- Additional Proxy Soliciting Materials (definitive) (DEFA14A)

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

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.          )

Filed by the Registrant ý
Filed by a Party other than the Registrant o
Check the appropriate box:
o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o		Definitive Proxy Statement
ý		Definitive Additional Materials
o		Soliciting Material under §240.14a-12

 

FIRST CHESTER COUNTRY CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
ý		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
		(1)		Title of each class of securities to which transaction applies:
		(2)		Aggregate number of securities to which transaction applies:
		(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
		(4)		Proposed maximum aggregate value of transaction:
		(5)		Total fee paid:
o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
		(1)		Amount Previously Paid:
		(2)		Form, Schedule or Registration Statement No.:
		(3)		Filing Party:
		(4)		Date Filed:

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On or about November 18, 2010, First Chester County Corporation ("First Chester"), the holding company for First National Bank of Chester County, mailed to its shareholders the following letter requesting that shareholders of First Chester vote "FOR" approval of the Agreement and Plan of Merger with Tower Bancorp, Inc., as amended, and enclosed a copy of First Chester's Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.

November 18, 2010

Dear Shareholder:

        You recently received proxy materials for First Chester Financial Corporation's upcoming special meeting of shareholders on December 8, 2010. I'm writing to you to provide additional information for your consideration and to request you to cast your vote " FOR " adoption of the agreement and plan of merger with Tower Bancorp, Inc. ("Tower").

        The Board of Directors has concluded that the merger is in the best interests of First Chester and its shareholders. In Tower, First Chester has a well-capitalized and profitable merger partner, and the combined company will continue to serve our communities, customers, and clients. As more fully described in the joint proxy statement/prospectus, the exchange ratio is subject to adjustment in the event that First Chester Delinquent Loans, as defined in and calculated in accordance with the merger agreement, are equal to or less than $35 million, or greater than $55 million, as of the last business day of the month prior to the closing date of the merger. Further, it is a condition of the merger that First Chester Delinquent Loans not exceed $90 million as of the last business day of the month prior to the closing date of the merger.

        If the merger were to close on or prior to November 30, 2010, the exchange ratio would have been 0.291 based on First Chester Delinquent Loans as of October 29, 2010 of $78.3 million As disclosed in the joint proxy statement/prospectus relating the proposed merger, the final exchange ratio cannot be determined until the closing of the merger, which is expected to occur in mid-December 2010, in which event the final exchange ratio would be determined based on First Chester Delinquent Loans calculated as of November 30, 2010.

        Additionally, enclosed is a copy of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010. You should review the information contained in this report in conjunction with the information provided in the joint proxy statement/prospectus prior to casting your vote on the agreement and plan of merger with Tower.

        The Board of Directors, management and I believe that the merger is the best route forward for First Chester and urge you to vote " FOR " the adoption of the agreement and plan of merger on your proxy and submit your vote. Whether or not you plan to attend the special meeting, the Board of Directors of First Chester urges you to complete and sign the proxy card enclosed with the joint proxy statement/prospectus and mail it promptly in the postage-prepaid envelope or, in the alternative, vote electronically over the Internet at www.proxyvote.com or by touch tone telephone at 1-800-690-6903. This will not prevent you from voting in person at the special meeting, but will assure that your vote is counted if you are unable to attend. If you are a shareholder whose shares are registered in "street name," you will need additional documentation from your broker in order to vote in person at the special meeting.

        Continuing through the completion of the merger, Phoenix Advisory Services, First Chester's proxy solicitor, will make current exchange ratio and merger consideration information available to First Chester and Tower shareholders at the following toll-free number: 1-800-576-4314.

        Thank you for your time to review this very important material and for your affirmative vote on the agreement and plan of merger.

Sincerely,
John A. Featherman, III Chairman, CEO and President

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Additional Information About the Merger

        The proposed transaction will be submitted to the shareholders of First Chester and Tower for their consideration and approval. In connection with the proposed transaction, Tower has filed with the Securities and Exchange Commission (the "SEC") a registration statement on Form S-4, which has been declared effective by the SEC and includes a joint proxy statement/prospectus and other relevant documents to be distributed to the shareholders of Tower and First Chester on or about November 5, 2010. Investors are urged to read the registration statement and the joint proxy statement/prospectus regarding the proposed transaction and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents, because they will contain important information. Investors can obtain a free copy of the joint proxy statement/prospectus, as well as other filings containing information about Tower and First Chester, free of charge from the SEC's Internet site (www.sec.gov), by contacting Tower Bancorp, Inc., 112 Market Street, Harrisburg, Pennsylvania 17101, Attention: Brent Smith, Investor Relations, telephone [phone] or by contacting First Chester Financial Corporation, 9 North High Street, West Chester, Pennsylvania 19381 Attention: John Stoddart, Investor Relations, telephone [phone]. INVESTORS SHOULD READ THE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS TO BE FILED WITH THE SEC CAREFULLY BEFORE MAKING A DECISION CONCERNING THE TRANSACTION.

Participants in the Transaction

        Tower, First Chester and their respective directors, executive officers, and certain other members of management and employees may be soliciting proxies from Tower and First Chester shareholders in favor of the transaction. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of the Tower and First Chester shareholders in connection with the proposed transaction is set forth in the joint proxy statement/prospectus filed with the SEC. You can also find information about Tower's executive officers and directors in its definitive proxy statement filed with the SEC on April 23, 2010, which is available at the SEC's Internet site (www.sec.gov). Additional information about First Chester's executive officers and directors is set forth in its Form 10-K filed with the SEC on July 27, 2010, which is available at the SEC's Internet site. You can also obtain free copies of these documents from Tower or First Chester, as appropriate, using the contact information above.

         This document is not an offer to sell shares of Tower's securities which may be issued in the proposed transaction. Such securities are offered only by means of the joint proxy statement/prospectus referred to above.

About First Chester County Corporation

        First Chester County Corporation and its wholly owned subsidiary, First National Bank of Chester County, is a financial institution with $1.2 billion in assets and with 23 branch offices located in Chester, Delaware, Lancaster and Cumberland counties. Founded in 1863, First National Bank of Chester County is the eighth oldest national bank in the country. First National provides quality financial services to individuals, businesses, government entities, non profit organizations, and community service groups. Wealth Management and Trust Services are provided through First National Wealth Management, a division of First National Bank of Chester County. For more information, visit www.1nbank.com. Mortgage services are provided through American Home Bank, a division of First National Bank of Chester County. American Home Bank (AHB) has multiple national delivery channels in the retail and wholesale mortgage arena as well as joint venture mortgage partnerships with builders and systems-built manufacturers. For more information visit www.bankahb.com.

Safe Harbor for Forward-Looking Statements

        This document may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to various risks, uncertainties and other factors. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: ineffectiveness of the company's business strategy due to changes in current or future market conditions; the effects of competition, and of changes in laws and regulations, including industry consolidation and development of competing financial products and services; interest rate movements; changes in credit quality; inability to achieve merger-related synergies; difficulties in integrating distinct business operations, including information technology difficulties; volatilities in the securities markets; and deteriorating economic conditions, and other risks and uncertainties, including those detailed in Tower Bancorp, Inc.'s and First Chester County Corporation's filings with the Securities and Exchange Commission (SEC).

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

FORM 10-Q

(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                    .

Commission File No. 1-34500

FIRST CHESTER COUNTY CORPORATION
(Exact name of Registrant as specified in its charter)

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

9 North High Street
West Chester, Pennsylvania 19380
(Address of principal executive office)
(Zip code)

[phone]
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý     No  o

        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  ý		Non-accelerated filer  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  ý

        The number of shares outstanding of Common Stock of the registrant as of November 8, 2010 was 6,317,925.

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INDEX

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

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FORWARD-LOOKING STATEMENTS

        This Quarterly Report on Form 10-Q contains "forward-looking statements." These forward-looking statements are made 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 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").

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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
						(unaudited)
ASSETS
	Cash and due from banks					$	18,186		$	20,853
	Federal funds sold and other overnight investments						2,441			1,721
	Interest bearing deposits						38,488			124,107
				Total cash and cash equivalents			59,115			146,681
	Investment securities available-for-sale, at fair value						58,204			82,698
	Loans and leases						835,388			901,889
	Less: allowance for loan and lease losses						(22,101	)		(23,217	)
				Net loans and leases			813,287			878,672
	Premises and equipment, net						18,761			20,513
	Deferred tax asset, net						1,182			2,593
	Bank owned life insurance						1,526			1,474
	Other real estate owned						4,080			3,692
	Other assets						18,500			32,560
	Discontinued assets (see Note 6):
		Mortgage loans and related derivative instruments					158,125			205,150
		Other discontinued assets held for sale					3,640			3,203
				Total assets		$	1,136,420		$	1,377,236
LIABILITIES
	Deposits
		Non-interest-bearing				$	149,203		$	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
		Total deposits					970,253			1,110,300
	Federal Home Loan Bank advances and other borrowings						73,239			172,897
	Subordinated debentures						20,795			20,795
	Other liabilities						11,921			13,097
	Discontinued liabilities (see Note 6)						4,690			3,245
				Total liabilities		$	1,080,898		$	1,320,334
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
	Additional paid-in capital						23,801			23,678
	Retained earnings						24,227			25,753
	Accumulated other comprehensive income (loss)						415			(499	)
	Treasury stock, at cost: 34,879 shares and 13,702 shares at September 30, 2010 and December 31, 2009, respectively						(442	)		(209	)
				Total First Chester County Corporation stockholders' equity			54,355			55,077
	Non-controlling interests						1,167			1,825
			Total equity			$	55,522		$	56,902
				Total liabilities and equity		$	1,136,420		$	1,377,236

The accompanying notes are an integral part of these statements.

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

						Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands—except per share)						2010			2009			2010			2009
INTEREST INCOME
	Loans and leases, including fees					$	11,949		$	13,565		$	36,391		$	40,140
	Investment securities						413			764			1,306			2,991
	Federal funds sold and deposits in banks						40			5			233			40
			Total interest income				12,402			14,334			37,930			43,171
INTEREST EXPENSE
	Deposits						2,351			2,881			7,869			9,854
	Subordinated debt						286			295			833			721
	Federal Home Loan Bank and other borrowings						891			1,388			3,317			4,360
			Total interest expense				3,528			4,564			12,019			14,935
Net interest income							8,874			9,770			25,911			28,236
	Provision for loan and lease losses						369			11,222			767			17,693
			Net interest income after provision for loan and lease losses				8,505			(1,452	)		25,144			10,543
NON-INTEREST INCOME
	Wealth management and advisory services						939			965			2,928			2,931
	Service charges on deposit accounts						561			669			1,726			1,961
	(Loss) gain on sales and calls of investment securities, net						(9	)		1			(9	)		1
	Operating lease rental income						222			314			726			999
	Net gain (loss) on the sales of fixed assets and other real estate owned						46			162			(29	)		279
	Write down of other real estate owned						—			—			(1,333	)		—
	Bank owned life insurance						16			13			52			39
	Net impairment losses on available for sale securities:
		Total impairment loss					—			(1,576	)		—			(1,576	)
		Portion of loss in other comprehensive income (before taxes)					—			—			—			—
				Net impairment losses recognized in operations			—			(1,576	)		—			(1,576	)
	Other						633			523			1,838			1,552
			Total non-interest income				2,408			1,071			5,899			6,186
NON-INTEREST EXPENSE
	Salaries and employee benefits						3,471			5,367			10,581			15,493
	Occupancy, equipment and data processing						1,681			1,811			5,110			5,410
	Depreciation expense on operating leases						179			259			585			828
	FDIC deposit insurance						598			422			1,938			1,897
	Bank shares tax						(173	)		207			305			674
	Professional services						2,564			1,100			7,074			2,508
	Marketing						153			216			529			836
	Other real estate expense						45			1			107			16
	Communications expense						176			177			516			628
	Other						765			1,022			3,072			2,893
			Total non-interest expense				9,459			10,582			29,817			31,183
			Income (loss) from continuing operations before income taxes				1,454			(10,963	)		1,226			(14,454	)
INCOME TAXES							582			(3,891	)		582			(4,610	)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS						$	872		$	(7,072	)	$	644		$	(9,844	)
DISCONTINUED OPERATIONS:
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
Less: Net income attributable to non-controlling interests							173			494			1,025			1,363
Net (loss) income attributable to discontinued operations						$	(767	)	$	628		$	(2,170	)	$	6,658
NET INCOME (LOSS) INCOME ATTRIBUTABLE TO FIRST CHESTER COUNTY CORPORATION						$	105		$	(6,444	)	$	(1,526	)	$	(3,186	)
PER SHARE DATA
	Net income (loss) per share from continuing operations (Basic)					$	0.14		$	(1.12	)	$	0.11		$	(1.57	)
	Net income (loss) per share from continuing operations (Diluted)					$	0.14		$	(1.12	)	$	0.11		$	(1.57	)
	Net (loss) income per share from discontinued operations (Basic)					$	(0.12	)	$	0.10		$	(0.35	)	$	1.06
	Net (loss) income per share from discontinued operations (Diluted)					$	(0.12	)	$	0.10		$	(0.35	)	$	1.06
	Net income (loss) per share attributable to First Chester County Corporation (Basic)					$	0.02		$	(1.02	)	$	(0.24	)	$	(0.51	)
	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.

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

					Nine Months Ended September 30,
(Dollars in thousands)					2010			2009
OPERATING ACTIVITIES
	Net loss attributable to First Chester County Corporation				$	(1,526	)	$	(3,186	)
	Net income attributable to non-controlling interests					1,025			1,363
	Net loss including non-controlling interests				$	(501	)	$	(1,823	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation				2,200			2,728
		Provision for loan and lease losses				767			17,693
		Amortization of investment security premiums and accretion of discounts, net				309			300
		Amortization of deferred loan fees				(1,129	)		(728	)
		Losses (gains) on sales and calls of investment securities available for sale, net				9			(1	)
		Net losses (gains) from sales of fixed assets and OREO				29			(279	)
		Write down of other real estate owned				1,333			—
		Net gain from mortgage banking activities				(33,910	)		(37,172	)
		Proceeds from the sale of mortgage loans held for sale				1,430,326			1,897,596
		Origination of mortgage loans held for sale				(1,349,440	)		(1,950,649	)
		Net cash paid for the settlement of derivative contracts				(1,006	)		(277	)
		Stock-based compensation expense				93			147
		Other than temporary impairment on investment securities available for sale				—			1,576
		Decrease (increase) in deferred tax asset				939			(3,201	)
		Decrease (increase) in other assets				9,730			(12,339	)
		Increase in other liabilities				1,294			2,369
			Net cash provided by (used in) operating activities			61,043			(84,060	)
INVESTING ACTIVITIES
	Net decrease (increase) in loans					65,747			(21,108	)
	Proceeds from sales of investment securities available-for-sale					245			33,641
	Proceeds from maturities, prepayments and calls of investment securities available-for-sale					26,031			10,048
	Purchases of investment securities available-for-sale					(713	)		(16,649	)
	Proceeds from the sale of OREO					2,064			5,060
	Purchase of premises and equipment					(576	)		(3,794	)
	Proceeds from the sale of premises and equipment					184			114
			Net cash provided by investing activities			92,982			7,312
FINANCING ACTIVITIES
	Change in subsidiary's shares from non-controlling interest					(1,683	)		(1,009	)
	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					—			58,300
	Repayment of long term Federal Home Loan Bank and other borrowings					(99,658	)		(77,047	)
	Proceeds from issuance of subordinated debentures					—			5,330
	Net decrease in deposits					(140,047	)		(29,077	)
	Cash dividends paid					—			(1,759	)
	Net treasury stock transactions					(203	)		111
			Net cash (used in) provided by financing activities			(241,591	)		4,549
			NET DECREASE IN CASH AND CASH EQUIVALENTS			(87,566	)		(72,199	)
Cash and cash equivalents at beginning of period						146,681			95,150
Cash and cash equivalents at end of period					$	59,115		$	22,951
Supplementary cash flow information:
	Interest paid				$	13,627		$	17,611
	Income taxes paid				$	—		$	2,750
	Loans transferred to real estate owned				$	3,890		$	2,963

The accompanying notes are an integral part of these statements.

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

				Common Stock												Accumulated Other Comprehensive Income (loss)
										Additional Paid -in Capital			Retained Earnings						Treasury Stock			Non- Controlling Interest			Total Equity			Comprehensive Income
(Dollars in thousands)				Shares			Par Value
Balance January 1, 2009					6,331,975		$	6,332		$	24,708		$	57,899		$	(3,292	)	$	(1,815	)	$	1,485		$	85,317
	Cumulative effect adjustment under ASC 860-50				—			—			—			240			—			—			—			240
Balance January 1, 2009, as adjusted					6,331,975			6,332			24,708			58,139			(3,292	)		(1,815	)		1,485			85,557
	Change in subsidiary shares from non-controlling interest				—			—			—			—			—			—			(1,009	)		(1,009	)
	Net income				—			—			—			(3,186	)		—			—			1,363			(1,823	)	$	(1,823	)
	Cash dividends declared				—			—			—			(2,632	)		—			—			—			(2,632	)
	Other comprehensive income				—			—			—			—			—			—			—			—
		Net unrealized gains on investment securities available-for-sale			—			—			—			—			2,769			—			—			2,769			2,769
	Treasury stock transactions				—			—			(1,330	)		—			—			1,441			—			111
	Stock based compensation				—			—			147			—			—			—			—			147
	Stock based compensation tax benefit				—			—			(10	)		—			—			—			—			(10	)
	Total comprehensive income																											$	946
Balance September 30, 2009					6,331,975		$	6,332		$	23,515		$	52,321		$	(523	)	$	(374	)	$	1,839		$	83,110
Balance January 1, 2010					6,354,475		$	6,354		$	23,678		$	25,753		$	(499	)	$	(209	)	$	1,825		$	56,902
	Change in subsidiary shares from non-controlling interest				—			—			—			—			—			—			(1,683	)		(1,683	)
	Net (loss) income				—			—			—			(1,526	)		—			—			1,025			(501	)	$	(501	)
	Other comprehensive income				—			—			—			—			—			—			—			—
		Net unrealized gains on investment securities Available-for-sale			—			—			—			—			914			—			—			914			914
	Treasury stock transactions				—			—			30			—			—			(233	)		—			(203	)
	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.

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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 for discontinued operations (see Note 6 for discontinued operations disclosure and Note 13 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 nine month periods ended 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 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 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 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 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"). On August 27, 2010, the Bank entered into a formal written agreement with the OCC, which supersedes and replaces

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

2. Going Concern (Continued)

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. In addition, in efforts to conserve capital, we elected to reduce and 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.

        Management and the board of directors are committed to the planned merger with Tower. However, if the announced 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.

3. Pending Merger

        On December 27, 2009, the Corporation entered into a definitive merger agreement, as amended (the "Merger Agreement"), with Tower, the holding company for Graystone Tower Bank ("Graystone"), pursuant to which First Chester will merge with and into Tower (the "Merger"), with Tower being the surviving corporation. The Merger Agreement also provides that upon consummation of the merger, the Bank 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 segment at or prior to the consummation of the 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 selected by the board of directors of First Chester, with the approval of Tower's board of directors, will be added to the board of directors of Tower, to serve as such for no less than three years.

        Under the terms of the Merger Agreement, shareholders of First Chester will receive 0.453 shares 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. If the merger had closed in October 2010, the exchange ratio would have been 0.291 based on First Chester Delinquent Loans of $76.2 million calculated as of September 30, 2010.

        Directors and 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

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(UNAUDITED)

3. Pending Merger (Continued)

Chester owned by them in favor of the approval of the Merger at the special shareholder's meeting to vote upon the Merger.

        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.

        On November 1, 2010, First Chester and Tower jointly announced that the companies will each hold a special meeting of its respective shareholders on December 8, 2010 for purposes of considering and approving the Merger. The Merger is currently anticipated to close in mid-December 2010. The transaction remains subject to approval by the shareholders of Tower and First Chester, as well as the satisfaction of other closing conditions. First Chester and Tower mailed the joint proxy statement/prospectus related to the special meetings to their respective shareholders on or about November 5, 2010.

4. Recent Accounting Pronouncements

        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.

        In 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.

        In January 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

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(UNAUDITED)

4. Recent Accounting Pronouncements (Continued)

Measurements and Disclosures": (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.

        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 securities. The updates to 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.

        In June 2009, the FASB updated ASC 810, "Consolidation," to modify certain characteristics that identify a variable interest entity ("VIE"), revise the criteria for determining the 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.

5. Regulatory Matters

Supervisory Actions

        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

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(UNAUDITED)

5. Regulatory Matters (Continued)

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.

        On October 16, 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 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.

        On August 27, 2010, the 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 that 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.

        The Board of Directors and Management have initiated corrective actions to comply with the provisions of the formal agreement.

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(UNAUDITED)

5. Regulatory Matters (Continued)

        Additionally, in November 2009, the Bank was advised 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 of satisfying the IMCRs, during 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 in the tables below, as of September 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.

				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			³ 4.00	%		N/A			N/A
		Bank			102,509			8.88	%		46,163			³ 4.00	%		92,326			³ 8.00	%
	Tier I Capital Ratio
		Corporation			73,418			8.38	%		35,060			³ 4.00	%		N/A			N/A
		Bank			102,509			11.72	%		34,996			³ 4.00	%		87,490			³ 10.00	%
	Total Risk Based Capital Ratio
		Corporation			86,971			9.92	%		70,121			³ 8.00	%		N/A			N/A
		Bank			113,616			12.99	%		69,992			³ 8.00	%		104,988			³ 12.00	%

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(UNAUDITED)

5. Regulatory Matters (Continued)