<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, 2000
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
incorporation or organization) Identification Number)
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
------------ -------------
1,786,758 common shares, no par value, were outstanding as of August 3, 2000.
<PAGE>
FIRST COMMUNITY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX
<TABLE>
<S> <C>
Page
PART I FINANCIAL INFORMATION Number
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 1
June 30, 2000 and December 31, 1999
Condensed Consolidated Statements of Income 2
Three and six months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Comprehensive Income 3
Three and six months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flow 4
Six months ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 5 - 6
Item 2 Management's Discussion and Analysis of Financial Condition 7 - 16
and Results of Operations
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission to Matters to a vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
</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, 2000
(unaudited) December 31,1999
----------- ----------------
<S> <C>
Assets
Cash and cash equivalents $9,576 $6,583
Investment Securities:
Available for sale 17,630 24,623
Mortgaged-backed securities
Available for sale 32,317 39,126
FHLB, at cost which approximates market 1,925 1,600
Loans receivable held for sale 377 213
Loans receivable held for investment, net 164,096 150,530
Premisies and equipment 2,397 2,483
Deferred income taxes 2,870 2,792
Other assets 4,385 2,791
-------- --------
Total assets $235,573 $230,741
-------- --------
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand $2,575 $2,585
Interest-bearing demand 14,344 14,247
Savings 14,653 15,612
Certificates of deposits, $100,000 and over 21,781 21,918
Other time deposits 100,213 93,178
-------- --------
Total deposits 153,566 147,540
-------- --------
Borrowed money 31,500 32,000
Advance payments by borrowers for property taxes and insurance 537 225
Other liabilities 3,821 3,708
-------- --------
Total liabilities 189,424 183,473
-------- --------
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized;
no shares issued or outstanding
Common stock, no par value, 20,000,000 shares authorized;
'1,786,758 shares issued and outstanding at June 30,2000 and
1,880,798 shares issued and outstanding at December 31, 1999 25,821 27,335
Unearned ESOP shares, 140,197 shares at June 30, 2000 and
145,207 shares at December 31, 1999 (2,103) (2,178)
Retained earnings, substantially restricted 23,849 23,477
Accumulated other comprehensive income (loss), net (1,418) (1,366)
-------- --------
Total shareholders' equity 46,149 47,268
-------- --------
Total liabilities and shareholders' equity $235,573 $230,741
-------- --------
</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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Interest income:
Interest and fees on loans $3,341 $2,680 $6,439 $5,298
Interest and dividends on investments 1,026 527 2,141 1,042
------ ------ ------ ------
Total interest income 4,367 3,207 8,580 6,340
Interest expense:
Interest on deposits 1,858 1,502 3,539 3,072
Interest on borrowed money 507 63 1,028 131
------ ------ ------ ------
Total interest expense 2,365 1,565 4,567 3,203
------ ------ ------ ------
Net interest income before provision for loan losses 2,002 1,642 4,013 3,137
Provision for loan losses 105 90 200 180
------ ------ ------ ------
Net interest income 1,897 1,552 3,813 2,957
------ ------ ------ ------
Other income:
Total other operating income 198 190 383 448
General and administrative expenses:
Compensation and fringe benefits 1,133 684 1,944 1,410
Occupancy 72 63 128 125
Furniture and fixtures 81 86 174 171
Advertising 38 33 103 60
Data processing 51 65 94 104
Contributions 2 1,510 3 1,510
Other 313 267 575 548
------ ------ ------ ------
Total general and administrative expenses 1,690 2,708 3,021 3,928
------ ------ ------ ------
Income before income taxes 405 (966) 1,175 (523)
Income taxes 132 (253) 374 (144)
------ ------ ------ ------
Net income $273 ($713) $801 ($379)
------ ------ ------ ------
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) $0.47 ($0.16)
Earnings per shared, diluted $0.16 ($0.16) $0.47 ($0.16)
Weighted average shares outstanding, basic 1,698,862 1,730,361 1,698,862 1,730,361
Weighted average shares outstanding, diluted 1,698,862 1,730,361 1,698,862 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 Comprehensive Income (Loss)
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Net income (loss) $273 ($713) $801 ($379)
---- ------ ---- -----
Unrealized gain (loss) on available for sale securities (128) (558) (99) (764)
Reclassification of net (gains) losses recognized in net income (2) (24) 22 (136)
Income taxes relating to unrealized gain on available 44 198 26 306
---- ---- ---- -----
for sale securities
Other comprehensive income (loss) (86) (384) (52) (594)
---- ----- ---- -----
Comprehensive income (loss) $187 ($1,097) $749 ($973)
---- ------- ---- -----
</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>
Six months ended
June 30,
2000 1999
---- ----
<S> <C>
Cash flows from operating activities:
Net income (loss) $801 ($379)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Provision for loan losses 200 180
Depreciation 159 169
ESOP Contribution 75
MRP Compensation 297
Loss (gain) on sale of securities 22 (136)
(Gain) on sale of assets (54)
Accretion of discounts on securities, net (31) (101)
Provision for deferred income taxes (51) (560)
Originations of loans held for sale (580) (4,426)
Proceeds from sale of loans held for sale 417 3,112
Net loss (gains) on sale of loans (1) (16)
Other operating activities (629) (177)
------ ------
Net cash provided by (used in) operating activities 625 (2,334)
------ ------
Investing activities:
Purchases of investment securities available for sale (1,525) (21,201)
Proceeds from sales of securities available for sale 8,110 0
Proceeds from redemptions of securities available for sale 6,060 12,360
Proceeds from principal repayment of mortgage-backed securities available for sale 763 908
Net increase in loans held for investment (13,959) (7,405)
Addidtions to other real estate (658)
Proceeds from sale of premises and equipment 68
Purchases of premises and equipment (73) (366)
--- ----
Net cash used in investing activities (1,214) (15,704)
------ -------
Financing activities:
Net increase (decrease) in deposit accounts 6,026 (2,505)
Proceeds from issuance of stock 25,206
Repurchase of common stock (1,514)
Payment of dividends on common stock (430)
Repayments of FHLB borrowings, net of proceeds (500)
----
Net cash provided by financing activities 3,582 22,701
------ ------
Increase (decrease) in cash and cash equivalents 2,993 4,663
Cash and cash equivalents, beginning of year 6,583 6,907
------ -------
Cash and cash equivalents, end of period $9,576 $11,570
------ -------
</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, 2000.
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".
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>
Six months ended June 30,
-------------------------
2000 1999
---- ----
(in thousands)
<S> <C>
Beginning balance $1,839 $1,331
Provision for loan loss 200 180
Net charge-offs (193) (15)
Balance, end of period $1,846 $1,496
Ratio of net charge-offs to average loans
outstanding 0.12% 0.01%
Ratio of allowance to total loans outstanding 1.09% 1.10%
at end of period
Ratio of allowance to total nonperforming
assets at end of period 127.57% 114.37%
</TABLE>
5
<PAGE>
Item 1. Continued
First Community Financial Corporation
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
six month period ended June 30, 2000, the weighted average number
of shares outstanding was 1,698,862. The effect, if any, on
diluted earnings per share of future periods of the stock awards
described in note 5 will be computed under the treasury stock
method.
5. On June 27, 2000, the Company awarded 75,232 shares of stock to
directors and employees under the Community Savings Bank, Inc.,
Management Recognition Plan and Trust, approved by shareholders on
June 27, 2000. In accordance with the provision of Accounting
Principles Board Opinion No. 25, the Company will accrue the cost
of the awards over the vesting period. One-fourth of the shares
were immediately vested upon award, and the remainder will vest
over the following 36 months. The Company acquired the shares to
be issued from the public.
6
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
Bank Employee
Financial Printing Group
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 June 30, 2000
Compared to December 31, 1999
Total assets increased 2.1% to $235.6 million at June 30, 2000, compared to
$230.7 million at December 31, 1999. The increase in assets was principally a
result of a $13.7 million increase in loans, net of reserves, and a $3 million
increase in cash and cash equivalents, offset by a $13.5 million decrease in
debt and equity securities.
Loans, net of reserves, increased 9.1% at June 30, 2000 to $164.5 million from
the December 31, 1999 balance of $150.7 million. At June 30, 2000, approximately
62.9% of the Community Savings' gross loan portfolio consisted of loans secured
by one- to- four family residential properties. At December 31, 1999, 64.7% 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 15.4% or $5 million, since December 31,
1999 and the construction loan portfolio increased 12.5% or $1.9 million since
December 31, 1999.
Securities decreased 13.8% at June 30, 2000 to $49.9 million compared to the
December 31, 1999 balance of $63.7 million. The decrease in securities was
primarily incurred to help meet loan growth not funded through deposit
7
<PAGE>
increases. The six-month average balance of securities increased 88.4 % for the
period ended June 30, 2000 to $58.6 million compared to the $31.1 million
average balance on securities for the six month period ended June 30, 1999,
reflecting the investment of proceeds received from the initial public offering
completed June 21, 1999.
Deposits increased to $153.6 million at June 30, 2000 from $147.5 million at
December 31, 1999, an increase of 4.1%. Local deposit competition is very strong
causing upward pressure on deposit interest rates.
Borrowed funds, collateralized through an agreement with the Federal Home Loan
Bank ("FHLB"), decreased to $31.5 million at June 30, 2000 from $32 million at
December 31, 1999, a decrease of 1.6%. $25 million of the FHLB borrowings float
with one-month LIBOR index and mature bi-annually on 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 $6.5 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 $1.5 million, or 0.63% of
total assets, at June 30, 2000, compared to $1.3 million, or 0.58% of total
assets, at December 31, 1999. Two loans totaling $218 thousand were charged off
against the allowance for loan losses, partially off set by recoveries on
previously charged off loans of $25 thousand. Net loans charged off against the
allowance for loan losses totaled $193 thousand or .12% 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 or the fair market value of available
collateral for collateral dependent loans. There were two impaired loans
aggregating $661 thousand at June 30, 2000. An allowance for impaired loans was
established in the amount of $100 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.
8
<PAGE>
In the opinion of management, the general allowance for loan losses of $1.7
million and the allowance for impaired loans in the amount of $100 thousand at
June 30, 2000 was adequate to cover probable losses.
Results of Operation for the three month periods ended June 30, 2000 and 1999
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 $272 thousand was recorded for the three month period ended June
30, 2000, compared to a net loss of $713 thousand for the three month period
ended June 30, 1999, a $986 thousand improvement. The increase in net income is
primarily due to a 21.9% increase in net interest income or $359 thousand, a 4%
or $8 thousand increase in other operating income, and a 37.6% or $1 million
decrease in other operating expense. The decrease in other operating expense
reflects the $1.5 million contribution to establish the Community Savings
Charitable Foundation in 1999. A $297 thousand expense was incurred in June 2000
to recognize 25% vesting of stock grants awarded to Officers and Directors as a
result of stockholders approving a Management Recognition Plan during the first
annual meeting of the Company held on June 27, 2000.
INTEREST INCOME
Interest income increased 36.2% or $1.2 million for the three months ended June
30, 2000 to $4.4 million compared to $3.2million for the three months ended June
30, 1999. The increase in interest income is two fold. Interest and fees on
loans increased 24.7% or $661 thousand reflecting management's continued
emphasis on developing commercial, construction and consumer lending. Interest
on securities increased 95% resulting from the investment of proceeds received
during the initial public offering dated June 21, 1999 and an arbitrage in the
amount of $25 million initiated July 15, 1999 and still active.
The average balance on total interest-earning assets increased 30.9% or $52.5
million for the three months ended June 30, 2000 compared to average balances at
June 30, 1999, resulting primarily from a $23.4 million increase in investment
average balances and a $30 million increase in net loan average balances. The
average annualized yield on total average interest-earning assets increased 28
basis points from the 1999 three month period, reflecting an increase in the
annualized yield on investments of 200 basis points and a increase in annualized
loan yields of 16 basis points.
9
<PAGE>
INTEREST EXPENSE
Interest expense increased 51.2% or $801 thousand to $2.4 million for the three
months ended June 30, 2000 compared to $1.6 million for the three months ended
June 30,1999. The increase in interest expense was a result of a 23.8% increase
in interest expense on deposits reflecting the competitiveness of the local
deposit market. A $444 thousand increase in interest expense on FHLB borrowing
reflects a $26.5 million balance increase in outstanding borrowings from $5
million at June 30,1999 to $31.5 million at June 30, 2000.
The average balance of interest-bearing liabilities increased 27.5% or $39.1
million for the three months ended June 30, 2000 compared to average balances at
June 30, 1999, resulting primarily from an increase in Federal Home Loan Bank
(FHLB) borrowings to facilitate an arbitrage. The average annualized cost on
total average interest-bearing liabilities increased 84 basis points from the
1999 three month period, resulting from an increase in the annualized rate on
FHLB borrowings of 140 basis points and an increase in annualized deposit costs
of 16 basis points.
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the three-month
period ended June 30, 2000, increased 21.9% or $359 thousand to $2 million
compared to $1.6 million for the three-month period ended June 30,1999. The
positive growth in net interest income was due to the significant increase of
investable assets resulting from the receipt of proceeds related to the initial
public offering completed June 21, 1999.
Comparable spreads and net interest margins were as follows:
<TABLE>
<CAPTION>
Annualized Yield Annualized Cost
on Interest of Interest Annualized Annualized
Earning Assets Bearing Liabilities Spread Margin
----------------- -------------------- ----------- -----------
<S> <C>
Three Months
Ended
June 30, 2000 7.84% 5.24% 2.60% 3.60%
Three Months
Ended
June 30, 1999 7.56% 4.40% 3.16% 3.88%
</TABLE>
PROVISION FOR LOAN LOSSES
A provision of $105 thousand was added to the allowance for loan losses,
increasing the period end balance to $1.8 million or 1.09% of outstanding loans.
A provision of $90 thousand was added to the allowance for loan losses for the
three-month period ending June 30, 1999. The increase to the allowance reflects
the significant change in the loan portfolio composition.
10
<PAGE>
NON-INTEREST INCOME
Non-interest income increased $8 thousand or 4% to $198 thousand for the three-
month period ended June 30, 2000 compared to $190 thousand for the three-month
period ended June 30,1999. 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 $38 thousand or 19.4% of non-
interest income for the three-month period ended June 30, 2000.
NON-INTEREST EXPENSE
Non-interest expense decreased 37.6% or $1 million to $1.7 million for the three
months ended June 30, 2000 compared to $2.7 million for the three-month period
ended June 30,1999. The decrease in other operating expense reflects the one
time $1.5 million contribution to establish the Community Savings Charitable
Foundation in 1999. The 1999 contribution expense was partially offset in 2000
by $297 thousand expense incurred in June to reflect a 25% vesting of stock
grants awarded to Officers and Directors. Stockholders authorized the awarding
of grants with the approval of the Management Recognition Plan during the first
annual meeting of the Company held on June 27, 2000. Salary expense increased
15.8% or $108 thousand reflecting the hiring of experienced commercial bank
personnel required to transition to a commercial banking environment. A seasoned
Senior Commercial Credit Officer with 12 years of commercial lending bank
experienced was hired during June 2000. A $43 thousand increase in benefit
expense was incurred associated with the Employee stock Ownership Plan (ESOP).
Data processing expenses decreased $14 thousand or 21.8% for the quarter ended
June 30, 2000 compared to the same period for 1999.
INCOME TAXES
The income tax provision for the three month period ended June 30,2000 was $132
thousand compared to a $253 thousand tax benefit for the three months ended June
30, 1999, an increase of $385 thousand from the prior year period. The increase
in the tax provision is the result of increases in earnings before income taxes.
The effective tax rates for the respective 2000 and 1999 periods were 32.6% and
26.2%.
11
<PAGE>
Results of Operation for the six month periods ended June 30, 2000 and 1999
NET INCOME
Net income for the six months ended June 30 2000 was $801 thousand, an increase
of $1.2 million. The loss for the six month period ended June 30, 1999 was $379
thousand. Earnings for the six month period ended June 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.
INTEREST INCOME
Interest income increased $2.2 million or 35.5% for the six months ended June
30, 2000 to $8.6 million at June 30, 2000 compared to $6.3 million for the six
months ended June 30, 1999. The increase in interest income can be principally
attributed to a $55.4 million increase in the average balance of interest
earning assets from 1999 to 2000, and an increase in the average annualized
yield on interest earning assets from 7.58% to 7.72%.
INTEREST EXPENSE
Interest expense increased 42.6% or $1.4 million for the six months ended June
30, 2000 compared to the six months ended June 30,1999. The increase in interest
expense was principally a result of a 14 basis point decrease in the annualized
cost on interest bearing deposits reflecting management's efforts to refine
deposit-pricing schemes, and a 102 basis point increase in the cost of
borrowings from the Federal Home Loan Bank. The aggregate annualized cost of
interest bearing liabilities increased 60 basis points. The average balance
outstanding of interest bearing deposits increased $9.3 million from $138.4
million at June 30, 1999 to $147.7 million at June 30, 2000, an increase of
6.73%. Average FHLB borrowings increased to $32.9 million at June 30, 2000 from
$5 million at June 30,1999 or 558%.
NET INTEREST INCOME
Net interest income before the provision for loan losses, for the six month
period ended June 30, 2000, increased 27.9% or $876 thousand compared to the six
month period ended June 30,1999. The primary ingredients affecting the positive
growth in net interest income were a 35.4% increase in interest income and a
42.6% increase in interest expense.
12
<PAGE>
Comparable spreads and net interest margins were as follows:
<TABLE>
<CAPTION>
Annualized Yield Annualized Cost
on Interest of Interest Annualized Annualized
Earning Assets Bearing Liabilities Spread Margin
----------------- -------------------- ----------- -----------
<S> <C>
Six Months
Ended
June 30, 2000 7.72% 5.06% 2.66% 3.60%
Six Months
Ended
June 30, 1999 7.58% 4.46% 3.12% 3.76%
</TABLE>
13
<PAGE>
PROVISION FOR LOAN LOSSES
A provision of $200 thousand was added to the allowance for loan losses,
increasing the period end balance to $1.8 million or 1.09% of outstanding loans
at June 30, 2000. A provision of $180 thousand was added to the allowance for
loan losses for the period ending June 30, 1999. The increase to the allowance
reflects the significant change in the loan portfolio composition.
NON-INTEREST INCOME
Non-interest income decreased $64 thousand or 14.3% to $384 thousand for the six
month period ended June 30, 2000 compared to the six month period ended June
30,1999. Non-interest income excluding gains and losses on the sale of
securities and other assets increased 12.9% for the six months ended June 30,
2000 compared to the same period for 1999. 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 $85 thousand or 22.3%
of the current period non-interest income.
NON-INTEREST EXPENSE
Non-interest expense decreased 23.1% or $907 thousand for the six months ended
June 30, 2000 compared to the six month period ended June 30,1999. The decrease
in non-interest expense was due primarily to a $1.5 million non-recurring
contribution to the Community Savings Charitable Foundation in 1999, offset by
increases in salary expense of $152 thousand or 10.8% and $381 thousnad of new
stock grant expenses referenced earlier, for the six month period ended June 30,
2000.
INCOME TAXES
Income tax expense for the six month period ended June 30,2000 was $374 thousand
compared to a tax benefit of $144 thousand for the six months ended June 30,
1999, an increase of $518 thousand from the prior year. The increase in the tax
provision was principally a result of a $1.2 million increase in income before
income tax. The average tax rate for the six months ended June 30, 2000 was
31.8% and 27.6% for the period ended June 30, 1999.
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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 June 30, 2000, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $61.5 million,
representing 33.2% 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 June 30, 2000, outstanding off-balance sheet commitments to
extend credit in the form of loan originations totaled $15.2 million. Available
lines of credit totaled $13.2 million. Management considers current liquidity
levels adequate to meet the Company's cash flow requirements.
CAPITAL
Shareholders' equity at June 30, 2000 was $46.1 million, a decrease of $1.1
million or 2.3% from $47.3 million at December 31, 1999 and a decrease of $1.2
million or 2.6% from $47.4 million one year earlier. The decrease in capital is
the result of repurchasing 94,040 shares of common stock during March and April
2000 at an average cost of $16.16 per common share or 62.6% of book value at
June 30, 2000. Included in shareholder's equity at June 30, 2000 was $1.4
million, net of tax, of accumulated other comprehensive loss related to
unrealized losses on securities available for sale compared to $447 thousand of
accumulated other comprehensive loss related to unrealized losses on securities
available for sale one year earlier. Also included in shareholder's equity at
June 30, 2000 was $2.1 million of unearned common stock for the Employee Stock
Ownership Plan, representing 140,197 shares of common stock.
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 March 30, 2000, Community Savings' ratio of
Tier I capital to average assets was 13.8%. 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, 2000, Community Savings had
a ratio of qualifying total capital to net risk-weighted assets of 24.6%.
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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
The Company incurred no Y2K related interruptions on January 1, 2000 and after,
even though Y2K had become a worldwide concern. The underlying cause of the
concern rested with antiquated computer programs identifying dates of calendar
years with two digits rather than four digits. It was feared that most old
computer programs with date-sensitive software would recognize the year 2000 as
"00" and misinterpret the year as 1900. This date misinterpretation could have
resulted in system failures or miscalculations causing disruptions of
operations, to include temporary interruption of utilities, telephone lines,
inability to process transactions, generate statements, or engage in normal
business activities.
First Community replaced nearly all existing software and 100% of all hardware
with year 2000 certified compliant systems. Several of the Bank's
telecommunications systems were replaced with year 2000 compliant systems. A
Comprehensive Business Resumption Plan had been developed which would have been
implemented in the event power failures or failures in communications equipment
prevented use of computer systems serving Community Savings or otherwise
impaired the operations of Community Savings. 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 continued to verify off-line and alternate manual procedures
through the end of the 1999 calendar year. Management identified clients who
posed Y2K risks to the institution, and. has developed the necessary
capabilities to continuously monitor and adequately respond to the risks
identified. To date, to the best of management's knowledge, there have been no
customers of the Bank significantly impacted by year 2000
The cost to bring all systems up to Y2K specifications totaled approximately
$428,000.
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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.
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.
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SIGNATURES
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 7, 2000 /s/Christopher B. Redcay
-------------- ------------------------
Christopher B. Redcay
Sr. Vice President, Treasurer
and Chief Financial Officer
