<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999
Commission file number: 000-26117
FIRST COMMUNITY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2119954
- ------------------------------- ------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
708 SOUTH CHURCH STREET, BURLINGTON, N.C. 27215
- --------------------------------------------------------------------------------
(Address of principal executive offices)
336-229-2744
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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. State the number of shares outstanding of
each issuer's classes of common equity, as of the latest practicable date:
Yes X No ______
-------
1,880,798 common shares, no par value, were outstanding as of September
30, 1999.
<PAGE>
FIRST COMMUNITY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
September 30, 1999 (unaudited) and December 31, 1998
Condensed Consolidated Statements of Income (Loss) 2
Three months and nine months ended September 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) 3
Three months and nine months ended September 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows 4
Nine months ended September 30, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements 5 - 6
Item 2 Management's Discussion and Analysis of Financial Condition 7 - 15
and Results of Operations
PART II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities and Use of Proceeds 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission to Matters to a vote of Security Holders 15
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
First Community Financial Corporation
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1999
(unaudited) December 31, 1998
------------------ -----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 6,953 $ 6,907
Investment securities:
Available for sale 25,451 16,477
Mortgaged-backed securities
Available for sale 41,443 14,628
FHLB stock, at cost which approximates market 1,800 1,369
Loans receivable held for sale 1,602
Loans receivable held for investment, net 141,585 127,230
Premises and equipment 2,530 2,407
Other assets 5,348 3,918
----------- -----------
Total assets $ 226,712 $ 172,936
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Demand $ 16,505 $ 16,506
Savings 16,239 18,119
Large denomination certificates of deposit 17,044 18,506
Other certificates of deposit 89,237 87,286
----------- -----------
Total deposits 139,025 140,417
Borrowed money 36,000 5,000
Other liabilities 3,939 4,362
----------- -----------
Total liabilities 178,964 149,779
Shareholders' Equity:
Preferred stock,
Authorized 5,000,000 shares; no shares issued and outstanding
Common stock, no par value:
20,000,000 shares authorized; 1,880,798 shares issued and outstanding 28,212
Retained earnings 22,339 23,010
Unearned ESOP shares, 147,685 shares (2,216)
Accumulated other comprehensive income (loss) (587) 147
----------- -----------
Total shareholders' equity 47,748 23,157
----------- -----------
Total liabilities and shareholders' equity $ 226,712 $ 172,936
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
1
<PAGE>
Item 1. Continued
First Community Financial Corporation
Condensed Consolidated Statements of Income (Loss)
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,692 $ 2,281 $ 7,990 $ 7,430
Interest and dividends on investments 1,038 895 2,080 2,003
---------- ----------- ---------- ----------
Total interest income 3,730 3,176 10,070 9,433
Interest expense:
Interest on deposits 1,464 1,656 4,536 4,966
Interest on borrowed money 372 81 503 255
---------- ----------- ---------- ----------
Total interest expense 1,836 1,737 5,039 5,221
---------- ----------- ---------- ----------
Net interest income before provision for loan losses 1,894 1,439 5,031 4,212
Provision for loan losses 90 150 270 350
---------- ----------- ---------- ----------
Net interest income 1,804 1,289 4,761 3,862
---------- ----------- ---------- ----------
Other income:
Total other operating income 199 139 647 377
General and administrative expenses:
Compensation and fringe benefits 769 1,100 2,179 2,199
Occupancy 63 56 188 158
Furniture and fixtures 88 69 260 163
Advertising 41 69 101 155
Data processing 40 145 144 215
Contributions 3 53 1,513 60
Other 215 295 762 650
---------- ----------- ---------- ----------
Total general and administrative expenses 1,219 1,787 5,147 3,600
---------- ----------- ---------- ----------
Income (loss) before income taxes 784 (359) 261 639
Income tax expense (benefit) 286 (190) 142 207
---------- ----------- ---------- ----------
Net income (loss) $ 498 ($169) $ 119 $ 432
========== =========== ========== ==========
PER SHARE DATA, calculated from June 21, 1999, the
date of the Company's initial public offering
Earnings per share, basic 0.29 0.13
Earnings per shared, diluted 0.29 0.13
Weighted average shares outstanding, basic 1,731,470 1,731,370
Weighted average shares outstanding, diluted 1,731,470 1,731,370
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
Item 1. Continued
First Community Financial Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 498 ($169) $ 119 $432
-------- -------- -------- --------
Unrealized gain (loss) on available for sale securities (202) 148 (966) 83
Reclassification of net (gains) losses recognized in net income (10) (30) (146) (85)
Income taxes relating to unrealized gain (loss) on available
for sale securities 72 (40) 378 1
-------- -------- -------- --------
Other comprehensive income (loss) (140) 78 (734) (1)
Comprehensive income (loss) $ 358 ($91) ($615) $431
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
Item 1. Continued
First Community Financial Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 119 $ 432 $ 119,374 $ 432,364
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 270 350 270,000 350,000
Depreciation 253 147 252,680 146,818
Accretion of discounts on securities, net (162) (1) (161,581) (1,022)
Provision for deferred income taxes (457) (320) (456,769) (320,424)
Originations of loans held for sale (5,199) (5,198,718)
Proceeds from sale of loans held for sale 3,616 5,920 3,615,967 5,919,840
Net loss (gains) on sale of loans (19) (24) (19,230) (24,360)
Other operating activities (1,005) 347 (1,005,238) 346,540
---------- ---------- ------------ ------------
Net cash provided by (used in) operating activities (2,584) 6,850 (2,583,515) 6,849,756
---------- ---------- ------------ ------------
Investing activities:
Purchases of investment securities available for sale (55,507) (15,658) (55,507,416) (15,657,775)
Proceeds from redemption of securities and mortgage-backed
securities available for sale 15,815 12,031 15,814,982 12,031,052
Proceeds from maturities of securities held to maturity 0 11,425 11,425,167
Proceeds from principal repayment of mortgage-backed
securities available for sale 2,507 2,507,439
Proceeds from principal repayment of mortgage-backed
securities held to maturity 0 1,885 1,884,809
Net increase in loans held for investment (14,626) (18,816) (14,625,699) (18,816,231)
Purchases of premises and equipment (375) (447) (374,831) (447,413)
---------- ---------- ------------ ------------
Net cash used in investing activities (52,186) (9,580) (52,185,525) (9,580,391)
---------- ---------- ------------ ------------
Financing activities:
Net increase (decrease) in deposit accounts (1,391) 3,327 (1,391,183) 3,326,592
FHLB borrowings 31,000 0 31,000,000
Repayments of FHLB borrowings 0 (1,700) 0 (1,700,000)
Proceeds from issuance of stock 25,206 25,205,673
---------- ---------- ------------ ------------
Net cash provided by financing activities 54,814 1,627 54,814,490 1,626,592
---------- ---------- ------------ ------------
Increase in cash and cash equivalents 45 (1,104) 45,450 (1,104,043)
Cash and cash equivalents, beginning of period 6,907 5,871 6,907,124 5,870,727
---------- ---------- ------------ ------------
Cash and cash equivalents, end of period $ 6,953 $ 4,767 $ 6,952,574 $ 4,766,684
========== ========== ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
Item 1. Continued
First Community Financial Corporation
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim information and with the instructions to FORM 10-Q SB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation
have been Included. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
2. Conversion from Mutual to Stock form of Ownership
On June 14, 1999, members of Community Savings Bank, SSB eligible to vote
at a special meeting, voted to approve the conversion of Community Savings
Bank, SSB. The conversion involved the transformation of Community Savings
Bank, SSB from mutual to stock form, First Community's acquisition of all
of the outstanding capital stock of Community Savings Bank, SSB and First
Community's sale of its common stock to the depositors and borrowers of
Community Savings Bank, SSB and other persons who had the right to purchase
shares. The sale was completed June 21, 1999, and First Community Financial
Corporation began trading on June 21, 1999 on the NASDAQ national markets
exchange under the symbol "FCFN". 1,880,798 shares of no par common stock
were issued raising $25.2 million of net proceeds.
3. Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Beginning balance $ 1,331 $ 781
Provision for loan loss $ 270 $ 350
Net charge-offs (15) 0
Balance, end of period $ 1,586 $ 1,131
============ ===========
Ratio of net charge-offs to average loans
outstanding -0.01% 0.00%
Ratio of allowance to total loans outstanding 1.09% 0.87%
at end of period
Ratio of allowance to total nonperforming
assets at end of period 116.19% 518.81%
</TABLE>
5
<PAGE>
Item 1. Continued
First Community Financial Corporation
Notes to Condensed Consolidated Financial Statement
4. Net Income (Loss) Per Share of Common Stock
Basic Income (loss) per share common stock is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
(less unearned ESOP shares) during the period. Diluted net income (loss)
per share of common stock is computed by dividing net income (loss) by the
weighted average number of common shares and common stock equivalents
outstanding during the period. For loss periods, diluted net loss per share
is the same as basic net loss per share. The inclusion of common stock
equivalents in loss periods would be anti dilutive. For the three month
period ended September 30, 1999, the weighted average number of shares
outstanding was 1,731,470. For the nine month period ended September 30,
1999, the weighted average number of shares outstanding was 1,731,370. Net
income (loss) per share is computed from the date of conversion.
6
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Information set forth below contains certain forward-looking statements, which
are based on assumptions, and describes future plans, strategies and
expectations of First Community Financial Corporation ("First Community" or "the
company"). These forward-looking statements are generally identified by use of
the words "believe", "expect", "intend", "anticipate", "estimate", "project", or
similar expressions. First Community's ability to predict results or the actual
effect of future plans and strategies is inherently uncertain. Factors which
could have a materially adverse effect on the operations of First Community and
its wholly owned subsidiary, Community Savings Bank, SSB ("Community Savings")
include, but are not limited to, changes in: interest rates, general economic
conditions, legislation and regulation, monetary and fiscal policies of the U.S.
Government including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
its market area and accounting principles and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
Financial Condition At September 30, 1999
Compared to December 31, 1998
Total assets increased 17.5% to $226.7 million at September 30, 1999, compared
to $172.9 million at December 31, 1998. The increase in assets was principally a
result of $ 25.2 million of net proceeds received from the company's successful
initial public offering completed June 21, 1999 and a leveraged securities
transaction initiated in July 1999 in the amount of $25 million.
Loans held for investment, net of reserves, increased 11.3% at September 30,
1999 to $141.6 million from the December 31, 1998 balance of $127.2 million. At
September 30, 1999, approximately 64.3% of the Community Savings' gross loan
portfolio consisted of loans secured by one- to- four family residential
properties. At December 31, 1998, 75.1% of gross loans were secured by 1-4
family residential properties. Loan production continued to emphasize commercial
and consumer credits in an effort to diversify the loan portfolio and reduce the
reliance on single family 1-4 residential loans. Commercial loans have increased
62.6% or $11.3 million since December 31, 1998 and the Construction loan
portfolio has increased 64.1% or $6 million since December 31, 1998.
Securities increased 115.2% at September 30, 1999 to $66.9 million compared to
the December 31, 1998 balance of $31.1 million. The increase in securities is
attributable to
7
<PAGE>
the re-investment of the proceeds received from the initial public offering and
a $25 million leveraged bond transaction initiated July 15, 1999. The nine-month
average balance of securities increased 24.6% for the period ended September
30, 1999 to $42.4 million compared to the $34.1 million average balance on
securities for the nine month period ended September 30, 1998.
Deposits decreased to $139 million at September 30, 1999 from $140.4 million at
December 31, 1998, a decrease of 1%. Depositors withdrew $2.9 million from
Community Savings Bank deposit accounts to purchase First Community Financial
Corporation common stock issued in the initial public offering. Normal deposit
growth of $ 1.5 million replaced 52% of investors' withdrawals. The Bank
incurred a net decrease of $1.4 million in deposits for the nine month period
ended September 30, 1999. Local deposit competition is very strong.
Borrowed funds, collateralized through an agreement with the Federal Home Loan
Bank ("FHLB"), increased to $36 million at September 30, 1999 from $5 million at
December 31, 1998, an increase of 620%. $30 million of the FHLB borrowings float
with one-month LIBOR index and mature bi-annually at September 30, 2001. The
borrowings are matched with Collateralized Mortgage Obligations (CMO's) in a
structured, leveraged, match funded arbitrage. The CMO's reprice monthly at 80
basis points over the one-month LIBOR index. The remaining $6 million of FHLB
borrowings are short-term proceeds used to facilitate normal loan growth and
deposit fluctuations.
Asset Quality
First Community's non-performing assets (loans 90 days or more delinquent and
fore- closed real estate and repossessed assets) were $1.4 million, or 0.60% of
total assets, at September 30, 1999, compared to $248 thousand, or 0.14% of
total assets, at December 31, 1998. Loans charged-off against the allowance for
loan losses for the nine-month period ended September 30, 1999 totaled $15
thousand or .01% of average loans outstanding.
Management performs a four-step procedure in determining the appropriate level
for the allowance for loan losses. First, at the end of each quarter, loan
department personnel perform a review of the bank's loan portfolio. Individual
loans are assigned an internal classification designation of unclassified,
substandard, doubtful, or loss based on historical performance and specific
circumstances known to the bank regarding the financial situation of the
customer. Next, impaired loans are identified and a determination is made as to
the necessity of creating a specific allowance. Any impairment allowance is
based on the expected cash flows and the collateral available. There were two
materially impaired loans totaling $897 thousand at September 30, 1999. A
specific impairment allowance was established in the amount of $282 thousand.
Next, the substandard and doubtful classifications are analyzed and a risk
percentage is determined considering each type of loan and the severity of any
probable loss. All loans
8
<PAGE>
categorized as "loss" are fully reserved. The final procedure is to assign risk
percentages to unclassified loans based on historical and industry information
regarding probable, yet unidentifiable, losses inherent in the portfolio.
Industry factors are adjusted to reflect individual bank circumstances. Since
First Community is entering new lines of business with little past experience to
draw on in the areas of commercial, construction and consumer lending, an entry
period of higher than industry norm loss is reflected in the risk percentages
assigned these loan categories.
In the opinion of management, the general allowance for loan losses of $1.3
million and the specific reserve of $282 thousand at September 30, 1999 were
adequate to cover probable losses.
Results of Operation for the three month periods ended September 30, 1999 and
1998
Net income is influenced significantly by the performance of net interest
income. Net interest income is the difference between interest income (derived
from revenues generated from loans, investments and other earning-assets), and
interest expense (consisting principally of interest paid on deposits and
borrowings). Operations may be materially affected by national and
international economic conditions, monetary and fiscal policies of the Federal
government, and policies of regulatory authorities.
NET INCOME
Net income of $498 thousand was recorded for the three month period ended
September 30, 1999, compared to a net loss of $169 thousand for the three month
period ended September 30, 1998, a $667 thousand or 394% improvement. The
increase in net income is primarily due to a 31.6% increase in net interest
income or $455 thousand, and a $330 thousand or 30% reduction in compensation,
as a deferred compensation plan has been fully funded.
INTEREST INCOME
Interest income increased 17.5% for the three months ended September 30, 1999
compared to the three months ended September 30, 1998. The increase in interest
income is two fold. Interest and fees on loans increased 18% or $411 thousand
reflecting managements continued emphasis on developing commercial, construction
and consumer lending. Interest on securities increased 16% resulting from the
investing of proceeds received during the initial public offering process and an
arbitrage in the amount of $25 million booked July 15, 1999.
INTEREST EXPENSE
Interest expense increased 5.7% for the three months ended September 30, 1999
compared to the three months ended September 30,1998. The increase in interest
expense was a result of an 11.6% decrease in interest expense on deposits
reflecting management's efforts to refine deposit-pricing schemes. A $291
thousand increase in
9
<PAGE>
interest expense on FHLB borrowing reflects a $31 million balance increase in
outstanding borrowings from $5 million at September 30, 1998 to $36 million at
September 30, 1999.
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the three-month
period ended September 30, 1999, increased 31.6% or $455 thousand compared to
the three-month period ended September 30, 1998. The positive growth in net
interest income was due to the 17.5% increase in interest income for the period
compared to a 5.7% increase in interest expense.
PROVISION FOR LOAN LOSSES
A provision of $90 thousand was added to the allowance for loan losses,
increasing the period end balance to $1.6 million or 1.09% of outstanding loans.
A provision of $150 thousand was added to the allowance for loan losses for the
three-month period ending September 30, 1998. The increase to the allowance
reflects the significant change in the loan portfolio composition.
NON-INTEREST INCOME
Non-interest income increased $71 thousand or 43% to $199 thousand for the
three-month period ended September 30, 1999 compared to the three-month period
ended September 30, 1998. Although management is encouraged by the increase in
non-interest income, continued emphasis will be placed on improving non-interest
income revenue. A wholly owned subsidiary of the Bank, Community Financial
Services, Inc., a retail securities broker and financial advisor, was formed in
the fourth quarter of 1997, for the sole purpose of enhancing non-interest
income. This newly formed subsidiary contributed $65 thousand or 32.5% of non-
interest income for the three-month period ended September 30, 1999.
NON-INTEREST EXPENSE
Non-interest expense decreased 31.8% or $568 thousand for the three months ended
September 30, 1999 compared to the three-month period ended September 30, 1998.
The decrease in non-interest expense is due primarily to a $331 thousand
reduction in compensation expense as a deferred compensation plan had been fully
funded as of December 31, 1998. The decrease in non-interest expense was also
the result of $104 thousand or 72.2% reduction in data processing servicer
expense related to a computer system upgrade in 1998 and a $50 thousand
reduction in contributions and $29 thousand reduction in advertising expense.
The Bank incurred a $19 thousand dollar or 28.2% increase in equipment and
fixtures expense primarily related to upgrading in-house computer equipment.
10
<PAGE>
INCOME TAXES
The income tax provision for the three month period ended September 30,1999 was
$286 thousand compared to an income tax benefit of $190 thousand for the three
months ended September 30, 1998, an increase of $476 thousand from the prior
year period. This principally results from the increase in earnings before
income taxes.
Results of Operation for the nine month periods ended September 30, 1999 and
1998
NET INCOME
Net income for the nine months ended September 30, 1999 was $119 thousand, a
decrease of $313 thousand or 72%. Net income for the nine month period ended
September 30, 1998 was $432 thousand. Earnings for the nine month period ended
September 30, 1999 were significantly impacted by a $1.5 million non-recurring
contribution to Community Savings Charitable Foundation, established as a
component of the initial public offering completed June 21, 1999. Recurring
earnings for the nine months ended September 30, 1999 were $1.1 million.
INTEREST INCOME
Interest income increased $636 thousand or 6.75% for the nine months ended
September 30, 1999 to $10.1 million at September 30, 1999 compared to $9.4
million for the nine months ended September 30, 1998. The increase in interest
income can be principally attributed to a $21.2 million increase in the average
balance of securities and loans receivable from 1998 to 1999, offset by a
decrease in the average annualized rate earned on all interest bearing assets
from 7.80% to 7.44%.
INTEREST EXPENSE
Interest expense decreased 3.5% for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998. The decrease in interest
expense was principally a result of a 48 basis point decrease in the annualized
rate paid on interest bearing liabilities reflecting management's efforts to
refine deposit-pricing schemes. This rate decrease was offset by a $10.9 million
increase in the average balance outstanding of interest bearing liabilities.
FHLB borrowings increased to $36 million at September 30, 1999 from $5 million
at September 30, 1998.
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the nine month
period ended September 30, 1999, increased 19.4% or $818 thousand compared to
the nine month
11
<PAGE>
period ended September 30, 1998. The primary ingredients affecting the positive
growth in net interest income were a 6.75% increase in interest income and a
3.5% decrease in interest expense.
Comparable spreads and net interest margins were as follows:
<TABLE>
<CAPTION>
Annualized Yield Annualized Yield
on Interest on Interest Annualized Annualized
Earning Assets Bearing Liabilities Spread Margin
----------------- -------------------- ----------- -----------
<S> <C> <C> <C> <C>
Nine Months
Ended
September 30, 1999 7.44% 4.44% 3.00% 3.72%
Nine Months
Ended
September 30, 1998 7.80% 4.92% 2.88% 3.48%
</TABLE>
PROVISION FOR LOAN LOSSES
A provision of $270 thousand was added to the allowance for loan losses,
increasing the period end balance to $1.6 million or 1.09% of outstanding loans
at September 30, 1999. A provision of $350 thousand was added to the allowance
for loan losses for the period ending September 30, 1998. The increase to the
allowance reflects the significant change in the loan portfolio composition.
NON-INTEREST INCOME
Non-interest income increased $270 thousand or 71.7% to $647 thousand for the
nine month period ended September 30, 1999 compared to the nine month period
ended September 30, 1998. Although management is encouraged by the increase in
non-interest income, continued emphasis will be placed on improving non-interest
income revenue. A wholly owned subsidiary of the Bank, Community Financial
Services, Inc., a retail securities broker and financial advisor, was formed in
December 1997, for the sole purpose of enhancing non-interest income. This newly
formed subsidiary contributed $146 thousand or 22.6% of the current period non-
interest income.
NON-INTEREST EXPENSE
Non-interest expense increased 43% or $1.5 million for the nine months ended
September 30, 1999 compared to the nine month period ended September 30, 1998.
The increase in non-interest expense is due primarily to a $1.5 million non-
recurring contribution to the Community Savings Charitable Foundation.
12
<PAGE>
INCOME TAXES
Income tax expense for the nine month period ended September 30, 1999 was $142
thousand compared to a provision of $207 thousand for the nine months ended
September 30, 1998, a decrease of $65 thousand from the prior year. The net
decrease in the tax provision is principally a result of the 60% decrease in
income before income taxes as previously discussed above.
LIQUIDITY
The Company's policy is to maintain adequate liquidity to meet continuing loan
demand and withdrawal requirements while paying normal operating expenses and
satisfying regulatory liquidity guidelines. Maturing securities, principal
repayments of loans and securities, deposits, income from operations and
borrowings are the main sources of liquidity. Short-term investments (overnight
investments with the Federal Home Loan Bank and Federal Funds Sold) and short-
term borrowings (Federal Home Loan Bank advances, Repurchase Agreements and
Federal Funds Purchased) are the primary cash management liquidity tools. The
investment portfolio provides secondary liquidity.
At September 30, 1999, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $73.8 million,
representing 42.2% of deposits and borrowed funds. As Community Savings
continues to grow, its loan portfolio liquidity will continue to be leveraged.
The primary uses of liquidity are to fund loans, provide for deposit
fluctuations and invest in other non-loan earning assets when excess liquidity
is available. At September 30, 1999, outstanding off-balance sheet commitments
to extend credit in the form of loan originations totaled $16.8 million.
Available lines of credit totaled $5.6 million. Management considers current
liquidity levels adequate to meet the Company's cash flow requirements.
CAPITAL
Shareholder's equity at September 30, 1999 was $47.8 million, an increase of
$24.6 million or 106.5% from $23.1 million at December 31, 1998 and an increase
of $24.5 million or 105.2% from $23.3 million one year earlier. The increase is
principally due to the Company's initial public offering issuance of 1,880,798
shares of no par common stock that was completed June 21, 1999. Included in
shareholder's equity at September 30, 1999 was $587 thousand, net of tax, of
accumulated other comprehensive loss related to unrealized losses on securities
available for sale compared to $97 thousand of accumulated other comprehensive
income related to unrealized gains one year earlier. Also included in
shareholder's equity at September 30, 1999 was $2.2 million of unearned common
stock for the Employee Stock Ownership Plan, representing 147,712 shares of
common stock.
13
<PAGE>
FDIC regulations require banks to maintain certain capital adequacy ratios,
leverage ratios and risk-based capital ratios. Banks supervised by the FDIC
must maintain a minimum leverage ratio of core (Tier I) capital to average
adjusted assets ranging from 3% to 5%. At September 30, 1999, Community
Savings' ratio of Tier I capital to average assets was 14.9%. The FDIC's risk-
based capital guidelines require banks to maintain risk-based capital to risk-
weighted assets of at least 8%. Risk-based capital for Community Savings is
defined as Tier I capital and the reserve for loan losses. At September 30,
1999, Community Savings had a ratio of qualifying total capital to net risk-
weighted assets of 26.6%.
First Community is also subject to capital adequacy guidelines of the Board of
Governors of the Federal Reserve (the "Federal Reserve Board"). Capital
requirements of the Federal Reserve Board are similar to those of the FDIC.
First Community significantly exceeds regulatory capital requirements.
Management anticipates that the Company will continue to exceed capital adequacy
requirements without altering current operations or strategies.
Year 2000
Y2K has become a worldwide concern. The underlying cause of this problem rests
with antiquated computer programs identifying dates of calendar years with two
digits rather than four digits. Most old computer programs with date-sensitive
software may recognize the year 2000 as "00" and misinterpret the year as 1900.
This date misinterpretation could result in system failures or miscalculations
causing disruptions of operations, including temporary interruption of
utilities, telephone lines, inability to process transactions, generate
statements, or engage in normal business activities.
First Community retains the services of a third party data processing service
center to process loan, deposit, general ledger, retail platform systems and
compliance data for the Bank. The Company in conjunction with its data
processing service center, conducted a Y2K test during October 1998 along with
eleven of the service center's other clients. Fifteen errors were detected
during the test. Fourteen of the errors were cosmetic, having to do with the
appearance of the year rather than then a true data error. The fourteen cosmetic
errors were corrected during the test period. The one actual Y2K error that was
reported, a General Ledger closeout of 1999 occurring in January 2000, was
repaired and successfully re-tested during a November 1998 test.
First Community has replaced nearly all-existing software and 100% of all
hardware with year 2000 certified compliant systems. Several of the Bank's
telecommunications systems have been replaced with year 2000 compliant systems.
All mission critical functions have been tested. A Comprehensive Business
Resumption Plan has been developed which would be implemented in the event power
failures or failures in communications equipment prevent use of computer systems
serving Community
14
<PAGE>
Savings or otherwise impair Community Savings operations. System-wide testing of
the Business Resumption Plan was conducted September 21, 1999 for the Accounting
and Operations departments. On October 4, 1999, the plan was tested for the
retail branches and the Loan Department. Although both tests were successful,
the Bank's Y2K team will continue to verify off-line and alternate manual
procedures through the end of the 1999 calendar year. Management has identified
those clients who pose Y2K risks to the institution, and is developing the
necessary capabilities to monitor and adequately respond to the risks
identified.
The cost to bring all systems up to Y2K specifications are expected to total
$550,000 of which amount approximately $428,000 has been incurred. There can be
no guarantee that the systems of other companies on which First Community relies
will be converted in a timely manner, or that First Community's actions will
effectively deal with all potential Year 2000 problems. Any such failures in
addressing potential Year 2000 problems could have a materially adverse effect
on the bank and on First Community.
Recent Events
None
Part II - Other Information
Item 1
Legal proceedings.
None.
Item 2
Changes in Securities and Use of Proceeds.
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
Item 3
Defaults upon Senior Securities
Not applicable.
Item 4
Submission of Matters to a vote of securities holders.
None.
15
<PAGE>
Item 5
Other information.
Not applicable.
Item 6
Exhibits and reports on form 8-K.
(a) Exhibits
27.01.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
16
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<PAGE>
<ARTICLE> 9
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
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<INT-BEARING-DEPOSITS> 3,327 3,822
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0 0
0 0
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<LOAN-LOSSES> 270 350
<SECURITIES-GAINS> 146 85
<EXPENSE-OTHER> 5,147 3,600
<INCOME-PRETAX> (523) 639
<INCOME-PRE-EXTRAORDINARY> 119 432
<EXTRAORDINARY> 0 0
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<NET-INCOME> 119 432
<EPS-BASIC> 0.13 0.00
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