1)		45			(167	)		215			(328	)

Balance at end of period	$	22,101		$	23,490		$	22,101		$	23,490

Period-end loans outstanding	$	835,388		$	957,502		$	835,388		$	957,502
Average loans outstanding	$	853,714		$	949,263		$	872,488		$	944,851
Allowance for loan and lease losses as a percentage of period-end loans outstanding		2.65	%		2.45	%		2.65	%		2.45	%
Net recoveries / (charge-offs) (annualized) to average loans outstanding		0.07	%		(1.29	)%		(0.32	)%		(0.60	)%

As ~~part~~ ~~of its holding company cash management strategy, the Corporation deferred~~ ~~its regularly scheduled interest payments on its outstanding junior~~ ~~subordinated notes relating to its $20.9 million of trust preferred securities~~ ~~beginning with the regularly scheduled quarterly interest payments that would~~ ~~otherwise have been made in September 2010.~~ (1)The ~~terms of the junior~~ ~~subordinated~~"Allowance ~~notes~~other ~~and~~adjustment" ~~the~~represents ~~related trust indentures allow~~ the ~~Corporation~~reclassification ~~to defer such payments~~ of ~~interest~~an allowance for upprobable tolosses 20on ~~consecutive~~unfunded ~~quarterly~~loans ~~periods without~~and ~~default. During~~unused ~~the~~lines ~~deferral~~of ~~period,~~credit. ~~the respective trusts will~~These ~~suspend~~loans ~~the declaration~~ and ~~payment~~lines of ~~dividends on the trust preferred securities. During the deferral period~~credit, ~~the~~although ~~Corporation may not~~unfunded, ~~among~~have ~~other things~~been ~~and~~committed ~~with limited exceptions, pay cash dividends on or repurchase its common stock nor make any payment on outstanding debt obligations that rank equally with or junior~~ to by the ~~junior subordinated notes~~Corporation. ~~We expect our deferral~~ of ~~interest on the junior subordinated notes will preserve approximately $270 thousand per quarter based upon the interest payments completed during the first and second quarters of 2010.~~

~~Interest Rate Sensitivity~~42

~~The~~Table ~~goal~~ of interest rate sensitivity management is to avoid fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates. Such sensitivity is measured as the difference in the volume of assets and liabilities in the existing portfolio that are subject to repricing in a future time period. The Corporation’s net interest rate sensitivity gap within one year including assets and liabilities of discontinued operations is a negative $175.2 million or 15.0% of total assets at June 30, 2010. The Corporation’s gap position is one tool used to evaluate interest rate risk and the stability of net interest margins. Another tool that management uses to evaluate interest rate risk is a computer simulation model that assesses the impact of changes in interest rates on net interest income under various interest rate forecasts and scenarios. Management has set acceptable limits of risk within its Asset Liability Committee (“ALCO”) policy and monitors the results of the simulations against these limits quarterly. As of the most recent quarter-end, results are within policy limits and indicate an acceptable level of interest rate risk, except rate simulations quantifying the impact of an interest rate declines of 100 basis points or more. Given the historically low interest rate levels the Bank is currently operating in, Management believes it is unlikely interest rates would decline 100 basis points or more in the future. Management Contents

38 Non-performing assets

~~Table~~ Non-performing assets include those loans on non-accrual status, loans past due 90 days or more and still accruing, troubled debt restructurings and other loans deemed impaired and other real estate owned. Non-performing loans are generally collateralized and are in the process of collection. ~~Contents~~The percentage of non-performing loans to gross loans was 6.32% at September 30, 2010, compared to 4.67% at December 31, 2009. The non-accrual loan and lease balance at September 30, 2010 was $35.8 million, compared to $27.6 million at December 31, 2009.

~~monitors~~ ~~interest~~Non-accrual ~~rate~~loan ~~risk as a regular part of corporate operations with the intention of maintaining a stable net interest margin. The following table presents our interest rate sensitivity analysis as of June 30, 2010~~ and ~~includes~~ ~~aggregated amounts from both continuing and discontinued operations:~~leases

				Two			Over
	Within			through			five			Non-rate
(Dollars in thousands)	one year (1)			five years (1)			Years (1)			Sensitive (1)			Total (1)
ASSETS
Federal funds sold and overnight investments	$	806		$	—		$	—		$	—		$	806
Investment securities	28,407			13,578			20,816			—			62,801
Interest bearing deposits in banks	23,638			—			—			—			23,638
Loans held for sale	166,818			—			—			—			166,818
Net loans and leases	343,115			359,188			165,175			(21,534		)	845,944
Cash and due from banks	—			—			—			19,306			19,306
Premises and equipment	—			—			—			21,396			21,396
Other assets	—			—			—			27,161			27,161
Total assets	$	562,784		$	372,766		$	185,991		$	46,329		$	1,167,870
LIABILITIES AND CAPITAL
Non-interest bearing deposits	$	—		$	—		$	—		$	161,760		$	161,760
Interest bearing deposits	661,947			165,007			3,253			—			830,207
FHLB advances and other Borrowings	60,543			20,297			2,462			—			83,302
Subordinated debentures	15,465			—			5,330			—			20,795
Other liabilities	—			—			—			16,254			16,254
Capital	—			—			—			55,552			55,552
Total liabilities & capital	$	737,955		$	185,304		$	11,045		$	233,566		$	1,167,870
Net interest rate sensitivity gap	$	(175,171	)	$	187,462		$	174,946		$	(187,237	)
Cumulative interest rate sensitivity gap	$	(175,171	)	$	12,291		$	187,237		$	—
Cumulative interest rate sensitivity gap divided by total assets	(15.0		)%	1.1		%	16.0		%

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