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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)ý

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

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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)

(484) 881-4000(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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Table of Contents



INDEX



PagePart I.

FINANCIAL INFORMATION


2Item 1Financial Statements


2Consolidated Balance Sheets September 30, 2010 (unaudited) and December 31,
2009


2Consolidated Statements of Operations Three and Nine Months Ended September 30, 2010
(unaudited) and 2009 (unaudited)


3Consolidated Statements of Cash Flows Nine Months Ended September 30, 2010
(unaudited) and 2009 (unaudited)


4Consolidated Statements of Equity Nine Months Ended September 30, 2010 (unaudited) and
2009 (unaudited)


5Notes to Consolidated Financial Statements (unaudited)


6Item 2Management's Discussion and Analysis of Financial Condition and Results of
Operations


35Item 3Quantitative and Qualitative Disclosures About Market Risk


51Item 4Controls & Procedures


51Part II.

OTHER INFORMATION


54Item 1Legal Proceedings


54Item 1ARisk Factors


54Item 2Unregistered Sales of Equity Securities and Use of Proceeds


54Item 3Defaults Upon Senior Securities


55Item 4[Removed and Reserved]


55Item 5Other Information


55Item 6Exhibits


55


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Table of Contents

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").

i

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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(unaudited)ASSETSCash and due from banks

$
18,186

$
20,853Federal funds sold and other overnight investments


2,441


1,721Interest bearing deposits


38,488


124,107Total cash and cash equivalents


59,115


146,681Investment securities available-for-sale, at fair value


58,204


82,698Loans and leases


835,388


901,889Less: allowance for loan and lease losses


(22,101
)

(23,217
)Net loans and leases


813,287


878,672Premises and equipment, net


18,761


20,513Deferred tax asset, net


1,182


2,593Bank owned life insurance


1,526


1,474Other real estate owned


4,080


3,692Other assets


18,500


32,560Discontinued assets (see Note 6):Mortgage loans and related derivative instruments


158,125


205,150Other discontinued assets held for sale


3,640


3,203Total assets

$
1,136,420

$
1,377,236LIABILITIESDepositsNon-interest-bearing

$
149,203

$
155,647Interest-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


954,653Total deposits


970,253


1,110,300Federal Home Loan Bank advances and other borrowings


73,239


172,897Subordinated debentures


20,795


20,795Other liabilities


11,921


13,097Discontinued liabilities (see Note 6)


4,690


3,245Total liabilities

$
1,080,898

$
1,320,334EQUITYCommon stock, par value $1.00; authorized 25,000,000 shares; outstanding, 6,354,475 at September 30, 2010 and December 31, 2009

$
6,354

$
6,354Additional paid-in capital


23,801


23,678Retained earnings


24,227


25,753Accumulated 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


55,077Non-controlling interests


1,167


1,825Total equity

$
55,522

$
56,902Total liabilities and equity

$
1,136,420

$
1,377,236


The accompanying notes are an integral part of these statements.

2

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Table of Contents



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

2009INTEREST INCOMELoans and leases, including fees

$
11,949

$
13,565

$
36,391

$
40,140Investment securities


413


764


1,306


2,991Federal funds sold and deposits in banks


40


5


233


40Total interest income


12,402


14,334


37,930


43,171INTEREST EXPENSEDeposits


2,351


2,881


7,869


9,854Subordinated debt


286


295


833


721Federal Home Loan Bank and other borrowings


891


1,388


3,317


4,360Total interest expense


3,528


4,564


12,019


14,935Net interest income


8,874


9,770


25,911


28,236Provision for loan and lease losses


369


11,222


767


17,693Net interest income after provision for loan and lease losses


8,505


(1,452
)

25,144


10,543NON-INTEREST INCOMEWealth management and advisory services


939


965


2,928


2,931Service charges on deposit accounts


561


669


1,726


1,961(Loss) gain on sales and calls of investment securities, net


(9
)

1


(9
)

1Operating lease rental income


222


314


726


999Net gain (loss) on the sales of fixed assets and other real estate owned


46


162


(29
)

279Write down of other real estate owned








(1,333
)

Bank owned life insurance


16


13


52


39Net 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


1,552Total non-interest income


2,408


1,071


5,899


6,186NON-INTEREST EXPENSESalaries and employee benefits


3,471


5,367


10,581


15,493Occupancy, equipment and data processing


1,681


1,811


5,110


5,410Depreciation expense on operating leases


179


259


585


828FDIC deposit insurance


598


422


1,938


1,897Bank shares tax


(173
)

207


305


674Professional services


2,564


1,100


7,074


2,508Marketing


153


216


529


836Other real estate expense


45


1


107


16Communications expense


176


177


516


628Other


765


1,022


3,072


2,893Total non-interest expense


9,459


10,582


29,817


31,183Income (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
)

8,021Less: Net income attributable to non-controlling interests


173


494


1,025


1,363Net (loss) income attributable to discontinued operations

$
(767
)
$
628

$
(2,170
)
$
6,658NET INCOME (LOSS) INCOME ATTRIBUTABLE TO FIRST CHESTER COUNTY CORPORATION

$
105

$
(6,444
)
$
(1,526
)
$
(3,186
)PER SHARE DATANet 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
)
$
1.06Net (loss) income per share from discontinued operations (Diluted)

$
(0.12
)
$
0.10

$
(0.35
)
$
1.06Net 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

$


$
0.42Basic weighted average shares outstanding


6,318,986


6,306,889


6,325,258


6,272,682Diluted 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.

3

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Table of Contents



FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended
September 30,(Dollars in thousands)

2010

2009OPERATING ACTIVITIESNet loss attributable to First Chester County Corporation

$
(1,526
)
$
(3,186
)Net income attributable to non-controlling interests


1,025


1,363Net 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


2,728Provision for loan and lease losses


767


17,693Amortization of investment security premiums and accretion of discounts, net


309


300Amortization 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


1,897,596Origination 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


147Other than temporary impairment on investment securities available for sale





1,576Decrease (increase) in deferred tax asset


939


(3,201
)Decrease (increase) in other assets


9,730


(12,339
)Increase in other liabilities


1,294


2,369Net cash provided by (used in) operating activities


61,043


(84,060
)INVESTING ACTIVITIESNet decrease (increase) in loans


65,747


(21,108
)Proceeds from sales of investment securities available-for-sale


245


33,641Proceeds from maturities, prepayments and calls of investment securities available-for-sale


26,031


10,048Purchases of investment securities available-for-sale


(713
)

(16,649
)Proceeds from the sale of OREO


2,064


5,060Purchase of premises and equipment


(576
)

(3,794
)Proceeds from the sale of premises and equipment


184


114Net cash provided by investing activities


92,982


7,312FINANCING ACTIVITIESChange 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





49,700Increase in long term Federal Home Loan Bank and other borrowings





58,300Repayment of long term Federal Home Loan Bank and other borrowings


(99,658
)

(77,047
)Proceeds from issuance of subordinated debentures





5,330Net decrease in deposits


(140,047
)

(29,077
)Cash dividends paid





(1,759
)Net treasury stock transactions


(203
)

111Net cash (used in) provided by financing activities


(241,591
)

4,549NET DECREASE IN CASH AND CASH EQUIVALENTS


(87,566
)

(72,199
)Cash and cash equivalents at beginning of period


146,681


95,150Cash and cash equivalents at end of period

$
59,115

$
22,951Supplementary cash flow information:Interest paid

$
13,627

$
17,611Income taxes paid

$


$
2,750Loans transferred to real estate owned

$
3,890

$
2,963


The accompanying notes are an integral part of these statements.

4

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Table of Contents



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 ValueBalance January 1, 2009


6,331,975

$
6,332

$
24,708

$
57,899

$
(3,292
)
$
(1,815
)
$
1,485

$
85,317Cumulative effect adjustment under ASC 860-50











240











240Balance January 1, 2009, as adjusted


6,331,975


6,332


24,708


58,139


(3,292
)

(1,815
)

1,485


85,557Change 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


2,769Treasury stock transactions








(1,330
)







1,441





111Stock based compensation








147














147Stock based compensation tax benefit








(10
)













(10
)Total comprehensive income

























$
946Balance September 30, 2009


6,331,975

$
6,332

$
23,515

$
52,321

$
(523
)
$
(374
)
$
1,839

$
83,110Balance January 1, 2010


6,354,475

$
6,354

$
23,678

$
25,753

$
(499
)
$
(209
)
$
1,825

$
56,902Change 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


914Treasury stock transactions








30








(233
)




(203
)Share based compensation








93














93Total comprehensive loss

























$
413Balance 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.

5

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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
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

6

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Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

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

7

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Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(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

8

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(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:



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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(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

RatioAs of September 30, 2010:Leverage RatioCorporation


73,418


6.35
%

46,245


34.00
%

N/A


N/ABank


102,509


8.88
%

46,163


34.00
%

92,326


38.00
%Tier I Capital RatioCorporation


73,418


8.38
%

35,060


34.00
%

N/A


N/ABank


102,509


11.72
%

34,996


34.00
%

87,490


310.00
%Total Risk Based Capital RatioCorporation


86,971


9.92
%

70,121


38.00
%

N/A


N/ABank


113,616


12.99
%

69,992


38.00
%

104,988


312.00
%


11

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

5. Regulatory Matters (Continued)



Actual

For Capital
Adequacy
Purposes

To Be Well
Capitalized Under
Individual Minimum
Capital Ratios(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

RatioAs of December 31, 2009:Leverage RatioCorporation


76,459


5.71
%

53,522


34.00
%

N/A


N/ABank


102,617


7.68
%

53,472


34.00
%

106,943


38.00
%Tier I Capital RatioCorporation


76,459


7.79
%

39,262


34.00
%

N/A


N/ABank


102,617


10.47
%

39,203


34.00
%

98,008


310.00
%Total Risk Based Capital RatioCorporation


89,936


9.16
%

78,525


38.00
%

N/A


N/ABank


115,035


11.74
%

78,407


38.00
%

117,610


312.00
%


Dividend Restrictions

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.

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.

6. Discontinued Assets Held for Sale and Discontinued Operations

On March 4, 2010, 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
the 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.

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 flows of the component have been, or will be, eliminated from ongoing operations of the entity as a

12

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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.

In
determining whether the Corporation met the conditions for a qualified plan of sale, management considered the relevant accounting guidance and concluded that the "held for sale"
conditions were met during the first 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.

Loans
held 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. The carrying value 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.

September 30,
2010

December 31,
2009Disposal Group 1Loans held for sale, at fair value

$
155,264

$
202,757Derivative instruments, at fair value


2,861


2,393Total assets

$
158,125

$
205,150Fair value of derivative instruments

$
384

$
Total liabilities

$
384

$
Disposal Group 2Premises and equipment

$
2,044

$
1,956Other miscellaneous assets


1,596


1,247Total assets

$
3,640

$
3,203Accounts payable and accrued liabilities

$
4,306

$
3,245Total liabilities

$
4,306

$
3,245


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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

Results of operations for discontinued operations for the three and nine months ended September 30, 2010 and 2009 are presented below.

Three Months Ended
September 30,2010

2009Interest income(1)

$
1,480

$
2,867Interest expense(2)


392


803Net interest income


1,088


2,064Non-interest income


10,557


12,472Non-interest expense


12,239


12,797(Loss) income before income taxes


(594
)

1,739Income taxes





617Net (loss) income prior to non-controlling interest

$
(594
)
$
1,122Less: Net income attributable to non-controlling interest

$
173

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

$
(767
)
$
628




Nine Months Ended
September 30,2010

2009Interest income(1)

$
4,166

$
7,810Interest expense(2)


1,120


2,364Net interest income


3,046


5,446Non-interest income


34,029


40,714Non-interest expense


38,220


35,601(Loss) income before income taxes


(1,145
)

10,559Income taxes





2,538Net (loss) income prior to non-controlling interest

$
(1,145
)
$
8,021Less: Net income attributable to non-controlling interest

$
1,025

$
1,363(Loss) income from discontinued operations, net of taxes

$
(2,170
)
$
6,658


(1)Interest
income excludes interest income earned on the Corporation's 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 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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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")
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 the three and nine month periods ending September 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
$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
September 30, 2009, respectively, was reclassified from the Corporation's continuing operations on the consolidated statements of operations to interest expense from discontinued operations.


7. Investment Securities

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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. Investment Securities (Continued)



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

September 30, 2010

(Dollars in thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueUS Treasury

$
5,001

$
11

$


$
5,012US Government agency mortgage-backed securities


29,408


1,166





30,574Collateralized mortgage obligationsResidential


1,042


8


(84
)

966Collateralized mortgage obligationsCommercial


1,003





(47
)

956State and municipal


2,346


41





2,387Corporate debt securities


7,044





(525
)

6,519Bank equity securities


270


60





330Other equity securities


11,460








11,460Totals

$
57,574

$
1,286

$
(656
)
$
58,204


December 31, 2009

(Dollars in thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueUS Treasury

$
20,003

$
13

$


$
20,016US Government agency notes


2,040


7





2,047US Government agency mortgage-backed securities


36,193


902


(100
)

36,995Collateralized mortgage obligationsResidential


1,249





(251
)

998Collateralized mortgage obligationsCommercial


1,004





(196
)

808State and municipal


4,542


52





4,594Corporate debt securities


7,056





(1,191
)

5,865Bank equity securities


525


50


(42
)

533Other equity securities


10,842








10,842$
83,454

$
1,024

$
(1,780
)
$
82,698


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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. Investment Securities (Continued)

differ
from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)

Amortized
Cost

Fair
ValueDue in one year or less

$
5,840

$
5,864Due after one year through five years


7,560


7,353Due after five years through ten years





Due after ten years


991


70114,391


13,918Mortgage-backed securities and CMOs


31,453


32,496Bank equity and other equity securities


11,730


11,790$
57,574

$
58,204


Proceeds
from the 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.

The
table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 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
LossesCollateralized 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
)


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. Investment Securities (Continued)

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

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
LossesUS 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
)


Other than Temporary Impairment

In accordance with ASC 320-10, "InvestmentsDebt and Equity Securities," the Corporation evaluates its
securities portfolio for other-than-temporary impairment ("OTTI") 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 nine months ended September 30, 2010 on available for sale securities.

Specific
conclusions for each category of securities with an unrealized loss position and where management believed an other than temporary impairment analysis was warranted are
summarized below:

CMOResidential and Commercial

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

7. Investment Securities (Continued)

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 as 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 Corporation does not
intend to sell these securities and it is more likely than not that the Corporation 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 September 30, 2010.

Corporate Debt Securities

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.

8. Loans and Leases

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:

September 30, 2010

(Dollars in thousands)

Loan
Balance

Impaired
Loan
Balance

Number of
Impaired
Loans

Specific
Allowance
on Impaired
LoansCommercial loans

$
305,143

$
21,248


62

$
3,252Real estatecommercial


246,172


16,871


16


2,728Real estatecommercial construction


52,512


9,065


7


Real estateresidential


92,980


3,047


11


816Real estateresidential construction


27,433


1,065


3


406Consumer loans


110,327


1,380


34


252Lease financing receivables


821


83


3


83Totals

$
835,388

$
52,759


136

$
7,537


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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

8. Loans and Leases (Continued)

Unearned
income included in the carrying amount of the loan balances above was $1.0 million at September 30, 2010. The amount of deposit account overdrafts classified as
loans above totaled $252 thousand at September 30, 2010.

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.

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. 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.

December 31, 2009

(Dollars in thousands)

Loan
Balance

Impaired
Loan
Balance

Number of
Impaired
Loans

Specific
Allowance
on Impaired
LoansCommercial loans

$
334,286

$
13,269


35

$
1,029Real estatecommercial


261,643


12,071


11


3,637Real estatecommercial construction


66,204


8,786


8


135Real estateresidential


88,024


2,601


7


644Real estateresidential construction


29,387


2,137


7


874Consumer loans


120,767


2,596


42


1,148Lease financing receivables


1,578


167


8


55Totals

$
901,889

$
41,627


118

$
7,522


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

The
non-accrual loan and lease balance was $27.6 million at December 31, 2009. The approximate gross interest income that would have been recorded for the
twelve months ending December 31, 2009 if the $27.6 million in non-accrual loans had been current in accordance with their original terms was $1.8 million. The actual
amount of interest income included in net income as of December 31, 2009 on these loans was $960 thousand resulting from interest earned prior to the loans being placed on
non-accrual status.

20

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

8. Loans and Leases (Continued)

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

Three Months Ended
September 30,(Dollars in thousands)

2010

2009Balance at beginning of period

$
21,534


15,528Provision charged to operating expenses


369


11,222Recoveries


781


90Loans charged-off


(628
)

(3,183
)Allowance adjustmentOther


45


(167
)Balance at end of Period

$
22,101

$
23,490




Nine Months Ended
September 30,(Dollars in thousands)

2010

2009Balance at beginning of period

$
23,217

$
10,335Provision charged to operating expenses


767


17,693Recoveries


1,059


339Loans charged-off


(3,157
)

(4,549
)Allowance adjustmentOther


215


(328
)Balance at end of Period

$
22,101

$
23,490


9. Income Taxes

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.

10. Other Real Estate Owned

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

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Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

10. Other Real Estate Owned (Continued)

gains
or losses are included in the Corporation's results of operations. The following table summarizes properties held as OREO as of September 30, 2010 and December 31, 2009:

(Dollars in thousands)

September 30,
2010

Number of
properties

December 31,
2009

Number of
propertiesLand

$
3,453


7

$
49


1Residential 1 - 4 family


627


5


3,643


15Total

$
4,080


12

$
3,692


16


11. Other Assets

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

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 $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.

The
Corporation deferred its regularly scheduled interest payments on its outstanding junior subordinated notes relating to its $20.8 million of trust preferred securities
beginning 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.

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Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Earnings (Loss) per Share

Three Months ended September 30, 2010

Income
(thousands)
(numerator)

Shares(1)
(denominator)

Per Share
AmountBasic income from continuing operations per shareNet income from continuing operations

$
872


6,318,986

$
0.14Effect of dilutive securitiesOptions to purchase common stock








Diluted net income from continuing operations available to common stockholders

$
872


6,318,986

$
0.14Basic loss from discontinued operations per shareNet loss from discontinued operations

$
(767
)

6,318,986

$
(0.12
)Effect of dilutive securitiesOptions 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 shareNet income available to common stockholders

$
105


6,318,986

$
0.02Effect of dilutive securitiesOptions to purchase common stock








Diluted net income available to common stockholders

$
105


6,318,986

$
0.02


(1)204,737
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.


23

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Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Earnings (Loss) per Share (Continued)

Three Months ended September 30, 2009

Income
(thousands)
(numerator)

Shares(1)
(denominator)

Per Share
AmountBasic loss from continuing operations per shareNet loss from continuing operations

$
(7,072
)

6,306,889

$
(1.12
)Effect of dilutive securitiesOptions 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 shareNet income from discontinued operations

$
628


6,306,889

$
0.10Effect of dilutive securitiesOptions to purchase common stock








Diluted net income from discontinued operations available to common stockholders

$
628


6,306,889

$
0.10Basic loss available to common stockholders per shareNet loss available to common stockholders

$
(6,444
)

6,306,889

$
(1.02
)Effect of dilutive securitiesOptions to purchase common stock








Diluted net loss available to common stockholders

$
(6,444
)

6,306,889

$
(1.02
)


(1)234,109
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.


24

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Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Earnings (Loss) per Share (Continued)




Nine Months ended September 30, 2010

Income
(thousands)
(numerator)

Shares(1)
(denominator)

Per Share
AmountBasic income from continuing operations per shareNet income from continuing operations

$
644


6,325,258

$
0.11Effect of dilutive securitiesOptions to purchase common stock








Diluted net income from continuing operations available to common stockholders

$
644


6,325,258

$
0.11Basic loss from discontinued operations per shareNet loss from discontinued operations

$
(2,170
)

6,325,258

$
(0.35
)Effect of dilutive securitiesOptions 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 shareDiluted net loss available to common stockholders

$
(1,526
)

6,325,258

$
(0.24
)Effect of dilutive securitiesOptions to purchase common stock








Diluted net loss available to common stockholders

$
(1,526
)

6,325,258

$
(0.24
)


(1)204,737
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.


25

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Table of Contents

FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

13. Earnings (Loss) per Share (Continued)




Nine Months ended September 30, 2009

Income
(thousands)
(numerator)

Shares(1)
(denominator)

Per Share
AmountBasic loss from continuing operations per shareNet loss from continuing operations

$
(9,844
)

6,272,682

$
(1.57
)Effect of dilutive securitiesOptions 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 shareNet income from discontinued operations

$
6,658


6,272,682

$
1.06Effect of dilutive securitiesOptions to purchase common stock








Diluted net income from discontinued operations available to common stockholders

$
6,658


6,272,682

$
1.06Basic loss available to common stockholders per shareNet income available to common stockholders

$
(3,186
)

6,272,682

$
(0.51
)Effect of dilutive securitiesOptions to purchase common stock








Diluted net loss available to common stockholders

$
(3,186
)

6,272,682

$
(0.51
)


(1)234,109
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.


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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)




14. Comprehensive Income

Components of comprehensive income are presented in the following charts:

Three Months Ended
September 30,Dollars in thousands

2010

2009Unrealized gains on securities:Unrealized gains arising in period

$
370

$
4,425Reclassification adjustment


(9
)

(1,575
)Net unrealized gains


361


2,850Other comprehensive income before taxes


361


2,850Income tax expense


(123
)

(969
)Other comprehensive income


238


1,881Net 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
)




Nine Months Ended
September 30,Dollars in thousands

2010

2009Unrealized gains on securities:Unrealized gains arising in period

$
1,395

$
5,771Reclassification adjustment


(9
)

(1,575
)Net unrealized gains


1,386


4,196Other comprehensive income before taxes


1,386


4,916Income tax expense


(472
)

(1,427
)Other comprehensive income


914


2,769Net (loss) including non-controlling interests


(501
)

(1,823
)Comprehensive income


413


946Less comprehensive income attributable to non-controlling interests


(1,025
)

(1,363
)Comprehensive (loss) for First Chester County Corporation

$
(612
)
$
(417
)


15. Fair Value Measurement and Fair Value of Financial Instruments

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

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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.

ASC
825-10Financial Instruments permits entities to choose to measure many financial instruments and certain other items at fair value at specified election
dates. The Corporation elected to account 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:



Assets and Liabilities Measured at Fair Value on a Recurring Basis

A 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:

Securities:Investment securities available-for-sale are recorded at fair 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.



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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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



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.

The
Corporation had no transfers in or out of Level 1 and Level 2 during the nine month period ended September 30, 2010.

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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

(Dollars in thousands)
September 30, 2010

Level 1

Level 2

Level 3

TotalAssetsInvestment securities available for sale:U.S. Treasury

$
5,012

$


$


$
5,012U.S. Government agency mortgage-backed securities





30,574





30,574CMOResidential





966





966CMOCommercial





956





956State and municipal





2,387





2,387Corporate debt securities





6,519





6,519Bank equity securities





330





330Other equity securities








11,460


11,460Mortgage servicing rights








449


449




December 31, 2009

Level 1

Level 2

Level 3

TotalAssetsInvestment securities available for sale:U.S. Treasury

$
20,016

$


$


$
20,016U.S. Government agency





2,047





2,047U.S. Government agency mortgage-backed securities





36,995





36,995CMOResidential





998





998CMOCommercial





808





808State and municipal





4,594





4,594Corporate debt securities





5,865





5,865Bank equity securities


3


530





533Other equity securities








10,842


10,842Mortgage servicing rights








575


575


Assets Measured at Fair Value on a Nonrecurring Basis

A description of the valuation methodologies and classification levels used for financial instruments measured at fair value on a
nonrecurring basis are listed as follows. These listed instruments are subject to fair value adjustments (impairment) as they are valued at the lower of cost or market.

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

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

repayments
or collateral exceed the recorded investments in such loans. At September 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.

OREO: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.

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

(Dollars in thousands)
September 30, 2010

Level 1

Level 2

Level 3

TotalImpaired loans & leases

$


$


$
45,222

$
45,222OREO








4,080


4,080




(Dollars in thousands)
December 31, 2009

Level 1

Level 2

Level 3

TotalImpaired loans & leases

$


$


$
34,105

$
34,105OREO








3,692


3,692


Disclosures about financial instruments

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

(Dollars in thousands)

Mortgage
Servicing Rights

InvestmentsBeginning balance

$
575

$
10,842Total gains realized/unrealized:Included in earnings


(126
)

Included in other comprehensive loss





Purchases





713Maturities/amortizations





(95
)Prepayments





Calls





Transfers into Level 3





Ending Balance

$
449

$
11,460


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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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

September 30, 2010

December 31, 2009(Dollars in thousands)

Estimated
Fair Value

Carrying
Amount

Estimated
Fair Value

Carrying
AmountFinancial AssetsCash and cash equivalents

$
59,115

$
59,115

$
146,681

$
146,681Investment securities available-for-sale


58,204


58,204


82,698


82,698Gross loans and leases


801,262


835,388


866,754


901,889Mortgage servicing rights


449


449


575


575Financial LiabilitiesDeposits with no stated maturities


538,121


538,121


594,278


594,278Deposits with stated maturities


436,513


432,132


518,642


516,022FHLB and other borrowings


75,258


73,239


175,904


172,897Subordinated debentures


14,620


20,795


12,410


20,795Off-Balance-SheetCommitments to extend credit and outstanding letters of credit


119,956


119,956


205,468


205,468


16. Accounting for Stock-Based Compensation Plans

At September 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 nine months ended September 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:

(Dollars in thousands, except shares,
and per share data)

Shares

Grant Date
Fair Value

Aggregate Intrinsic
Value of
Unvested SharesUnvested at January 1, 2010


54,474

$
10.57

$
503Granted




$Vested


(2,199
)
$
21.05Forfeited


(1,400
)
$
11.35Unvested at September 30, 2010


50,875

$
10.09

$
253


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.

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

16. Accounting for Stock-Based Compensation Plans (Continued)

The
Corporation's ability to issue stock options under the Corporation's 1995 Stock Option Plan has expired. However, outstanding stock options remain in effect according to their terms.
Aggregated information regarding the Corporation's 1995 Stock Option Plan and the options assumed in the AHB acquisition as of September 30, 2010 is presented below.

(Dollars in thousands, except shares,
per share and years data) Options

Shares

Weighted-
Average
Exercise
Price

Weighted-Average
Remaining
Contractual
Term (years)

Aggregate
Intrinsic
ValueOutstanding at January 1, 2010


230,900

$
15.79


3.32

$
Granted


Exercised


Forfeited


(26,163
)
$
13.08Expired


Outstanding at September 30, 2010


204,737

$
16.09


2.68

$
Exercisable at September 30, 2010


204,737

$
16.09


2.68

$



There
were no options granted during the nine months ended September 30, 2010. There was no intrinsic value (market value on date of exercise less grant price) of options at
September 30, 2010 as all options had an exercise price that was higher than the September 30, 2010 market price.

17. Commitment and Contingencies

Reserve for Unfunded Commitments

The Corporation maintains a reserve for unfunded 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 September 30, 2010 and December 31, 2009 was approximately
$454 thousand and $669 thousand, respectively. Management believes this reserve level is sufficient to absorb estimated probable losses related to these commitments.

Loan Recourse

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

33

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FIRST CHESTER COUNTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

17. Commitment and Contingencies (Continued)

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
representation or warranty. As of September 30, 2010 and December 31, 2009, the Corporation had a liability of $443 thousand and $688 thousand, respectively, included in
Liabilities related to assets held for sale on the Consolidated Balance Sheet, for probable losses related to the Corporation's recourse exposure. This liability is part of our discontinued mortgage
banking operations, however it is anticipated that the Corporation will retain this liability after the anticipated sale of the mortgage banking division.

Asserted and Unasserted Claims

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Corporation but
which will only be resolved when one or more future events occur or fail to occur. The Corporation's management and legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Corporation or unasserted claims that may result in such proceedings, the
Corporation's legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability
would be accrued in the Corporation's financial statements. The Corporation will disclose asserted claims when it is at least reasonably possible that an asset has been impaired or a liability has
been incurred as of the date of the financial statements and unasserted claims when it is considered probable that a claim will be asserted and there is a reasonable possibility that the outcome will
be unfavorable. The Corporation will not accrue a liability or disclose unasserted claims which management believes are only reasonably possible of assertion.

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

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
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.

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Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion is intended to further your understanding of the consolidated financial condition and results of operations of the
Corporation and its direct and indirect subsidiaries. It should be read in conjunction with the consolidated financial statements included in this report.

OVERVIEW

The Corporation reported a net income from continuing operations of $872 thousand and $644 thousand for the three and
nine months ended September 30, 2010, respectively, as compared to a net loss from continuing operations of $7.1 million and $9.8 million for the three and nine months ended
September 30, 2009, respectively.

The
following is an overview of key factors affecting our September 30, 2010 results from continuing operations:



During
first quarter 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.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

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.

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

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

Discontinued Operations

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.

In
accordance with ASC 205-20-45, "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 flows of the
component have been, 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 ASSETS

Other assets decreased $14.1 million to $18.5 million at September 30, 2010 from $32.6 million at
December 31, 2009. 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.

NET INTEREST INCOME

Net interest income is the difference between interest income earned on interest-earning assets and interest expense paid on interest
bearing liabilities. The following tables provides detail regarding the Corporation's average balances with corresponding interest income (on a tax-equivalent basis) and interest expense
as well as yield and cost information for the periods presented. Management's

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discussion
and analysis of net interest income, interest income, and interest expense is based on aggregated amounts of continuing and discontinued operations.

Three Months ended September 30,2010

2009(Dollars in thousands)

Average
Balance

Interest

Rate%

Average
Balance

Interest

Rate%ASSETSFederal 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 assetsAllowance for loan and lease losses


(22,168
)







(12,383
)Cash and due from banks


20,527








17,010Other assets


36,907








59,184Total assets

$
1,156,192







$
1,342,457LIABILITIES AND EQUITYSavings, 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








152,047Other liabilities


15,412








18,301Total liabilities


1,101,116








1,252,539Equity


55,076








89,918Total liabilities and equity

$
1,156,192







$
1,342,457Net 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








2,064Less tax equivalent adjustment





79








146Net interest income from continuing operations





8,874








9,770


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Nine Months ended September 30,2010

2009(Dollars in thousands)

Average
Balance

Interest

Rate%

Average
Balance

Interest

Rate%ASSETSFederal 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 assetsAllowance for loan and lease losses


(23,091
)







(11,403
)Cash and due from banks


19,452








18,563Other assets


44,662








55,785Total assets

$
1,229,201







$
1,340,128LIABILITIES AND EQUITYSavings, 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








148,424Other liabilities


14,900








16,555Total liabilities


1,173,794








1,251,472Equity


55,407








88,656Total liabilities and equity

$
1,229,201







$
1,340,128Net interest income (tax equivalent) / margin on earning assets




$
29,207


3.29
%



$
34,137


3.57
%Net yield on interest-earning assetsLess net interest income from discontinued operations(3)





3,046








5,446Less tax equivalent adjustment





250








455Net interest income from continuing operations





25,911








28,236


(1)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 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.


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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.

The
yield earned on average interest-earning assets was 4.94% for the three month period ended September 30, 2010, compared to 5.38% for the same period in 2009, a decrease of 44
basis points. For the nine month period ended September 30, 2010, the yield earned on interest earning assets decreased 62 basis points to 4.76% from 5.38% during the same period in 2009.

Average
interest-earning assets decreased approximately $157.7 million or 12.3% to $1.121 billion for the three months ended September 30, 2010 from
$1.279 billion in the same period last year. The decrease in average interest-earning assets for the three month period ended September 30, 2010 was the result of a $93.6 million
decrease in loans held for sale, a $95.5 million decrease in average total loans and leases, and a decrease of $27.3 million in investments securities available for sale. These decreases
were partially offset by a $58.8 million increase in average Federal funds sold and interest bearing deposits in banks balance.

Average
interest-earning assets decreased approximately $89.0 million or 7.0% to $1.188 billion for the nine months ended September 30, 2010 from
$1.277 billion in the same period last year. The decrease in average interest-earning assets for the nine month period ended September 30, 2010 was the result of an $86.5 million
decrease in loans held for sale, 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.

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.

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.

INTEREST INCOME

Interest income on a tax-equivalent basis decreased $3.4 million to $14.0 million for the three months ended
September 30, 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.

On
a tax equivalent basis, interest income on investment securities decreased 46.0% or $363 thousand 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

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$41.2 million
of securities were purchased. The actions were taken primarily to reduce the 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 $26.0 million during the first nine months
of 2010.

Interest
income on loans held for sale decreased $1.4 million to $1.5 million during the three month period ended September 30, 2010. For the nine month period ended
September 30, 2010, interest income on loans held for sale decreased $3.6 million to $4.2 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 nine months periods ended September 30, 2010 were $143.3 million and $132.2 million as compared to approximately
$237.0 million and $218.6 million for the same periods in 2009.

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-offs. In addition to
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.

INTEREST EXPENSE

Interest expense on deposit accounts decreased by approximately $804 thousand or 22.9% to $2.7 million for the three
month period ended September 30, 2010 from $3.5 million for the same period in 2009. Interest expense on deposit accounts decreased approximately $3.0 million or 25.1% to
$8.9 million for the nine months ended September 30, 2010 from $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 average rate paid for 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 CD promotion which was undertaken to increase liquidity and lengthen the maturities of
liabilities supporting earning assets to help mitigate the risk of rising interest rates.

Interest
expense on FHLB and other borrowings decreased $632 thousand or 40.5% to $927 thousand for the three month period ended September 30, 2010 from the same
period in 2009. Interest expense on FHLB and other borrowings for the nine months ended September 30, 2010 decreased approximately $1.3 million or 27.5% to $3.4 million from
$4.7 million in 2009. These decreases in interest expense were primarily due to decreases in the average balances of these funding sources in 2010 as compared to 2009. The average balance of
FHLB and other borrowings for the

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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
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.

ASSET QUALITY AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Allowance and provision for loan and lease losses

Management believes that the allowance for loan and lease losses is adequate. The determination for this allowance requires significant
judgment, and estimates of probable losses in the loan and lease portfolio 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 in the financial condition of borrowers. 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 portfolio and the allowance. Such reviews may
result in adjustments to the provision based upon their analysis of the information available at the time of each examination. During 2010, there were no major changes in estimation methods that
affected the allowance methodology from the prior year.

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 $1.1 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
decrease in the September 30, 2010 required allowance for loan losses, as compared to December 31, 2009, can be attributed to the following
factors:



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Charge-offs

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 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.

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

Three Months Ended
September 30,

Nine Months Ended
September 30,Dollars in thousands

2010

2009

2010

2009Balance at beginning of period

$
21,534

$
15,528

$
23,217

$
10,335Provision charged to operating expense


369


11,222


767


17,693Recoveries of loans previously charged-off


781


90


1,059


339Loans 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

$
23,490Period-end loans outstanding

$
835,388

$
957,502

$
835,388

$
957,502Average loans outstanding

$
853,714

$
949,263

$
872,488

$
944,851Allowance 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
)%


(1)The
"Allowance other adjustment" represents the reclassification of an allowance for probable losses on unfunded loans and unused lines of credit. These
loans and lines of credit, although unfunded, have been committed to by the Corporation.


42

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Non-performing assets

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. 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.

Non-accrual loan and leases

Loans are generally placed on non-accrual when the loan becomes 90 days delinquent at which time all accrued but
unpaid interest is reversed. Interest income is no longer accrued on such assets and any future payments are applied as a reduction in the principal balance of the loan. All non-accrual
loans are considered impaired assets and are evaluated individually for required specific reserves. 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 approximately $553 thousand and
$1.3 million, respectively. The actual amount of interest income included in net income for the three and nine months ending September 30, 2010 on these loans was $28 thousand and
$183 thousand, respectively relating to interest received prior to loans being placed on non accrual status.

Restructured and other impaired loans

Through 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 September 30, 2010, we had $16.9 million in restructured and other impaired loans of which
$5.6 million are considered by management to be TDRs. At September 30, 2010, these TDRs continue to perform under their re-negotiated terms and remain on accrual status.

The
remaining $11.3 million is comprised of loans which Management has reviewed individually and believes the borrower's financial performance and/or a shortfall in the value of
collateral securing the loan provide enough evidence to deem the loan impaired. These other impaired loans were performing under their original contractual terms as of September 30, 2010.

Potential Problem Loans

As a recurring part of its portfolio management program, we identified approximately $35.2 million in potential problem loans at
September 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 September 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.

Other real estate owned

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

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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 September 30, 2010
was $4.1 million, as compared to $3.7 million at December 31, 2009.

The
following chart presents detailed information regarding non-performing loans and leases and OREO:

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

2010

2009Past due over 90 days and still accruing

$


$


$
530Non-accrual loans and leases(1)


35,818


15,787


27,581Restructured and other impaired loans


16,941


21,524


14,046Total non-performing loans and leases


52,759


37,311


42,157Other real estate owned


4,080


3,062


3,692Total non-performing assets

$
56,839

$
40,373

$
45,849Non-performing loans and leases as a percentage of total loans and leases


6.32
%

3.90
%

4.67
%Allowance for loan and lease losses as a percentage of non-performing loans and leases


41.89
%

62.96
%

55.07
%Non-performing assets as a percentage of total loans and other real estate owned


6.77
%

4.20
%

5.06
%Allowance for loan and lease losses as a percentage of non-performing assets


38.88
%

58.18
%

50.64
%


(1)Generally,
the Bank places a loan or lease in non-accrual status when principal or interest has been in default for a period of 90 days
or more unless the loan is both well secured and in the process of collection.


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. 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.

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The
following charts present additional information about impaired loans and lease balances as of September 30, 2010 and December 31, 2009:

September 30, 2010

(Dollars in thousands)

Loan
Balance

Impaired
Loan
Balance

Number of
Impaired
Loans

Specific
Allowance
on Impaired
LoansCommercial loans

$
305,143

$
21,248


62

$
3,252Real estatecommercial


246,172


16,871


16


2,728Real estatecommercial construction


52,512


9,065


7


Real estateresidential


92,980


3,047


11


816Real estateresidential construction


27,433


1,065


3


406Consumer loans


110,327


1,380


34


252Lease financing receivables


821


83


3


83Totals

$
835,388

$
52,759


136

$
7,537


December 31, 2009

(Dollars in thousands)

Loan
Balance

Impaired
Loan
Balance

Number of
Impaired
Loans

Specific
Allowance
on Impaired
LoansCommercial loans

$
334,286

$
13,269


35

$
1,029Real estatecommercial


261,643


12,071


11


3,637Real estatecommercial construction


66,204


8,786


8


135Real estateresidential


88,024


2,601


7


644Real estateresidential construction


29,387


2,137


7


874Consumer loans


120,767


2,596


42


1,148Lease financing receivables


1,578


167


8


55Totals

$
901,889

$
41,627


118

$
7,522


NON-INTEREST INCOME

Total non-interest income from continuing operations increased $1.3 million to $2.4 million for the three
months ended September 30, 2010, compared to $1.1 million for the same period in 2009. The increase is primarily due to a $1.6 million other than temporary impairment charge on
four bank equity securities in the third quarter 2009. Offsetting this increase was a $108 thousand decrease in service charges on deposit accounts resulting from a decrease in deposit balances
as well as a $116 thousand decrease in gains on sales of fixed assets and real estate owned.

Total
non-interest income from continuing operations decreased $287 thousand to $5.9 million for the nine months ended September 30, 2010, compared to
$6.2 million for the same period in 2009. 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 reflected the realizable value of these properties based on the actual sales price. Offsetting the nine month ended
variance was a $1.6 million other than temporary impairment charge on four bank equity securities in the third quarter 2009. There were no such impairment charges during the nine months ended
September 30, 2010.

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NON-INTEREST EXPENSE

Total non-interest expense decreased $1.1 million to $9.5 million for the three-month period ended
September 30, 2010, compared to $10.6 million during the same period in 2009. Total non-interest expense decreased $1.4 million to $29.8 million for the nine
months ended September 30, 2010, from $31.2 million during the same period in 2009.

Salaries
and employee benefits decreased $1.9 million to $3.5 million for the three month period ended September 30, 2010 compared to the same period in 2009.
Salaries and employee benefits decreased $4.9 million to $10.6 million for the nine month period ended September 30, 2010 compared to the same period in 2009. The primary driver
of this reduction was the fourth quarter 2009 reduction in force.

Offsetting
these decreases, professional services expense increased $1.5 million to $2.6 million for the three month period ended September 30, 2010 from
$1.1 million for the same period in 2009. Professional services expense increased $4.6 million to $7.1 million for the nine month period ended September 30, 2010 from
$2.5 million for the same period in 2009. The increases were primarily due to the increased legal, audit and consulting fees related to the merger with Tower and the restatement of our 2009
financial statements and related SEC filings.

INCOME TAXES

At September 30, 2010 the valuation allowance against the Corporation's deferred tax asset was $7.7 million as compared
to $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.

LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY

Liquidity Management

The objective of liquidity management is to ensure the availability of 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, to repay borrowings as they mature and to 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 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 of $100,000. Details of core deposits, non-interest bearing demand deposit
accounts, and other deposit

46

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sources
are highlighted in the following table and include aggregated amounts from both continuing and discontinued operations:

For the Nine Months
Ended
September 30, 2010

For the Year Ended
December 31, 2009(Dollars in thousands)

Average
Balance

Effective
Yield

Average
Balance

Effective
YieldDEPOSIT TYPENOW Accounts

$
217,393


0.41
%
$
193,760


0.78
%Money Market


111,589


1.04
%

158,668


1.17
%Statement Savings


39,618


0.39
%

40,198


0.55
%Other Savings


2,323


0.85
%

1,946


0.96
%Tiered Savings


49,143


0.87
%

46,650


1.05
%Total NOW Savings, and Money Market


420,066


0.63
%

441,222


0.93
%CDs Less than $100,000


264,781


1.96
%

276,274


2.55
%CDs Greater than $100,000


199,700


2.03
%

152,891


2.66
%Total CDs


464,481


1.99
%

429,165


2.59
%Total Interest Bearing Deposits


884,547


1.34
%

870,387


1.75
%Non-Interest BearingDemand Deposits


150,934





149,967


Total Deposits

$
1,035,481




$
1,020,354


The
Bank maintains credit facilities with the FHLB as well as the Federal Reserve. During the third quarter of 2010, average FHLB advances were $48.0 million and consisted of term
advances with a variety of maturities. The average interest rate on these advances was 3.75%. At September 30, 2010, the Bank had a maximum borrowing capacity with FHLB of
$107.7 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 a backup line of
credit available from the Federal Reserve, totaling $171.8 million. Federal Reserve borrowings are collateralized by a pledge on certain commercial and commercial real estate loans and a lien
on the Bank's Federal Reserve stock.

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
$20.8 million of trust preferred securities beginning 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. We expect our
deferral of interest on the junior subordinated notes will preserve approximately $270 thousand of cash per quarter based upon the interest payments completed during the first and second
quarters of 2010.

Interest Rate Sensitivity

The goal of interest rate sensitivity management is to avoid fluctuating net interest margins, and to enhance consistent growth of net
interest income through periods of changing interest rates. Such sensitivity is measured as the difference in the volume of assets and liabilities in the existing portfolio

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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
$173.6 million or 15.3% of total assets at September 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 monitors interest rate 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 September 30, 2010 and includes aggregated amounts from both continuing and discontinued operations:

(Dollars in thousands)

Within
one year(1)

Two
through
five years(1)

Over
five
Years(1)

Non-rate
Sensitive(1)

Total(1)ASSETSFederal funds sold and overnight investments

$
2,441

$


$


$


$
2,441Investment securities


29,819


12,506


15,879





58,204Interest bearing deposits in banks


38,488











38,488Loans held for sale


155,781











155,781Net loans and leases


311,400


353,806


170,182


(22,101
)

813,287Cash and due from banks











18,186


18,186Premises and equipment











20,805


20,805Other assets











29,228


29,228Total assets

$
537,929

$
366,312

$
186,061

$
46,118

$
1,136,420LIABILITIES AND CAPITALNon-interest bearing deposits

$


$


$


$
149,203

$
149,203Interest bearing deposits


645,553


172,656


2,841





821,050FHLB advances and other Borrowings


50,531


20,264


2,444





73,239Subordinated debentures


15,465





5,330





20,795Other liabilities











16,611


16,611Capital











55,522


55,522Total liabilities & capital

$
711,549

$
192,920

$
10,615

$
221,336

$
1,136,420Net interest rate sensitivity gap

$
(173,620
)
$
173,392

$
175,446

$
(175,218
)Cumulative interest rate sensitivity gap

$
(173,620
)
$
(228
)
$
175,218

$
Cumulative interest rate sensitivity gap divided by total assets


(15.3
)%

0.0
%

15.4
%


(1)Amounts
above are shown consolidated and do not exclude the balances related to the mortgage banking division's discontinued operations. Presentation with
the exclusion of these balance sheet amounts was deemed not meaningful by management.


The
nature of our current operations is such that we are not subject to foreign currency exchange or commodity price risk. However, the Bank is subject to interest rate risk with respect
to its mortgage

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banking
division. When the Bank contractually commits with a customer to an interest rate on a residential mortgage loan that it intends to sell, the Bank may be at risk that the value of the loan,
when ultimately sold, will be less than par. To hedge this risk, the Bank enters into a derivative contract, primarily consisting of forward loan sale commitments. Additionally, our liquidity planning
takes into account current risks in our mortgage banking operations. We sell residential mortgage loans to various secondary market investors under several agreements. In the event we breach certain
requirements within these agreements, the investors have the ability to suspend or terminate the agreements. A suspension or termination could expose us to interest rate and liquidity risk, and also
limit our ability to manage our balance sheet size and maintain compliance with regulatory capital guidelines. Prior to filing this report, we were in default under these agreements due to our failure
to file our audited financial statements within the specified timeframe and our failure to satisfy the IMCRs. We will continue to be in default under certain agreements due to the inclusion of a
"going concern" explanatory paragraph in the auditors' report regarding the consolidated financial statements. To date, two of the investors under these agreements have terminated their agreements
with us. Additionally, other investors, to whom we sell nearly 88% of our loan production, have verbally indicated that although we are in breach of the above mentioned requirements, they will
forebear the defaults for an unspecified period of time.

CAPITAL ADEQUACY

We are subject to Risk-Based Capital Guidelines adopted by the Federal Reserve for bank holding companies. The Bank is also
subject to similar capital requirements adopted by the OCC. Under these requirements, the regulatory agencies have set minimum capital ratio thresholds. To be considered "well capitalized" banks must
generally maintain a Tier I leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6% and a total risked-based capital ratio of at least 10%. During the
fourth quarter of 2009, the OCC advised management that they had established new higher capital ratio requirements on the Bank (individual minimum capital ratios, or IMCRs) thereby requiring the Bank
to maintain its Tier 1 leverage ratio at not less than 8%, its Tier 1 risk-based capital ratio at not less than 10% and its total risk-based capital ratio at not
less than 12%. The Bank was required to achieve these new higher levels by December 31, 2009.

Our
efforts to raise capital before the OCC's deadline consummated in the definitive merger agreement with Tower Bancorp. As part of the merger agreement, Graystone Tower Bank increased
our loan from $4 million, which was entered into on November 20, 2009, to up to a maximum of $26 million. We used the increased proceeds to make a capital contribution to the Bank
in effort to satisfy the capital requirements established by the OCC. The loan, as modified, is a non-revolving one year term loan bearing interest at the rate of 6% per annum, and is
secured by a pledge of all of the common stock of the Bank. Additionally, under the definitive merger agreement, Graystone purchased $52.5 million in first lien residential real estate and
commercial loan participations at a 1.5% discount in effort to assist the Bank in satisfying the IMCRs.

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.

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As set forth in the table 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. The Corporation's and Bank's risk-based capital ratios, shown below, have been
computed in accordance with regulatory accounting policies.

September 30,
2010

December 31,
2009

Current
Requirements to
remain "Well
Capitalized"(*)CorporationLeverage Ratio


6.35
%

5.71
%

N/ATier I Capital Ratio


8.38
%

7.79
%

N/ATotal Risk-Based Capital Ratio


9.92
%

9.16
%

N/ABankLeverage Ratio


8.88
%

7.68
%

8.00
%Tier I Capital Ratio


11.72
%

10.47
%

10.00
%Total Risk-Based Capital Ratio


12.99
%

11.74
%

12.00
%


(*)Ratios
imposed by the OCC under the IMCRs.


REGULATORY MATTERS

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. Among other things, under the MOU, the Bank has agreed to address the following matters:



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

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Table of Contents

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.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Corporation's assessment of its sensitivity to market risk since its presentation in the
2009 Annual Report. Please refer to Item 7A of the Corporation's 2009 Annual Report for more information.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of September 30, 2010, the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation
of the effectiveness of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-5(e) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) was performed under the supervision and with the participation of management, including our President and CEO, Chief Operating Officer and our Chief Financial Officer.
Based on that evaluation and the identification of the material weakness in our internal control over financial reporting as described below, management has concluded that our disclosure controls and
procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

As reported in our 2009 Annual Report, Management conducted a thorough and methodical evaluation and testing of our internal controls
over financial reporting as of December 31, 2009, which resulted in the identification of three material control weaknesses. Management continues their ongoing efforts to correct and revise the
existing processes surrounding these material weaknesses and additional changes will be implemented as determined necessary.

Allowance for Loan and Lease Losses

During the third quarter of 2009, management identified a material weakness in our internal controls related to the design and
implementation of policies to promptly identify problem loans and to quantify the elements of risk in problem loans. The Bank's policies and procedures were not systematically applied, which caused a
failure in the identification of problem loans on a timely basis and a failure to accurately estimate the risk in the portfolio; this in turn caused a failure to accurately determine the appropriate
allowance for loan and lease losses ("ALLL"). We also discovered a monitoring weakness that contributed to the characterization of the status of certain loans to be classified as fully
performing, when in fact these loans were not. Management concluded that the ALLL and the provision for loan and lease losses as of and for the three and nine months ended September 30, 2009
should be increased by $3.5 million. As a result of the June 30, 2009 ALLL shortfall of $3.5 million, amounts originally recorded as provision for loan and lease losses for the
three months ended September 30, 2009 were restated to the three month period ended June 30, 2009. This restatement created a material misstatement in the consolidated statements of
operations for the three months ended September 30, 2009, as well as related footnote disclosures. During the fourth quarter of 2009 and subsequent to year-end, we began taking the
steps described below to remediate the material

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weakness
surrounding the ALLL as disclosed in our Amendment No. 1 to Form 10-Q/A for the periods ended June 30, 2009 and September 30, 2009.

Mark-to-Market Accounting of Mortgage Loans Held for Sale

Subsequent to year-end, management identified a material weakness in internal controls related to our process to review the
valuation of mortgage loans held for sale. Mortgage loans held for sale represent mortgage loans originated by us and held until sold to secondary market investors. Upon the closing of a residential
mortgage loan originated by us, the mortgage loan is typically warehoused for a period of time and then sold into the secondary market. While in this warehouse phase, mortgage loans held for sale are
recorded at fair value under the fair value option with changes in fair value recognized through earnings. An error was identified in our process to properly identify a certain population of loans
held for sale prior to sending the loan details to our third party valuation firm. As such, we erroneously excluded from the population to be fair valued, loans which were identified for sale but for
which we were awaiting the consideration from the counterparty to complete the sales transaction. These particular loans were correctly classified as loans held for sale on the consolidated balance
sheet; however, the unrealized gain associated with these loans was not reflected in the consolidated balance sheet and the statement of operations. This error resulted in an understatement in the
carrying amount of loans held for sale for the quarters ended March 31, June 30 and September 30, 2009, as well as an understatement of net income for each quarter.
As a result of this material weakness, the Bank increased net gains from mortgage banking by $1.2 million, $14 thousand and $2.7 million for the quarters ended March 31,
June 30, and September 30, 2009, respectively. Additionally, in April 2010, management discovered another process error relating to the accounting for the
mark-to-market of mortgage loans held for sale, which produced an additional increase in net gains from mortgage banking of $215 thousand as of December 31, 2009,
which was correctly reflected in our financial statements for the year ended December 31, 2009. Accordingly, management concluded that these deficiencies constitute a material weakness in
internal controls related to our process to review the valuation of mortgage loans held for sale.

Subsequent Events

In May 2010, management discovered an error related to our process of reviewing, accounting for and the reporting of subsequent events,
which resulted in the improper application of GAAP. Specifically, $6.7 million of the provision for loan and lease losses, which was recorded subsequent to December 31, 2009, should have
been recorded as of December 31, 2009. This error was correctly reflected in our financial statements for the year ended December 31, 2009.

Remediation of Material Weaknesses

Allowance for Loan and Lease Losses

During the fourth quarter 2009 and subsequent to year-end, management began taking steps to remediate the material weakness
surrounding the Allowance for Loan and Lease Losses. The following steps have been completed as of the time of this filing:



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Management
continues to review existing policies, procedures and practices for compliance with risk rating, accountability and timeliness regarding credit administration, risk
recognition, credit management and credit assessment.

Mark-to-Market Accounting of Mortgage Loans Held for Sale

Subsequent to December 31, 2009, and immediately following management's identification of the material weakness surrounding the
mark-to-market accounting of Mortgage Loans Held for Sale, management enhanced an existing process that will ensure the portfolio of Mortgage Loans Held for Sale is complete
prior to delivery to the third party valuation firm. At each month-end a reconciliation is performed to ensure the loans held for sale included in the file sent to the third party
valuation firm reconciles to our internal subledger. This internal subledger of loans held for sale is reconciled to our general ledger. These reconciliations are reviewed by management monthly to
ensure timely completion and that reconciling items, if any, are appropriately addressed.

Subsequent Events

Management has created and implemented procedures to review and evaluate events occurring after the end of each quarter, but prior to
issuing financial statements, to determine if there is any impact on the quarterly or annual financial statements. As of the date of this report, management is continuing their ongoing efforts to
correct, revise and test the processes surrounding the material weaknesses described above. Additional changes will be implemented as determined necessary.

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Table of Contents

PART IIOTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS.

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the
Corporation, or any of its subsidiaries, is a party or of which any of their respective property is the subject.

ITEM 1A.RISK FACTORS.

For a summary of risk factors relevant to our operations, see Part 1, Item 1A, "Risk Factors" in our 2009 Annual Report.
There have been no material changes in the risk factors relevant to our operations, except as discussed below:

Compliance with the recently enacted Dodd-Frank Reform Act may increase our costs of operations and adversely impact our
earnings.

On
July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") into law. The
Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services industry. Among other things, the Dodd-Frank Act creates a new
federal financial consumer protection agency, tightens capital standards, imposes clearing and margining requirements on many derivatives activities, and generally increases oversight and regulation
of financial institutions and financial activities. In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative rulemakings
by various federal agencies to implement various parts of the legislation. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the
financial industry, the competitive environment, and our business. We will have to apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act
and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table provides the total repurchases made by the Company during the three months ended September 30, 2010:

Period

Total
Number of
Shares (or
Units)
Purchased
(a)(1)

Average
Price Paid
per Share
(or Unit)
(b)(1)

Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
(c)

Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that
May Yet Be Purchased Under
the Plans or Programs
(d)July 1 to July 31


490

$
8.40





August 1 to August 31




$






September 1 to September 30




$
8.40





Total


490

$
8.40








(1)Pursuant
to the trust agreement between the Corporation and the trustee, these shares were repurchased from our 401(k) Plan. The purchase price was the
average between the bid and the ask on the repurchase date.


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Table of Contents

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.[REMOVED AND RESERVED.]

ITEM 5.OTHER INFORMATION.

None.

ITEM 6.EXHIBITS.

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index
attached hereto and are incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on November 9, 2010.

FIRST CHESTER COUNTY CORPORATION/s/ JOHN A. FEATHERMAN, III John A. Featherman, III Chairman, Chief Executive Officer & President
(Principal Executive Officer)/s/ ERIC A. SEGAL Eric A. Segal Interim Chief Financial Officer
(Principal Financial and Accounting Officer)


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INDEX TO EXHIBITS

Exhibit
Number

Exhibit2.1

Agreement and Plan of Merger by and between First Chester County Corporation and Tower Bancorp, Inc., dated as of December 27, 2009 (incorporated by reference to Exhibit 2.1 to Corporation's Current Report
on Form 8-K filed December 28, 2009.)2.2

First Amendment to Agreement and Plan of Merger by and between First Chester County Corporation and Tower Bancorp, Inc., dated March 4, 2010 (incorporated by reference to Exhibit 10.1 to Corporation's
Current Report on Form 8-K filed on March 9, 2010.)2.3

Second Amendment to Agreement and Plan of Merger by and between First Chester County Corporation and Tower Bancorp, Inc., dated August 25, 2010 (incorporated herein by reference to Exhibit 10.1 to the
Corporation's Current Report on Form 8-K filed August 26, 2010.)2.4

Third Amendment to Agreement and Plan of Merger by and between First Chester County Corporation and Tower Bancorp, Inc., dated August 25, 2010 (incorporated herein by reference to Exhibit 10.1 to the
Corporation's Current Report on Form 8-K filed November 2, 2010.)2.5

Form of Bank Plan of Merger by and between First National Bank of Chester County and Graystone Tower Bank (included as Exhibit F to the First Amendment to Agreement and Plan of Merger filed herewith as
Exhibit 2.2.)3.1

Amended Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 filed May 14,
2004.)3.2

Amendment to the Articles of Incorporation (incorporated herein by reference to Exhibit 3.2 to the Corporation's Form 8-A filed October 22, 2009.)3.3

Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.3 to the Corporation's Form 8-A filed October 22, 2009.)10.1

Limited Waiver dated May 5, 2010 relating to Loan Agreement between First Chester County Corporation and Graystone Tower Bank dated November 20, 2010, as amended (incorporated by reference to
Exhibit 10.1 to the Corporation's Current Report on Form 8-K filed on May 6, 2010).10.2

Amendment to Limited Waiver dated July 26, 2010, relating to Loan Agreement between First Chester County Corporation and Graystone Tower Bank dated November 20, 2010, as amended (incorporated by reference to
Exhibit 10.49 to the Corporation's Annul Report on Form 10-K filed on July 27, 2010.)10.3

Agreement by and between the Office of the Comptroller of the Currency and First National Bank of Chester County, dated August 27, 2010 (incorporated herein by reference to Exhibit 10.1 to the Corporation's
Current Report on Form 8-K filed September 2, 2010.)10.4

Letter Agreement between First Chester County Corporation and Graystone Tower Bank dated October 28, 2010 (incorporated herein by reference to Exhibit 10.1 to the Corporation's Current Report on
Form 8-K filed November 2, 2010.)10.5

Letter Agreement between First Chester County Corporation and Tower Bancorp, Inc. dated October 28, 2010 (incorporated herein by reference to Exhibit 10.2 to the Corporation's Current Report on
Form 8-K filed November 2, 2010.)


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Exhibit
Number

Exhibit31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*


*Filed
herewith.


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