<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
0F 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1999
Commission file number:
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.
Yes X No_______
-------
1,880,798 common shares, no par value, were outstanding as of June 30,1999.
<PAGE>
FIRST COMMUNITY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
June 30,1999 (unaudited) and December 31, 1998
Condensed Consolidated Statements of Income (Loss) 2
Three months and six months ended June 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Comprehensive
Income (Loss) 3 Three months and six months ended June
30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows 4
Six months ended June 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>
June 30, 1999
(unaudited) December 31,1998
------------- ----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 11,570 $ 6,907
Investment Securities:
Available for sale 24,060 16,477
Mortgaged-backed securities
Available for sale 14,568 14,628
FHLB, at cost which approximates market 978 1,369
Loans receivable held for sale 1,330
Loans receivable held for investment, net 134,455 127,230
Premisies and equipment 2,604 2,407
Other assets 4,978 3,918
--------- -----------
Total assets $ 194,543 $ 172,936
========= ===========
Liabilities and Shareholders' Equity
Deposits:
Demand $ 16,879 $ 16,506
Savings 16,527 18,119
Large denomination certificates of deposit 16,236 18,506
Other certificates of deposit 88,270 87,286
--------- -----------
Total deposits 137,912 140,417
--------- -----------
Borrowed money 5,000 5,000
Other liabilities 4,241 4,362
--------- -----------
Total liabilities 147,153 149,779
--------- -----------
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 27,459
Retained earnings 22,631 23,010
Unearned ESOP shares, 150,217 shares (2,253)
Accumulated other comprehensive income (447) 147
--------- -----------
Total shareholders' equity 47,390 23,157
--------- -----------
Total liabilities and shareholders' equity $ 194,543 $ 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,680 $ 2,740 $ 5,298 $ 5,149
Interest and dividends on investments 526 419 1,042 1,109
-------- ------- -------- -------
Total interest income 3,206 3,159 6,340 6,258
Interest expense:
Interest on deposits 1,501 1,641 3,072 3,311
Interest on borrowed money 63 82 131 173
-------- ------- -------- -------
Total interest expense 1,564 1,723 3,203 3,484
-------- ------- -------- -------
Net interest income before provision for loan losses 1,642 1,436 3,137 2,774
Provision for loan losses 90 100 180 200
-------- ------- -------- -------
Net interest income 1,552 1,336 2,957 2,574
-------- ------- -------- -------
Other income:
Total other operating income 190 119 448 237
General and administrative expenses:
Compensation and fringe benefits 684 622 1,410 1,098
Occupancy 63 28 125 102
Furniture and fixtures 86 70 171 94
Advertising 33 40 60 86
Data processing 65 34 104 70
Contributions 1,511 7 1,511 7
Other 266 191 547 355
-------- ------- -------- -------
Total general and administrative expenses 2,708 992 3,928 1,812
-------- ------- -------- -------
Income (loss) before income taxes (966) 463 (523) 999
Income taxes (253) 211 (144) 397
-------- ------- -------- -------
Net income (loss) ($713) $ 252 ($379) $ 602
-------- ------- -------- -------
PER SHARE DATA, calculated from June 21, 1999, the date of the
Company's initial public offering
Earnings per share, basic (0.16) (0.16)
Earnings per shared, diluted (0.16) (0.16)
Weighted average shares outstanding, basic 1,730,361 1,730,361
Weighted average shares outstanding, diluted 1,730,361 1,730,361
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
Item 1. Continued
First Community Financial Corporation
Condensed Consolidated Statements of Income (Loss)
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1999 1998 1999 1998
------- ----- ------ -----
<S> <C> <C> <C> <C>
Net income (loss) ($713) $ 252 ($379) $ 602
------- ----- ------ -----
Unrealized gain (loss) on available for sale securities (558) (49) (764) (65)
Reclassification of net (gains) losses recognized in net income (24) (30) (136) (55)
Income taxes relating to unrealized gain on available
for sale securities 198 27 306 41
------- ----- ------ -----
Other comprehensive income (loss) (384) (52) (594) (79)
------- ----- ------ -----
Comprehensive income (loss) ($1,097) $ 200 ($973) $ 523
======= ===== ====== =====
</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)
<TABLE>
<CAPTION>
(dollars in thousands) Six months ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($379) $ 602
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Provision for loan losses 180 200
Depreciation 169 98
Accretion of discounts on securities, net (101)
Provision for deferred income taxes (560) (15)
Originantions of loans held for sale (4,426)
Proceeds from sale of loans held for sale 3,112 287
Net loss (gains) on sale of loans (16) (19)
Other operating activities (313) 306
-------- -------
Net cash provided by (used in) operating activities (2,334) 1,459
-------- -------
Investing activities:
Purchases of investment securities available for sale (21,201) (4,005)
Purchases of investment securities held to maturity 0 (865)
Proceeds from redemption of securities and mortgage-backed securities available for sale 12,360 3,313
Proceeds from maturities of securities held to maturity 0 9,189
Proceeds from principal repayment of mortgage-backed securities available for sale 908
Proceeds from principal repayment of mortgage-backed securities held to maturity 0 705
Net increase in loans held for investment (7,405) (8,685)
Purchases of premises and equipment (366) (484)
-------- -------
Net cash used in investing activities (15,704) (833)
-------- -------
Financing activities:
Net increase (decrease) in deposit accounts (2,505) 1,498
Repayments of FHLB borrowings, net of proceeds (1,000)
Proceeds from issuance of stock 25,206
-------- -------
Net cash provided by financing activities 22,701 498
-------- -------
Increase in cash and cash equivalents 4,663 1,124
Cash and cash equivalents, beginning of year 6,907 5,871
-------- -------
Cash and cash equivalents, end of period $ 11,570 $ 6,995
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
Item 1. Continued
First Community Financial Corporation and Subsidiary
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 ot 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 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".
3. Analysis of Allowance for Loan Loss
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 1,331 $ 781
Provision for loan loss 180 200
Net charge-offs (15) 0
------- -------
Balance, end of period $ 1,496 $ 981
======= =======
Ratio of net charge-offs to average loans
outstanding -0.01% 0.00%
Ratio of allowance to total loans outstanding 1.10% 0.79%
at end of period
Ratio of allowance to total nonperforming
assets at end of period 114.37% 410.46%
</TABLE>
5
<PAGE>
Item 1. Continued
First Community Financial Corporation and Subsidiary
Notes to Condensed Consolidated Financial Statements
4. Net Income (Loss) Per Share of Common Stock
Basic income (loss) per share of 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 and six
month periods ended June 30, 1999, the weighted average number of shares
outstanding was 1,730,361. 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). 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 June 30, 1999
Compared to December 31, 1998
Total assets increased 12.5% to $194.5 million at June 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.
Loans held for investment, net of reserves increased 5.7% at June 30, 1999 to
$134.5 million from December 31, 1998 balance of $127.2 million. At June
30,1999, approximately 66.9% 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.
Securities increased 24.2% at June 30, 1999 to $38.6 million compared to the
December 31, 1998 balance of $31.1 million. The increase in securities is
directly attributable to the proceeds received from the initial public offering.
The six-month average balance on securities decreased 10.9 % for the period
ended June 30, 1999 to $31.1 million compared to the $34.9 million-six month
average balance on securities for the six month period ended June 30, 1998.
7
<PAGE>
Deposits decreased to $137.9 million at June 30, 1999 from $140.4 million at
December 31, 1998, a decrease of 1.8%. The decrease in deposits was principally
due to depositors withdrawing funds from accounts to purchase First Community
Financial Corporation common stock issued in the initial public offering.
Borrowed funds, collateralized through an agreement with the Federal Home Loan
Bank ("FHLB"), remained unchanged at $5 million at June 30, 1999. The FHLB
borrowings float with one-month LIBOR index and mature annually at September 30.
The borrowings are matched with a Collateralized Mortgage Obligation (CMO) in a
structured, leveraged, match funded arbitrage. The CMO floats at 95 basis points
over the one-month LIBOR index. The CMO collateralizes the FHLB borrowings.
Asset Quality
First Community's non-performing assets (loans 90 days or more delinquent and
fore- closed real estate and repossessed assets) were $1.3 million, or 0.67% of
total assets, at June 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 six-month period ended June 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 $884 thousand at June 30,1999. A specific
impairment allowance was established in the amount of $281 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 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 $1.2
million and the specific reserve of $281 thousand at June 30, 1999 were adequate
to cover probable losses.
8
<PAGE>
Results of Operation for the three month period ended June 30,1999 compared to
June 30, 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
A net loss of $713 thousand was recorded for the three month period ended June
30, 1999, compared to net income of $251 thousand for the three month period
ended June 30,1998. The net loss was primarily due to a non-recurring $1.5
million contribution to the Community Savings Charitable Foundation. The
contribution was stipulated in the Company's mutual to stock conversion plan.
The initial public offering was successfully completed June 21, 1999. Recurring
earnings for the three months ended June 30, 1999 were $277 thousand compared to
$252 thousand for the prior year period. Recurring earnings represent earnings
computed without including the effect of the $1.5 million non-recurring
contribution.
INTEREST INCOME
Interest income increased 1.5% for the three months ended June 30, 1999 compared
to the three months ended June 30, 1998. The increase in interest income can be
principally attributed to the 25.7% increase in interest on securities resulting
from the investing of proceeds received during the initial public offering
process.
INTEREST EXPENSE
Interest expense decreased 9.2% for the three months ended June 30, 1999
compared to the three months ended June 30,1998. The decrease in interest
expense was a result of 8.5% decrease in interest expense on deposits reflecting
management's efforts to refine deposit-pricing schemes. The 23.1% decrease in
interest expense on FHLB borrowing reflects a 12.3% balance decrease in
outstanding borrowings from $5.7 million at June 30,1998 to $5 million at June
30,1999 and a moderately lower interest rate environment.
9
<PAGE>
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the three-month
period ended June 30, 1999, increased 14.4% or $207 thousand compared to the
three-month period ended June 30,1998. The primary ingredient affecting the
positive growth in net interest income was the increase in Federal Home Loan
Bank overnight deposits interest income and securities interest income caused by
increased balances available for investment from the influx of proceeds received
during the Company's initial public offering process.
PROVISION FOR LOAN LOSSES
A provision of $90 thousand was added to the allowance for loan losses,
increasing the period end balance to $1.5 million or 1.10% of outstanding loans.
A provision of $100 thousand was added to the allowance for loan losses for the
period ending June 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 60.1% to $190 thousand for the
three-month period ended June 30, 1999 compared to the three-month period ended
June 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 Community Savings, 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 $50 thousand or 26.3% of the current period non-
interest income.
NON-INTEREST EXPENSE
Non-interest expense increased 173.1% or $1.7 million for the three months ended
June 30, 1999 compared to the three-month period ended June 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. Fifty-one thousand
dollars or 53% of the increase in equipment and occupancy expense was incurred
related to upgrading in-house computer equipment for preventative measures
related to Y2K. Compensation has increased $62 thousand or 10.1% due to
attracting and retaining commercial bank personnel needed to implement the
company's long-term objectives.
10
<PAGE>
INCOME TAXES
The income tax benefit for the three month period ended June 30,1999 was $253
thousand compared to a provision of $211 thousand for the three months ended
June 30, 1998, a decrease of $464 thousand from the prior year. The decline in
the tax provision was a result of deferred taxes associated with the $1.5
million contribution to the Community Savings Charitable Foundation.
Results of Operation for the six month period ended June 30,1999 compared to
June 30, 1998
NET INCOME
Because of the $1.5 million non-recurring contribution to Community Savings
Charitable Foundation, a net loss of $379 thousand was recorded for the six
month period ended June 30, 1999 compared to net income of $602 thousand for the
six month period June 30, 1998. Recurring earnings for the six months ended June
30, 1999 were $611 thousand compared to $602 thousand for the six month period
ended June 30, 1998.
INTEREST INCOME
Interest income increased $82 thousand or 1.3% for the six months ended June 30,
1999 to $6.3 million at June 30, 1999 compared to $6.2 million at June 30, 1998.
The increase in interest income can be principally attributed to a 2.8% increase
in interest and fees on loans. Interest income on securities decreased 6% or $67
thousand, as the six-month average balance on securities decreased 10.9 % for
the period ended June 30, 1999 to $31.1 million compared to the $34.9 million-
six month average balance on securities for the six month period ended June 30,
1998.
INTEREST EXPENSE
Interest expense decreased 8.1% for the six months ended June 30, 1999 compared
to the six months ended June 30,1998. The decrease in interest expense was a
result of 7.2% decrease in interest expense on deposits reflecting management's
efforts to refine deposit-pricing schemes. The 24.5% decrease in interest
expense on FHLB borrowing reflects a 12.3% balance decrease in outstanding
borrowings from $5.7 million at June 30,1998 to $5 million at June 30,1999.
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the six-month
period ended June 30, 1999, increased 13.1% or $363 thousand compared to the
six-month period ended June 30,1998. The primary ingredients affecting the
positive growth in net interest income was due to the increase in interest and
fees on loans and the decrease in interest expense on deposits and FHLB
borrowings.
11
<PAGE>
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>
Six Months
Ended
June 30, 1999 7.58% 4.46% 3.12% 3.76%
Six Months
Ended
June 30, 1998 7.86% 4.98% 2.88% 3.48%
</TABLE>
PROVISION FOR LOAN LOSSES
A provision of $180 thousand was added to the allowance for loan losses,
increasing the period end balance to $1.5 million or 1.10% of outstanding loans.
A provision of $200 thousand was added to the allowance for loan losses for the
period ending June 30, 1998. The increase to the allowance reflects the
significant change in the loan portfolio composition.
NON-INTEREST INCOME
Non-interest income increased $210 thousand or 88.6% to $448 thousand for the
six-month period ended June 30, 1999 compared to the six-month period ended June
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 Community Savings, 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 $81 thousand or 18.1% of the current period non-
interest income.
NON-INTEREST EXPENSE
Non-interest expense increased 116.7% or $2.1 million for the six months ended
June 30, 1999 compared to the six-month period ended June 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. One hundred
thousand dollars or 52% of the increase in equipment and occupancy expense was
incurred related to upgrading in-house computer equipment for preventative
measures related to Y2K. Compensation has increased $312 thousand or 28.4% due
to hiring, retaining and attracting commercial bank personnel needed to
implement the company's long-term objectives.
12
<PAGE>
INCOME TAXES
The income tax benefit for the six-month period ended June 30,1999 was $144
thousand compared to a provision of $397 thousand for the six months ended June
30, 1998, a decrease of $542 thousand from the prior year. The decline in the
tax provision is a result of deferred taxes associated with the $1.5 million
contribution to the Community Savings Charitable Foundation.
LIQUIDITY
The Company's policy is to provide 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 June 30, 1999, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $50.2 million,
representing 35.1% 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 June 30, 1999, outstanding off-balance sheet commitments to
extend credit in the form of loan origination's totaled $14.7 million. Available
lines of credit totaled $6 million. Management considers current liquidity
levels adequate to meet the Company's cash flow requirements.
CAPITAL
Shareholder's equity at June 30, 1999 was $47.4 million, an increase of $24.3
million or 104.9% from $23.1 million at December 31, 1998 and an increase of $24
million or 102.9% from $23.4 million one year earlier. The increase is 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 June 30, 1999 was $447 thousand, net of tax, of accumulated other
comprehensive loss related to unrealized losses on securities available for sale
compared to $19 thousand of accumulated other comprehensive income related to
unrealized gains one year earlier. Also included in shareholder's equity at June
30, 1999 was $2.3 million of unearned common stock for the Employee Stock
Ownership Plan, representing 150,217 shares.
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 June 30, 1999, Community Savings' ratio of Tier
I capital to average assets was 17.5%. 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 June 30, 1999, Community Savings had a ratio of
qualifying total capital to risk-weighted assets of 43.64%.
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 processes 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. Operating plans are being
developed which would be implemented in the event power failures or failures in
communications equipment prevent use of computer systems serving Community
Savings or otherwise impair Community Savings operations. Management is in the
process of identifying customers
14
<PAGE>
who pose Y2K risks to the institution, and is developing the necessary
capabilities to 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
On July 15, 1999 Community Savings Bank, a wholly-owned subsidiary of First
Community Financial Corporation, increased an existing securities leveraged
arbitrage position by $25 million. The Bank purchased $25 million of US Agency
Collateralized Mortgaged Obligations that re-price monthly at 75 basis points
over LIBOR. The purchased securities were funded by borrowings from the Federal
Home Loan Bank of Atlanta, GA that re-price monthly at LIBOR. The arbitrage
should realize $124 thousand net income, after tax, per annum.
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
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
First Community Financial Corporation
-------------------------------------
Registrant
Date August 10,1999 /S/ Christopher B. Redcay
-------------- -------------------------
Christopher B. Redcay
Treasurer and Chief Financial Officer
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